Many affinity frauds turn out to be Ponzi schemes. In a Ponzi scheme new investors money goes to pay earlier investors to create the illusion that the investment is succeeding all the while the fraudster skims large amounts of the funds for his or her personal use. When the fraudster’s supply of new investor money runs out and current investors seek payment the scheme collapses. Fraudsters use many legitimate investment sounding vehicles and names to mask their schemes. For example, the fraudster may tell investors that they are investing in real estate, options, precious metals, or employing leverage or other sophisticated investment tools to increase returns.
In order to carry out affinity frauds, the fraudster will be a member of the group they are trying to defraud such as a particular denomination or church. However, any close knit community or group such as an ethnic group, immigrant community, or racial minority will work. Fraudsters may also prey upon members with other commonalities such as teachers, union members, or military servicemen. The key to affinity fraud is that the fraudster can target the group and built up a high level of trust and confidence through the affinity connection to convince them to trust the fraudster with their life savings.
According to the SEC, affinity frauds can be very difficult for regulators or law enforcement officials to detect. Sometimes victims will fail to notify authorities or pursue legal remedies either because they feel they need to protect the fraudster as a member of the group or that they convince themselves that the fraudster simply made a mistake or could not possibly abuse the group’s trust.
The SEC put out a few tips to avoid becoming a victim of an affinity fraud scam.
1) Just because you know the person making the investment offer be sure to do your homework on the person’s background and the investment. If the person isn’t a registered broker or investment advisor that’s a “red flag.” Also be aware that even if the person isn’t a registered broker they may be getting their information from another person that may be fooling them in order to tap into the group’s money.
2) If the basis of your investment is solely based upon the recommendation of a member of the group or organization, think twice, do your homework.
3) Promises of spectacular profits or “guaranteed” returns with little talk of risk are red flags.
4) Approach investment offers that aren’t in writing with extreme caution. Fraudsters often will simply ask for a check without providing disclosures. If you are provided a writing bring it to a second broker or financial advisor for a second opinion. Its possible that an experienced broker may quickly see that the disclosures lack the necessary statutory statements and warnings.
5) Be wary of pressure tactics such as “limited time offers.” Other tactics used to sell investments include promises that others that they or others have made money or “once-in-a-lifetime” opportunities.
The attorneys at Gana Weinstein LLP are experienced in representing investors. Our consultations are free of charge and the firm is only compensated if you recover.