Like any reasonable person, John Niggeling, 56, deletes e-mails from African dictators offering him a share of their fortunes. He ignores print ads promising thousands of dollars a week working from home. Postcards declaring that he's won some lottery go straight into the trash. Yet two years ago, the Clermont, Fla. resort-community salesman did something that made him feel like just the sort of idiot who buys into these pitches. He took $108,000 and poured it into an "opportunity" that turned out to be a Ponzi scheme. He lost every penny. "I'm reasonably financially savvy. I knew better than to get involved, but I did," says Niggeling, his voice full of regret. "I still can't believe I got scammed."

At this point you may be shaking your head, feeling just a little bad for the guy but not too concerned. You'd never be fooled by whatever sucker pitch he fell for because you're too smart, right?

Before you answer, maybe you should consider some data. In a recent study, the Federal Trade Commission estimated that more than one in 10 Americans had lost money in a scam the previous year. The majority of the victims are between the ages of 25 and 44, according to the FTC; the biggest group is baby boomers. And according to an eye-opening new study by the National Association of Securities Dealers, people with financial education and higher incomes are actually more likely than otheres to fall for investment scams. So forget the stereotype that victims are all lonely old widows or wide-eyed naifs.

To protect yourself from becoming the next statistic, your first step is this: Get over the idea that you're too smart to be conned. Certainly it helps to know the earmarks of common swindles so that alarms go off when one crosses your path. But even more important, you need to recognize how vulnerable your own all-too-human psychology can make you. Fraud experts and psychologists (and unfortunately, con artists) have long known that people are not nearly as good at detecting liars as they think. And however much you may pride yourself on your powers of reason, understand that you are wired to make critical money decisions emotionally, and with biases you may not recognize. One way or another, every financial scam exploits this fact.

The sooner you recognize the chinks in your mental armor, then, the better. Still think you're too savvy to read this story? Then answer the following questions.

Do you trust your family and friends?

Three years ago, John Niggeling's nephew David told him about Learn Waterhouse, a company that promised investors a 10% monthly return, supposedly earned by trading debt from an elite group of "prime" banks overseas. To Niggeling the returns sounded too good to be true. But for every question he had -- how did Learn Waterhouse make money? Was it legal? Who else was investing? -- his nephew had an answer. David kept after him. "When he told me that a prominent local attorney was involved, I was hooked," says Niggeling. In the summer of 2004, he took $25,000 out of his IRA and put it into Learn Waterhouse. Wtihin weeks he received a check of $2,200. Encouraged, he invested another $83,000. A month later the Securities and Exchange Commisssion froze Learn Waterhouse's assets and alleged that its promoters had defrauded 1,700 investors out of $24.5 million. The investigation is ongoing. Niggeling, who will likely never see his money again, no longer speaks to his nephew. (David admist connecting his uncle to the scam but says that he too was a victim; the attorney representing the head of Learn Waterhouse declined to comment.)

According to SEC claims, the Learn Waterhouse deal was structured as a Ponzi scheme. In scams of this ilk, early investors appear to reap promised returns; in reality they're only getting money put in by later investors, but those early results make the scam look like a genuine bonanza. The alleged front for Learn Waterhouse's operation was another classic hustle, the so-called prime-bank scam. There's no such thing as a prime bank, but most marks don't learn that until too late. All they hear are some of the sexiest buzzwords in the fraudster pitch book: international investment, elite banks, "guaranteed" returns.

But what really sold Niggeling was the hard sell by his nephew. Affinity fraud, as regulators call it, is among the most effective scams going and the hardest to prevent. Typically the con artist infiltrates a social group like a church or professional club, then persuades his new friends to enroll in the scheme. Like Niggeling's nephew, the members of that inner circle become an unwitting sales network, spreading word to family and friends.

Such frauds are depressingly common. Last year, seven NFL players were allegedly cheated out of $20 million by International Management Associates, a hedge fund promising 30% annual returns. The fund's manager, Kirk Wright, had worked his way into the players' professional network -- he'd even been vetted by the NFL Players Association's Registered Financial Advisors program. (Now being sued by the victims, the NFLPA maintains that Wright was not in the program at the time the players invested.) A Harvard-educated smooth talker who owned three sports cars and lived in a million-dollar home, Wright socialized with players at his hospitality suite at football games and convinced them to invest. Former Philadelphia Eagle Blaine Bishop, 36, turned over millions of dollars to Wright -- and realized it was gone only when Wright was arrested in May for embezzlement. "I'll never be able to make up that loss," Bishop says.

It's easy to point out how improbable Wright's promised 30% return was, let alone the 10% monthly yield "guaranteed" by Learn Waterhouse, and to criticize Bishop and Niggeling for believing in them. But in the middle of an affinity fraud, such perspective is hard to come by. In fact, once people you trust have embraced a scheme, it runs against human nature not to be swept up in it. According to research done by Emory University neuroscientist Gregory Berns, when we go along with peers, activity in a part of the brain that thinks analytically may decrease, presumably reducing our skepticism. And when we go against consensus, there's a reaction in the part of the brain that's usually triggered by fear. So we're afraid to go against the crowd, even when confronted with plain evidence.

How not to be a sucker: The best antidote to any financial scam, of course, is to thoroughly check out the offer. That's easier said than done in an affinity fraud, however, when there's so much pressure to go along with the group.

As a result, it's important to establish your own personal due-diligence procedure now (see page 121 for advice) and resolve to follow your checklist to the letter when an "opportunity" appears, however much your friends swear it's legit. You rarely need to be a forensic accountant to find warning signs. In Niggeling's case, just typing "prime bank" into a search engine would have done it. The scam is so common that the SEC devotes an entire page on its website to it.

Have you suffered a personal loss?

Antioch, Tenn. resident Ann Rittenberry was devasted when the family beagle, Peanut, escaped through a hole in the backyard fence one night in December 2004. The dog had been a special gift to her son Justin at age eight, after his father passed away two years prior. "Justin loved that dog," says Rittenberry, 38, who tests software for an insurance company. She posted an ad in the paper, and a few days later a "Ron Barton" called from Atlanta to say he'd found Peanut at a Nashville truck stop and had taken the dog home. He offered to fly it back if Rittenberg would wire $85 for a pet carrier. Though she was initially skeptical, "he described the area where he found the dog, so I believed him." She wired the money, but Peanut never arrived. Barton, a.k.a. Andre Gould, was later convicted of wire fraud for conning people who'd lost pets out of some $20,000.

Gould's con was small stuff compared with a multimillion dollar Ponzi scheme, but it had interesting twists. One was the use of mapping software to make his tales more credible. The maps enabled him to describe landmarks in his targets' neighborhoods even if he'd never been there. Moreover, by focusing on panicked pet owners, he caught people at a time when they were too disgruntled to look closely into his story. "If I'd been thinking properly," says Rittenberry, "I could've driven to Atlanta or asked a friend to get Peanut. But I was frantic. I just wanted my son's dog back."

With Rittenberry, who had been widowed two years earlier, Gould unknowingly tapped into an even deeper level of vulnerability. According to the NASD study, fraud victims are more likely than the rest of the population to have experienced a "negative life event" (such as the death of a loved one, a layoff, or a divorce) in the previous three to five years. "When something bad happens in your life, it chews up your cognitive abilities and coping skills," says University of California - Santa Cruz psychology professor Anthony Pratkanis, who worked on the study.

How not to be a sucker: That tragedy weakens your judgment is hardly news to financial planners, who've seen client after client make disastrous money decisions in the wake of personal loss. If you've suffered a blow, planners say, understand that it leaves you vulnerable and could very well draw con artists to your door. The standard advice: Don't make any major financial commitments for six months after the death of a family member or other such crisis. If you can't wait, at least consult a trusted friend or financial counselor before acting.

Have you ever felt stressed about money?

In July 2005, Mike and Rhonda Bower purchased a new home in Monroe, N.C. They'd used their savings for the down payment. With their eldest son off to college that fall, "we needed extra money to catch up," says Rhonda, 40. She and Mike, 44, applied for a personal loan at their bank but were turned down because they'd just taken on a big mortgage.

"We didn't feel that we had a lot of choices," says Rhonda. They turned to the Internet, where an outfit called Unifirst Financial approved an $8,000 loan. One catch: The Bowers would have to wire collateral of $1,497 to an address in Canada. "We never heard of putting money down to borrow money," says Rhonda. Skeptical, Mike called Unifirst and was told he need send only $900. He did. Two days later Unifirst said he'd been misinformed -- he had to send the rest. Having already sunk $900 into the deal, he did as told. The Bowers say they never got the loan, nor did they ever see that $1,497 again. (Attempts by MONEY to contact Unifirst were unsuccessful.)

It appears the Bowers fell for a classic "advance fee" fraud. In this setup, also used in lottery scams and Nigerian e-mail fraud, the mark is asked to send a fee in order to get a alrger sum of money. The thief will commonly ask for a portion of the payment first, knowing that even if a victim grows suspicious, he'll usually rationalize the second installment as necessary to avoid losing the first.

The Bowers' trouble started even before they contacted Unifirst -- from the moment they decided they had no good way to raise the money they needed. According to the FTC, people who describe themselves as being in tight financial straits are more likely than others to fall victim to fraud. Behavioral economists too note that people who feel under the gun financially are willing to take bigger risks than those who don't -- one reason that lower-income investors are more inclined toward dubious "jackpot" investments like penny stocks.

How not to be a sucker: From the Bowers' initial contact with Unifirst, the deal was loaded with red flags, such as the lender's foreign address and the demand that money be wired. To protect yourself, get to know the most common warning signs now. (You'll find a list on page 116).

Also, bear in mind that while financial distress may make you feel poorer, it can actually make you more attractive to a con artist because it leaves you vulnerable. So get help from sources you know are legit. If debt is the problem, for example, let your creditors know you're in danger of falling behind and renegotiate, rather than grasping for a miracle solution. The Bowers, in the end, wound up getting the loan they needed from a family member. They only wish they had done that in the first place.

Are you willing to take a risk?

Chuck Crites, 39, a successful real estate entrepreneur in Corona, Calif., has no problem with what many regard as the cardinal rule of investing. "If you want a payoff," he says, "you have to take a risk." So in 2002, when he heard about a company called MX Factors that promised a 12% return every 90 days, he followed up. A representative explained that the company provided short-term loans to government contractors. Crites knew of the projects MX claimed to be financing, which reassured him. He felt even more assured when his initial $25,000 investment started earning fat returns. By 2003 he had raised his stake to $500,000, just before regulators exposed MX as a Ponzi scheme. Crites and 550 others lost a total of $38 million.

Like many Ponzi operations, MX sought plausibility by tying its "business" to an industry that potential victims would likely regard as profitable -- in its case, well-known local government projects. (Experts say the latest fashion in Ponzi schemes is to claim to be in natural gas or oil.) This plays well with "sophisticated" investors who relish getting a piece of deals not available in ordinary markets. That, plus the ace card of every Ponzi scheme -- the windfall payouts to early investors -- hooked Crites. "I figured if you can lose in the stock market, which is regulated, why not take a chance on something that's actually paying out?" he says.

The lure of the big score is well known to Stanford psychology professor Brian Knutson. His research has shown that the parts of the brain that anticipate reward are markedly more sensitive to the amount of potential gain than to the probability of earning it. In other words, we're wired to ask, "How big?" not "How likely?" Which is just the way a Ponzi promoter likes it.

How not to be a sucker: Both questions, however, need to be asked of any serious investment. And if you don't understand the business behind the scheme, don't invest. For all his investment savvy, Crites failed to press MX on the obvious questions: How could a business that lent to small businesses earn 12% compounded quarterly, or more than 57% a year? And if those returns were legit, why wasn't the field jammed with big lenders trying to undercut MX's prices? Crites may be quite comfortable with the rule that you must take risk to earn rewards. But he failed to apply another rule -- one that, if followed faithfully, will keep you out of any scamster's clutches. Call it the second cardinal rule of investing: If it sounds too good to be true, it is.

(source: Money Magazine, November, 2006)