Affinity Fraud: No Safety In Numbers – Ponzi Schemes
Many people have heard about how Bernie Madoff scammed many wealthy people out of billions of dollars. Madoff pulled off something that is often referred to as a Ponzi scheme, which is a type of affinity fraud. Affinity fraud occurs when investment scams are targeted at specific groups of people. These groups usually include the elderly, the religious or professionals. Unfortunately, the very people who do the scamming can sometimes be the ones that people trust the most. One way to protect yourself is to understand what affinity fraud is and how to avoid it.
What is Affinity Fraud?
Affinity fraud occurs when specific groups of people are targeted with the intention to scam them out of money. Usually, a relationship is exploited, as in the case of a friendship, a religious association or relying on the loyalty to a common group. Many leaders of these groups trust the scammer and unfortunately help spread the scammer’s message.A Ponzi scheme is similar to a pyramid scheme. The difference lies in the fact that with a Ponzi scheme, money is promised without requiring the investor to sell anything. In a pyramid scheme, the investor often has to sell a product or service as well as try to recruit others to join. With a Ponzi scheme, the investor believes they are investing in something that is promised to make a large return. In actuality, the scammer is just bringing in more investors which provide them with more money for personal use. The scheme works as more and more new investors bring in more and more money. (For more, read Fiscally Challenged? Wise Up To Financial Fraud.)
One of the reasons affinity scams are so successful is that they rely on loyalty and testimonials. Many times the scammer will use names of others from their group to convince them that they are in good company. The scammer relies on the fact that the investor feels comfortable within this group of people and shares a sense of community with them. By learning that others within their group have already invested, investors are less skeptical and have their guard down.
Types of Common Affinity Fraud
One of the most common types of affinity fraud is targeted at religious or ethnic groups. It may be difficult to detect fraud within these groups due to their tight structure. Also due to their relationships with one another, these groups are less likely to report victimization to authorities.Usually prominent members of the group are targeted first so that others will feel more comfortable with their recommendation.
Many different types of groups can be targeted. The elderly have long been targets of many different types of investment scams. Affinity fraud is no exception. The ploy is to give an illusion of security which is something that many elderly are searching for. Professional groups are another easy target. Scammers find any group that is close-knit where they can prey upon that relationship. By learning that others within their group have already invested, the investor is less skeptical and has their guard down.
Affinity Fraud in the News
Ponzi schemes were in the news quite a bit in 2009 due to Bernie Madoff. One of the groups that he exploited included a large number of people in Hollywood. Madoff targeted big names like Steven Spielberg, and once a scammer can gain access to an elite like this, those who travel in the same circles are prime targets for the scam. (To learn more, see How To Avoid Falling Prey To The Next Madoff Scam.)
The Hollywood community is not the only group that’s been targeted. Predators rely on the fact that people that are part of these groups feel a sense of pride and belonging.
Another commonly targeted group by affinity fraud is the elderly. Fraudsters have been known to convince senior citizens to liquidate their retirement to buy securities that are never actually purchased. Some elderly have trusted their investment advisors with their retirement only to find that their money had never been invested and is long gone.
Avoiding Affinity Fraud
There are ways to avoid affinity fraud:
- Do not rely solely on recommendations by fellow friends, club members or associates.
- Be sure to know where your money is being invested and who is investing it.
- Get everything in writing and check to be sure that your money it is actually where it is supposed to be.
- Be careful if the person is trying to pressure you into quick decisions. If they make it sound too good to be true or imply it is a once in a life time opportunity, be skeptical.
Remember, it is never a good idea to have all of your eggs in one basket; it is important to always diversify. Should you actually get scammed, you will always have other money to fall back on as a safety net. If you feel you have been scammed, you can contact the SEC. Fill out their complaint form at http://www.sec.gov/complaint.shtml. You can also contact a state securities regulator at http://www.nasaa.org/QuickLinks/ContactYourRegulator.cfm to find out if the product being sold or investment being promoted is legitimately registered. (Read Stop Scams In Their Tracks for more on this topic.)
When the economy is doing poorly, a lot of people look to make back the money they lost in the stock market. This is a time when people are more vulnerable than ever to these types of scams. The best things to do are to not trust blindly, be sure to check out everything about the investment and don’t let greed get the best of you. (To learn more, see our Investment Scams Tutorial.)
by Diane Hamilton, Ph.D
Someone was asking me about Ponzi Schemes today . . . so I thought I’d share the above article I wrote for Investopedia.