Sometimes Familiarity Also Breeds a Con Game

Affinity fraud--in which crooks prey on members of religious organizations, ethnic minorities or other identifiable groups--has become big business.

First “diagnosed” in 1988, affinity fraud has become so pervasive that many law enforcement authorities are beginning to study it as a separate and distinct type of financial scam. Congress, aware of the growing scope of the problem, has asked the North American Securities Administrators Assn. to study and develop statistics about it.

While no one has exact statistics, officials say they’ve uncovered affinity frauds targeting most professionals--including doctors, lawyers and teachers--as well as virtually every ethnic and religious group. There have been scams that concentrated on Latinos, African Americans, Chinese, Taiwanese, Koreans, Haitians and French.

There have been con artists who focused on members of particular church congregations and others who targeted broader religious sects, from fundamentalist Christians to Mormons, Baptists, Catholics and Jews. Some have even targeted graduates of particular colleges and universities.

While every state has been hit by some affinity scam, they seem to be most pervasive in California. And that’s an ominous sign for the rest of the country.

“California is a bellwether state for investment fraud,” says Scott Stapf, a spokesman for the securities association. “The fact that this problem has grown to enormous proportions in California means that it’s just a matter of time before it’s a much bigger problem in other states.”

Financial scams of all types proliferate in recessions, but affinity fraud seems to be growing faster simply because it’s unusually effective, experts say. The con artist is able to tailor the pitch to the weaknesses and worries of that specific group and sway people who are normally not gullible.

“Each sales pitch is geared to that group’s particular fears, particular needs and particular hot buttons,” says Bill McDonald, chief of enforcement at the California Department of Corporations. “The common theme is, ‘This is our chance to get a piece of the American dream. And it’s just for us.’ ”

Affinity is a way to get people to let down their guard, adds Robert W. Mills, a San Francisco-based attorney who specializes in securities fraud.

“If it were just a cold call, people would hang up. But these guys call you and say, ‘Hey, I went to school with you--or I know you from temple or the Rotary Club,’ ” he says. “They get you talking about something familiar, so you feel as if you can trust them. That’s a very potent thing.”

There is no single type of investment preferred by affinity scamsters. Instead, they tailor the “opportunities” based on the group.

For instance, one recent scam took a group of doctors and nurses for at least $10 million. The con artist, a financial planner, told his clients they were financing a long-term care facility, which was never built.

Another scam hit Chinese-Americans who were convinced to buy into a real estate partnership that in fact was nothing more than a Ponzi scheme operated by another Chinese-American.

Several recent scams have targeted retirees who are generally reluctant to take risks but are worried about declining investment returns. In California alone, McDonald says he has uncovered nine separate cons that vary in every way except that they promise high, “guaranteed” investment returns.

Affinity frauds are also popular with savvy crooks because they can go undetected for years. Bogus investments are frequently pushed through “specialized media”--television stations, newspapers and magazines catering to ethnic, professional or religious groups.These media are not effectively monitored by law enforcement, officials acknowledge.

And frequently, victims of these cons are reluctant to come forward because of ingrained distrust of authority, inability to maneuver in a foreign legal system or simply because they trust the members of their group so completely that they give the con artist every benefit of the doubt.

Worse still, authorities say, once these deals are uncovered, all law enforcement officials can do is “stop the bleeding.” The victims’ money has already been lost and there’s very little chance of recovery.

“The fact is that by the time the law enforcement authorities have been called, the horse is really out of the barn,” says McDonald. “The investing public has to be their own first line of defense.

“There are very few sure things in this world,” he says. “Anything that’s labeled as ‘high-return, guaranteed, sure thing, no risk’ is virtually guaranteed to be phony.”

How to Avoid Getting Ripped Off

How can you spot and avoid affinity fraud? There’s no set answer, because the fraud varies based on who is being targeted. But here are some tips on what to do and not do when approached:

* Ask for information in writing. Scam artists usually try to avoid making promises in writing because someone just might save the document and give it to a district attorney. However, getting written details on a legitimate investment opportunity is easy.

* Read it. Legitimate investment documents spell out the risks and say where your money is going and who is going to manage it. Read these documents carefully--particularly the parts on risk--before you invest.

* Watch the rate. Any investment that pays significantly more than Treasury bills has significantly more risk. Anyone who tells you otherwise is lying.

* Don’t follow the crowds. A lot of people who have been caught up in affinity frauds said they invested--often without asking for or reading investment documents--because a trusted friend or acquaintance invested. Don’t let your friends make investment decisions for you unless they’re willing to support you when you retire.

* Ask, “Why me?” If you’re being offered an incredible deal, ask yourself why this person would give it to you. Is the salesperson your best friend since childhood? Your brother? Your mother? If not, look harder at the deal. It’s probably not as good as it sounds.

* Follow your instincts. Many victims say they had “a nervous feeling” about investments that later turned out to be scams. But they ignored their gut response because the con “sounded so good.”