Affinity at the heart of Madoff mayhem
Anthony’s Take the Madoff Test asked us whether we would have been strong enough or smart enough to recognize Madoff’s Ponzi scheme for what it was, in the absence of really obvious red flags. But which is more surprising to you: that Madoff was able to dupe knowledgeable, high-profile investors, or that he took money from members of his own extended family?
It’s a hard one to call. You’d think sophisticated investors would have the smarts and tools to look out for themselves. But then we all want to trust the family and close friends we count on to watch out for our best interests. Really, it’s not so surprising that Madoff’s family and trusted friends fell for his pyramid scheme but that the investment mogul had the nerve to offer it to them.
Turns out just about anyone can be a vitim of investment fraud, as the Canadian Securities Administrators discovered in their 2007 Investor Study: Understanding the Social Impact of Investment Fraud.
This study found that of the million or so Canadians who had at some point in their lives been a victim of investment fraud, more than half were introduced to the fraud by a friend, neighbour, co-worker, or family member. There’s a name for this—affinity fraud—and it involves any group of people well known to each other through connections like religion, ethnicity, work or social bonds and, yes, family. The way Madoff worked his Jewish connections through prestigious clubs, businesses, charities, educational institutions, and investment firms in New York and Florida is classic affinity fraud.
The key to affinity fraud seems to be that we lower our guard with people we trust. Even when we know the red flags of investment fraud, we tend to miss them or turn a blind eye when someone close to us waves them in our face. Sometimes the person close to us isn’t the scammer at all, but someone who is innocently promoting a scammer’s “opportunity” not knowing what it is. When you’re on the receiving end, it may seem rude to be suspicious and it can be awkward saying “no”. But think what being scammed would do to the relationship.
How do you handle your guard with family and friends? Do you have a way of sniffing out bad stuff with them that’s different from how you protect yourself with people you know less well? Has a family member or close friend ever approached you with an investment opportunity? What happened then?
BTW: It you ever do come across an investment opportunity that doesn’t seem quite right, report it to the BC Securities Commission online, or call 604-899-6854 or 1-800-373-6393 (toll-free across Canada). The BCSC and other regulators rely on reports to help identify suspicious and illegal market activity. Your report can help them go after scammers and keep other unsuspecting investors from becoming victims.