James Gonedes served two combat tours in Iraq as a Marine. While there, he formed many enduring bonds and friendships, including with fellow Marine Clayton Cohn. So when Clayton started working as an investment adviser in Chicago after their discharge, James gladly invested in his hedge fund business. He eventually gave Cohn almost $400,000—money James had inherited from his late father.
Clayton also reached out to his friends, family members and other fellow veterans as potential investors. And he controlled a so-called charity—the Veteran's Financial Education Network—that purported to teach veterans how to understand and manage their money.
Clayton repeatedly told James that his investments were doing great. According to the U.S. Securities and Exchange Commission, that was a lie. In their complaint, the SEC alleged that Clayton used less than half of the funds he collected from his family, friends and fellow veterans on the trading strategy described in his pitch to investors. And he lost every penny as a result of unsuccessful trading and bad investment choices. He used the rest of the investor funds to finance an extravagant lifestyle, and to pay redemptions to early investors. It was a classic Ponzi scheme. The SEC eventually shut down Clayton's firm, claiming it was a fraud. Many investors, including James, lost all of their money.
Unfortunately, James' story is not unique. Military veterans are targets of investment scams across the country. And in some cases, the frauds are perpetrated by fellow veterans. For instance, in San Diego, ex-Navy SEAL Jason Mullaney recently was sentenced to more than six years in prison for stealing more than a million dollars from fellow SEALs in an investment scam. And in Hawaii, Army reservist Jason Pascua cheated 29 people, many fellow reservists, out of $1.6 million.
Experts say these cases are classic affinity fraud. You trust someone because he or she is in a group you identify with, and you don't bother to check out the investment. And who would you trust more than someone you served with?
"Just because you served with someone doesn't mean you don't need to verify that the investment is above board," says Bud Schneeweis, Director of the FINRA Investor Education Foundation's Military Financial Readiness Program. He recommends getting answers to some important questions. "What did your battle buddy do in the time since you served to develop the financial wherewithal to offer you investments? Did he go to school? Is he registered with FINRA to sell you the kind of investment he's offering? Is the investment registered with the SEC?"
Regardless of your trust or ties, do your homework. To help you avoid fraud and make informed investing decisions, state and federal regulators have tools that can help. FINRA BrokerCheck lets you check to see if someone is licensed to sell securities as a broker or investment adviser. And the Securities and Exchange Commission's EDGAR database lets you research whether an investment product is registered. Always ask if a person or product is registered with the proper regulatory bodies—and verify before you invest.
Learn about how to protect your money.