9 tips for avoiding affinity and other investment scams and improving your financial literacy: Internet ScamBusters #124
This is a time of year when scams truly abound. And since April is Financial Literacy Month, we decided to focus on an important type of investment scam we haven't covered before: affinity scams.
One quick announcement first: We're excited to tell you about the second new ebook of 2005 that our company is publishing. If you're a busy parent who is looking for a collection of kids' craft activities that kids really love, check out the first promo below or click here.
OK, let's get going...
Affinity and Other Investment Scams
April is Financial Literacy Month. According to NASAA, the North American Securities Administrators Association:
"The need for financial education in the United States has never been greater. The precipitous drop in savings rates and the rise of personal debt indicates a looming crisis that will be averted only through the combined efforts of public and private sectors, educators and, in the end, individuals making informed choices about their own financial futures. These problems will not be solved by education alone, but we are certain that they cannot be solved without education."
We agree. And with the big ups and downs of the stock market these days -- and with so many baby boomers realizing they won't have enough money to retire -- many investors (especially retirees), are becoming more vulnerable to investment fraud.
Last month, NASAA named the Top 10 threats to investors. You can see their list here:
Affinity fraud is #8 on NASAA's list.
Affinity fraud is a really important topic that we haven't yet covered.
Affinity groups are organizations where the members share a common religion, ethnicity, profession or interest.
Affinity fraud involves scammers joining or pretending to be members of the group in order to scam the organization's members by gaining their trust. They often focus on conning the group's leaders into trusting them so that the leaders will unwittingly help them spread the scam.
Con artists are masters at exploiting the trust and friendship that exists in affinity groups. In fact, they will sometimes get down on their knees to pray with their victims in order to gain trust and win them over.
For example, in February, a federal jury convicted a Georgia preacher of stealing almost $9 million from 1,600 small, African American churches (as well as other non-profits). The minister had told his congregation -- and these people then told their friends and relatives -- that he was developing Christian resorts around the country. For just a few thousand dollars, their church would be 'members' of the company, which meant that in time, they would get a grant or forgivable loan up to $500,000.
However, rather than using the money to develop Christian resorts, the Georgia preacher actually used investors' money for buying cars, private jets, limos and gambling trips to Las Vegas.
Another example occurred last May, when a Korean man raised nearly $36 million from Korean citizens (many elderly). He claimed he'd set up brokerage accounts for each investor at Carlin Equities Corp., a registered broker-dealer. He guaranteed returns by purchasing and selling stock on the victims' behalf at discounted prices.
Instead, he deposited most of the money into his own personal bank account and created and sent fraudulent statements to his victims that appeared to be issued by Carlin Equities Corp.
Affinity scams work because many people are looking for short cuts for knowing who to trust -- and affinity groups provide that short cut.
Scammers use the pitch that the victim can trust them because 'I'm just like you.' Since the scammer shares the same background and/or interests, they claim they are trustworthy, and that they can help the victims make money.
Here are 9 tips to help you avoid getting taken by affinity scams:
1. Always check out any investment carefully, no matter how trustworthy the person seems to be. Recognize that the person telling you about the investment may also be a victim, so never take their word for it.
2. Be very skeptical of testimonials from other members of your affinity group. Scammers often pay out high returns to early investors, and then make their money on later investors based on the referrals from the early investors.
3. Always be suspicious of any investment that promises guaranteed high returns, spectacular profits, or no to little risk. As you know, if it seems too good to be true, it probably is a scam. Investments are almost never without risk.
4. Always get information in writing. Scammers don't like to put things in writing, but legitimate investments always offer a prospectus or other written information. This written info should explain the risks of the investment and exactly how you can get your money out of the investment.
5. Never allow someone to pressure you into making an investment -- this is a big red flag that the investment is a scam. Always take time to investigate and do your research. 'Once-in-a-lifetime' investment opportunities are usually just ways to lose your 'lifetime' of savings.
6. Get advice from a neutral outside expert, such as your accountant, attorney or financial planner. Ask them to evaluate the investment risks for you.
7. Get help from your state or provincial securities agency. Make sure the person offering the investment is registered to do business in your state, and that the investment is legal.
8. Don't ever invest a significant portion of your life savings in just one investment, no matter how good it seems. We believe a diversified portfolio is a good idea.
9. Never respond to spam email investment offers. They're all scams.
For more on affinity fraud, click here.
And for more on how to avoid investment scams, schemes and scandals, visit one of our most popular pages on investing fraud.
OK, time to wrap up. Take some time this week to improve your financial literacy. And have an excellent week.