Markets Wired

The SEC’s Office of Investor Education and Advocacy (OIEA) and the Division of Enforcement’s Retail Strategy Task Force warn investors not to make investment decisions based solely on common ties with someone recommending or selling the investment.

Don’t Trust Someone Just Because You Have Something in Common

Having something in common is a great way to strike up a conversation.  When you meet someone who grew up in your home town, graduated from the same high school, or practices the same religion, you may have plenty to talk about.

But many fraudsters take advantage of the trust that having something in common creates.  For example, they know you might find it hard to believe that a man from your church would ever try to cheat you.  Or that a woman who served in the armed forces would rip off a fellow soldier.  Fortunately, that’s usually true.  But when it’s not, and an “investment” is really a scam, the financial losses can be devastating.

What to do?  Know who you are dealing with and know what they are selling—even when the person doing the selling seems to be a lot like you.   Always do a background check on any investment professional you are considering by using Investor.gov and the SEC Action Lookup – Individuals (SALI) database.

How Does It Happen?

Fraudsters may be (or pretend to be) part of the very group they are trying to cheat.  Targeted groups may include people with common ties based on ethnicity, nationality, religion, sexual orientation, military service, and age.  Those targeted may even be a group that no one has “joined,” but that have things in common, like retirees in South Florida.
Fraudsters will target any group if they think its members can be convinced to trust them.  Some scams even enlist leaders of a group to spread the word about the scheme.  Those leaders may not realize the “investment” is actually a fraud, which means they too may be victims.

Don’t Fall For it

There are things you can do to avoid being a victim:

• Don’t check your common sense at the door, and don’t assume that people you have something in common with can necessarily be trusted.  Remember the saying:  trust, but verify.

• Even if you know the person offering the investment offer, research the seller and the investment.  Do this no matter how honest you think the person seems.  And remember that the person telling you about the investment may also have been fooled into believing that the investment is real when it isn’t.

• If someone recommends an investment, get more information.  Don’t make your decision without learning more.  Be even more careful with online recommendations, like those you see in a chat room or bulletin board for people with similar interests.  Those are common places for fraud.

• Don’t fall for investments promising spectacular profits or “guaranteed” returns.  More likely than not, they are frauds.  Also, watch out for investments claiming to have “no risks.”  Investments have risks.  Promises of quick and high investment returns, without risk, are classic warning signs of fraud.

• Don’t trust an investment offer if you can’t get it in writing.  Fraudsters often avoid putting things in writing.  Steer clear if someone tells you they “don’t have time” to write down the details.  Also, walk away if you are told to keep the investment opportunity confidential or a secret.

• Don’t be rushed into buying.  Research the “opportunity” before you decide.  Just because someone you know made money, or says they did, doesn’t mean you will.  Be especially suspicious of investments pitched as “once-in-a-lifetime” opportunities, particularly when the seller claims the recommendation is based on “inside” information.

Report Possible Fraud

This type of fraud takes advantage of your ties to others.  And that can make it especially difficult to report.  You may not want to embarrass yourself or your group.  You may be even more hesitant if someone you look up to, like a leader of your group, is involved.  But not reporting a fraud often may mean it will continue and others will be hurt—possibly people in the very group you want to protect.  Someone who is targeted for fraud is sometimes in the best position to help stop the fraud by alerting authorities.  Report possible securities fraud to the SEC.  And remember that the person who should be ashamed is the fraudster—not you.

Additional Information

For more information about this type of fraud, see our Investor Alert: Affinity Fraud (in Vietnamese), affinity fraud webpage, and brochure Stopping Affinity Fraud in Your Community.  For information on investing generally, visit Investor.gov.
Here are examples of SEC enforcement actions involving affinity fraud:

Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at Help@SEC.gov.

Receive Investor Alerts and Bulletins from OIEA by email or RSS feed.  Follow OIEA on Twitter @SEC_Investor_Ed.  Like OIEA on Facebook at facebook.com/secinvestoreducation.

The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities or tax law.