Eight Red Flags to Watch for while Protecting Your Nest Egg

When I was reading through a blog recently, I came across the following story:

"I invested my entire IRA funds, which I earned as a retired Kindergarten teacher from San Leandro Unified School District with RE Loans. My husband, Al, was diagnosed with Parkinson’s disease 3 years ago. Al requires daily care which is very expensive. Since we lost my retirement with RE Loans, we sold our home in Oakland and have moved in with our daughter. We invested nearly $400,000 with RE Loans. Now, all of our funds are in limbo because we trusted Walter Ng. I am 82 and my husband is 84. I doubt that we will ever recover any significant part of our life savings."

Perhaps you heard this story in the news recently. Ng Real Estate Investments evidently bilked thousands of investors, mainly the elderly, out of their savings.

Apparently, this case could turn out to be one of the largest securities fraud case in California’s history. According to a class action lawsuit, $750 million dollars from about 3,000 investors is at stake.

How does one identify a failing investment?

How do you protect yourself and your family from financial elder abuse?

What steps can you take to minimize your risk?

Here are eight ways to keep your nest egg protected from a situation like this happening to you.

1.         Involve your Children         

If the person or company you are investing with believes that bringing your children into your financial affairs isn’t a wise decision, stop and think about your family and their overall needs for a moment.  Though adults may be conservative about discussing their income or budgets, it actually may be beneficial to involve your entire family in your personal affairs.

The more the whole family unit comprehends the economic reality and overall plans of the household, the better the investing results you could achieve. To keep everything organized and updated, conduct periodic family meetings with everyone in your family to measure where you are, financially. It is important to discuss what everyone’s goals and objectives are. Open communication is key to achieving your goals.

2.         One Product Cannot Solve All of Your Problems

Planning your retirement and your estate distribution after your death is a process. A very involved process. It takes time and meticulous planning to achieve the results you desire. Tax rules change often, so check your financial situation and involvement regularly. It may take some juggling to do this, but don’t put all of your retirement money into just one investment. The RE Loans case in California is a classic example. Most of the people who invested their money in RE loans invested a substantial portion, if not all, of their retirement funds.

According to reports over the past 35 years, Ng Real Estate and family pediatrician, Bruce Horwitz, ran a series of limited partnerships, making loans to developers. They told their investors that the properties were primarily in California.

"As it turned out, most of the holdings were out of state," said lawyer Richard Brown, who has filed a class action lawsuit against Ng and his partners. "They were very speculative, you know, the classic desert land outside of Utah or desert land in Texas or swampland in North Carolina."

Walter Ng would tell his investors, "It was safety first, safety second, safety third," and when investors would ask about their financial situation, Ng would assure them and always say, "You know, everything's going great," even though the RE market actually collapsed.

3.         Don’t Put your Head in the Sand  

If you hear that the area that you have invested in is beginning to fall apart, look into your investments immediately and make sure they are still there.

Take a diligence trip to the company’s headquarters. You are also allowed to read publicly-filed documents at the SEC website under the EDGAR section. Companies are required to file reports regularly.

It is critical to find out who is touching your money. Is it an organization you have heard of, or is it an individual?  One of the biggest problems with RE Loans and the operator of the recent Ponzi scheme, Mr. Bernie Madoff, was that they did actually have direct access to money.  There was not a third party intermediary between the investors and the investment brokers.

People could have avoided what happened.

4.         Pay the Taxes When you Make Money 

Yes, paying taxes is frustrating. Many times, people tend to get so emotional about not paying taxes that they make poor choices and may place their money into bad investments, just in order to delay paying those taxes.

Ultimately, these same people could actually lose all of their money and investments because the investment was bad in the first place and were blinded by the concept of tax postponement.

Stay organized and stay on top of your finances. If you can afford to pay them, do it. Right away.

5.         If it Sounds too Good to be True, it Probably is.    

Nurse Arlyss Rothman and her husband, also working in the medical field, invested in RE Loans and now have to delay their retirement after investing seven figures;

"We understood RE Loans never lost a penny. This promise was repeated millions and millions of times, they've never lost a penny of investors' money."

But they did.

It is impossible for any investment to continue to go up.  Nothing can pay an 8% return forever, no matter what the market climate delivers, period.  There will always be some level of risk and you, as the investor, need to understand what that is.

Ask yourself the important questions. What are the risks?

6.         The Asset Managers

Asset managers sometimes use churches, country clubs or other private closed organizations to raise a substantial portion of their investment.

Apparently, pediatrician, Dr. Horwitz, recruited fellow doctors and his friends at the Orinda Roadrunners Club. This begs the obvious question—what was Dr. Horwitz’s profession, managing money or taking care of patients? Mr. Ng allegedly worked the Sequoya Country Club in Oakland to recruit investors, also.

Stick to meeting professional advisors in a professional environment.

Social environments can feel better, but beware of your feelings, you are talking about your financial future, after all. Apply business mindset principals. If you have a strange feeling about anything, follow your gut and confide in a different advisor or request a legitimate meeting place.

7.         Check the Business’ Health

Is the business you are investing in healthy enough to generate the stated distributions?

Apparently, Ng Investments set up the Mortgage Fund '08 to pay off investors in the various RE Loans funds.  Even when the Real Estate market was falling apart, RE was still paying the promised 8% distribution, apparently.

Conduct regular checkups of the business’ underlying health to make sure they can afford to pay you the 8% from operations after covering all of their expenses.

If they can’t, then you have a problem.

8.         Make Sure the Reports you Receive are Clear and Understandable. 

Is there sufficient transparency to understand the complexity of the investment you are investing in?

Do they disclose all of their business activities?

Do they disclose the information of the personnel involved and their experience?

Apparently, Ng and his partners were able to take out a $50 million line of credit from a large bank and continue disbursements to family and friends.  Because they weren’t required to, they didn't disclose that the line of credit put investors in a secondary position.

In this case, the bank will have to be paid, before any investor sees a dime of their own money. Read the fine lines.

 You can read more from David Hollander at www.libertygroupllc.com