“Trust me.” That’s the mantra of every securities scam artist.
Investors are more likely to jump into an investment if it is
recommended by someone they trust – particularly somebody from their
“group.”
“Affinity fraud” refers to a particularly insidious form of investment scam that targets members of an identifiable group – such as race, religion, ethnic heritage, age or special interests. As a rule, people are inclined to believe – and trust - someone who claims to have the same background or beliefs. Unfortunately, con artists know this, and are fully prepared to take advantage of that inclination.
Take, for example, a complaint filed by the SEC on September 13, 2000. In that case the Commission charges that Bernard Taalib-Din Hasan (a/k/a Bernard Caldwell), and his common law wife Maria Elena Gonzalez, targeted Hispanic investors as victims of their scheme. According to the Complaint, the defendants allegedly raised approximately $1.5 million while misrepresenting the risks and potential returns of “overseas trading” in rice, diamonds and precious metals. Investors are believed to have lost about $860,000 – more than half of the total funds that were invested.
The North American Securities Administrators Association (NASAA) cautions investors to be on guard against infinity fraud, telling the public to “Beware of swindlers who claim loyalty to your group.” That is often more easily said than done. As NASAA points out,
[e]veryone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust – sometimes to our detriment.
The warning rings true. After all, at one time or another we have all been solicited to contribute money to a place of worship, a community club, an alumni association or some other common cause. So how can individuals differentiate legitimate fund raising activities from scams? It is not always easy, particularly when the con artist’s message goes something like: “You can trust me because we have a common bond.”
How do these scamsters locate their prey? Sometimes they really are members of the “group.” On other occasions, they join organizations, go to meetings or obtain membership lists. Sometimes they do not bother to actually join the “group.” Instead, they begin by soliciting some of the more prominent members of a community or organization. Then they invoke those prominent names to attract other investors.
The Internet has made it even easier to find and communicate with members of a particular group. Chat rooms, message boards and web sites are specifically geared to special interests, religions and ethnic groups. In the past, sophisticated scam artists might buy a mailing list that identified people of a particular age group, religious belief or ethnic background. Today, they can buy e-mail lists containing even more detailed information, and communicate almost instantaneously with hundreds or thousands of potential victims.
How can you recognize “affinity fraud?” Start by keeping in mind these few examples:
How can you protect against affinity fraud? A few tips:
One final word. If you believe you have been the victim of an affinity fraud, contact your state regulator and the SEC immediately. (See CONTACT THE REGULATORS for the addresses of these agencies). Do not hesitate because you are reluctant to turn against a “group member.” After all, with friends like these …
About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.
“Affinity fraud” refers to a particularly insidious form of investment scam that targets members of an identifiable group – such as race, religion, ethnic heritage, age or special interests. As a rule, people are inclined to believe – and trust - someone who claims to have the same background or beliefs. Unfortunately, con artists know this, and are fully prepared to take advantage of that inclination.
Take, for example, a complaint filed by the SEC on September 13, 2000. In that case the Commission charges that Bernard Taalib-Din Hasan (a/k/a Bernard Caldwell), and his common law wife Maria Elena Gonzalez, targeted Hispanic investors as victims of their scheme. According to the Complaint, the defendants allegedly raised approximately $1.5 million while misrepresenting the risks and potential returns of “overseas trading” in rice, diamonds and precious metals. Investors are believed to have lost about $860,000 – more than half of the total funds that were invested.
The North American Securities Administrators Association (NASAA) cautions investors to be on guard against infinity fraud, telling the public to “Beware of swindlers who claim loyalty to your group.” That is often more easily said than done. As NASAA points out,
[e]veryone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust – sometimes to our detriment.
The warning rings true. After all, at one time or another we have all been solicited to contribute money to a place of worship, a community club, an alumni association or some other common cause. So how can individuals differentiate legitimate fund raising activities from scams? It is not always easy, particularly when the con artist’s message goes something like: “You can trust me because we have a common bond.”
How do these scamsters locate their prey? Sometimes they really are members of the “group.” On other occasions, they join organizations, go to meetings or obtain membership lists. Sometimes they do not bother to actually join the “group.” Instead, they begin by soliciting some of the more prominent members of a community or organization. Then they invoke those prominent names to attract other investors.
The Internet has made it even easier to find and communicate with members of a particular group. Chat rooms, message boards and web sites are specifically geared to special interests, religions and ethnic groups. In the past, sophisticated scam artists might buy a mailing list that identified people of a particular age group, religious belief or ethnic background. Today, they can buy e-mail lists containing even more detailed information, and communicate almost instantaneously with hundreds or thousands of potential victims.
How can you recognize “affinity fraud?” Start by keeping in mind these few examples:
- Seven officials of the Tampa-based Greater Ministries International Church were charged with operating a massive Ponzi scheme that may have defrauded investors around the country out of as much as $200 million. Greater Ministries quoted from the bible as they told investors that their money would soon double.
- The Illinois Securities Department claimed a promoter allegedly targeted Christians by saying that he had a device that could find oil based upon visions he received from God. About 150 investors are believed to have lost an aggregate of $1 million through this scheme.
- A Milwaukee, Wisconsin man was charged with allegedly raising money from hundreds of Milwaukee residents, many of whom were reached through their churches, to finance a minority owned and operated telephone company. Soon after raising the money, the promoter’s company filed for bankruptcy.
- In Indiana, the NASSA says, elderly investors were duped into buying bogus promissory notes by three men "who often got on their knees and prayed with their victims to gain their trust."
- The SEC alleged that four men bilked approximately 100 elderly persons out of about $2.5 million by promising "guaranteed" returns. According to the SEC, the defendants first obtained information about the assets and investments of the senior citizens and then encouraged them to invest in phony promissory notes issued by companies with little or no business. The SEC says that these defendants preyed on the fears and insecurities of the elderly by disseminating literature designed to alarm senior citizens with claims that the Texas probate process was costly and lengthy.
- The SEC charged a stockbroker raised and misappropriated at least $1.7 million from victims, including elderly church members, through the sale of a fictitious “Interim Church Loan Fund.”
- In another SEC action, charges were brought against a defendant who allegedly bilked 375 investors, most of whom were African-American, out of $2.8 million. Victims were falsely promised that they would have an opportunity to participate in investments and reap profits not normally available to African-Americans.
How can you protect against affinity fraud? A few tips:
- Always ask for, and review, written materials detailing the proposed investment. If it involves an Initial Public Offering, make sure you receive a prospectus that has been filed with the SEC. If someone is reluctant to provide this information, or says it is not available, you should avoid the investment.
- Discuss the investment with someone who is outside the “group” – preferably an accountant, attorney, investment advisor or broker with whom you have a long-standing, and satisfactory relationship.
- Be wary of anyone who repeatedly emphasizes his or her connection to the “group” in order to gain your trust.
- Stay away from anyone who asks you to make an investment on faith alone.
- Be skeptical of someone who invokes the names of “group” leaders or who offers testimonials from other “group” members. Many affinity frauds involve “Ponzi” schemes, where the earliest investors get high payouts at the expense of later subscribers. Those early investors may then become unwitting pawns in the scheme, speaking enthusiastically about their successful investments.
- As always, stay away from “guarantees” of profits or “risk-free” investments. There are no “sure things.”
- Always check out the person who is soliciting the investment with the SEC, NASD and your state regulators. You will not be betraying a “group” member by checking on credentials. You will, however, be following a prudent course of conduct to protect your assets.
One final word. If you believe you have been the victim of an affinity fraud, contact your state regulator and the SEC immediately. (See CONTACT THE REGULATORS for the addresses of these agencies). Do not hesitate because you are reluctant to turn against a “group member.” After all, with friends like these …
About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.
No comments:
Post a Comment