Avoiding Affinity Fraud

Do your due diligence on investment offers — even when they come from those you trust.

Some investment pitches are so obviously bogus they’re laughable, but what if someone you know makes you an offer that sounds like a sure winner?

You might act on it based solely on trust, without vetting the person or product being touted. Many who have done that wound up losing much or all of their life savings.

It’s called affinity fraud — a type of scam that preys upon members of close-knit groups, such as church or social club members, those who are part of ethnic communities or racial minorities, coworkers, and the elderly. Even members of the military have been targets.

In a recent example, the Securities and Exchange Commission (SEC) filed civil fraud charges against a pastor accused of exploiting church members, retirees and laid-off auto workers who were misled to believe they were investing in a successful real estate business.

The SEC alleged that the pastor in Flint, MI, cloaked his offers in faith-based rhetoric, with references to scripture and biblical figures. He allegedly told prospective investors that as a person who “prayed for your children,” he was more trustworthy with their money than a banker. He held financial presentations labeled “Blessed Life Conferences” at churches nationwide, where congregants were asked to fill out cards detailing their financial holdings, after which he promised to pray over the cards and invited attendees to one-on-one sessions with his team, the SEC said.

It alleged that the pastor’s company, Treasure Enterprises, LLC, and his associate raised about $6.7 million from more than 80 investors who were guaranteed high returns and told they were investing in a profitable real estate company with hundreds of residential and commercial properties. But the business struggled to generate enough funds to stay afloat and make promised payments to investors. The associate allegedly advertised on a religious radio station, urging laid-off auto workers with severance packages to consult her for a “financial increase.” She allegedly promised to roll over their funds into tax-advantaged IRAs and invest them in the company. But the SEC said no funds were deposited in IRAs, and the company owed investors in that scheme $1.9 million when the complaint was filed.

More recently, Michigan regulators shut down the pastor’s business and imposed fines of $40,000 each against him and his business and $90,000 against his associate. The fines have been deferred until the SEC case is resolved.

Many affinity frauds are Ponzi or pyramid schemes, in which money from new investors is paid to earlier ones to give the impression the investment is successful.

To help avoid becoming an affinity fraud victim, follow these tips:

• If you know the person making the offer — no matter how trustworthy — act as though you don’t. Research the person’s background and the investment offer. Sometimes those making pitches are victims themselves without realizing it.

• Never invest solely on the recommendation of a member of a group to which you belong. Be especially wary of pitches made through online groups, chat rooms or bulletin boards catering to an interest you have.

• Don’t fall for promises of spectacular, “once in a lifetime” profits or “guaranteed” returns with little or no risk. These are classic signs of fraud.

• Reject the opportunity if you can’t get the promoter to put everything in writing.

• Be suspicious if you’re told to keep the opportunity confidential.

• Don’t be pressured into something before you have time to research it.

• Just because someone you know claims to have made money doesn’t mean that’s true or that you will also make money.

If you have a question or concern about an offer, or you think you have encountered a fraud scheme, contact the SEC, FINRA or your state securities regulator.

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