Fighting Back Against Financial Crime

Sometimes it seems like we're fighting a losing battle against increasingly sophisticated fraud perps. But there have been some inroads, and I thought it was time for some good news.

My hometown paper, the St. Paul Pioneer Press, recently reported on a lawsuit filed by Minnesota Attorney General Lori Swanson against the giant international life insurance company Allianz for pressuring seniors into buying deferred annuities. Although good for some people, deferred annuities are bad for seniors who can't afford to have their money tied up or who are likely to die before the maturity date. In October, Allianz and the state settled, allowing more than 7,000 Minnesotans to get their money back for annuities they'd purchased, plus interest in some cases. Swanson has also filed a lawsuit against American Family Legal Plan and Heritage Marketing and Insurance Services for selling elderly people living trusts and annuities that don't make financial sense. According to Swanson, "They scare the begeezers out of senior citizens" by suggesting they won't be able to pass their savings on to relatives without giant penalties unless they invest their money in certain ways. Heritage agents are also trained to discourage elderly prospective customers from consulting with their children or financial advisers about the policies they're considering. For more, see Watchdog.

At the national level:

In September, the Securities and Exchange Commission issued a report on "free lunch" investment seminars for seniors based on a year-long study it conducted in collaboration with the Financial Industry Regulatory Authority (FINRA) and state securities regulators. Among the key findings was that 100% of the "seminars" reviewed were actually sales presentations, despite the fact that many were advertised as educational workshops or that participants had been assured that nothing would be sold. In fact, attendees were encouraged to open new accounts and buy investment products, if not at the seminars themselves, then during follow-up contacts. For more, see SEC.

And recently, the National Adult Protective Services Association (NAPSA) joined forces with California Advocates for Nursing Home Reform (CANHR) and the Women’s Institute for a Secure Retirement (WISER) to create a new coalition, CEASE, to address annuity fraud, trust mills, and other forms of financial abuse (CEASE is a rough acronym for Coalition to End Elder Financial Abuse). CANHR has been sponsoring groundbreaking consumer protection legislation for years, and WISER develops information on financial issues. In recent testimony before the Senate Special Committee on Aging, CANHR attorney Prescott Cole cited a 92-year-old client who was talked into purchasing a $650,000 annuity that doesn’t mature until the year 2063.

Beginning on November 1, the Experian credit bureau will join with Trans Union in offering free credit freezes to victims of identity theft. For other customers, it will cost $10 to implement the freezes and $10 to temporarily or permanently remove them, unless state law mandates otherwise. The service is available to consumers in all 50 states and the District of Columbia

Last month, CBC produced an excellent program on Canadian scams against elders:

In Canadian Senior Scams, reporter Armen Keteyian takes viewers inside a Montreal "boiler room" to show how con artists operate. He also interviews Yve LeBlanc of the Royal Canadian Mounted Police; Doug Shadel who runs a call center in Seattle that warns seniors they've been target, and Zack, a working con artist.

The follow-up segment, "On the Sucker List," focuses on how scammers get hold of elders' names in the first place. In it, Zack assures us that those who sell lists with names like "Elderly Opportunity Seekers" and "Suffering Seniors" know exactly what they're being used for (for more on "information trafficking," see Predators and Politics). Also featured is U.S. Postal Inspector Timothy Mahoney who tracks down suppliers of "leads."

And finally, last month I updated my Web site to include a fact sheet on "mass marketing fraud," a term used to describe the various techniques that perpetrators use to target and defraud people using the phone, Internet, and mail. See Mass Marketing Fraud.

NYT's Article on Nursing Home Buyouts Prompts Action

In a follow-up to its September 23rd article "At Many Homes, More Profit and Less Nursing" by Charles Duhigg, the New York Times yesterday reported that the article has prompted a flurry of Congressional activity. Last week, Senators Max Baucus, who chairs the Finance Committee, and ranking member Charles Grassley sent letters to five private investment firms requesting information about their ownership and management of nursing homes–the Finance Committee oversees Medicaid and Medicare, which pay for more than two-thirds of nursing home patients. Among the firms they contacted was the Carlyle Group, one of the world’s largest private equity firms, which was in the process of buying Manor Care at the time of the report. Manor Care operates 552 facilities in 32 states. Senator Grassley has also asked the Government Accountability Office to examine how private equity ownership has affected the quality of nursing home care. And, earlier this week, two Congressional committees, the Energy and Commerce Committee and the Financial Services Committee, announced that they would also be investigating private investment firms' practices with respect to nursing homes.

The Carlyle Group also acted quickly, sending letters to regulators and officials in states where Manor Care has facilities, promising to maintain staff levels and other standards. The firm also sent letters to residents and families criticizing the Times article and denying its claim that they were intending to overhaul Manor Care to make it harder for regulators to trace ownership. But yesterday's article cites documents filed with Maryland regulators that indicate that Carlyle plans to reorganize Manor Care to make each home a stand-alone company and to separate ownership of the homes' real estate and operations, a move that other private investment groups have used to avoid liability and scrutiny by regulators.

Elder Abuse for Profit

In a chilling article that ran on September 23, The New York Times analyzed trends in patient care in nursing homes purchased by private investment groups. Using Centers for Medicare and Medicaid Services (CMS) data, The Times looked at more than 1,200 nursing homes purchased by large private investment groups since 2000 and more than 14,000 other homes; they compared the investor-owned homes against national averages in multiple categories, including complaints received by regulators, health and safety violations cited by regulators, fines levied by state and federal authorities, and the performance of homes as reported in the Minimum Data Set Repository and the Online Survey, Certification and Reporting database.

Not surprisingly, they found that investors' profits came at the expense of patient care.

The article focused on Habana Health Care Center, a 150-bed nursing home in Tampa, Florida, which was struggling when a group of large private investment firms purchased it and 48 other homes in 2002. According to the article:

The facility’s managers quickly cut costs. Within months, the number of clinical registered nurses at the home was half what it had been a year earlier, records collected by the Centers for Medicare and Medicaid Services, indicate. Budgets for nursing supplies, resident activities and other services also fell, according to Florida’s Agency for Health Care Administration. The investors and operators were soon earning millions of dollars a year from their 49 homes.

Residents fared less well. Over three years, 15 at Habana died from what their families contend was negligent care in lawsuits filed in state court. Regulators repeatedly warned the home that staff levels were below mandatory minimums. When regulators visited, they found malfunctioning fire doors, unhygienic kitchens and a resident using a leg brace that was broken.

The article also focuses on how private investment companies have made it nearly impossible for families to sue them or for regulators to levy fines by creating complicated corporate structures that obscure who controls the homes. For example, when Vivian Hewitt sued Habana in 2002 after her mother died from a large bedsore that became infected by feces, she found that its owners and managers had spread control of the home among 15 companies and five layers of firms. As a result, Mrs. Hewitt’s lawyer has been unable to establish definitively who was responsible for her mother’s care.

Investors claim that the corporate structures are common in other businesses and have helped them revive an industry that was on the brink of widespread bankruptcy. According to Arnold M. Whitman, a principal with Formation Properties I, the fund that bought Habana in 2002, "Lawyers were convincing nursing home residents to sue over almost anything…Homes were closing because of ballooning litigation costs…We should be recognized for supporting this industry when almost everyone else was running away.”

Other excerpts:

At facilities owned by private investment firms, residents on average have fared more poorly than occupants of other homes in common problems like depression, loss of mobility and loss of ability to dress and bathe themselves, according to data collected by the Centers for Medicare and Medicaid Services.

The typical nursing home acquired by a large investment company before 2006 scored worse than national rates in 12 of 14 indicators that regulators use to track ailments of long-term residents. Those ailments include bedsores and easily preventable infections, as well as the need to be restrained. Before they were acquired by private investors, many of those homes scored at or above national averages in similar measurements.

The Byzantine structures established at homes owned by private investment firms also make it harder for regulators to know if one company is responsible for multiple centers. And the structures help managers bypass rules that require them to report when they, in effect, pay themselves from programs like Medicare and Medicaid.

The Times’s analysis of records collected by the Centers for Medicare and Medicaid Services reveals that at 60 percent of homes bought by large private equity groups from 2000 to 2006, managers have cut the number of clinical registered nurses, sometimes far below levels required by law. (At 19 percent of those homes, staffing has remained relatively constant, though often below national averages. At 21 percent, staffing rose significantly, though even those homes were typically below national averages.) During that period, staffing at many of the nation’s other homes has fallen much less or grown.

To see the full article, see At Many Homes, More Profit and Less Nursing.

BTW, Charles Duhigg, the reporter who wrote the piece, is now working on an article on dynamics within families that may lead to, or be perceived as, financial abuse. His request came to Sharon Merriman-Nai, Project Director of the National Center on Elder Abuse (NCEA) Co-Management, who posted it on NCEA's list serve. Mr. Duhigg is also asking for suggestions for related topics. He can be reached at duhigg@nytimes.com

Keeping up With Financial Predators

While interviewing Shawna Reeves Nourzaie for another recent posting, I asked her what affect the sub-prime crash has had on her job. Shawna is a social worker at the Fair Lending Project for Seniors of the Council on Aging Silicon Valley. She organizes community education and outreach events about predatory lending and hooks victims up to social and legal services. Up until now, her passion has been on steering folks away from risky loans. Here's what she had to say:

Our educational focus has needed to shift radically. Teaching seniors to avoid risky loan products that no longer exist on the market doesn’t make a whole lot of sense. Our main focus now is identifying seniors who have already been victimized and helping them bring legal claims against predatory lenders and brokers. We also provide them with social work services and help them locate reasonable fixed rate loan products that will allow them to stay in their homes—not an easy task!

We're also providing much more education to seniors about reverse mortgages in light of all the marketing that is targeting them these days. My hunch is that when the credit crunch hit and lenders pulled their riskier sub-prime products, many mortgage brokers shifted their focus to the senior market and reverse mortgages. For some seniors, especially those in ill-health who might need nursing homes soon, the reverse mortgage is a terrible choice because of the high upfront costs and because the loans come due when the homeowners are out of their homes for 12 months.

For other seniors though, including victims of predatory lending who now have monthly loan payments that they cannot afford, the reverse mortgage can be the lifesaver that allows them to stay in the home. They have become the only loan product available to many seniors on fixed incomes. The risker products they were qualifying for just two months ago to get cash out are no longer available, leaving the reverse mortgage as the last product standing.

Keeping up with the various and sundry schemes that profiteers and predators use to exploit the elderly isn't easy. Just when you think you understand one, it's passé.

By the way, if you haven't seen Off the Hook Again: Understanding Why the Elderly Are Victimized by Economic Fraud Crimes, released last year, I recommend you do. Produced by the Consumer Fraud Research Group for WISE Senior Services and the National Association of Securities Dealers (which has since changed its name to the Financial Industry Regulatory Authority, or FINRA), the report describes the findings of a study aimed at understanding 1) what kinds of persuasion tactics cons use in investment and lottery scams and 2) How victims differ from non-victims. The researchers' hope is that identifying specific psychological persuasion tactics is the first step in alerting potential victims. They're also hoping that their work will lead to the development of instruments to measure vulnerability to various frauds.

What they found is that perps tailor their pitches to meet the "psychological needs" of potential senior victims. Perpetrators of investment fraud, for example, may befriend their victims, scare or intimidate them, or vary their techniques. As for who's vulnerable, in the case of investment fraud victims, the results were surprising. Victims were found to be more financially literate than non-victims, which goes against the conventional wisdom that it's naiveté or lack of experience that renders elders vulnerable to financial abuse. Victims were also:

More likely to listen to sales pitches;

More likely to rely on their own experience and knowledge when making investment decisions;

More likely to experience difficulties from negative life events than non-victims; and

More optimistic about the future.

For the full report, click on Off the Hook Again

County Caregiver Screening Program Faces Challenges

An article in yesterday's Napa Valley Register provides an update on a project I've been watching for many months. Lacking confidence that the state was going to solve the problem of preventing dangerous criminals from becoming caregivers and working in frail elders' homes, advocates in Napa County California, including Betty Rhodes of the county's Commission on Aging and Terri Restelli-Deits, planner with the Area Agency on Aging, launched a campaign to urge the county and its cities to require prospective caregivers to obtain permits. To get permits, prospective workers would be fingerprinted for FBI background checks, have their employment history for the last five years checked, and demonstrate, through Department of Motor Vehicles records, that they have good driving records.

There's a lot of support for the proposed program and little opposition. In fact, according to the article, "the list of people invested in the success of the program is a virtual 'Who’s Who' of law enforcement." It includes District Attorney Gary Lieberstein, who, in an earlier Register article, was quoted as saying he'd heard of parole officers telling convicts that home caregiving was a promising field for gainful employment. “I don’t think they would suggest they do it because they wanted to see someone ripped off,” he said. “I’d imagine it’s because parolees can get the work without a lot of background checking.” Deputy District Attorney Bryan Tong, who runs an elder abuse unit in the DA's office, estimates that about one-third of all the financial elder abuse cases he sees involve home caregivers.

The County appointed staff to help develop the program and yesterday's article reported on some of the obstacles and issues they've identified regarding the program, which include:

The possibility that it would require an act of the Legislature and the state Attorney General before FBI records can be released to the agency Napa County might set up.

The risk Napa County could be sued if a screened caregiver abuses an elder, especially if the system — for whatever reason — failed to flag a caregiver with a significant criminal past.

Problems with delays in getting fingerprint background check results, which could be a month long, as the county In Home Support Services has experienced. In that case, caregivers might not be able to work when they want to, encouraging them to operate underground.

The need for cooperation from local cities if the county passed an ordinance that would affect businesses within city jurisdictions.

Questions about how to enforce the law.

To the last item, I would add the need to develop specific criteria for disqualifying workers (e.g. types of crimes that would disqualify workers, length of time since crimes were committed, etc.) as well as mitigating factors that could affect decisions such as evidence of rehabilitation or restitution. While deciding who should and should not work with vulnerable populations may seem like a no-brainer, states and agencies have run up against myriad problems, some of which I've described in earlier posts. For example, When New Jersey passed a law disqualifying workers with certain convictions from working, over 400 current employees, many of whom had worked for years and were doing a good job, were found to have committed disqualifying crimes. So the state had to figure out how to keep them. Others have reported instances in which disqualified workers have challenged decisions to withhold employment, which has raised the call for scientific evidence linking past criminal conduct to heightened risk. For more on these issues, see Elder Abuse by Paid Caregivers on my Web site.

In the meantime, as Napa continues it struggle to iron out the issues, California and several other states are developing legislation.