Rick Siskey fraud case shows why this type of retirement account can be a red flag

The unraveling of an alleged Ponzi scheme run by Charlotte businessman Rick Siskey highlights a risk with a type of investment typically seen as safe and conservative: Individual Retirement Accounts, or IRAs.

Rick Siskey took his own life in December, days after court filings gave the first public indication that he was under investigation for fraud. An FBI affidavit unsealed in January alleged he was operating a Ponzi scheme for years.

Bankruptcy court filings show that more than 100 investors have submitted claims exceeding $49 million, including funds that came from IRAs they’d entrusted to Siskey. The documents indicate that at least two trust companies that specialize in so-called self-directed IRAs were the custodians of some of the investors’ money.

A self-directed IRA is different from the IRAs offered by most banks and brokerage houses. The latter type generally offers investments in stocks, bonds and mutual funds. Self-directed IRAs, on the other hand, allow investors to put money into a wider range of assets – real estate, promissory notes, private placement securities and other options that may promise higher returns but also more risk.

The U.S. Securities and Exchange Commission and state securities regulators have warned investors of the potential for fraud in these investments, saying they have investigated numerous cases where self-directed IRAs were used to build credibility for investment schemes.

The firms that serve as custodians of these investments – handling administrative tasks such as issuing statements and tax documents – have limited obligations to investors and generally don’t evaluate the actual investments, the regulators warn. They can include banks, trust companies or other entities approved by the IRS to act as a custodian.

With self-directed IRAs, “folks think there is protection there when there isn’t,” said North Carolina Secretary of State Elaine Marshall, whose office regulates the securities industry in the state. “They are not validating. They are not doing any due diligence. They are not looking at the investment.”

Investors used IRA funds

Siskey, a well-known financial planner in Charlotte since the 1980s, took in investors’ money for years, but apparently did little actual investing, according to an FBI affidavit filed in federal court. Instead, he used the money for personal purposes, such as gambling, and to pay off investors who asked for their money back.

The FBI affidavit also said Siskey made some payments on behalf of investors to an unnamed trust company that advertised itself as a “leading custodian of self-directed IRAs.” The individuals appeared to have been investing their retirement accounts with Siskey, the affidavit states.

Bankruptcy and other court documents indicate companies handling the IRAs included Mainstar Trust (previously known as First Trust Company of Onaga) and Sterling Trust (now part of Equity Trust).

In one claim submitted against Siskey’s estate in Mecklenburg County probate court, a Charlotte couple said they invested about $200,000 of rollover IRA money with Siskey. The funds, the claim says, were invested through Mainstar Trust, after being previously invested through Sterling Trust.

“To date, these funds are frozen and claimant has not received these funds,” say the documents, filed in March.

On its website, Ohio-based Equity Trust describes itself as “a leading custodian of truly Self-Directed IRAs,” while Kansas-based Mainstar calls itself a self-directed IRA custodian.

In documents obtained from one investor, a Mainstar account agreement emphasizes the account holder has the “sole responsibility” for directing the investment and the company has no “liability for any taxes, loss, or damage” that may result. A Sterling account application states that the company has “no duties or responsibilities with respect to the investments of the funds” in the customer’s account.

Equity Trust said as a matter of policy it doesn’t comment on pending litigation. Mainstar did not respond to requests for comment.

The Retirement Industry Trust Association, an industry trade group, says it’s important for investors to understand that self-directed IRA custodians have very limited duties. These firms handle chores such as reporting tax information to the IRS and following instructions from investors to move money, but they don’t recommend investments or do any reviews of the actual investments.

The companies “that administer self-directed IRAs do not do any due diligence,” said Mary Mohr, executive director of the trade group. “That’s not their job.”

If an investment adviser is offering unrealistic returns, investors should be wary, she said. “The burden of education,” Mohr said, “is on the shoulders of the investor, not the directed custodian.”

In 2015, state securities agencies around the country opened 44 investigations into complaints stemming from third-party custodians, including those who handle self-directed IRAs, and initiated 19 formal enforcement actions, according to the North American Securities Administrators Association. That compared with 63 investigations opened and nine formal enforcement actions in 2014.

The association in 2014 issued an advisory to help investors better understand the role of these custodians.

“If it’s too good to be true, check with us,” Marshall, the North Carolina secretary of state, said. “All that kind of advice applies in the IRA category just like in other offerings a person may be presented with.”

What’s next for Siskey investors?

Meanwhile, Siskey’s investors are still waiting to see how much money they will get back as former Siskey companies move through bankruptcy court.

Joseph Grier, a court-appointed trustee, is now examining investor claims and Siskey’s remaining assets. The final deadline for claims is Aug. 23, he said.

After all claims are made, Grier will determine what assets are available to distribute. Siskey’s widow, Diane, has pledged to set aside $37.5 million of the $47 million in life insurance proceeds from her husband’s death for investors, but attorneys for investors have said that might not be enough.

“What we can say is we anticipate making a substantial distribution,” Grier said. “But until we know what the claims are and what the assets are we’re not going to be able to say what that distribution will be.”

In addition to determining payouts, Grier said he is also investigating “everything about Rick Siskey and that includes who knew what when and who was involved.”

His current focus is on making payments to investors, but after that he will determine whether to bring litigation against any parties, he said.

At that time, “hopefully we will be further down the road in our investigation,” Grier said, “and know who, if anybody, we ought to sue.”

This story was originally published May 22, 2017 at 12:15 PM with the headline "Rick Siskey fraud case shows why this type of retirement account can be a red flag."