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SEC Advice: Tips For Avoiding Affinity Fraud

David P. Meyer

SEC Advice: Avoid Affinity Fraud with These Tips from the SEC

Affinity fraud schemes – when a con artist uses a group affiliation to gain his or her victims’ trust – is one of the nation’s most prevalent types of investment fraud. The schemes often involve racial, ethnic, or religious identities, but any group affiliation will suffice. Some fraudsters use union affiliations or other work-related identities to defraud their victims. Others may target a particular immigrant or age group. It really makes no difference – a charismatic con artist can take any group identity and use it to his or her own benefit.

“At its core,” says the Securities and Exchange Commission, “affinity fraud exploits the trust and friendship that exist in groups of people who have something in common.”

Typically, affinity fraudsters gain access to their victims either because they are members of the targeted group or because they are pretending to be members of that group. They also often enlist the help of a respected group leader, who ends up spreading the word about a great, new “investment” that actually turns out to be a scam. Generally, the leaders don’t realize the “investment” is a scam until it is too late.

Thankfully, the right knowledge and the right tools can go a long way toward protecting your lifelong assets.

If you’re serious about protecting yourself from investment fraud, you should:

• Know what a Ponzi scheme looks like – the vast majority of affinity fraud scams are Ponzi schemes;
• Be skeptical of “exclusive” or “private” offers;
Spend time choosing – and investigating - the right financial advisor;
• Ask for, read, and understand your investment prospectus; and
• Watch out for these common red flags of investment fraud.

You also should follow this advice from the SEC on avoiding affinity fraud:

• Even if you know the person making the investment offer, be sure to research the person’s background, as well as the investment itself – no matter how trustworthy the person who brings the investment opportunity to your attention seems to be.

Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

• Never make an investment based solely on the recommendation of a member of an organization or group to which you belong.

This is especially true if the recommendation is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be a fraud.

• Be skeptical of any investment opportunity that you can’t get put in writing. Fraudsters often avoid putting things in writing.

Avoid an investment if you are told they do “not have the time to put in writing” the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential or a secret.

For additional tips or to learn more about affinity fraud, read the SEC’s investor bulletin here.