Can You Prevent Affinity Fraud?
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Forbes Affinity Fraud |
William Barrett has a nice article about Universo FoneClub and two associates, Sann Rodrigues and Victor Sales, An Affinity For Fraud.
"Federal pleadings describe the hotel meeting, held on May 18, 2006, as akin to a revival meeting. "God did not want the Brazilian community to be poor," Sales is quoted as saying, adding that "God did not want the Brazilians to spend all of their lives working as house cleaners, dishwashers and landscapers."
A PowerPoint presentation reportedly showed photographs of golfers and expensive homes, accompanied by a commentary that Universo investors would even earn enough to buy their own island. The firm's Web site held out the possibility of earning $17,000 a month.
To emphasize that point, the feds say, Universo officials handed out checks, ranging from $400 to $7,000, to 10 attendees."
The quote about what God wants always catches my eye: how could you deny it? Would anyone go around saying that God did want the Brazilians, and especially the Brazilians in Boston, spending all of their lives working as house cleaners, dishwashers and landscapers? Recall that this compliance trick was also used Cambodian ponzi scheme.
Barrett rightly ponts out, in his seven tips to avoid affinity fraud, that "Be suspicious if anyone touting an investment opportunity says it is limited to a group with a common heritage, religion, nationality, race, fraternity or other shared trait. There rarely is a valid economic reason for such a limitation."
How good are his other tips? Which are: No risk, no reward, Get it in writing, Don't buy on the spot, Check out the pitch, No secrets here, and But Bud says so!
The problem here is that except for the last bit of advice, which I will get to, there is no evidence that the tips actually prevent fraud.
However, consider what Barrett says about "But Bud says so!" tip.
"Don't rely solely on the recommendation of even a trusted fellow member of the local Order of Ancient and Honorable Groundhogs. He, too, may have been fooled"
This is an excellent tip, if you can remember how to put it into practice: When you hear the report of an economic miracle from a trusted source, don't frame the question is my trusted friend lying. Rather ask, could my trusted source be mistaken? Or in the language of economists, use Bayes Rule to update your beliefs.
