Community connections used to commit affinity fraud

By John Breyault, Vice President of Public Policy, Telecommunications and Fraud When consumers imagine a typical scam artist, a number of images may jump to mind. Nigerian princes, damsels-in-distress in Russia, and exiled dictator’s former wives’ son-in-law come to mind. What most consumers don’t immediately tend to think about is the man sitting in the pew next to them at church. They probably wouldn’t suspect their country club golf buddy. Or the neighbor who just hosted a block party. Or their tennis partner at the senior center. Unfortunately for consumers, scam artists don’t adhere to any easy-to-distinguish profile. In fact, many scammers use the very same social connections they develop as part of a community to gain their victims’ trust. The central thread of these scams is that members of a particular community tend to trust other members of the community and thus don’t exercise the proper caution needed to spot and avoid a scam. In recent years, enforcement agencies have investigated and prosecuted many of these scam artists. Unfortunately, by the time law enforcement catches up with the scam artists, there is often little money left to reimburse victims of these scams. Recent examples of Securities and Exchange Commission investigations of these scams include:

• 190 victims of a Ponzi scheme targeting seniors members of Jehovah’s Witness congregations defrauded victims of more than $16 million.
• $36 million in losses to a fraudulent investment scheme targeting members of a Korean-American community.
• A Baptist minister running an investment scheme targeting African-American congregants defrauded victims of more than $3.5 million.

Consumers who are approached to commit funds to an investment opportunity should be sure to be wary of some of the classic signs of affinity fraud, including:

• A refusal by investment operators to document promises in writing. Legitimate investment managers should be eager to provide documentation substantiating claims made in marketing materials or presentations.
• Pressure to “buy now” to avoid a “can’t miss” opportunity. Fraudsters thrive on getting victims to suspend logical thought and surrender to emotion -- particularly fear (of losing out on an opportunity).
• An absence of credentials. Investment operators should be qualified to operate. Good places to check and see if someone is competent include FINRA’s BrokerCheck database, your local Better Business Bureau, and your state Attorney General.
• Unusual similarities among investors. If an unusual number of the investors in a particular investment are from the same church, community group, or ethnic group, be sure to dig deeper into the fundamentals of the investment.

These indicators do not automatically mean that an investment opportunity is a scam. Instead, if a particular investment triggers one or more of the above red flags, consumers should be sure to investigate and make sure that the investment is actually legitimate and not a scam. For additional information on affinity scams, be sure to check out the SEC’s Affinity Fraud Investor Alert which details recent scams and gives consumers a good resource to start their due diligence.