FINRA INVESTIGATES 72(T) SCAM

by Lawrence C. Melton, Esq. lmelton@dhayeslaw.com

THE HAYES LAW FIRM, www.dhayeslaw.com

InvestmentNews.com reports that FINRA (Financial Industry Regulatory Authority) has begun a sweep of broker-dealers focusing on the use of exemptions in the tax code to withdraw money from retirement accounts for clients before they reach 59 1/2.  The purpose of the sweep is to gather evidence of the 72(T) scam for the the purpose of disciplinary actions.    (See Bruce Kelly, FINRA sweep scrutinizing withdrawals, InvestmentNews.com, August 13, 2007). http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070813/FREE/70813007

The Internal Revenue Service imposes an additional 10 percent tax on early withdrawals from a qualified retirement plan.  Section 72(t) of the Internal Revenue Code allows early retirees who withdraw money from their Individual Retirement Accounts (IRA) before age 59 1/2 to avoid the 10 percent penalty.  The fraudsters hold seminars encouraging people to retire early.  At these seminars, registered representatives guarantee comfortable early retirements.  During such pitches, the broker or investment adviser promises high levels of withdrawals and high rates of return.  They promise too much.  FINRA is requesting extensive materials and information on the early retirement seminars.      

The fraudsters tell early retirees that they can take an unreasonably high level of annual withdrawals from their IRA without depleting their principal.  This presupposes the market will grow at a steady rate.  Of course, in reality, the market often declines for extended periods of time.  The broker may tell the client, the market return is 10 %, and we are taking out 8 %, so your money will grow and we will not have to touch your principal.  Some time later the market goes down, and you are still taking withdrawals at a high level.  This will eventually lead to the depletion of your principal investment.  Of course, the broker did not convey this possibility to you when you first set up the 72(T) withdrawals.

I have written on the 72(T) scam before.  Please read the following blogs at the link below:

1. THE FLEECING OF EARLY RETIREES: A 72(T) PRIMER, August 06 2007. 
2. NASD FINES CITIGROUP OVER $15 MILLION FOR 72(T) SCAM, June 7, 2007. 

http://aboutbrokerfraud.typepad.com/about_broker_fraud_blog/72t_and_early_retirement/index.html

Earlier this year, the NASD disciplined Citigroup because it failed to adequately supervise a team of brokers based in Charlotte, North Carolina.  Three Citigroup brokers, Jeffrey Sweitzer, Mathew Muller and Joseph Zentner contrived a 72(T) scam.  From 1994 to 2002, Sweitzer conducted 40 seminars, alone or with Muller.  They used misleading sales materials during the seminars and meetings for hundreds of employees of BellSouth Corporation. As a result of the sales presentations many of the BellSouth employees came to believe that they could afford to retire early by relying upon monthly withdrawals from their retirement savings pursuant to Section 72(t) of the Internal Revenue Code.  The employees cashed out their pensions and 401(k) accounts, and invested these proceeds with Citigroup.  More than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers.  Over 200 BellSouth employees saw the principal in their accounts decline by a total of approximately $12.2 million. On June 6, 2007, the NASD fined Citigroup Global Markets, Inc., $3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North and South Carolina.  Additionally, NASD ordered Citigroup to pay $12.2 million in restitution to over 200 former BellSouth employees. (See NASD News Release: Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading Documents and Inadequate Disclosure in Retirement Seminars, Meeting for BellSouth Employees, June 6, 2007). http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P019240

Last year, the NASD fined Securities America Inc. $2.5 million and ordered it to pay restitution of $13.8 million to clients for 72(T) scam.  NASD Press Release available at the following link.  http://www.finra.org/PressRoom/NewsReleases/2006NewsReleases/p017386

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Comments

[Jack Payne]

Over 1,100 accounts opened for 300 investors? Why, that's some 3 accounts per investor. Certainly an elaborate scheme. Guess that goes without saying when 200 people can cough up $13 million in losses.

I write extensively on investment scams--the old 80-40-20, historical bonds, inheritance cons, etc.--but have yet to come across anything quite like this. Digging into the details must be fascinating.

[Early retiree]

I retired before 59 and 1/2 and my broker told me I had to withdraw $4,000/month and I would not have to worry about anything. That was six years ago, and now I have nothing.

Is this the same thing as this 72T scam?

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