Social media and the Internet are making it easier for people to commit affinity fraud -- when a person uses a common bond he has with others to cheat them out of their money, says SEC Chairwoman Mary L. Schapiro.

U.S. Attorneys in several states have made arrests recently in cases in which a Jewish person misused trust from a close-knit Jewish community or someone infiltrated an elderly community to build enough trust to sell fraudulent investments.

"Religious groups or ethnic groups can be a hot bed for these types of fraud," says Owen Donley, chief counsel of investor education and advocacy. "We put out publications and use social media to fight this. I would hope this type of fraud is not something an advisor would fall for, but it is something advisors can help their clients watch out for.

"We warn investors to look for red flags. Anything that purports to guarantee a high profit with little or no risk is almost always a fraud," Donley says. "A potential investor should not take for granted that because someone has a common background they can be trusted. Don't be pushed into anything and, if you feel pressured, do not do it."

Schapiro added in a recent speech at the Finra Investor Education Foundation conference, "In these cases, fraudsters often rely on group members to provide recommendations and word-of-mouth advertising that brings in new victims." Affinity fraud is an "area of particular interest to enforcement."

Likewise the Microcap Fraud Working Group is one that brings together the Division of Enforcement and the Office of Compliance Inspections and Examinations in a coordinated, proactive approach to detect and deter fraud involving microcap securities.

Microcap stocks usually have a market capitalization of roughly $300 million or less and the stocks often sell for very low prices and are highly volatile.

"This type of fraud is often perpetuated through 'pump and dump' schemes, in which the securities are promoted, or pumped, through the release of false and misleading information, while insiders profit by selling, or dumping, the promoted stock to the public," Schapiro says. The SEC has shut down several operations of this nature this year.

"Last January, we brought a case against a New York fraudster who was pushing millions of shares of penny stocks on his Web site and posting price predictions with no basis in reality," Schapiro says. "While these promotional efforts brought dramatic, but temporary, increases in volume and price, the perpetrator sold shares from his personal account, earning almost $3 million in profits."

Like affinity fraud, the Internet makes promoting these types of operations more widespread and quicker, Donley adds. "There is a need for small companies to be able to raise money but because accurate information about microcap stocks can be difficult to find, investors have to be especially careful."

-Karen DeMasters