NASD Cracking Down on CD Scams Targeting Elderly.

WHEN you see an ad for unusually high rate certificates of deposit, get out your skunk detector.

So-called "CD brokers" are setting up near areas where a lot of retired people live. They're selling FDIC-insured CDs at higher rates of interest than banks pay.

But you may not get what you expected. You also might lose a lot of money. It doesn't occur to people that a CD could be trouble. If it's covered by FDIC insurance, you think, "What could go wrong?"

Many things.

One story is outlined in a complaint filed by the National Association of Securities Dealers against California-based San Clemente Securities and its two principals, Cooke Christopher and Thomas Sunderland. The firm did business nationwide.

The NASD also filed against seven CD brokers in independent firms who sold CDs for San Clemente.

Christopher and Sunderland settled without admitting fault and were sanctioned in various ways. (Christopher had no comment; Sunderland couldn't be reached.) Four of the brokers have settled, too. The firm was purchased by InterFirst Capital.

Alas, investors won't get any money back unless they take their case to arbitration and win. The government doesn't help.

The NASD took issue with San Clemente over a type of CD known technically as "zero-coupon."

When you buy a zero CD, you pay less than its face value. Each year's interest is added to the CD's value. At maturity, you collect all the principal and interest at once.

San Clemente and its agents advertised these CDs at high rates and claimed that buyers would pay no commissions or fees, according to the NASD complaint. Yet NASD charges that San Clemente and its brokers exaggerated the interest rate investors earned. They touted an "average annual yield" rather than the compounded "annual percentage yield" (APY) required by law.

At this point, you're probably saying, "Huh? What's the difference between the two?" The difference is absolutely crucial.

The "average yield" makes the interest rate sound bigger than it really is. For example, an average of 7.75 percent, over 10 years, is actually just 5.9 percent, compounded annually.

If you're told only the higher rate, you think you're earning more than is the actually case.

Other problems

The next problem: When investors bought, they discovered that the CDs weren't issued in their names. Instead, they were issued to an unregulated company called United Custodial Corp., "as custodian." UCC was affiliated with San Clemente.

San Clemente charged undisclosed commissions of up to 6 percent, according to the complaint. UCC charged 8 percent a year. Only the remaining amount was invested in the CD.

Investors received statements of their CD accounts. The statements made it appear that the full amount had been invested, and overstated the dollar amount of interest earned, the NASD says.

The investors weren't directly insured. If one of the banks that issued the CDs had failed, the FDIC would have paid UCC. If UCC didn't pay, investors would be stuck.

The Securities and Exchange Commission charged UCC with being an unregistered broker-dealer. In a July settlement, UCC admitted nothing but agreed to transfer ownership of the CDs to the investors themselves or to another institution.

Jeffrey Schwertfeger, one of the brokers named in the NASD complaint, hasn't settled. He wasn't aware of "anything inappropriate," he told my associate, Dori Perrucci. Schwertfeger's company, Jeffco Financial Services, has five locations in California.

At least two of Jeffco's clients are taking their cases to arbitration, says their attorney, Steven Lehat of Irvine.