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Don’t Fall Victim To Affinity Fraud; If It Sounds Too Good To Be True, It Probably Is

By George Miller of Shustak Reynolds & Partners, P.C. posted on Wednesday, November 30, 2011.

It’s one of the oldest tricks in the book, and new clients routinely contact our firm after falling victim to it. A member of your community organization, a friend from work or perhaps even your child’s soccer coach recommends a new, “guaranteed” investment promising unbelievable double digit returns. The investment is such a sure thing, they tell you, that your town’s police chief, the principal of your child’s school and even the mayor have invested significant sums of money and are already realizing incredible returns–returns you will miss out on if you don’t invest right now. So you decide to invest a substantial portion of your savings or retirement funds to take advantage of this once-in-a-lifetime opportunity only to realize, months or even years later, that the returns you were guaranteed will never be realized and your entire investment has been lost. By then, the friend or community member you trusted has absconded with your hard earned money, and you are, like thousands of others have been, the latest victim of affinity fraud.

According to the Securities and Exchange Commission (“SEC”), affinity fraud refers to investment scams that prey upon members of specific, identifiable groups, such as religious or ethnic communities, the elderly and other professional and community groups. Scammers often enlist respected community members to participate in their fraud–almost always unknowingly–and use them to convince new investors to join the scheme by touting the significant gains they’ve realized in only a few short weeks or months. Sooner or later, when the wheels inevitably fall off the wagon, the scheme collapses and most investors are left financially devastated, twisting in the wind with little more than the falsified agreements and statements the fraudsters gave them.


The SEC has issued a list of tips to avoid affinity fraud, including the following:

(1) Check out everything concerning the investment. No matter how trustworthy the person offering the investment may seem, investigate the investment thoroughly; check his or her background; and verify the veracity of everything you are told about the investment. Consider eliciting the help of experienced counsel in your due diligence efforts.

(2) Be wary of investments promising spectacular profits or “guaranteed” returns. These are “classic signs” of fraud, according to the SEC. Remember what your parents told you–if it seems to good to be true, it probably is.

(3) Insist that everything be put in writing. Fraudsters and scammers like to avoid writing down their false promises and representations, perhaps as an attempt to escape civil liability or criminal prosecution down the line. Insist that everything be reduced to a writing, and keep in mind that legitimate private investments often involve hundreds of pages of documents and disclosures.

(4) Don’t be pressured or rushed into making a decision. Pariticularly when your life savings are on the line, take the time to learn about the investment and confirm it is legitimate and suitable for your needs before proceeding. An ounce of prevention is worth a pound of cure in this regard–and perhaps also your life savings.

(5) Finally, be wary of unsolicited e-mails advertising a once-in-a-lifetime investment. If the investment really was so desirable, the scammers would not need to email hundreds of thousands of would-be investors to participate.

Even when abiding by all of these rules, many investors still fall victim to fraud. After uncovering a fraud, it may be important to act quickly to increase your chances of recovery. If you believe you are a victim of affinity fraud or another type of securities fraud, contact our firm’s managing partner, Erwin Shustak, at (619) 696-9500 or [email protected]. Our firmhas handled many affinity fraud claims on behalf of investors from fraudulent ponzi schemes to real estate scams and other fraudulent or unsuitable investment schemes.

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