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 Clayton’s hedge fund business. James eventually contributed almost $400,000—money he had inherited from his late father.
Clayton also reached out to his family members and other friends and 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 (SEC), that was a lie. In a formal complaint, the SEC alleged that Clayton used less than half of the funds he collected from his investors on the trading strategy described in his investment pitch. 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 was sentenced to more than six years in prison for stealing over $1 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 they’re in a group you identify with, and you don't bother to check out the investment. And who would you think you can trust more than someone you served with?
"Just because you served with someone or were friends with their spouse doesn't mean you don't need to verify that the investment is legit," said Shay Cook, financial readiness manager of the FINRA Investor Education Foundation's Military Project. She recommends getting answers to some important questions. "In the time since you served with them, what did your fellow service member do to develop the financial knowledge to offer you investments? Did they go to school or a specific training program? Are they registered with FINRA to sell you the kind of investment they are offering? Is the investment registered with the SEC?"
Regardless of your trust or ties, do your homework. State and federal regulators have tools that can help you avoid fraud and make informed investing decisions. FINRA BrokerCheck lets you check to see if someone is registered to sell securities as a financial professional. And the SEC'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 more on how to protect your money.