Friday’s Fraud – Affinity Fraud: Scammers in Sheep’s Clothing

By Benjamin Stubbs, Spring 2014 Student Intern

sheepWe’ve all heard the story about the wolf who dressed as a sheep to get an easy meal from an unwary lamb. Unfortunately some disreputable brokers, and people acting like brokers, have used this strategy to steal money from unsuspecting investors. This type of scheme is known as affinity fraud.

Affinity fraud came in fourth NASAA’s list of most common investment frauds of 2013. According to NASAA, affinity fraud “continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters.” To avoid falling victim to affinity fraud, NASAA’s president advises to base your investment decisions on the merits of the investment itself, not the connections or relationship you may have with the person asking for your money.

What is Affinity Fraud?

According to Investor.gov, “Affinity frauds target members of identifiable groups, such as the elderly, or religious or ethnic communities.” The scammers exploit the friendships and trust that often exist in certain groups by acting like they belong to the group—they put on sheep’s clothing and blend in. Then, after convincing a few members of the group that they can be trusted, they often use those members to convince others in the group that the investment being offered is legitimate.

There are several ways that fraudsters can carry out affinity fraud. The Securities and Exchange Commission (SEC) explains that fraudsters running these schemes especially like to recruit leaders of the community to help convince others to invest. Because leaders have more influence over a particular group, they can recruit people more effectively without realizing what is going on, and sadly “those leaders become unwitting victims of the fraudster’s ruse.”

socialAnother way affinity fraud occurs in through social networking. In 2011, NASAA released an alert warning of people who were using social networking to propagate scams. NASAA points out, “Just because someone has ‘friended’ you online does not mean that person is your friend when it comes to investing.” Scammers can go far beyond simply sending a friend request and can learn your views and see what your interests are and then mimic them to try to make themselves seem trustworthy.

As a recent example of alleged affinity fraud, look at this SEC announcement concerning operators of a pyramid scheme that targeted Asian and Latino Communities. According to the SEC’s complaint, the operators were recruiting investments for cloud services, but instead of building out those services or investing for the investors’ benefit, the operators were using the new investments to run a Ponzi scheme and spend the money for their own benefit to buy properties such as golf courses.

How can you avoid affinity fraud?

The SEC provides several tips on how to avoid affinity fraud. I’ll list a few here. First, do your homework. Start by running a BrokerCheck on the person asking for your money. Then ask for information, in writing, on the investment. Do not base investment decisions on someone’s advice solely because that person belongs to the same religious, professional or ethnic group as you. Base your decisions on careful study and trusted advice. Just because someone looks and acts like a friend doesn’t mean he or she is not a wolf.

Second, take your time. Just because one of your friends or someone you respect has made a lot of money on an investment, that doesn’t mean you should follow in his or her footsteps. After all that person may have been scammed, and even if he or she was not, the investment could lose money as soon as you sign on. Third, be careful online. Don’t take the bait that is often sent through emails or online networking sites that offer once-in a-lifetime investment opportunities.

Don’t make investing personal.

researchIt may be difficult to say no to a friend or trusted leader when that person asks you to invest in something, especially if he or she is, or seems to be, making a lot of money from the investment. Wise investing, however, is not based on personal relationships. If someone tries to convince you to invest in something and their main selling point is that they know all the people you know or belong to the same church or have a similar background, that’s probably a bad sign. Politely tell that person that you don’t rush into investment decisions and you need to do some research first. If the person is truly your friend, he or she should understand and give you time. If the person keeps pressing you, remember the unwary lamb who was betrayed by a clever and convincing wolf.

If you think you may have already fallen victim to affinity fraud, don’t be embarrassed. You’re not alone. You can contact our Clinic, and we’ll see if we can help you. And remember to check back in next week to pick up another tip from the past that could help you save for your future.