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I.R.A. Custodians: Stricter Supervision Needed To Protect Investors

Silence is the voice of complicity. And in the case of Fiserv, the silence is deafening. A former leader in the I.R.A. service industry before selling its business to TD Ameritrade in February 2008, Fiserv is making news for its role as an I.R.A. custodian to hundreds of self-directed individual retirement accounts (I.R.A.s) that lost more than $1 billion of investors’ money to high-profile Ponzi schemes. 

All of the Ponzi scheme victims were steered solely to Fiserv as the account custodian. As for the scams, one included Bernie Madoff’s. Another was orchestrated by Louis J. Pearlman, former manager of the Backstreet Boys and N’Sync. A third Ponzi scheme was conducted by Daniel Heath, who was convicted last year of defrauding hundreds of elderly churchgoers.

All three con artists focused on the self-directed I.R.A., and all three apparently told their victims to only use Fiserv as their I.R.A. service firm. 

That edict would prove costly. More than $1 billion has been erased from I.R.A. accounts that were set up through various units of Fiserv, according to a July 24 story in the New York Times

Now investors are suing not only the masterminds of the Ponzi schemes – i.e. Madoff, Heath and Pearlman – but also companies like Fiserv that acted as custodians for individuals with self-directed I.R.A.s. 

Unlike traditional IRAs that invest in stocks, bonds or mutual funds, self-directed IRAs allow investors to put money into alternative investments. Those investments can range from real estate to hedge funds. The investor then relies on a support firm – the I.R.A. custodian – to make the purchases and perform various administrative functions. 

“From the beginning, [Fiserv] was the only firm that Madoff recommended,” said Peter Moskowitz of Corona, Calif., in the New York Times story. Moskowitz is one of dozens of Madoff victims who said they were directed to a Fiserv unit called Retirement Accounts. 

“Once, when I wanted to change, they told me ‘absolutely not’ – they would only deal with Fiserv,” Moskowitz said.

Last year, Fiserv paid $8.5 million to settle a California class-action lawsuit involving elderly victims who were snared in a long-running Ponzi scheme that made investments through self-directed IRAs administered by Heath. The investors lost about $100 million. A separate lawsuit against Fiserv, brought by about 40 investors in the same scam, is ongoing. Fiserv also faces two lawsuits by Pearlman’s victims in a federal court in Florida, as well as two Colorado lawsuits involving Madoff’s victims.

All of the lawsuits agree that Fiserv did not steer customers into the actual investments. Instead, they argue that Fiserv failed to perform its contractual and fiduciary duties as an I.R.A. custodian and, as a result, failed to protect the accounts from fraud. 

According to the New York Times, Heath’s victims say Fiserv issued inaccurate account statements that concealed repeated defaults on the promissory notes that Heath sold them. In the lawsuit involving Pearlman, documents say the securities were “completely mystifying,” with Fiserv describing them as mutual funds, assets, shares, nonstandard assets and brokerage accounts, all within the same account statements. 

Meanwhile, victims of Madoff are asking how Fiserv, as the custodian of the I.R.A. accounts, could fail to notice that no stocks were ever purchased for those accounts. 

In June, regulators shut down yet another Ponzi scheme, which claimed $30 million in I.R.A. savings. This one was run Edward Stein. As for the I.R.A. custodian who handled the account for Stein? It was none other than Fiserv.

The bottom line: Stricter regulations, supervision and oversight are desperately needed when it comes to monitoring the actions of I.R.A. custodians. Had custodians like Fiserv performed the most basic due diligence – doing record-keeping duties, for example – it would have been very difficult for scam artists like Bernie Madoff to steal investors’ I.R.A. savings. Fiserv’s failure to fulfill its obligations makes it, at the very least, an accomplice in the latest Ponzi schemes that have come to light. 

One thought on “I.R.A. Custodians: Stricter Supervision Needed To Protect Investors”

  1. Don Says:

    Mr. Hargett,
    I find your article most interesting, and most depressing for me. 12 years ago I stupidly bought viatical policies which were touted as ‘great investments’. In the 12 years only one of three has paid off and that was the smallest. The custodian listed was RAI Inc. which was recently purchased by FISERV. The fees went fron $58 per year to $300! I want out of that company – can you recommend some others that may be less expensive and vastly more honest??

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