How to Avoid Affinity Fraud

What these scams have in common is that they exploit the trust and friendship that exist in groups of people who have something in common. “Once the connection to the group is understood, the natural skepticism of the individual member is overcome, and one more group name is added to the sales column,” the NASAA writes.

Then things can get complicated. “Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam,” according to an SEC press release. “Victims often fail to notify authorities or pursue their legal remedies, and instead try to work things out within the group.”

Here are some tips to avoid becoming a victim, courtesy of the NASAA and the Indiana Secretary of State’s office:

• Check out everything. Never make an investment based solely on the recommendation of a member of a group to which you belong. Check the truth of every statement you are told about the investment. 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. Know, too, that scam artists frequently pay out high returns to early investors using money from later arrivals. Those early investors may be enthusiastic about a scheme that may collapse entirely once you’ve invested. Ask an accountant, attorney, or financial planner outside your group to evaluate the investment.
• Do not fall for investments that promise spectacular profits or “guaranteed” returns. Similarly, be extremely leery of any investment that is said to have no risks; very few investments are risk-free. Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.
• Be skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information. Make sure you understand the product being offered, and take your time in making a decision.
• Also be skeptical of any investment opportunity that is not in writing. Affinity fraud relies on word-of-mouth and networking among group members. Scammers often avoid putting things in writing. Obtain a prospectus or other written information that details the risks in the investment as well as the procedures to get your money out.
• Be suspicious if you are told to keep the investment opportunity confidential.
• Before investing any money, call your local securities agency to learn more about the salesperson and firm. Ask if they are registered to do business in your state and if the investment is allowed to be sold. If one or the other is not registered, that is a sure warning to inquire further.
• Finally, if you discover that a once-trusted group member has scammed you and your organization, as difficult as it is, you need to turn that person in to law enforcement officials. Reporting the person will help protect future potential investors.