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YOUR MONEY: Advice may be a scam in disguise

Investors who consider themselves fairly savvy would never touch a stock that they've heard about through a message board or spam e-mail. Those same investors, though, might end up handing thousands of hard-earned retirement dollars to a financia...

Investors who consider themselves fairly savvy would never touch a stock that they've heard about through a message board or spam e-mail. Those same investors, though, might end up handing thousands of hard-earned retirement dollars to a financial adviser they meet through friends at their union or church or bowling league.

And they could get scammed just the same.

Securities regulators across the country are trying to warn everyday investors to be careful of so-called affinity fraud.

Con artists and bad actors know that an easy way to gain access to lots of money is to gain the trust of tight-knit groups of people, such as those at a union local, professional group or church. Bernie Madoff used connections -- and others working smaller-scale scams find ways to connect with vulnerable investors, too.

"Working families feel it more when a fraud happens to them because they need every penny," said Tung Chan, commissioner of securities for the State of Hawaii.

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HOW THESE SCAMS USUALLY WORK

Regulators in Hawaii began working with unions in the state to roll out warnings about fake investment products and scams as a way to stop affinity fraud before it can take place.

Chan said typically such scams involve Ponzi schemes, where the first investors see rich returns because they're paid with money from other investors down the line. The few fortunate investors then let their friends in on the deal and invest even more money themselves -- much like what worked for Madoff -- but eventually, the scam hits hard and most people lose everything.

"If you don't understand the investment, don't buy it," Chan said.

The Office of Financial and Insurance Regulation in Michigan has warned investors to be on guard against a rise in investment scams that prey upon members of religious or ethnic communities, elderly people or others. In Hawaii, one scam involved targeting members of the deaf community.

When you know someone through a group, it's easier to drop your guard.

In Michigan, one well-known case a few years ago involved a woman named Vazilyn Poinsetta, who was so well-liked by friends and church members that some still spoke well of her after they were scammed out of thousands of dollars. While she promised to invest the money, she often used retirement money of her clients to pay her own bills.

In March, the Securities and Exchange Commission charged John H. Min of Tacoma, Wash., and his company Dime Financial Group LLC in a $6 million scheme that targeted churches, church members and senior citizens. The SEC alleged that investors were misled into believing their money would support Third World charitable causes. Instead, the money was spent on Min's lavish lifestyle and on failed high-risk investments. Min bragged that his trading expertise allowed him to make annual returns as high as 800 percent.

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NOT EVERYONE CAN BE TRUSTED

Michigan regulators also have seen bogus promissory notes that are sold as investment products that guarantee above-market, fixed interest rates.

The pitch is for high returns and safety, but the products are worthless. The scam artist almost always steals the investors' money for personal use.

Another pitch for fake products can start with unusually high offerings on some strange version of a certificate of deposit.

"Five percent on a CD doesn't maybe seem too good to be true," said Dan Lord, education and public affairs manager for the Alabama Securities Commission.

But the deal can be too good to be true, he said, if the product isn't really a true CD or isn't insured.

Lord said the warnings about affinity fraud are necessary because too often people have an inner trust when they're part of a group. And the con artists abuse that trust.

One church in Alabama was targeted by a con artist, Lord said, and things turned so bad that the church lost its building to the scam.

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HOW TO AVOID INVESTMENT SCAMS

--Know that scam artists target groups, such as church groups and unions.

--Contact state regulators if you have questions about an investment firm, professional or product.

--Beware of unrealistic returns or overly enthusiastic testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once they've invested.

--Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.

--Get advice from another professional, such as an accountant or attorney who is not a part of your group.

--See www.nasaa.org for an outreach program for unions wanting to avoid affinity fraud. See "United Against Investment Fraud" under "Investor Education."

--Understand that con artists play on your emotions. Fear comes into play when the con artist warns you that complaining about a failed investment to the government may result in your spoiling it for others or rocking the boat. Con artists try to make you feel inadequate if you don't believe them or ask too many questions.

(Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com .)

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