stolen futures: an aarp washington survey of investors and ... · telephone interviews for this...

Stolen Futures:An AARP WashingtonSurvey of Investors andVictims of InvestmentFraud

June 2007

Stolen Futures: An AARP Washington Survey of Investors

and Victims of Investment Fraud Data Collected by Woelfel Research, Inc.

Report Prepared by Jennifer H. Sauer and Karla Pak

Copyright © 2007 AARP

Knowledge Management 601 E Street NW

Washington, DC 20049 http://research.aarp.org

Reprinting with Permission

AARP is a nonprofit, nonpartisan membership organization that helps people 50+ have independence, choice and control in ways that are beneficial and affordable to them and society as a whole. We produce AARP The Magazine, published bimonthly; AARP Bulletin, our monthly newspaper; AARP Segunda Juventud, our bimonthly magazine in Spanish and English; NRTA Live & Learn, our quarterly newsletter for 50+ educators; and our website, www.aarp.org. AARP Foundation is our affiliated charity that provides security, protection, and empowerment to older persons in need with support from thousands of volunteers, donors, and sponsors. We have staffed offices in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Special thanks go to Department of Financial Institutions (DFI) and National Association of Securities Dealers (NASD) for their partnership and collaboration on this project. Doug Shadel, Karla Pak, and Jason Erskine of the AARP Washington state office were instrumental in designing this survey. AARP staff from Knowledge Management, Office of State and National Initiatives (SNI) – Financial Security, and Office of General Counsel also contributed to the design and implementation of this study: Jean Setzfand, Kelley Coates-Carter, Rachelle Cummins, Jennifer Leslie, Joanne Binette, Anita Ritter, Erica Dinger, Crystal Glover, Cassandra Burton, and Michael Schuster. Jennifer H. Sauer wrote the report with valued input and knowledge from Karla Pak, AARP Washington Associate State Director. For questions regarding this survey, please contact Jennifer H. Sauer at (202) 434-6207 or [email protected].

Stolen Futures: An AARP Washington Survey of Investors and Victims of Investment Fraud 1

Executive Summary

Stolen Futures: An AARP Washington Survey of Investors and Victims of Investment Fraud

AARP Washington wanted to quantify the experiences, perceptions, and knowledge of two groups of investors: 1) residents who invest and report they have never been a victim of securities or investment fraud and, 2) residents who invest and have been a victim of securities fraud, in an effort to provide additional support to a study conducted by the National Association of Securities Dealers (NASD) conducted in February 2006. Based on the recent findings from this dual-sample phone survey of 383 victims and non-victims of investment fraud in Washington state, the following recommendations have been made:

continued research examining greater numbers of individuals who have suffered financial losses because they were deliberately misled or conned should be pursued;

efforts should be made toward survey questioning and inquiry that will allow such individuals to come forward and discuss their experience;

as the NASD study suggests, continued pursuit of research to develop an investment fraud vulnerability index; implement aggressive public education and information about investing, registered stock brokers, basic rules and laws of investing and working with various financial securities professionals, and common scams and fraudulent or suspect sales offers, and where to report such crimes.

Gainfully, much of this current survey did successfully replicate many of the findings from the NASD Investor Fraud Study: both studies found investment fraud victims more likely than non-victims to be financially literate, male, married, open to sales pitches, and to rely on their own experience rather than that of a professional advisor. Much like the NASD survey, a number of respondents from both groups indicate behaviors and characteristics that may put them at risk for responding to fraudulent investments or brokers or con artists. Yet, victims are more likely than non-victims to answer a series of financial literacy questions correctly. Telephone interviews for this survey took place in February 2007. Respondents came from two distinct samples: 125 respondents who had been the victim of an investment fraud and 258 respondents age 40 and older who currently invest or have invested in securities but have not been the victim of an investment fraud. The margin of sampling error for the victim sample is ± 9 percent and the margin of sampling error for the RDD non-victim sample is ±6 percent.1 Because both samples yielded a small number of completed interviews and neither sample could be weighted back to a population, caution must be used when considering generalizing the findings to all victims of investment fraud and all non-victims of investment fraud. The findings of this survey reflect the responses of those who completed the interviews for this study. A detailed explanation of the survey methodology can be found on page 17 of the full report or contact Jennifer H. Sauer for this information at (202) 434-6207 or [email protected].

1 The response rate for this study measured using AAPOR’s response rate 3 method. The response rate for the list sample was 16% and the response rate for the RDD sample was 6%. The relatively low response and cooperation rates can be attributed to the sensitive nature of the interviewing material.


Key Survey Highlights include:

Investment fraud victim respondents are more likely to be male (victim: 64%; non-victim: 43%), married (victim 77%; non-victim: 67%), and employed (victim 53%; non-victim: 35%). Victims of investment fraud were, on average, 55 years old.

Both victims and non-victims view themselves as less than highly knowledgeable about investing: a third of the respondents from each sample say they are not that knowledgeable or not at all knowledgeable (victim: 30%, non-victim 33%), and another half from each sample say they are somewhat knowledgeable about investing (victim: 53%; non-victim: 56%).

Respondents from both samples combined did not know the correct answer to half of the six financial literacy questions tested in the survey. Victims of security fraud answered significantly more questions correctly than non-victims (victim: 56%; non-victim: 51%).2

Among those respondents who invest through a professional, only about one-third say they

have ever checked the background of that broker, financial planner, or financial advisor to see if they are registered with a national or local securities regulator before hiring them (victim: 37%; non-victim: 32%). Additionally, less than two in ten report checking the background of the financial professional to see if they have broken any laws or rules related to their profession before hiring them (victim: 19%; non-victim: 18%).

2 Obtained by a t-test.


Background While persons of all ages can be vulnerable to consumer fraud and securities fraud, the North American Securities Administrators Association (NASAA) warns that as Baby Boomers approach retirement, investment fraud among seniors could increase.3 They report that over 40 percent of all investor complaints received by state securities regulators are made by seniors, and nearly one-third of all enforcement action by securities regulators in the state involved senior investment fraud. According to the Federal Trade Commission (FTC) , in 2005, consumers reported fraud losses of over $680 million and of the total fraud complaints filed in calendar year 2005, 30 percent of complaints were filed by people age 50 years or older. According to recent Federal Trade Commission data, Washington state currently ranks third in the nation for overall number of fraud complaints with a reported total of $20,758,960 paid out by Washington consumers.1 Moreover, during the fiscal year 2006, the Securities Exchange Commission (SEC) reported 77,274 investor complaints and questions of which 20,663 were just complaints.5 The top complaint was with regard to advance fee fraud, while other top complaints included manipulation of securities, prices, markets, or short selling. The SEC reported that the top five complaints against broker-dealers included account problems involving transfers, errors, or access as well as unauthorized transactions. It is hoped that the data from this survey will provide support to an earlier study conducted by the National Association of Securities Dealers (NASD) that examined the differences between victims and non-victims of investment fraud to determine why older consumers are more at risk for being scammed or victimized. Based on the current and earlier data, AARP Washington will be better positioned to provide information and outreach to residents about financial fraud, as well as lobby for greater legislative protection for investors and their families.

3 (2006) NASAA Survey shows Senior Investment Fraud Accounts for Nearly Half of all Complaints Received by State Securities Regulators; http://www.nasaa.org/nasaa_newsroom/current_nasaa_headlines/4998.cfm 4 Federal Trade Commission Consumer Fraud and Identity Theft Complaint Data, January – December 2006, Released February 7, 2007. Go to http://www.consumer.gov/sentinel/pubs/Top10Fraud2006.pdf. Percentages are based on the total number of fraud complaints from Washington consumers (10,451) and average amount paid is based on the total number of fraud complaints where amount paid was reported by Washington consumer (8,812). Five consumers reported an amount paid of $1 million or more. 5 U.S. Securities and Exchange Commission, Investor complaints and Questions, FY 2006 Annual Complaint Data, http://sec.gov/news/data.htm


Detailed Survey Findings How do victims of investment fraud differ from other investors in this study? Given the small sample sizes and inability to weight the data back to any population, it is difficult to offer reliable statements on how the respondents truly differ with respect to their demographics. However, the data from this survey do suggest that respondents who were victims of investment fraud may differ significantly from those who say they are not by age, gender, marital status, and employment. In particular, significantly more men from the victim sample than from the non-victim sample completed the survey. Likewise, respondents from the victim sample were more likely than those from the non-victim sample to be married and employed full or part-time. The average age of the respondents from the victim sample was 55 and the average age for the non-victim sample was 59. While they do not differ with respect to income, it is interesting to note that nearly six in ten respondents in each group report annual incomes of $35,000 or more, with just under half in group reporting annual income of $50,000 or more (see Appendix A and B, Annotated Survey, Demographics).

Investment Fraud Victims Currently Investing in Financial Securities

(unweighted victims N=125)

RDD Non-victims of Investment Fraud Currently Investing in Financial Securities

(unweighted non-victims N=258)

Age Age 13% 18 to 39 years** --- -----

60% 40 to 64 years 66% 40 to 64 years

22% 65 years or older 29% 65 years or older

Gender Gender 64% Men 43% Men

36% Women 57% Women

Marital Status Marital Status 78% Married 68% Married

2% Living with partner 4% Living with partner

18% Not married 28% Not married

Employment Employment 64% Full or part-time 53% Full or part-time

34% Not currently working 46% Not currently working

Income Income 12% <$35K 16% <35K

58% $35K or more 59% $35K or more **See methodology section.


What are the investment experiences of respondents to this survey? Respondents from both samples were asked about their experiences with simply a bad investment that may have resulted in a loss of money, savings, or the entire investment. Those respondents from the list of investment victims were further asked when this incident happened and to whom they reported it. Naturally, respondents from the non-victim sample did not indicate being misled or defrauded as they were screened earlier for such an experience (see Appendix B, Annotated Survey for RDD Non-victim Respondents). Not surprisingly, among the victims of investment fraud, most (90% or n=113) report they made an investment that resulted in the loss of their money, savings, or an entire investment – a significantly greater proportion than the less than half non-victim sample (44% or n=113). While a majority of victims say their bad investment experience was due to being deliberately misled, nearly three-quarters also felt the reason for the loss was due to it just being a bad investment.

Why Did Investment Loss Happen?

(unweighted victims n =113)

Why Did Investment Loss Happen?

(unweighted non-victims n=113)

Just bad investment 72% 54%

Deliberately misled 69% -----

New to investing 49% 33%

Market took downward turn 30% 85%

Not sure 0 0 * Multiple responses were allowed for this question so percents will not add up to 100. Significantly more non-victim respondents than victims view their bad investment experience as a result of the market taking a downward turn, but much like victims, many non-victims also feel they simply made a bad investment. Half of victims and one-third of non-victims felt the loss was due to being new to investing and not knowing enough about the opportunity.


How Respondents Invest (unweighted victims N=125; non-victims N=258)

68%

50%

68%

54%

33%

54%

0% 20% 40% 60% 80% 100%

Through abroker/financial

professional

Self

Throughretirement plan

Victim Non-victim

What do respondents invest in and how do they invest?

Respondents in both groups report investing in a variety of financial securities. In fact, about half of victim respondents (55%) and non-victim respondents (51%) have bought or sold one or more of the securities types listed in the survey.6 Otherwise noteworthy is the data show that victim respondents are more likely than non-victim respondents to say they have bought or sold stocks in the past twelve months. Roughly a third of both victims and non-victims have bought or sold mutual funds, and about one in ten respondents in either group say they have bought or sold shares in investment partnerships. Similar proportions of respondents in either group, though slightly more among non-victims, say they have bought or sold any type of bonds.

Type of Securities Bought/Sold (unweighted victims N=125)

Types of Securities Bought/Sold (unweighted non-victims N=258)

Stocks 42% 33%

Mutual funds 34% 31%

Share in investment partnerships 11% 7%

Any bonds 11% 16%

Options or futures 7% 4%

Annuities 6% 11%

Insurance for investment purposes 2% 4%

Hedge funds 0 1% Most respondents in both groups invest in a retirement plan like a 401(k) or an IRA (Victims: 73%; Non-victims: 76%) (see Appendix A and B, Annotated Surveys). When asked how they invest in general, most indicate investing through a retirement plan or through a broker or financial professional. Interestingly, victim respondents are significantly more likely than non-victim respondents to say they invest directly themselves.

6 Derived from a count of all eight of the securities types tested in the survey for each group. Neither group indicated buying or selling 7 types of securities or 8 types of securities. Slightly less than half of the respondents in each group say they bought or sold none of the securities types listed in the survey in the previous 12 months.


What is the total value of investments among respondent victims and non-victims of investment fraud? The majority of respondents in this study in either group report total investments of less than $500,000. Roughly a quarter in each group report investments totaling more than $25,000 but less than $100,000, and about three in ten respondents in each group report investments totaling between $100,000 and less than $500,000. About one in ten report investments of more than $500,000 but less than 1 million dollars, and seven percent or less have investments totaling one million dollars or more.

Current Reported Total

Amount of Assets (unweighted victims N =125)

Current Reported Total Amount of Assets

(unweighted non-victims N =258)

Less than $25,000 11% 9%

$25,000 to less than $100,000 21% 26%

$100,000 to less than $500,000 30% 33%

$500,000 to less than $1 million 12% 7%

$1 million or more 6% 7%

Not sure 4% 3%

Refused 16% 15% How do victims and non-victims perceive retirement income? This survey also explored the perceptions respondents have about retirement income, obtaining enough income, and work ethic to see if any of these variables might differ between those who have been a victim of investment fraud and those who say they have not been a victim. The majority of respondents in both groups indicate they believe they would need to save anywhere from $100,000 up to 1 million dollars to live comfortably during retirement with roughly half or more indicating they would need at least 1 million dollars. Interestingly, victims of investment fraud are more likely than the non-victim sample of investors to say they would need at least 1 million dollars to comfortably retire.

Perceived Income Needed for Retirement

(unweighted victims N =125)

Perceived Income Needed for Retirement


Less than $25,000 1% 2%

$25,000 to less than $100,000 3% 6%

$100,000 to less than $500,000 14% 16%

$500,000 to less than $1 million 22% 22%

$1 million or more 37% 23%

None 1% 1%

Not sure 3% 6%


What are respondent’s perceptions of generating income and “getting ahead”? To better understand what might lie behind someone’s perceptions of investments and accumulating assets and wealth, respondents were asked what they thought would be the top most practical way to personally accumulate several hundred thousand dollars. About six in ten respondents in each group say they believe that saving something each month for many years is the best way to accumulate substantial sums of money, while about quarter of both victims and non-victims say that finding an investment that promises extremely high returns would be the best way. Less than one in ten view winning the lottery or inheriting money as a top way to accumulate thousands of dollars. In tandem with the belief that saving money will generate several thousands of dollars is the belief that hard work, as opposed to help from others or lucky breaks, are important in getting ahead – about three-quarters of respondents in each group feel this way.

Perceptions of How to Generate Income (unweighted N=125 victims; N=258 non-victims)

Perceptions of How to “get ahead” (unweighted N=125 victims; N=258 non-victims)

2%

6%

6%

28%

58%

2%

3%

7%

28%

60%

0% 20% 40% 60% 80% 100%

Not sure

Inherit money

Win the lottery

Find investment thatpromises high return

Save something eachmonth for many years

Victim Non-victim

1%

4%

12%

12%

72%

0%

3%

8%

12%

74%

0% 20% 40% 60% 80% 100%

Not sure

Luckybreaks

All of theabove

Help fromothers

Hard work

Victim Non-victim


What are respondent’s broad perceptions of work? The NASD study found that con artists will tell victims they are being let in on a secret way to make money – something only a few are privy to and most are not. This notion was further examined in this survey and most respondents strongly or somewhat agree with the statement: To make money, there is an easy way and hard way. Only select few know the easy way and most do it the hard way.7 Moreover, significantly more victim respondents than non-victim respondents are more likely to agree with this statement. A notable proportion indicate they somewhat agree with this statement.

Level of Agreement on Statement: To make money, there is an easy way and a

hard way. Only select few know easy way and most do it the hard way

(unweighted Victims N=125)

Level of Agreement on Statement: To make money, there is an easy way and a

hard way. Only select few know easy way and most do it the hard way


Neither agree/

disagree5%

Somewhat disagree

14%

Strongly disagree

10%

Not sure2%

Strongly agree30%

Somewhat agree40%

Neither agree/

disagree2%

Somewhat disagree

21%

Strongly disagree

16%

Not sure3%

Strongly agree22%

Somewhat agree36%

7 Statement created by AARP Washington staff to further test how likely victims and non-victims of investment fraud were to believe a con artist using this using this sales pitch.


How much do respondents think they know about financial investing? Overall, very few respondents indicate feeling highly knowledgeable about investing. In fact, only sixteen percent of victim respondents and eleven percent of non-victim respondents say they are knowledgeable. A substantial number of respondents in each group express feeling moderately knowledgeable about financial investing, and about a third in each group view themselves as not knowledgeable. Victim and non-victim respondents do not differ significantly in their self ratings of investment knowledge. Self-rated Level of Knowledge about Investing

(unweighted Victims N=125) Self-rated Level of Knowledge about Investing


Somewhat knowledge-

able53%

Not that knowledge-

able22%

Not at all knowledge-

able8%

Not sure1%

Extremely knowledge-

able2%

Very knowledge-

able14%

Somewhat knowledge-

able56%Not that

knowledge-able21%

Not at all knowledge-

able12%

Not sure0%

Extremely knowledge-

able2%

Very knowledge-

able9%


What do respondents actually know about investing? Respondents in this study were asked to answer a series of questions adapted from a larger study conducted by Washington State University and intended to test their knowledge on certain aspects of the financial investing industry.8 A simple comparison of all respondents who responded correctly and those who were wrong or not sure yields no substantial differences. However, after grouping the six financial literacy-based questions and determining the total number of correct or incorrect questions per respondent group, it could be inferred that all respondents essentially “failed” the test incorporated in the survey – respondents to this survey answered only half (53%) of all six questions correctly. On average, victims were more likely than non-victims to answer these questions correctly (victims: 56% of questions correct; non-victims: 50% of questions correct). 9

Proportion of Respondents Answering Question Correctly

Proportion of Respondents Answering Question IN-correctly or

Not Sure (unweighted

Victims N=125)

(unweighted non-victims

N=258)

(unweighted Victims N=125)

(unweighted non-victims

N=258)

What yields highest return over 40 years…bonds, stocks, IRA’s, Savings account?

56% 48% 45% 50%

When diversifying investments, does risk of losing money increase, decrease, or stay same?

54% 46% 47% 53%

True or False: Compound interest earns interest on interest as well as principle.

83% 82% 16% 19%

True or False: Mutual funds pay guaranteed rate of return.

78% 71% 14% 19%

Best description of “no-load” mutual fund…no fees, no sales charges, not high risk, has no time limits for buying/selling/

22% 18% 77% 81%

When interest rates go up, do bond prices fall, remain the same, go up?

44% 41% 56% 69%

An additional question asked to assess respondents knowledge of financial investing was what agency insures consumers against losses in the stock market. Clearly most do not know there is no protection. About three in ten victims (29%) and four in ten (40%) non-victims correctly responded ‘none-of-the-above’, while two-thirds or more in each group were incorrect or not sure (victims: 78%; non-victims: 66%).

8 Moore, D. (2003) Survey of Financial Literacy in Washington State: Knowledge, Behavior, Attitudes, and Experiences. Washington State University. 9 t-test: two-tail assuming equal variance: P(T<=t) = 0.052072


How vulnerable are respondents to potential fraudulent investment offers? To help understand what might make someone more vulnerable to fraudulent crimes, respondents were asked a series of questions about their experiences with telemarketing calls, investment sales people, retirement planning activities, and their motivation to check the backgrounds of stock brokers and other financial advising professionals.10 Telemarketing calls When someone calls and tries to sell them something or get them to enter a sweepstakes or make an investment, just over half of respondents in each group say they hang up right away while one in four victims and a third of non-victims say they end the call at a convenient pause. One in ten respondents in each group ask for information to be sent to their home. Very few respondents in either group listen to hear more or keep the caller on the phone to hear more of what they have to say.

Action Taken for Telemarketing Calls

(unweighted victims N =125)

Action Taken for Telemarketing Calls


Hang up right away 52% 55%

End call at convenient pause 32% 24%

Ask for information to be sent 10% 11%

Listen to hear more 4% 3%

Keep caller on phone as long as they have something say

2% 2%

Ask Questions 1% 2%

Not sure 0 4%

Over half of respondents in both groups say they do not get any calls from investment sales people (victims: 57%; non-victims: 64%), but over one-third of victims (35%) and about one in four non-victims (26%) say they get between one and five calls per week from such people. Very few respondents in either group say they get more than five calls per week from investment sales people. Investment sales brokers and financial advisors All respondents to this survey were asked to rate on a scale from one to seven their interest in hearing more information from an initial investment sales offer. The scale ranged from one to seven where one indicates not interested in hearing more and seven means they would be extremely interested in hearing more. Assuming the middle rating indicates neither interest nor not interested, ratings above four could naturally indicate the respondent leans positively toward interest in learning or hearing more from the broker. Ratings below ‘4’ could naturally indicate the respondent leans negatively toward disinterest in learning or hearing more. Data from this survey show that, overall, more victim respondents than non-victim respondents 10 As suspected, most respondents replied that they had not attended an informational seminar on retirement planning, estate planning, or investing which included free meals or gifts. Therefore, data collected on the experiences of the very few who did report attending such functions will not be reported. Please see Appendix A and B, Annotated Surveys, for this information.


indicate interest in each of the sales offers tested in this survey. Interestingly, the sales offer stating this stock has stock outperformed the Dow Jones Industrial average ranks top among all respondents, while hearing that only three units are left was the least appealing sales offer to nearly all respondents.

Sales offers:

Level of Interest Hearing More (unweighted victims N =125)

Level of Interest Hearing More (unweighted non-victims N =258)

Interested Not interested Interested Not interested This stock has outperformed the Dow Jones Industrial average for last 5 years 42% 43% 30% 58%

This investment is for company with excellent management and in high growth industry

30% 56% 24% 63%

This investment product is registered with SEC and state securities agency 28% 56% 21% 66%

The lowest return could possibly get on this investment is 50% annually, but most investors are making upwards of 110% /year

19% 71% 14% 79%

I am registered with NASD 15% 69% 14% 76%

There is no way to lose on this investment - it is fully secured 12% 76% 10% 81%

This investment made hundreds of people extremely wealthy 11% 79% 8% 85%

We have only three units left on this one; if you don’t make a decision t day, you won’t be able to get in on this opportunity

<1% 94% 1% 97%

* Percentages are based on top three levels (5,6,7) of a seven point scale as representing moderate to extreme interest and bottom three levels (3,2,1) representing moderate disinterest interest to no interest. ** Percentages of ‘Interested’ and ‘Not interested’ will not add up to 100% because the rating of ‘4’ is left out of this table. Between 1 and 12 percent of respondents in each group rated these statements as ‘4’. No one refused to respond. Please refer to Annotated Surveys in Appendix A and B. Retirement planning activities In the three years prior to this survey, over four in ten respondents in both groups say they received five or more invitations to free informational seminars on retirement planning, estate planning, or investing which included a free meal or gift (victims: 51%; non-victims: 44%). Twenty-one percent of victims and thirty percent of non-victims say they received about more than one invitation but less than five in the past three years. About one in five respondents in both groups say they have not received any invitations to such seminars (victims: 20%; non-victims: 17%). Although most respondents in both groups say they have not attended these seminars (victims: 82%; non-victims: 92%), among the few that have (victims: n=23; non-victims: n=20), the top reason for doing so is different.


For those who have been a victim of investment fraud, learning about investing in general is their top reason for going to these seminars, while non-victims indicate that learning about retirement is their top reason. Learning about estate planning, a specific product or service, curiosity, or the free meal or gift are among other reasons all respondents give for attending (see Appendix A and B, Annotated Surveys). Checking the background of brokers, financial planners, investment advisors, and other financial service professionals. Among those respondents who indicated that they invest through a broker or other type of professional, two-thirds of victim and non-victim respondents say they have not checked the background of these professionals to see if they are registered with the national or local securities regulator before they hired them. In addition, eight in ten victim and non-victim respondents say they have not checked the background of stockbrokers or other similar professionals to see if they have broken any laws or rules related to their profession before they hired them. Victim respondents and non-victim respondents do not differ significantly in their responses to either question.

Checked Background of Stock Broker/others: Registered with National/Local Securities

Regulator (unweighted Victims N=85)

Checked Background of Stock Broker/others: Broke Laws/Rules


0%

64%

37%

1%

66%

32%

0% 20% 40% 60% 80% 100%

Not sure

No

Yes

Victim Non-victim

1%

80%

19%

2%

79%

18%

0% 20% 40% 60% 80% 100%

Not sure

No

Yes

Victim Non-victim

Trusting the broker was essentially the top reason all respondents gave when asked why they did not check the backgrounds of these professionals to determine their registration status and why they did not check backgrounds for criminal records or citations (see Appendix A and B, Annotated Surveys, Q. 4a and 5a respectively). The samples do not differ significantly from each other.


Can certain life events make people more vulnerable to investment fraud? Life events have been reported to contribute to poor investment choices or decision making as well as possibly placing investors at greater risk for fraudulent offers and products.11 Data from this survey show that victims of investment fraud are just as likely as non-victims to have experienced each of the possible life events. Over one-third of respondents in both groups report having had a serious injury or illness in the family over the past three years (victims: 37%; non-victims: 37%), while another quarter report experiencing problems with transportation or traffic (victims: 25%; non-victims: 28%). Though it is not surprising to see that one in five victims in this survey (21%) report a negative change in their financial status over the past three years, it is interesting that one in six non-victims (16%) also report financial troubles during this time period. About another one in five respondents report having had a serious illness or injury to themselves (victims: 17%; non-victims: 19%) or developed a condition that limited their physical ability (victims: 18%; non-victims: 19%) (see Appendix A and B, Annotated Surveys, Questions 36 and 32, respectively).

11 NASD Investor Education Foundation (2006) Investor Fraud Study.


Detailed Summary of Findings The present survey examined the demographic characteristics, investment behaviors, financial literacy, and other psychological and behavioral characteristics of non-victim investors and victims of investment fraud in Washington state. With respect to demographic characteristics, this survey found that investment fraud victims are more likely than the non-victim respondents to be men, married, and employed, and on average, 55 years old. In addition, both this survey and the NASD study found that a large number of investing respondents, victim and non-victim, reported annual incomes of $35,000 per year and have a college education or higher. Regarding their investments, both investment fraud victims and non-victim investors invest in a variety of financial securities, and most participate in some kind of financial retirement plan. However, when asked how they invest, victims are more likely than non-victim investors to say they invest directly themselves. Interestingly, while more victims than non-victims report losing money to an investment than non-victims, they are also more likely than their counterparts to attribute the loss to a downward turn in the market rather than to a bad investment. Very few respondents overall, victim or non-victim investors, rate themselves as highly knowledgeable about investing. In fact, the majority of all respondents consider themselves somewhat to not very knowledgeable about investing. When asked a series of six standard financial literacy questions, less than 5 percent of all respondents answered all the questions correctly and less than 40 percent of respondents answered four of the six questions correctly. So on average, each respondent knew the answer to only three of the six questions. Interestingly, however, victims were more likely than non-victims to answer these questions correctly. Much like the NASD survey, data from this survey also show that a number of respondents from both groups indicate behaviors and characteristics that may put them at risk for responding to fraudulent investments or brokers or con artists. Their perceptions of how to generate income, their perceptions of work, their level of interest in sales offers or pitches, and their efforts to check the background of brokers or securities professionals for registrations and legal citations could all be strong indicators of vulnerability to a fraudulent or misleading investment.

• Roughly a quarter of all respondents say they believe that to generate income, or accumulate several hundred thousand dollars, is to find an investment that promises extremely high returns. While this can be true in some cases, high return investments usually carry a high risk level and investment con artists can easily lure victims to deals promising extremely high returns, while guaranteeing a lower level of risk.

• Over half of all respondents agree that to make money, very few know the easy way and most do it the hard way. As the NASD study found many con artists use beliefs like this to their advantage.


• Many respondents to this survey indicated some interest in learning more about an investment after hearing each of the sales pitches tested in this survey, but overall, victims showed more interest than non-victims in each offer. Again, though well known sales pitches, this survey indicates that they continue to pique the interest of investors.

• Finally, and perhaps a most interesting possible indicator of at-risk behavior, is the large proportion of respondents (two-thirds or more), both victim and non-victim, that report not checking the backgrounds of brokers or other financial professionals to see if they are registered with a securities regulator or to see if they have broken any laws or rules.

Many of the key findings from this survey successfully replicated those in the NASD Investor Fraud Study conducted in February 2006.12 For instance, both studies found that investment fraud victims were more likely than non-victims to be financially literate, be male, be married, be open to sales pitches, and to rely on their own experience. Some findings, however, from the nation-wide NASD study were not replicated in the current study, including differences in income, education, and the number of negative life events each group experienced. In addition, the current study included new questions about interest in sales pitches. Implications of Survey Findings

Overall, these findings, combined with the NASD Investor Fraud Study Report, give us important information about the differences between victims of investment fraud and non-victim investors. Some important implications to consider arose from this survey:

• Like the NASD survey, while investment fraud victims are more interested than non-victims in the sales pitches and score higher on financial literacy questions, they may not know how to defend against sales pitches, hence leaving them more vulnerable to con artists.

• Previous surveys of known investment fraud victims have had very low self-report rates, with over 70 percent of known victims not reporting victimization.13, 14 Rewording the question to ask about victim status in this survey led to a 62 percent self-report rate, which is more than 30 percent higher than previous studies.

• Unlike the NASD study, this survey did not yield many respondents in either group who

indicated attending any free seminars on investing. Survey question wording and imprecise or indistinct descriptions not able to stimulate memory could have contributed to the low response to this series of questions. Perhaps utilizing a more evaluative method of study for this type of inquiry would produce more meaningful data on perceptions of such events and those who sponsor and work at them.

• Though samples are small in this survey, this study serves well to contribute to the

relatively scant literature on fraud victimization.

12 NASD Investor Education Foundation (2006), Investor Fraud Study Final Report. Prepared for Wise Senior Services and NASD by The Consumer Fraud Research Group 13 Ibid. 14 AARP (2002) Off the Hook.


Recommendations Based on Survey Findings Findings from this survey clearly show that continued research should be pursued on individuals who have suffered financial losses because they were deliberately misled or conned. Given the self-reporting victimization rates of known victims in particular and the general population at large, efforts should focus on questioning and inquiry that will allow such individuals to come forward and discuss their experience. As the NASD study suggests, such research could further the development of a vulnerability index. Identifying certain characteristics or behaviors of victims to any crime can contribute to its prevention and the persecution of the offender. Also like the NASD study, these findings strongly suggest the need for public education and information about investing, registered stock brokers, basic rules and laws of investing and working with securities professionals, the common scams and fraudulent/suspect sales offers, and where to report such crimes. Hence, combined with the low self-reporting rates from this survey, as well as other research on fraud victimization, there is clearly a need for public educators to encourage individuals to report their experiences to the proper authorities. Additional sources for this survey and report include: (2006) NASD Senior Investor Literacy Survey

(2006) Investor Protection: A Survey of AARP Members in Wyoming

(2006) Retirement Confidence Survey, EBRI and Matthew Greenwald & Associates

(2006) How Americans View Personal Wealth vs. How Financial Planners view this wealth. Opinion Research Corporation Study, no. 714278.

(2003) Off The Hook: Reducing Participation in Telemarketing Fraud. AARP.


Methodology AARP Washington commissioned Woelfel Research, Inc. to conduct telephone interviews from two distinct samples: 125 respondents who had been the victim of an investment fraud and reported the crime to authorities and 258 respondents age 40 and older who currently invest or have invested in securities but say they have not been the victim of an investment fraud. Screening for non-victim respondents from the general population age 40 and older from the general population was based on other data indicating that victims of investment fraud tend to fall in the age 40 and older age segment.15,16,17 The final completed interviews from 125 Washington State residents who have been the victims of investment fraud was drawn from two secured lists (List A and B) totaling 2,412 respondents provided by various law enforcement agencies in the state for research purposes. Woelfel Research, Inc. completed 96 interviews from List A and 29 interviews from List B. The list of investment fraud victims included a small number of people ages 18 through 39 so they were kept for interviewing. Sixteen respondents from this list ages 18 through 39 completed the interviews and are included in the final data set. Names and other identifying information from this data set were not provided to interviewers or programmers. First names were asked at the very end of the survey in the event that a respondent needed to be called back for survey information or validation of completing the survey by an interviewer. The final completed interviews of 258 Washington residents age 40 and older who say they have not been the victim of investment fraud was the result of a sample drawn at random from the Washington adult population in telephone households using a standard list-assisted random digit dialing (RDD) methodology. In order to improve the quality of the data, the questionnaire was pre-tested with a small number of respondents. The interviews were conducted in English from February 8 to February 19, 2006. The margin of sampling error for the sample of 125 victims of security fraud is ± 9 percent. The margin of sampling error for the sample of 258 RDD non-victim investors is ±6 percent.18 Because both samples yielded a small number of completed interviews and neither sample could be weighted back to a population, caution must be used when considering generalizing the findings to all victims of investment fraud and all non-victims of investment fraud. The findings of this survey reflect the responses of those who completed the interviews for this study.

15 AARP (2006) Off the Hook: Reducing Participation in Telemarketing Fraud 16 Securities Industry and Financial Markets Association (SIFMA). 17 The Rodney L. White Center for Financial Research, The Wharton School, University of Pennsylvania (2004) Employees’ Investment Decisions about Company Stock 18 The response rate for this study measured using AAPOR’s response rate 3 method. The response rate for the list sample was 16% and the response rate for the RDD sample was 6%. The relatively low response and cooperation rates can be attributed to the sensitive nature of the interviewing material.


APPENDIX A ANNOTATED SURVEY

LIST SAMPLE – VICTIMS OF INVESTMENT FRAUD


Financial Security Survey – Investors that report being victims of financial fraud

(Total N=125) Screener S1. NO AGE SCREEN FOR THIS POPULATION. S2. Do you currently invest or have you ever invested or owned “securities” such as stocks, bonds,

mutual funds, etc., either through a company or on your own? This could also include investments in a 401(K) or an IRA, variable annuities, or hedge funds [INTERVIEWER: IF RESPONDENT SAYS life insurance OR real estate only, check NO, TERMINATE CALL]. [INTERVEIWER PROMPT: if told they have no investments right now, but USED to, remind them we’re looking for ‘ever’ invested as well.

% 100 Yes 0 No TERMINATE CALL 0 Not sure TERMINATE CALL 0 Refused TERMINATE CALL

S2a. Do you invest in a retirement plan like a 401K or an IRA?

% 73 Yes 27 No 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


Continue with 40+ Investors 1. In the last 12 months, have you bought or sold _______ [READ ITEMS. RANDOMIZE ITEMS – DO

NOT REPEAT “In the last 12 months for every item until about e or f or if asked for time span again]? % 42 Stocks 11 Any bonds 34 Mutual funds 6 Annuities 0 Hedge funds 11 Shares in an investment partnership 7 Options or futures 2 Insurance for investment purposes 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

2. In general, how knowledgeable would you say you are about investing? Would you say you are

Extremely knowledgeable, Very knowledgeable, Somewhat knowledgeable, not that knowledgeable or not at all knowledgeable?[SPLIT SAMPLE: FOR HALF READ EXTREMELY TO NOT AT ALL, HALF READ NOT AT ALL TO EXTREMELY]

% 2 Extremely knowledgeable 14 Very knowledgeable 53 Somewhat knowledgeable 22 Not that knowledgeable 8 Not at all knowledgeable 1 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

3. Do you currently or did you ever invest directly yourself, through a retirement plan, or through

someone such as a stock broker, financial planner or investment advisor? [DO NOT READ LIST - MULTIPLE RESPONSES ALLOWED]

% 50 I invest directly myself SKIP TO QUESTION 6 47 I invest through a retirement plan SKIP TO QUESTION 6 68 I invest through a broker/financial planner/investment advisor 1 Not sure [DO NOT READ] SKIP TO QUESTION 6 7 Refused [DO NOT READ] SKIP TO QUESTION 6

4. Have you ever checked the background of a stock broker, financial planner, investment advisor, or

other financial services provider to see if they registered with a national or local securities regulator before you hired them? (n=85)

% 37 Yes SKIP TO QUESTION 5 64 No 0 Not sure [DO NOT READ] SKIP TO QUESTION 5 0 Refused [DO NOT READ] SKIP TO QUESTION 5


4a. IF NO, why not? [DO NOT READ LIST – ACCEPT FIRST/ONE RESPONSE] (n=147)

% 53 I trust him or her 13 Never thought about it 12 They were a big/reputable firm/company

6 They were recommended 6 Don’t know where to get that information 7 Other (specify): ____________________________________ 3 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

5. Have you ever checked to see if they [IF NECESSARY: stock brokers, financial planners, investment

advisors] broke any laws or rules related to their profession before you hired them? (n=85) % 19 Yes SKIP TO QUESTION 6 80 No 1 Not sure [DO NOT READ] SKIP TO QUESTION 6 0 Refused [DO NOT READ] SKIP TO QUESTION 6

5a. IF NO, why not? [DO NOT READ LIST – ACCEPT FIRST/ONLY

RESPONSE] (n=68) % 53 I trust him or her 13 Never thought about it 12 They were a big/reputable firm/company

9 Other (specify): ____________________________________ 6 Don’t know where to get that information

3 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

6. Now I’d like to ask you some questions about investing. Thinking about bonds, stocks, IRA’s or a

bank savings account, which do you think would yield the highest returns in a 40 year period? [DO NOT READ UNLESS PROMPTED TO HEAR ITEMS AGAIN]

% 16 Bonds 56 Stocks 2 Bank Savings account 14 IRA 13 Not sure 0 Refused

7. When an investor diversifies their investments, do you think the risk of losing money increases,

decreases or stays about the same? % 16 Increase 54 Decrease 22 Stay about the same 9 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


8. I am going to read two statements to you and after each I’d like you tell me whether or not you think it is true or false.

a. With compound interest you earn interest on your interest as well as your principle. Would you

say this is a true or false statement? % 83 True 10 False 6 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

b. Mutual funds pay a guaranteed rate of return. [PROMPT IF NECESSARY: Would you say this is a

true or false statement?] % 14 True 78 False 8 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

9. After I read the following four short statements, tell me which ONE you think best describes a no-load

mutual fund: % 35 It carries no fees 22 It carries no sales charges 3 It is not high risk 14 It has no time limits regarding buying or selling 25 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

10. In your opinion, when interest rates go up, do bond prices typically fall, remain the same, or go up

when interest rates go up? [DO NOT READ LIST] % 44 Fall 10 Remain the same 29 Go up 17 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

11. Have you ever made an investment that resulted in a loss of your money, savings, or the entire

investment? % 90 Yes 9 No SKIP TO 15 1 Not sure [DO NOT READ] SKIP TO 15 0 Refused [DO NOT READ] SKIP TO 15


12. Why do you think this happened to you? Was it because….. [READ AND ROTATE ITEMS FOR EACH RESPONDENT] [MULTIPLE RESPONSES ALLOWED] (n=113)

% 30 The market took a downward turn SKIP TO QUESTION 15 49 You were new to investing, didn’t know enough about the opportunity SKIP TO QUESTION

15 69 You were deliberately misled or defrauded by the broker, salesperson, or company promoting the

investment opportunity 72 It was just a bad investment SKIP TO QUESTION 15 0 Not sure [DO NOT READ] SKIP TO QUESTION 15 0 Refused [DO NOT READ] SKIP TO QUESTION 15

13. When did this happen to you? [DO NOT READ LIST-USE LIST FOR CODING] (n=78)

% 1 Less than l year ago 9 1-3 years ago 53 Between 3 and 5 years ago 37 More than 5 years ago 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

14. To whom did you report the incident? DO NOT READ – USE LIST FOR CODING] (n=78)

% 39 No one – didn’t report it at all 0 NASD (National Association of Securities Dealers) 3 State regulatory agency 4 Securities and Exchange Commission 3 Police 3 FBI 13 Attorney General 3 Federal Trade Commission 1 Better Business Bureau 0 Department of Financial Institutions 0 Friend or Family Member 22 It was reported to me 10 Other 1 Not sure [DO NOT READ] 4 Refused [DO NOT READ]

If Q12 = 3, TAKE TO QUESTION 16


15. If you felt you had been the victim of investment fraud, where would you report the problem? [DO NOT READ – ACCEPT MULTIPLE RESPONSES] (n=47)

% 0 I have never been/felt like a victim of investment fraud 2 No one – WOULD NOT report it at all 2 NASD (National Association of Securities Dealers) 9 State regulatory agency 34 Securities and Exchange Commission 9 Police 0 FBI 23 Attorney General 6 Federal Trade Commission 0 Better Business Bureau 4 Department of Financial Institutions 2 Friend or Family Member 4 Attorney/Lawyer 4 Broker 6 State government/commissioner 19 Other 15 Not sure [DO NOT READ] 9 Refused [DO NOT READ]

16. Now I’d like to read a list of a few agencies. After I’m done, please tell me which of those agencies you

think insures consumers against losses in the stock market: [RECORD RESPONSES – ACCEPT MULTIPLE RESPONSES]

% 11 The Federal Deposit Insurance Corporation 2 The national Association of Securities Dealers 24 The Securities and Exchange Commission 14 The Securities Investor Protection Corporation 0 The Department of Financial Institutions 17 All of the above, or… 29 None of the above 10 Not sure [DO NOT READ] 2 Refused [DO NOT READ]

17. Thinking about your retirement years, about how much money do you think you need to save to live

comfortably during that time? [DO NOT READ LIST – USE FOR CODING APPROXIMATIONS] % 1 None 1 Less than $25,000 3 $25,001- less than $50,000 0 $50,001- less than $100,000 5 $100,001- less than $250,000 9 $250,001- less than $500,000 15 $500,001- less than $750,000 7 $750,000- less one million ($1,000,000) 14 $1,000,001- less than $1.5 million 11 $1,500,001- less than $2 million 11 More than $2 million 3 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


18. Of the following possible options, which do you think would be the TOP most practical way for you personally to accumulate several hundred thousand dollars? [READ LIST - ACCEPT ONLY ONE/FIRST RESPONSE]

% 58 Save something each month for many years 6 Win the lottery 6 Inherit money 28 Find an investment that promises extremely high returns 2 Not sure [DO NOT READ] 2 Refused [DO NOT READ]

19. How strongly do you agree or disagree with the following statement: “To make money, there is an

easy way and hard way. Only a select few know the easy way and most people do it the hard way”. Would you say you strongly agree, somewhat agree, somewhat disagree or strongly disagree with this statement?

% 30 Strongly agree 40 Somewhat agree 5 Neither agree or disagree [VOLUNTEERED] 14 Somewhat disagree 10 Strongly disagree 2 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

20. Some say that people get ahead by their own hard work, and others say that lucky breaks or help

from other people are more important in getting ahead. Which do you think is most important – hard work, help from others, or lucky breaks? DO NOT READ – ALLOW FOR “ALL OF THE ABOVE” OR “NONE OF THE ABOVE”

% 72 Hard work 4 Lucky breaks 12 Help from others 12 All of the above 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

21. As I read the following possible value ranges of investments, please stop me when I read the range

where the total value of your investments fall – please do NOT include the value of your home: Would you say the total value of your investment are/fall between:

% 11 Less than $25,000 10 More than $25,000 but less than $50,000 11 More than $50,000 but less than $100,000 10 More than $100,000 but less than $200,000 19 More than $200,000 but less than $500,000 12 More than $500,001 but less than $1 mill 6 Over $1 million 4 Not sure [DO NOT READ]

16 Refused [DO NOT READ]


22. In general, when someone calls you and tries to sell you something, or get you to enter a sweepstakes, or make an investment, what do you do? Do you usually …. [READ LIST - RANDOMLY ROTATE ORDER BETWEEN A-F]

% 52 Hang up right away 32 End the call at a convenient pause 4 Listen to hear more before deciding how to respond 2 Keep the caller on the phone for as long as they have something to say, or… 10 Ask for information be sent to your home 1 Ask questions 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

23. Thinking about calls from investment sales people, about how many calls per week do you get? [DO

NOT READ LIST – USE FOR CODING] % 57 Don’t get any/no calls at all 35 Between 1 to 5 calls per week 4 Between 6-10 calls 2 More than 10 calls 2 Not sure [DO NOT READ] 1 Refused [DO NOT READ]

24. In the past 3 years, about how many invitations have you received to free informational seminar on

retirement planning, estate planning, or investing which included a free meal or gift? [DO NOT READ LIST – USE FOR CODING]

% 20 None 4 1 14 2-3 7 4-5 51 More than 5 3 Not sure/can’t remember 0 Refused

25. How many have you attended in the past three years?

% 82 None – SKIP TO QUESTION 35 12 1 4 2-3 1 4-5 2 5 or more 0 Not sure/can’t remember 0 Refused


26. Thinking about the most recent free seminar on retirement planning, what was your MAIN or TOP

reason for attending? [DO NOT READ – USE FOR CODING – ACCEPT FIRST/ONE RESPONSE] (n=23)

% 13 To learn about retirement planning 4 To learn about estate planning or living trusts 22 To learn about investing in general 13 To learn about the specific product or service being offered 13 To enjoy a free meal or gift- I didn’t plan to invest 4 For something to do- I went for the entertainment 13 Curious/Just to see what they have to say 17 Other 0 Not sure 0 Refused

27. Now I’d like to know what you thought of the sales presentation at this free seminar you attended.

Please tell me if you agree or disagree with the following statements: (n=23) Agree Disagree Not

Sure Refused

% % % % a. The sales person was very friendly to me............................................. 96 4 0 0 b. The sales person spoke with considerable authority............................ 100 0 0 0 c. They [THE SALES PERSON] claimed that the product had been endorsed by reputable companies or individuals ......................................

65

13

22

0

d. They stated that there was a limited amount of time to make a decision....................................................................................................... 30 65 4 0 e. They made claims about how great the product was compared to other investments........................................................................................ 61 26 13 0 f. I felt some pressure to invest because I had received a free lunch and/or gift ................................................................................................... 13 87 0 0 g. The sales person drew attention to the fact that other investors in the room had decided to invest ..................................................................

17

83

0

0

h. The sales person was very aggressive and applied a lot of pressure ... 9 91 0 0

28. Again, thinking about the most recent seminar you attended, were specific stocks, bonds, mutual funds, or other investments recommended by the presenter or instructor? (n=23)

% 48 Yes 52 No [SKIP TO QUESTION 31] 0 Not sure [DO NOT READ] [SKIP TO QUESTION 31] 0 Refused [DO NOT READ] [SKIP TO QUESTION 31]

29. At the time of this recommendation, did you decide to invest in those securities? (n=11)

% 27 Yes 73 No [SKIP TO QUESTION 31] 0 Not sure [DO NOT READ] [SKIP TO QUESTION 31] 0 Refused [DO NOT READ] [SKIP TO QUESTION 31]


30. And did you lose money, break even, or make a profit on those securities? [RECORD RESPONSE – DO NOT READ] (n=3)

% 0 Lost money 0 Broke even 67 Made a profit 33 Too soon to tell 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]

31. Now, thinking about the three months after the informational seminar you attended, were you

contacted by the sponsoring company about investing or buying a product? (n=23) % 39 Yes 61 No [SKIP TO QUESTION 35] 0 Not sure/Don’t recall, can’t remember [DO NOT READ] 0 Refused [DO NOT READ] [SKIP TO QUESTION 35]

32. And about how many times during those three months after the free seminar did this company attempt to contact you? [DO NOT READ – USE FOR CODING] (n=9)

% 56 At least once 44 About 2 or 3 times 0 About 4 or 5 0 More than 5 times 0 Not sure/Don’t recall, can’t remember [DO NOT READ] [SKIP TO QUESTION 35] 0 Refused [DO NOT READ] [SKIP TO QUESTION 35]

33. In you opinion, would you describe the company sponsor who contact you was extremely aggressive,

very aggressive, somewhat aggressive, not that aggressive, or not at all aggressive? (n=9) % 11 Extremely aggressive 0 Very aggressive 56 Somewhat aggressive 0 Not that aggressive 33 Not at all aggressive 0 Not sure/Don’t recall, can’t remember [DO NOT READ] 0 Refused [DO NOT READ]

34. As a result of the sponsoring company contacting you after the seminar, did you invest in the

securities opportunity they recommended? (n=9) % 22 Yes 78 No 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


35. Now I’d like to read some statements to you that are often made by brokers or financial advisors when they are describing a potential investment opportunity. After hearing each, tell me on a scale from 1 to 7 where 1 means that statement would NOT make you interested to hear more and 7 means it WOULD make you extremely interested to hear more. [RANDOMIZE ORDER OF ITEMS WITH EACH RESPONDENT]

Extremely Interested

to hear more (7)

6

5

4

3

2

Not Interested

to hear more (1)

Don’t know

Refused

% % % % % % % % %

a. This investment made hundreds of people extremely wealthy..................................................... 6 1 5 6 6 15 58 3 0

b. There is no way to lose on this investment- it is fully secured ............................................................. 5 2 5 9 9 6 61 3 0

c. I am a registered broker with the NASD............... 2 2 10 9 12 14 42 7 0

d. We only have 3 units left on this one; if you don’t make a decision today, you won’t be able to get in on this investment opportunity .......................

1 0 0 2 2 6 86 3 0

e. The lowest return you could possibly get on this investment is 50% annually, but most investors are making upwards of 110% a year .........

6 6 7 6 7 12 52 4 0

f. This investment product is registered with the SEC and your state securities agency ....................... 5 5 18 9 11 12 34 6 0

g. This stock has outperformed the Dow Jones Industrial Average each year for the last 5 years...... 9 13 20 12 13 5 26 3 0

h. This investment is for a company with excellent management and in a high growth industry .....................................................................

5 7 18 10 22 8 26 4 0

36. I am going to read a list of life events. Simply tell me if this event has happened to you in the past

three years or not by saying yes or no, and if you are not sure, simple tell me you are not sure: Have you…..[RANDOMIZE ORDER OF ITEMS WITH EACH RESPONDENT]

% 17 Had a serious illness or injury yourself 18 Developed a condition that limits your physical ability 37 Had a serious injury or illness in the family 21 Experienced a negative change in financial status 16 Had problems with keeping up with household chores 25 Experienced problems with transportation or traffic 6 Experienced recent loss of employment 15 Had problems with troublesome neighbors 17 Found yourself getting bored more often


DEMOGRAPHICS D1. RECORD RESPONDENT’S GENDER

% 64 Male 36 Female

D2. What is your age as of your last birthday? (IN YEARS) __________

% 13 18-39 60 40-64 22 65 or more 5 Refused

D3. What is your current marital status? [READ LIST]

% 77 Currently Married 2 Currently living with partner/significant other 5 Widowed 10 Divorced 1 Separated 2 Never Married 0 DON’T KNOW / NOT SURE [DO NOT READ] 3 REFUSED [DO NOT READ]

D4. Are you or your spouse a member of A-A-R-P, formerly known as the American Association of

Retired Persons? [IF NOT “MARRIED” ASK, “Are you a member…”] % 31 Yes 66 No 2 Don't Know/Not Sure [DO NOT READ] 1 Refused [DO NOT READ]

D5. What is the highest level of education that you completed? (READ LIST)

% 2 Less than high school 19 High school graduate or equivalent 34 Some college or technical training beyond high school 31 College graduate (4 years) 12 Post graduate or professional degree 0 DON’T KNOW / NOT SURE [DO NOT READ] 2 Refused [DO NOT READ]

D6. Do you currently have children or any other family members living with you in your household? [Do

not read] % 44 Yes 54 No 2 Refused [DO NOT READ]


D7. Do you have anyone living with you in your household that is not a relative? [Do not read] % 6 Yes 93 No 2 Refused [DO NOT READ]

D8. Which of the following best describes your current employment status? (READ LIST)

% 54 Employed or self-employed full-time 10 Employed or self-employed part-time 30 Retired and not working 2 Unemployed and looking for work 2 Homemaker 0 Disabled 1 Student 0 Something Else (specify) 0 DON’T KNOW / NOT SURE [DO NOT READ] 1 REFUSED [DO NOT READ]

D9. What was your annual household income before taxes in 2006?

% 5 Less than $15,000 ($14,999) 3 $15,000 to less than $25,000 ($24,999) 4 $25,000 to less than $35,000 ($34,999) 10 $35,000 to less than $50,000 ($49,999) 17 $50,000 to less than $75,000 ($74,999) 30 $75,000 or more 5 DON’T KNOW / NOT SURE [DO NOT READ] 26 REFUSED [DO NOT READ]

D10. Are you of Spanish, Latino, or Hispanic descent?

% 2 Yes 97 No 1 Refused [DO NOT READ]

D11. What is your race? % 91 White / Caucasian 2 Black/African American 2 Native America 1 Asian American 0 Don't Know 0 Other [Please Specify: _______] 3 Refused [DO NOT READ]

D12. What is your 5-digit zip code? ___ ___ ___ ___ ___

D13. In what county do you live? [INTERVIEWERS: ASK RESPONDENT TO SPELL IF NECESSARY]


APPENDIX B ANNOTATED SURVEY

RDD SAMPLE OF INVESTORS

NON-VICTIMS OF INVESTMENT FRAUD


Washington Financial Security Survey –

RDD Investors who report not being victim of financial fraud N=258

Screener S1. Insert age screen here S2. Do you currently invest or have you ever invested or owned “securities” such as stocks, bonds, mutual

funds, etc., either through a company or on your own? This could also include investments in a 401(K) or an IRA, variable annuities, or hedge funds [INTERVIEWER: IF RESPONDENT SAYS life insurance OR real estate only, check NO, TERMINATE CALL]. [INTERVIEWER PROMPT: if told they have no investments right now, but USED to, remind them we’re looking for ‘ever’ invested as well.

% 100 Yes 0 No TERMINATE CALL

S2a. Do you invest in a retirement plan like a 401K or an IRA?

% 76 Yes 23 No 0 Not sure [DO NOT READ]

S3. Have you ever made an investment that resulted in a loss of your money, savings, or the entire

investment? % 44 Yes 56 No SKIP TO S5

S4. Why do you think that happened to you? Was it because: (n=113) [ROTATE ITEMS FOR EACH RESPONDENT] [MULTIPLE RESPONSES ALLOWED]

% 85 The market took a downward turn 33 You were new to investing, didn’t know enough about the opportunity 0 You were deliberately misled or defrauded by the broker, salesperson, or company

promoting the investment opportunity SKIP TO S6 54 It was just a bad investment

S5. Have you ever been the victim of financial fraud? In other words, have you ever been deliberately

misled or misinformed by anyone or a company selling a security that you invested but resulted in a loss of your money, savings, or the entire investment?

% 0 Yes 100 No GO TO QUESTION 1


CONTINUE WITH 40+ INVESTORS WHO HAVE NOT BEEN SCAMMED OR VICTIMS OF INVESTMENT FRAUD 1. In the last 12 months, have you bought or sold ___ [READ ITEMS. RANDOMIZE ITEMS – DO NOT

REPEAT “In the last 12 months for every item until about e or f or if asked for time span again]? % 33 stocks 16 any bonds 31 mutual funds 11 annuities 1 hedge funds 7 shares in an investment partnership 4 options or futures 4 Insurance for investment purposes

2. In general, how knowledgeable would you say you are about investing? Would you say you are Extremely

knowledgeable, Very knowledgeable, Somewhat knowledgeable, not that knowledgeable or not at all knowledgeable?[SPLIT SAMPLE: FOR HALF READ EXTREMELY TO NOT AT ALL, HALF READ NOT AT ALL TO EXTREMELY]

% 2 Extremely knowledgeable 9 Very knowledgeable

56 Somewhat knowledgeable 21 Not that knowledgeable 12 Not at all knowledgeable 0 Not sure [DO NOT READ] 0 Refused

3. Do you currently or did you ever invest directly yourself, through a retirement plan, or through someone

such as a stock broker, financial planner or investment advisor? [DO NOT READ LIST - MULTIPLE RESPONSES ALLOWED]

% 33 I invest directly myself SKIP TO QUESTION 6 44 I invest through a retirement plan SKIP TO QUESTION 6 54 I invest through a broker/financial planner/investment advisor 4 Not sure [DO NOT READ] SKIP TO QUESTION 6 16 Refused [DO NOT READ] SKIP TO QUESTION 6

4. Have you ever checked the background of a stock broker, financial planner, investment advisor, or other

financial services provider to see if they registered with a national or local securities regulator before you hired them? (n=140)

% 32 Yes SKIP TO QUESTION 5 66 No 1 Not sure [DO NOT READ] SKIP TO QUESTION 5


4a. IF NO, why not? [DO NOT READ LIST – ACCEPT ONLY ONE/FIRST ANSWER] (n=93) % 4 I don’t know where to get that information

40 I trust him or her 4 My broker/financial planner/advisor told me there were no problems 1 I do not work with a broker

44 Other (specify): ____________________________________ 7 Not sure [DO NOT READ]

5. Have you ever checked to see if [IF NECESSARY: ‘…stock brokers, financial planners, investment advisors,

etc] they have broken any laws or rules related to their profession before you hired them? (n=140) %

18 Yes SKIP TO QUESTION 6 79 No 2 Not sure [DO NOT READ] SKIP TO QUESTION 6 1 Refused [DO NOT READ] SKIP TO QUESTION 6

5a. IF NO, why not? [DO NOT READ LIST – ACCEPT FIRST ANSWER] (n=111)

% 0 I don’t know where to get that information

43 I trust him or her 1 My broker/financial planner/advisor told me there were no

problems 1 I do not work with a broker

48 Other (specify): ____________________________________ 7 Not sure [DO NOT READ]

6. Now I’d like to ask you some questions about investing. Thinking about bonds, stocks, IRA’s or a

bank savings account, which do you think would yield the highest returns in a 40 year period? [DO NOT READ UNLESS PROMPTED TO HEAR ITEMS AGAIN]

% 12 Bonds 48 Stocks 2 Bank Savings account

21 IRA 15 Not sure [DO NOT READ] 2 Refused [DO NOT READ]

7. When an investor diversifies their investments, do you think the risk of losing money increases decreases

or stays about the same? % 15 a. Increase 46 b. Decrease 28 c. Stay about the same 10 d. Not sure [DO NOT READ] 1 e. Refused [DO NOT READ


8. I am going to read two statements to you and after each I’d like you tell me whether or not you think it is true or false.

a. With compound interest you earn interest on your interest as well as your principle.

Would you say this is a true or false statement? % 82 True 12 False 7 Not sure [DO NOT READ]

b. Mutual funds pay a guaranteed rate of return. [PROMPT IF NECESSARY:

Would you say this is a true or false statement?] % 19 True 71 False 11 Not sure [DO NOT READ]

9. After I read the following four short statements, tell me which ONE you think best describes a no-load

mutual fund: % 36 it carries no fees 18 it carries no sales charges 6 it is not high risk, or..

11 it has no time limits regarding buying or selling 28 Not sure [DO NOT READ] 0 Refused [DO NOT READ

10. In your opinion, when interest rates go up, do bond prices typically fall, remain the same, or go up

when interest rates go up? [DO NOT READ LIST] % 41 Fall 11 remain the same 32 go up 16 not sure 0 refused

11. Now I’d like to read a list of a few agencies and after I’m done, please tell me which of those agencies

you think insures consumers against losses in the stock market. [READ LIST] % 16 The Federal Deposit Insurance Corporation 2 The National Association of Securities Dealers

11 The Securities and Exchange Commission 9 The Securities Investor Protection Corporation 2 The Department of Financial Institutions

12 All of the above , or 40 None of the above 14 Not sure [DO NOT READ] 1 Refused [DO NOT READ]


12. If you felt you had been the victim of investment fraud, where would you report the problem? [DO NOT READ – USE LIST FOR CODING]

% 1 No one – wouldn’t report it at all 5 NASD (National Association of Securities Dealers) 3 State regulatory agency

27 Securities and Exchange Commission 15 Police 3 FBI

20 Attorney General 5 Federal Trade Commission 9 Better Business Bureau 1 Department of Financial Institutions 2 Friend or Family Member

29 Other 25 Not sure [DO NOT READ] 4 Refused [DO NOT READ]

13. Thinking about your retirement years, about how much money do you think you need to save to live

comfortably during that time? [DO NOT READ LIST – USE FOR CODING APPROXIMATIONS] % 1 None 2 Less than $25,000 3 $25,001- less than $50,000 4 $50,001- less than $100,000 7 $100,001- less than $250,000

11 $250,001- less than $500,000 14 $500,001- less than $750,000 8 $750,000- less one million ($1,000,000)

14 $1,000,001- less than $1.5 million 6 $1,500,001- less than $2 million 4 More than $2 million 6 Not sure [DO NOT READ]

14. Of the following possible options, which do you think would be the TOP most practical way for you

personally to accumulate several hundred thousand dollars? [READ LIST-ACCEPT ONLY ONE/FIRST RESPONSE]

% 60 Save something each month for many years 7 Win the lottery 3 Inherit money

28 Find an investment that promises extremely high returns 2 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


15. How strongly do you agree or disagree with the following statement: “To make money, there is an easy way and hard way. Only a select few know the easy way and most people do it the hard way”. Would you say you strongly agree, somewhat agree, somewhat disagree or strongly disagree with this statement?

% 22 Strongly agree 36 Somewhat agree 2 Neither agree or disagree [VOLUNTEERED]

21 Somewhat disagree 16 Strongly disagree 3 Not sure [DO NOT READ]

16. Some say that people get ahead by their own hard work, and others say that lucky breaks or help from

other people are more important in getting ahead. DO NOT READ – ALLOW FOR “ALL OF THE ABOVE” OR “NONE OF THE ABOVE”

% 74 hard work 3 lucky breaks 8 help from others

14 All of the above 0 None of the above 1 Not sure 0 Refused

17. As I read the following possible value ranges of investments, please stop me when I read the range where

the total value of your investments fall – please do NOT include the value of your home: Would you say the total value of your investments fall between:

% 9 Less than $25,000

11 More than $25,000 but less than $50,000 14 More than $50,000 but less than $100,000 16 More than $100,000 but less than $200,000 18 More than $200,000 but less than $500,000 7 More than $500,001 but less than $1 mil 7 Over $1 million 3 Not sure

15 Refused 18. In general, when someone calls you and tries to sell you something, or get you to enter a sweepstakes,

or make an investment, what do you do? Do you usually …. [READ LIST- RANDOMLY ROTATE ORDER BETWEEN A-F]

% 55 Hang up right away 24 End the call at a convenient pause 3 Listen to hear more before deciding how to respond 2 Keep the caller on the phone for as long as they have something to say, or…

11 Ask for information be sent to your home 2 Ask questions 4 Not sure 2 Refused


19. Thinking about calls from investment sales people, about how many calls per week do you get? [DO NOT READ LIST – USE FOR CODING]

% 64 Don’t get any/ no calls at all 26 between 1 to 5 calls per week 2 between 6-10 calls 3 more than 10 calls 6 Not sure

20. In the past 3 years, about how many invitations have you received to free informational seminar on

retirement planning, estate planning, or investing which included a free meal or gift? [DO NOT READ LIST – USE FOR CODING]

% 17 None 4 1 21 2-3 9 4-5 44 More than 5 5 Not sure/can’t remember 0 Refused

21. How many have you attended in the past three years?

% 92 None SKIP TO QUESTION 31 5 1 3 2-3 0 4-5 0 More than 5 0 Not sure/can’t remember 0 Refused

22. Thinking about the most recent free seminar on retirement planning, what was your MAIN or TOP

reason for attending? [DO NOT READ–USE FOR CODING–ACCEPT FIRST RESPONSE] (n=20) % 40 To learn about retirement planning 0 To learn about estate planning or living trusts 5 To learn about investing in general 5 To learn about the specific product or service being offered

15 To enjoy a free meal or gift- I didn’t plan to invest 10 Curious to see what they have to say 5 For something to do- I went for the entertainment

20 Other 0 Not sure [DO NOT READ] 0 Refused [DO NOT READ]


23. Now I’d like to know what you thought of the sales presentation at this free seminar you attended. Please tell me if you agree or disagree with the following statements: (n=20) Agree Disagree Not sure Refused % % % % a. The sales person was very friendly to me ....................... 90 0 5 5 b. The sales person spoke with considerable authority ....... 95 5 0 0 c. They [THE SALES PERSON] claimed that the product had been endorsed by reputable companies or individuals............................................................................

80

20

0

0 d. The sales person stated that there was a limited amount of time to make a decision.......................................

35 65 0 0

e. The sales person made claims about how great the product was compared to other investments ........................

55 45 0 0

f. I felt some pressure to invest because I had received a free lunch and/or gift............................................................

15 85 0 0

g. The sales person drew attention to the fact that other investors in the room had decided to invest .........................

50 50 0 0

h. The sales person was very aggressive and applied a lot of pressure. ...........................................................................

0 100 0 0

24. Again, thinking about the most recent seminar you attended, were specific stocks, bonds, mutual funds,

or other investments recommended by the presenter or instructor? (n=20) % 10 Yes (n=2) 90 No SKIP TO QUESTION 27

25. At the time of this recommendation, did you decide to invest in those securities? (n=2)

% 0 Yes

100 No (n=2) SKIP TO QUESTION 27 26. And did you lose money, break even, or make a profit on those securities? Or is it still too soon to tell?

[RECORD RESPONSE – DO NOT READ] (n=0) % - lost money - broke even - made a profit - too soon to tell - not sure - refused

27. Now, thinking about the three months after the informational seminar you attended, were you contacted

by the sponsoring company about investing or buying a product? (n=20) % 45 Yes 55 No


28. And about how many times during those three months after the free seminar did this company attempt to contact you? [DO NOT READ – USE FOR CODING] (n=9)

% 33 At least once 56 about 2 or 3 times 0 about 4 or 5

11 more than 5 times

29. In you opinion, would you describe the company sponsor who contacted you as extremely aggressive, very aggressive, somewhat aggressive, not that aggressive, or not at all aggressive? (n=9)

% 0 Extremely aggressive 0 Very aggressive

22 Somewhat aggressive 56 Not that aggressive 22 Not at all aggressive 0 Not sure/Refused [DO NOT READ]

30. As a result of the sponsoring company contacting you after the seminar, did you invest in the securities

opportunity they recommended? (n=9) % 22 Yes 78 No

31. Now I’d like to read some statements to you that are often made by brokers or financial advisors when

they are describing a potential investment opportunity. After hearing each, tell me on a scale from 1 to 7 where 1 means that statement would NOT make you interested to hear more and 7 means it WOULD make you extremely interested to hear more. [RANDOMIZE ORDER]

Extremely Interested to

hear more

6

5

4

3

2

Not Interested to hear more

Don’t know

% % % % % % % % a. This investment made hundreds of people

extremely wealthy ........................................................ 3 1 4 5 5 7 73 2

b. There is no way to lose on this investment- it is fully secured ......................................................................... 3 1 6 7 4 6 70 2

c. I am a registered broker with the NASD...................... 3 2 10 7 12 14 50 2

d. We only have 3 units left on this one; if you don’t make a decision today, you won’t be able to get in on this investment opportunity.....................................

1 0 0 1 3 4 90 2

e. The lowest return you could possibly get on this investment is 50% annually, but most investors are making upwards of 110% a year..................................

4 4 5 5 6 7 66 2

f. This investment product is registered with the SEC and your state securities agency................................... 5 4 12 10 15 11 41 4

g. This stock has outperformed the Dow Jones Industrial Average each year for the last 5 years ......... 5 7 17 10 13 10 35 2

h. This investment is for a company with excellent management and in a high growth industry ................. 3 7 14 11 17 10 36 2


32. I am going to read a list of life events. Simply tell me if this event has happened to you in the past three years or not by saying yes or no, and if you are not sure, just tell me you are not sure: Have you….. [RANDOMIZE ORDER OF ITEMS WITH EACH RESPONDENT] Yes %

a. Had a serious illness or injury yourself.................................................................................... 19 b. Developed a condition that limits your physical ability........................................................... 19 c. Had a serious injury or illness in the family ............................................................................ 37 d. experienced a negative change in financial status.................................................................... 16 e. had problems with keeping up with household chores ............................................................ 27 f. experienced problems with transportation or traffic ................................................................ 28 g. experienced recent loss of employment ................................................................................... 12 h. had problems with troublesome neighbors .............................................................................. 10 i. Found yourself getting bored more often................................................................................. 22

DEMOGRAPHICS D1. RECORD RESPONDENT’S GENDER

% 43 Male 57 Female

D2. What is your age as of your last birthday? (IN YEARS) __________

% AGE 66 40-64 29 65+ 5 Refused

D3. What is your current marital status? (READ LIST)

% 67 Currently Married 4 Currently living with partner/significant other

11 Widowed 10 Divorced 0 Separated 7 Never Married 0 DON’T KNOW / NOT SURE [DO NOT READ] 1 REFUSED [DO NOT READ]

D4. Are you or your spouse a member of A-A-R-P, formerly known as the American Association of Retired

Persons? [IF NOT “MARRIED” ASK, “Are you a member…”] % 45 Yes 54 No 1 Not Sure [DO NOT READ] 0 Refused [DO NOT READ]


D5. What is the highest level of education that you completed? (READ LIST) % 1 Less than high school

19 High school graduate or equivalent 33 Some college or technical training beyond high school 24 College graduate (4 years) 23 Post graduate or professional degree 0 DON’T KNOW / NOT SURE [DO NOT READ] 1 Refused [DO NOT READ]

D6. Do you currently have children or any other family members living with you in your household?

[DO NOT READ] % 31 Yes 68 No 1 Refused [DO NOT READ]

D7. Do you have anyone living with you in your household that is not a relative? [Do not read]

% 7 Yes

92 No 1 Refused [DO NOT READ]

D8. Which of the following best describes your current employment status? (READ LIST)

% 43 Employed or self-employed full-time 11 Employed or self-employed part-time 35 Retired and not working 3 Unemployed and looking for work 5 Homemaker 3 Disabled 0 Student 0 Something Else (specify) 0 DON’T KNOW / NOT SURE [DO NOT READ] 1 REFUSED [DO NOT READ]

D9. What was your annual household income before taxes in 2006?

% 2 Less than $15,000 ($14,999) 5 $15,000 to less than $25,000 ($24,999) 9 $25,000 to less than $35,000 ($34,999)

12 $35,000 to less than $50,000 ($49,999) 16 $50,000 to less than $75,000 ($74,999) 32 $75,000 or more 4 DON’T KNOW / NOT SURE [DO NOT READ]

21 REFUSED [DO NOT READ]


D10. Are you of Spanish, Latino, or Hispanic descent? % 1 Yes

98 No 1 Refused [DO NOT READ]

D11. What is your race?

% 91 White / Caucasian 1 Black/African American 1 Native America 2 Asian American 0 Don't Know 0 Other [Please Specify: _______] 6 Refused [DO NOT READ]

D12. What is your 5-digit zip code? ___ ___ ___ ___ ___ D13. In what county do you live? [INTERVIEWERS: ASK RESPONDENT TO SPELL IF NECESSARY

Copyright ©2007 AARP

Knowledge Management 601 E Street NW

Washington, DC 20049 www.aarp.org/research

Reprinting with Permission

For more information about this survey please contact Jennifer H. Sauer at: 202-434-6207 or e-mail [email protected]

stolen futures: an aarp washington survey of investors and ... · telephone interviews for this...

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