Boomers vulnerable to fraud, study suggests

(September 21, 2005) An academic study of B.C.’s notorious Eron Mortgage scam suggests that pre-retirement investors, as well as those who consider themselves highly knowledgeable, may be more vulnerable to fraud than the general population.

The report also calls for regulatory reform to protect investors in the private market and a new push on investor education.

Eron collapsed in 1997, after the mortgage investment firm had attracted thousands of investors and raised $240 million. The company’s bankruptcy trustee managed to recover only about 18 cents on every dollar and the firms’ two principals, Frank Biller and Brian Slobogian are now in jail. They were also fined $1.8 million by the British Columbia Securities Commission (BCSC) for perpetrating a “massive fraud” on B.C. residents.

The research study, written by Neil Boyd, a criminology professor at Simon Fraser University, involved nearly 600 Eron investors. About 60% were male and most were in their mid-50s or older at the time of their initial investment. They were not particularly wealthy, with two-thirds reporting annual household incomes of less than $75,000.

“The purpose of the Eron investment was, for the overwhelming majority of investors, to fund retirement,” Boyd says. “These were men and women who were approaching retirement without adequate income.”

Perhaps surprisingly, those who described themselves as highly knowledgeable investors lost more than twice as much as other Eron investors and those who invested early (between 1993 and 1995) lost more than those who invested in 1996 and 1997, contrary to most Ponzi schemes.

“The effects of the Eron mortgage losses were devastating to hundreds. More than half reported extreme or major harm to their emotional well being, their current financial situation and their retirement security.”

Boyd’s study makes a number of recommendations, including regulatory reform and improved investor education. “All principals in businesses which seek to raise capital should be required to obtain a third-party credit check,” he suggests. “Additionally, we question the logic of an exemption from the need for an offering memorandum, when that exemption is based in personal trust. One of the hallmarks of investment fraud is that it operates on the basis of exploitation of existing trust.”

As baby boomers approach retirement in the coming decade, investor education will become a pressing problem, he says, adding that a carefully focused and creative set of educational approaches will be necessary to reach boomers, many of whom already consider themselves to be investment savvy.

The report also notes that although Eron investors overwhelmingly felt that the province’s regulators should have done more to prevent the scheme, most did not know that the BCSC has no legal responsibility to check the qualifications of investment principals in the private market, to disclose who is under investigation, to evaluate the risk of an investment, or to recover investors’ money.

“There is a clear and pressing need to make clear to investors in the private capital markets that they are essentially on their own: the principle of caveat emptor is paramount.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com