7 Tips to Avoid Becoming an Affinity Fraud Victim

Avoid Becoming an Affinity Fraud Victim

Some financial deals are so obviously fraudulent they’re laughable — like the email saying there’s a fortune in your name waiting for you in Nigeria, and all you have to do is pay a fee to claim it.

On the other hand, what if someone you know and trust makes you an investment offer that sounds like a sure winner?

You might act on that offer based solely on trust, without vetting the person or the product being touted. Many who have done that wound up losing much or all of their life savings.

It’s called affinity fraud, a type of scam that preys upon members of close-knit groups — such as church members, ethnic communities, a particular workforce, racial minorities, social clubs and the elderly. Even members of the military have been targets.

Even though I and others have warned about affinity fraud for years, it’s growing. So much so that the Securities and Exchange Commission and the Financial Industry Regulatory Authority have both issued investor alerts about it.

Many affinity frauds are Ponzi or pyramid schemes, where money from new investors is paid to earlier ones to give the impression that the investment is successful. Fraudsters often are members of the very group they’re defrauding, exploiting the trust and friendships they’ve developed. They sometimes enlist respected leaders within the group, who unwittingly spread the word about the scheme — becoming victims themselves.

The SEC regularly reveals affinity frauds from a wide spectrum of groups. Here are some cases that occurred within the past three years:

  • A Ponzi promoter sold promissory notes promising interest rates of 12% to 20% to African-American churchgoers, telling them the funds would be used to purchase and run small businesses such as laundries, juice bars or gas stations.
  • Ponzi promoters raised almost $6 million from nearly 80 evangelical Christian investors through fraudulent, unregistered offers of stocks and short-term, high-yield promissory notes issued by their company, which was marketed as a worldwide provider of video and Internet services.
  • The SEC obtained an emergency court order to stop a $7.5 million Ponzi scheme targeting members of the Persian-Jewish community in Los Angeles. The promoter, a member of the community, lured 11 investors with promises of pre-IPO shares of well-known companies. He then used nearly $1.6 million of their money to buy jewelry, high-end cars and VIP tickets to sporting events.
  • A fraudster in south Florida raised nearly $11 million, claiming returns as high as 26%, from clients who came to him through word-of-mouth referrals among friends and relatives. Deals usually were made during dinners at expensive restaurants. Many victims were members of the gay community.
  • The SEC found that the Amish Helping Fund, formed in 1995 by a group of Amish elders who offered securities to fund mortgage and construction loans to young Amish families in Ohio, had not updated its offering memorandum for 15 years and thus made misrepresentations about the securities offered. It agreed to update the material and take other remedial steps.

To avoid becoming an affinity fraud victim, follow these tips:

  1. If you know the person making the offer, act as though you don’t. Research the person’s background and the investment being offered — no matter how trustworthy the person who brings the offer to your attention appears to be. Remember that the person telling you about the opportunity may be a victim without knowing it.
  2. Never invest solely on the recommendation of a member of a group to which you belong. Be especially wary of pitches made through online groups, chat rooms or bulletin boards catering to an interest you have.
  3. Don’t fall for investments that promise spectacular profits, “guaranteed” returns, or little or no risk. These are classic warning signs of fraud.
  4. Reject the opportunity if you can’t get the investment promoter to put everything in writing.
  5. Be suspicious if you are told to keep the opportunity confidential.
  6. Don’t be pressured or rushed into buying into something before you have time to research it.
  7. Be leery of “once-in-a-lifetime” opportunities, particularly when the salesperson claims the deal is based on “inside” or confidential information.

Just because someone you know claims to have made money doesn’t mean that the claim is true or that you will also make money.

If you have lost money in a scam like this, contact the SEC Center for Complaints and Enforcement at www.sec.gov/complaint.shtml or your state’s securities administrator via the North American Securities Administrators Association at www.nasaa.org.

Originally published in Inside Personal Finance April 2015

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