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Affinity Fraud: How it works & how to avoid it

by Natalie MacLellan on May 12, 2010

in Fraud Prevention, Red Flags of Fraud

Beware of swindlers who claim loyalty to your group

In a world of increasing complexity, many people are searching for a way to know who they can trust. This is especially true when it comes to investing money.

Unfamiliar with how our financial markets work, often people don’t know how to thoroughly research an investment and its salesperson. Many fall prey to affinity fraud in which a con artist claims to be a member of the same ethnic, religious, career or community-based group.

“You can trust me,” says the con artist, “because I’m like you. We share the same background and interests. And I can help you make money.”

Another equally effective pitch, if the con artist is not a member of your union or association, is to lull members into a misplaced trust by selling first to a few prominent members, then pitching the scam to the rest by using the names of those previously sold.

The effect is the same: 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.

Once a victim realizes that he or she has been scammed, too often the response is not to notify the authorities but instead to try to solve problems within the group. Swindlers who prey on unions or associations play the loyalty angle for all its worth.

How to avoid affinity fraud

  • Beware of the use of names or testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once you’ve invested. (As with a Ponzi scheme, for example.)
  • Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.
  • Ask for professional advice from a neutral outside expert not in your group—an accountant, attorney or financial planner—to evaluate the investment.
  • Before investing any money, call your check with the Nova Scotia Securities Commission to learn more about the salesperson and firm. The simplest inquiry is to ask if they are registered to do business in Nova Scotia, and if the investment isallowed to be sold. If one or the other is not registered, that is a sure warning to inquire further.
  • Don’t take the word of a salesperson! Check out the investment yourself.
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Tagged as: affinity, fraud, NASAA, ponzi, scams, union

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Cold Calling Alert

by Natalie MacLellan on May 6, 2010

in Fraud Prevention

Post image for Cold Calling Alert

You’ve got to understand,” said the voice on the other end of the telephone. “Typically, I don’t make these type of calls. I’ve got people to do that. I’ve got 11 years in this business and worked my way up to senior vice president with 400 clients and $40 million dollars under management. I don’t need this account, but I want it.”

So says a caller trying to close a deal for an unknown stock by bragging of his accomplishments. But it was all a lie. He was merely reading from a script his employer had written.

“Perhaps a return of 100 percent in 20 minutes sounds a bit unrealistic,” the scam artist read from another script. “But that’s exactly how all our initial public offerings trade. We did three deals last year yielding collectively 34 points within the first ten days of trading. That’s a fact! All I ask for is your vote of confidence this one time. I won’t let you down.”

Taken from an actual script seized by securities regulators, these scenes showcase the danger faced by investors who purchase shares of stock in unknown companies over the phone from people they do not know. Unfortunately, far too many investors are falling for the lure of these “too good to be true” scams. And the telemarketers, playing upon people’s desire for ever-greater financial returns, have been running away with millions of dollars of hard-earned money.

The best way to avoid becoming a victim is to ask questions. Start by asking if the caller is registered to do business in your province. And how they got your phone number. Ask why this stock is a good investment for you, and your specific situation. Ask what risks might be involved. Where is the company traded?(You can then investigate its trading history. Make phone calls. Find out more about it.) Will they send you a prospectus? (They are legally required to.)

Don’t let someone force you into a quick decision. Take your time. Check with the Canadian Securities Administrators National Registration Search. Call the Nova Scotia Securities Commission (or your local regulator). Ask about the record of the firm and its representative. Are there any past disciplinary events? This information is available if you only ask.

With information from the North American Securities Administrators Association.

Tagged as: fraud, Investor Alert, NASAA, scams

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Entertainment Investments – Top 10 Investor Traps of 2009

August 24, 2009

As promised last week, we are going to take a closer look at each of the schemes identified in the Top 10 Investor Traps of 2009. Today we start by looking at entertainment investments.
These unregistered investments, encompassing a variety of products including movies, infomercials, internet gambling and pornography sites, promise high returns while offering little [...]

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