In these uncertain and volatile markets hedge fund due diligence is more important than ever.  We’ve discussed how hedge fund due diligence is likely to change, but it is also important to note that hedge fund frauds can be detected through simple due diligence procedures.  In this vein, the NFA has released a notice and an alert on “affinity fraud.”  The NFA alert points out that there are many ways a potential hedge fund investor can protect themselves from a fraud by conducting basic research on the investment advisor, commodity pool operator, or forex manager.  If you are a hedge fund investor and would like a referral to a due diligence firm, please contact us. 

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National Futures Association issues Investor Alert to help individuals protect themselves from affinity fraud

December 8, Chicago – National Futures Association (NFA) has issued an Investor Alert to help individuals avoid becoming victims of fraudulent investment offers targeted to specific ethnic communities, religious organizations and social clubs. This particular type of fraud, called affinity fraud, is becoming more prevalent as individuals become more fearful of the volatile stock market and look for more “safe” investments.

“Recently, NFA has seen a rise in affinity fraud, especially within immigrant communities,” says Karen Wuertz, NFA’s senior vice-president of strategic planning and communications. “These communities are particularly vulnerable to con artists who speak their native language and know their social customs.”

In many cases, affinity fraud is conducted as a classic Ponzi scheme. The fraudster pays out high dividends to early investors using funds received from customers who sign up later in the process. Flush with success, these early investors then promote the investment offer to their friends and family, allowing the con artist to continue his scheme right up until the moment he skips town.

NFA’s Investor Alert, which can be downloaded from the Investor Learning Center section of NFA’s Web site (www.nfa.futures.org), lists several steps investors should take to avoid becoming a victim of affinity fraud.

NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

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Investor Alert

NATIONAL FUTURES ASSOCIATION
INVESTOR ALERT: AFFINITY FRAUD

During this time of financial turmoil and investor uncertainty, National Futures Association (NFA) reminds investors to be especially wary of investment offers that come from individuals who claim an affinity with a specific ethnic community, religious organization or social club. Just because someone belongs to your church or speaks your native language does not guarantee that the investment opportunity they are offering is legitimate.

“Recently, NFA has seen a rise in affinity fraud, especially within immigrant communities,” says Karen Wuertz, NFA’s senior vice-president of strategic planning and communications. “These communities are particularly vulnerable to con artists who speak their native language and know their social customs.”

In many cases, affinity fraud is conducted as a classic Ponzi scheme. The fraudster pays out high dividends to early investors using funds received from customers who sign up later in the process. Flush with success, these early investors then promote the investment offer to their friends and family, allowing the con artist to continue his scheme right up until the moment he skips town.

“One of the biggest problems with affinity fraud is the reluctance of the victims to seek help or even admit it to a friend,” says Wuertz. “A lot of damage is already done before the regulators and law enforcement agencies become aware of the problem.”

As with any investment offer, there are steps investors should take to avoid becoming a victim of affinity fraud.

• Beware of anyone who approaches you with an investment opportunity that promises great financial reward and no risk.
• Always request written information that details the risks in the investment and procedures to get your money out.
• Don’t be pushed into a quick decision. Never provide funds until you’ve thoroughly checked out the investment, as well as the firm’s and individual’s regulatory status and disciplinary history.
• Beware of testimonials you have no way of checking. Con men often pay others to act as “satisfied customers”.
• Ask what state or federal agencies the firm is regulated by and with whom it is registered. If the firm says they’re not subject to registration or regulation, proceed carefully.

NFA encourages all investors to share this information with family, friends and neighbors. Remember: Don’t make any investment decisions without a thorough examination of the investment offer and the person making the offer, no matter how well you think you know them.

NFA is a self-regulatory organization subject to oversight by the CFTC. NFA’s primary mission is to protect investors and maintain market integrity.