Cautionary Tale of Defrauding the Elderly

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Two Morgan Stanley investment advisers agreed last week to plead guilty to stealing nearly $500,000 in a set of schemes that took particular aim at their elderly or retired clients, the U.S. Department of Justice charged. One client is in his mid-80s.

Multiple allegations detailed in the federal complaint demonstrate the creative ways that trusting older individuals might be deceived. For example, the Justice Department (DOJ) indicated that college tuition may have been the auspice or motivation for adviser and broker James S. Polese’s alleged fraud to obtain $320,000 from the client in his 80s – labeled Client B in the complaint.

The allegations included that Polese, age 51, knew a $50,000 loan from Client B for his children’s college expenses was prohibited by Morgan Stanley and was “a conflict of interest between the client and his adviser,” said the complaint, which was filed last week in U.S. District Court in Boston.

Polese and Cornelius Peterson, who both live in the Boston metropolitan area, also worked together to divert money from Client A and also a Client B to a failed wind farm investment without their knowledge, the complaint said. A third client allegedly paid inflated fees.

The brazen allegations in this case come amid reports that financial fraud against the elderly is on the rise. Retired people with nest eggs can be enticing targets for scam artists, and the elderly are “likely financially vulnerable” if they are experiencing cognitive decline, one study said. Further, a trusting senior might have more difficulty detecting financial deceptions that involve complex transactions. (Little detail about the clients’ personal situations was disclosed in the court documents.)

Morgan Stanley said that it fired Polese and Peterson in June 2017 immediately after uncovering the fraudulent activities and “referred the misconduct to regulatory and law enforcement agencies.” The two are registered brokers, and the Securities and Exchange Commission was involved in the investigation. The brokers agreed to plead guilty, said a statement from the U.S. Attorney in Massachusetts. A plea hearing is scheduled for February 15.

Client A and Client B were involved in the wind farm investment, the complaint said: Client A lost $100,000 after Peterson made “false statements” to his employer “when he signed a form stating that Client A had verbally authorized the $100,000 [wind farm] investment.” Client B, a businessman, was unaware that his funds were being used to support the wind farm, in the form of a loan account that could be used as a collateral backstop to the project, according to the charges. Although the funds were never used, Client B’s money was nevertheless put at risk, DOJ said, and he paid $12,000 in fees associated with the transaction.

Boston attorney Carol Starkey said her client, Peterson, age 28, was a “minor participant” and noted that Polese, who is 23 years his senior, was Peterson’s supervisor. Polese’s attorney did not respond to requests for a comment.

There was also a Client C, a retired paralegal. Here’s how the government said she was allegedly victimized by Polese: an investment fee equal to 1.5 percent of her portfolio’s asset value was regularly withdrawn from her account, but Polese was “fraudulently inflating” the fee, which was actually 1 percent.

Trust, established over the years between an older client and an investment adviser, can play a role in fraud. Client B has been a Morgan Stanley client since the 1980s and Polese’s client for eight of them. Client B had confided to his financial adviser that he planned “to give away substantially all of his assets to charity,” the complaint said.

Federal authorities are seeking that the funds be returned to the victims. The Justice Department’s charges of investment adviser fraud carry sentences of up to five years in prison; bank fraud is up to 30 years.

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Jim Linnehan

I find it appalling that “…charges of investment adviser fraud carry sentences of up to [ONLY] five years in prison…”

Such charges, in my opinion, warrant much higher sentences, especially in cases involving retirement funds, but especially in cases involving retirement funds of the elderly.

    Mark Gall

    I do not disagree with your statement concerning the sentences, although be aware that with a Federal conviction, there will not be parole, the person will serve what they get (minus 1 day each month for good behavior). State convictions often actually serve far less of actual sentence.

Ken Pidcock

People need to understand that, unless their compensation varies with the success of your investments, financial service providers are not going to treat you as a client. They are going to treat you as a host. As in that which sustains a parasite. Not a moral judgment – it’s how many of us make a living – but you need to be aware of it.

    Tom in Bucks

    Although the risk of becoming a host may be less if you deal with a fee-only advisor – though this route is likely not “affordable” by smaller investors. And as a general, do not deal with one who will not accept (and whose firm will not accept) fiduciary responsibility.

      Ken Pidcock

      Fair enough, and I cannot speak highly enough of the Garrett network advisor with whom we’ve worked. But the sector as a whole…I think of target date funds. One’s first impression is that these are balanced funds that keep re-balancing. But no. Most (if not all?) are funds of funds. They are designed not to mitigate clients’ risk but to allow every fund in a family to get a piece of clients’ (typically elevated) expenses. Anyone would be better off looking at a TDF’s glide path and balancing between stock and bond index funds. Not rocket science, but there’s money to be had in convincing us that it is.


As an adjunct to your blog, investment advisory fees will no longer be deductible under the new tax law.

It amazes me that people just fork over a percentage of their assets, to advisors every year, whether they gain or lose money. It seems to me this should be negotiable and contingent upon performance

Paul Brustowicz

Stories like this pop up every year or so. Lots more do not make the news.

More than a decade ago I produced a program at the Society of Financial Service Professionals in cooperation with the Alzheimer’s Association on the signs of cognitive impairment in the elderly. The program was aimed at financial advisors and others with fiduciary responsibilities on what constituted cognitive impairment and the ethics of dealing with the elderly who may be impaired.

The elderly have been, are, and always will be, sitting ducks for unscrupulous and unethical advisors despite state requirements for ethics courses.


It’s important to note that investment advisory fees will no longer be tax deductible for 2018. This used to take the sting out of this expense.

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