February 02, 2009


It seems that in the past few months an inordinate amount of financial scams have been uncovered. You’ve likely seen the media buzz surrounding the Bernie Madoff allegations of swindling $50 billion from investors. To me, there is a common thread that appears to be at the heart of many of these exposed financial ‘schemes.’ Many people expect greed and/or ignorance to be at the heart of a financial scam. Granted, these factors have their place. I’m not going to pretend that greed doesn’t play a role for an individual lured by someone like Nicholas Cosmo (recently arrested) and his promises of annual returns as high as 80%! I do believe that there is another lesson we can learn, however … the very real risks of affinity fraud.

The SEC defines affinity fraud as “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, elderly, or professional groups.” These types of scams work by exploiting the trust and friendship shared by groups of people who share a common bond. No group is immune from being a target. The Wall Street Journal and ABC News (Different Worlds, One Scam) both have carried recent news stories about the phenomenon.


As every investor has learned in the past year (if it wasn’t learned or realized prior), investing ALWAYS involves some degree of risk. The objective is to eliminate unnecessary risks by asking questions and gathering facts about any investment prior to purchasing it. The SEC (http://www.sec.gov/investor/pubs/affinity.htm) outlines a list of things ‘to do’ to minimize the risks of falling prey to these types of affinity scams …

CHECK OUT EVERYTHING. No matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely upon the recommendation of a member of a group (i.e., professional organization, social, church, ethnicity) to which you belong. Investigate the investment opportunity thoroughly and check the truth of what you are told; the person telling you about the investment may also have been fooled into believing it is legitimate (when it is not).

AVOID THE PROMISE OF SPECTACULAR PROFITS/“GUARANTEED” RETURNS. Your parents were right when they told you that if ‘it seems too good to be true, it probably is.’ Be leery of any investment that is said to have no risks. The greater the potential return, the greater the risk of loss. Any promise of a quick profit with little or no risk is a classic warning sign.

OFFER IS NOT IN WRITING. You have good cause to be skeptical of any opportunity that is not in writing. Any opportunity you are told to be hush-hush about should also raise your suspicions.

TIME-SENSITIVE OFFERS. Be on the lookout for opportunities that are “once-in-a-lifetime” (particularly when the recommendation is based on “inside” information). Avoid situations where there is pressure to rush into buying before you have the chance to think avoid/investigate the opportunity. If the offer will “go away” tomorrow if you don’t buy in today, you should probably walk away.

E-MAIL/INTERNET TARGETING. More and more frequently, scams are being perpetrated over the Internet, targeting groups through e-mail spam. If your “can’t miss” investment comes via e-mail, forward it to the SEC enforcement team (enforcement@sec.gov) and delete it.

If you have been targeted [or victimized] by an affinity fraud scheme, contact:
- The SEC Complaint Center
- Your State’s Securities Administrator