Recently the Securities and Exchange Commission (SEC) sued Kay Yang of Wisconsin alleging she defrauded Hmong-American investors out of 16.5 million dollars. The Hmong are an ethnic group native to China and Southeast Asia. According to the SEC, Yang, an investment advisor told her victims that she would invest their funds in stocks and foreign currencies, but invested little of the money and instead used most of it to fund her own lavish lifestyle. The FBI also alleges that her investment scam was a Ponzi scheme in which she used money from later investors to pay earlier investors to make the investments appear legitimate.
Yang’s scam is a good example of what is called affinity fraud where people put undeserved trust in someone offering an investment opportunity because that person is “someone like me.” Affinity fraud works because people trust other people who may share a common bond, such as family, religion or some other group affiliation. The list goes on and on. Scammers take advantage of every connection they can make with their victims to gain their trust and then steal their money. In Yang’s case, her victims, many of whom did not speak English well, put undeserved trust in her because she came from a similar ethnic background.
Before investing with anyone, you should investigate the person offering to sell you the investment with the Securities and Exchange Commission’s Central Registration Depository. This will tell you if the broker is licensed and if there have been disciplinary procedures against him or her. You can also check with your own state’s securities regulation office for similar information. Many investment advisers will not be required to register with the SEC, but are required to register with your individual state’s securities regulators. You can find your state’s agency by going to the website of the North American Securities Administrators Association. You should also check with the Financial Industry Regulatory Authority (FINRA) for information about the particular investment adviser.
It is also important to remember that you should never invest in something that you do not completely understand. This was a mistake that many of Bernie Madoff’s victims made. You also may want to check out the SEC’s investor education website at www.investor.gov. Scammers can be very convincing and it may sound like there is a great opportunity for someone to make some money, but you must be careful that the person making money is not the scam artist taking yours.
Additionally, investing with someone merely because you trust them because they are similar to you in some way is dangerous.
Having the same person advise the investment and control the investment such as was the case with Yang is a common thread among Ponzi schemers because it enables them to falsify documents to make the investment look profitable. Generally, for additional security it is desirable to have a separate broker-dealer act as custodian for investments chosen by an investment adviser.
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