1-800-607-0145 info@midatlanticira.com

By John “Jack” Kiley, CPA, CISP / Partner
MidAtlantic IRA, LLC
Self Directed Retirement Plan Solutions

800/607-0145 x201

I’ve recently spent two days at an industry conference where the main topic was detecting fraudulent IRA investments. Significant emphasis was placed on the various government agencies, (SEC, FINRA, FBI, et al.) that are concerned about this very issue; especially in this bad economic environment.

As the owner or potential owner of a self directed IRA, the onus is on you and your advisors to determine whether an investment is right for you. Although, lessons from the past several years should have taught you that ultimately it is your responsibility to determine if the investment is right for your portfolio.

The following are some simple steps you can take to begin assessing your potential investment.

Caveat emptor.

Look at the promoter – be sure he is who he says he is.
(This is not about his reputation, do you know anyone who had a great reputation but is now a ward of the penal system?)

1. What credentials does the promoter have (Lawyer, CPA, Broker)? Check them out, inspect what you expect. Every state has a website listing all license holders. Many also report any disciplinary actions taken against these individuals.2. Who gets paid on the transaction? Ask the promoter how he gets paid. Remember that maxim you learned in your college economic class “there is no such thing as a free lunch”. While everyone deserves to make a living, if he is not willing to tell you how and how much he gets paid, dig deeper. Full disclosure is always the right thing.

Look at the deal

3. Is there a written business plan? If the person asking you to make an investment hasn’t done this, has he really thought the deal through? If it is not written how can it be? Why isn’t there a written plan: maybe it’s not a solid idea, maybe it’s not truly possible, is the transaction you are being proposed not really what is going to happen, does the promoter not have a plan so it can’t be written?

4. Is it too good to be true? If the investment model shows an unusually high rate of return, dig deeper. If it looks too good to be true, it probably is. If you see phrases like ‘guaranteed return’ or ‘approved investment’ beware. Do not be intimidated when you4. don’t understand. A sophisticated scam can make you feel very unsophisticated when the transaction goes south.

5. Can you understand the investment? Good investment advisors will caution you against investing in things you do not understand. Use some common sense. If the investment seems overly complicated, be cautious. The successful transaction is not in the structure, it is in the underlying economic viability. I don’t care how complicated the ownership is, if the cow won’t give milk we are not in the dairy business.

6. Is the entity registered to do business? Most investments are structured as entities (LLC, LPs, Corporations). These entities are formed under state law and must be registered in that State. Every state maintains a listing of registered entities. Contact the State and see if the entity has been properly registered. There are two good reasons for doing this.

  • First, if the entity is not registered, it has no legal standing to do business. If it is not a legal entity, what will you own?
  • Second, the registry will tell you who the resident agent is. If you have a legal issue later on, this the person you person you need to contact.

7. Search for liens and judgments, these are a matter of public record. If you find these problems, it can in fact impact the ownership you think you are acquiring.

8. Research the principals offering the investment. Do they have any convictions or have they been bankrupt? As with the promoters, if they have licenses, verify them. If there is no history of prior success are you willing to pay their tuition on this endeavor? Do you really want to be the first in?

Is the investment registered with the Securities and Exchange Commission, (SEC)? If the investment is being advertised to the general public, it must be registered. You should have received a bevy of paperwork regarding the investment; (i.e. prospectus, financial statements, 10K, 10Q, offering circular, etc.).

9. Check with the SEC to see if, in fact, the paperwork in your hand was actually filed with the SEC. Only in rare instances are the investors lined up BEFORE the SEC filing is made. This is because additional filings are required and it becomes a more cumbersome process.10. Are the financial statements audited? Call the auditors. They will tell you whether they in fact did prepare the financial statements. What is the name of the law firm that prepared the SEC filing, call them. Did they in fact prepare the filing? It is extremely easy to make documents look official or put them on someone else’s letterhead.

Starting here will save you a lot of time. Many scams are perpetrated by people with questionable backgrounds and when discovered, the warning signs seemed very apparent. If you begin your due diligence with these 10 steps, you may end up saving yourself a lot a pain and money later.