SEC Chairman Jay Clayton last week took aim at self-directed Individual Retirement Accounts, warning that the account types are open to use by fraudsters.
“I have great skepticism for self-directed IRAs,” he said Friday at a financial fraud conference at Fordham Law School in New York. “They have the veneer of legitimacy but they don’t have the protections that other investments have.”
Clayton was in part responding to the story of Anita Dorio, a victim of affinity fraudster Ephren Taylor, who stole around $16 million from members of churches around the country by preaching what he called the “prosperity gospel.” Affinity fraud is investment fraud that targets members of identifiable groups such as ethnic or religious communities. Taylor’s Ponzi scheme, aimed at church-goers, used a self-directed IRA. In 2015 he was sentenced to 20 years prison.
“Some fraudsters hide behind financial institutions,” Dorio said during a panel session discussing victim experiences. “Self-directed IRA custodians — we think they’ll take care of you, but my custodian was in bed with the scheme.”
While SEC enforcement lawyers claimed the custodian in Dorio's case, Equity Trust Company, participated at marketing event for Taylor's investments, an SEC administrative judge ultimately cleared the custodian of any wrongdoing.
“Self-directed IRA custodians are responsible only for holding and administering the assets in a self-directed IRA," judge Carol Fox Foelak wrote in her June 2016 dismissal. "Self-directed IRA custodians generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.”
Last year the SEC issued an investor alert on self-directed IRAs, warning that fraudsters exploit self-directed IRAs because the custodians and trustees of such accounts may only offer limited protections.
“Custodians and trustees typically have only limited duties to investigate the assets or the background of the promoter,” the alert read. “Fraudsters may misrepresent the duties of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. For example, fraudsters often claim or suggest that self-directed IRA custodians investigate and validate any investment in a self-directed IRA.”
Self-directed IRAs also let investors hold alternative investments which could have limited information available, warned the SEC.
“Even when financial information for these alternative investments is available, it may not be audited by a public accounting firm [and] self-directed IRA custodians usually do not investigate the accuracy of any financial information that is provided.”
Jonathan Brennan, a securities lawyer at Maynard, Cooper & Gale in New York, says self-directed IRAs are not for the unsophisticated investor or the faint of heart.
“The fact that many well-known institutions don’t offer them, should give most investors pause,” he says. “Under the right circumstances, they can work for experienced and savvy investors working with familiar asset classes. For typical retail investors, though, the need to conduct one’s own due diligence, to closely follow IRS rules, and to steer clear of potential frauds, far too often makes them an unwise choice over a traditional IRA account.”
But Dennis Concilla, an attorney at Carlile Patchen & Murphy in Columbus, Ohio, suspects the incidence of fraud regarding self-directed IRAs is no greater — and probably less — than non-IRA investments.
“Unfortunately, there will always be people who prey on the vulnerable,” says Concilla. “The vast majority of investment professionals are honest and diligent. But investors need to know who they are dealing with and always be vigilant. Theft and fraud are already against the law. I doubt that any changes in rules and regulations will make a difference.”
The SEC warns investors to be cautious when it comes to self-directed IRAs. The regulator says investors should verify information in self-directed IRA account statements, avoid unsolicited investment offers, be wary of “guaranteed” returns, and consult an investment professional or attorney.