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For Retirees, Investment Fraud Can Have a Friendly Face

Ruth Mitchell and her husband were victims of their friend’s Ponzi scheme. Photo Credit: John Trotto

It's possible that someone you trust and socialize with could defraud you. That's what happened to Ruth and Len Mitchell. They were victims of an $11 million Ponzi scheme run by their neighbor and friend, Barry Korcan.

The Mitchells socialized with Korcan. He also kept the books for Len's business, did the Mitchell's personal taxes and ran an investment company. So when Korcan came to them with an opportunity to invest $130,000 in real estate bonds, the Mitchells didn't think to question the legitimacy of the investment.

They should have. When it comes to investing, experts warn against blindly trusting people in social circles. You never know who may be a wolf in sheep's clothing. And it happens more often than you think, according to Gerri Walsh, president of the FINRA Investor Education Foundation.

"Fraudsters often invest their time to develop relationships and credibility in a particular community, positioning themselves as a financial expert and a friend," said Walsh. "This is a tactic known as 'source credibility' and like the Mitchells, many investors have fallen for this false sense of security."

The Mitchells weren't the only ones to fall into Korcan's investment fraud scheme. Over time, many of the Mitchells' friends and business associates also invested with Korcan. Because the Mitchells and others trusted Korcan, they believed Korcan was a legitimate seller. This blind faith, and the thought that if everyone else is doing it, it must be ok, is called "social consensus"—and it cost this community millions of dollars.

The IRS finally uncovered Korcan's Ponzi scheme and convicted him for mail fraud and tax evasion. But it was too late for the Mitchells and their friends to get their money back.

When you make any kind of financial investment, even among friends, follow these steps to avoid becoming a victim of investment fraud:

• Ask and check before investing. Even if you know and trust the seller, don't just take his or her word. Make sure you check out the investment and the seller.

• Avoid the "source credibility" pitch. Beware if the seller is trying to build credibility by claiming he's from a reputable firm or well known in the neighborhood. If the seller is emphasizing the relationship you have with him or her, rather than critical specifics like why the investment is right for you, how it works and the risks that come with it, you should start asking questions immediately.

• Don't fall for the "social consensus" tactic. The seller may try to convince you to invest because all of your friends or neighbors are doing just that. Even if that's true, the popularity of an investment shouldn't be your deciding factor.

For more resources on spotting investment fraud tactics, visit the FINRA Foundation's website www.SaveAndInvest.org/FraudCenter.

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