Affinity Fraud:
How To Avoid Investment Scams That Target Groups
What is an Affinity Fraud?
Affinity
fraud refers to investment scams that prey upon members of identifiable
groups, such as religious or ethnic communities, the elderly, or professional
groups. The fraudsters who promote affinity scams frequently are - or pretend
to be - members of the group. They often enlist respected community or
religious leaders from within the group to spread the word about the scheme,
by convincing those people that a fraudulent investment is legitimate and
worthwhile. Many times, those leaders become unwitting victims of the
fraudster's ruse.
These scams exploit the trust and friendship that exist in groups of people who
have something in common. Because of the tight-knit structure of many groups,
it can be difficult for regulators or law enforcement officials to detect an
affinity scam. Victims often fail to notify authorities or pursue their legal
remedies, and instead try to work things out within the group. This is
particularly true where the fraudsters have used respected community or
religious leaders to convince others to join the investment.
Many affinity scams involve "Ponzi" or pyramid schemes, where new investor
money is used to make payments to earlier investors to give the false
illusion that the investment is successful. This ploy is used to trick new
investors to invest in the scheme and to lull existing investors into believing
their investments are safe and secure. In reality, the fraudster almost
always steals investor money for personal use. Both types of schemes depend
on an unending supply of new investors - when the inevitable occurs, and the
supply of investors dries up, the whole scheme collapses and investors
discover that most or all of their money is gone.
How To Avoid Affinity Fraud
Investing always involves some degree of risk. You can minimize your risk of investing
unwisely by asking questions and getting the facts about any investment
before you buy. To avoid affinity and other scams, you should:
- Check out everything - no matter how trustworthy the person seems who brings the
investment opportunity to your attention. Never make an investment based
solely on the recommendation of a member of an organization or religious or
ethnic group to which you belong. Investigate the investment thoroughly and
check the truth of every statement you are told about the investment. Be
aware that the person telling you about the investment may have been fooled
into believing that the investment is legitimate when it is not.
- Do not fall for investments that promise spectacular profits or
"guaranteed" returns. If an investment seems too good to be true,
then it probably is. Similarly, be extremely leery of any investment that is
said to have no risks; very few investments are risk-free. The greater the
potential return from an investment, the greater your risk of losing money.
Promises of fast and high profits, with little or no risk, are classic
warning signs of fraud.
- Be skeptical of any investment opportunity that is not in writing. Fraudsters
often avoid putting things in writing, but legitimate investments are usually
in writing. Avoid an investment if you are told they do "not have the
time to reduce to writing" the particulars about the investment. You
should also be suspicious if you are told to keep the investment opportunity
confidential.
- Don't be pressured or rushed into buying an investment before you have a chance to think
about - or investigate - the "opportunity." Just because someone
you know made money, or claims to have made money, doesn't mean you will too.
Be especially skeptical of investments that are pitched as
"once-in-a-lifetime" opportunities, particularly when the promoter
bases the recommendation on "inside" or confidential information.
- Fraudsters are increasingly using the Internet to target particular groups through
e-mail spams. If you receive an unsolicited e-mail from someone you don't
know, containing a "can't miss" investment, your best move is to
pass up the "opportunity" and forward the spam to us
at enforcement@sec.gov.
Recent Affinity Fraud Schemes
Affinity frauds can target any group of people who take pride in their shared
characteristics, whether they are religious, ethnic, or professional. Senior
citizens also are not immune from such schemes. The SEC has investigated and
taken quick action against affinity frauds targeting a wide spectrum of
groups. Some of our cases include the following:
Ponzi
scheme solicited elderly members of Jehovah’s Witnesses congregations
The SEC complaint alleges that the defendants operated a Ponzi scheme and used
investor funds to pay lavish personal expenses. The defendants raised over
$16 million from more than 190 investors nationwide. Many of the victims were
elderly members of Jehovah’s Witnesses congregations and were promised returns
of up to 75 percent.
Fraudulent
real estate investment scheme directed at retirees
SEC charged various real estate investment companies and their principals with
defrauding senior citizens and retirees out of $15 million by conducting
transactions in which they issued promissory notes in real estate investments
they owned and operated. To make the sales, the defendants made gross
misrepresentations about the financial conditions of their investment
companies.
Ponzi
scheme targeted African-Americans and Christians
Defendants perpetrated an affinity fraud, raising at least $16.5 million from mostly
African-Americans and Christians by falsely representing they would receive
returns through investments in, among other things, real estate, small
businesses, and "markets of the world."
California
Investment Adviser bilked Korean Investors
Investment adviser raised more than $36 million by inducing members of the
Korean-American community to invest funds with promises of large returns.
Investors funds were not invested in accounts of a New York brokerage firm as
represented; rather defendants put funds in bank accounts and fabricated
monthly account statements. The adviser has pleaded guilty to related criminal charges.
Armenian-American
community loses more than $19 Million
This affinity fraud targeted Armenian-Americans with little investment experience,
for some of whom English was a second language. The architect of this fraud
was later indicted.
Criminal
charges against South Florida man for $51.9 million fraud
African-American victims
of this investment scheme were guaranteed that their investments would
generate a 30% risk-free and tax-free annual return.
"Church
Funding Project" costs faithful investors over $3 Million
This nationwide scheme primarily targeted African-American churches and raised at
least $3 million from over 1000 investing churches located throughout the United States.
Believing they would receive large sums of money from the investments, many
of the church victims committed to building projects, acquired new debt,
spent building funds, and contracted with builders.
Baptist
investors lose over $3.5 Million
The victims of this fraud were mainly African-American Baptists, many of whom
were elderly and disabled, as well as a number of Baptist churches and
religious organizations located in a number of states. The promoter
(Randolph, who was a minister himself and who is currently in jail) promised
returns ranging between 7 and 30%, but in reality was operating a Ponzi
scheme. In addition to a jail sentence, Randolph was ordered to pay $1
million in the SEC's civil action.
More
than 1,000 Latin-American investors lose over $400 Million
The victims sought low risk investments. Instead, the two promoters (who received
prison terms
of seven and 12 years respectively) misappropriated their funds and lied
about how much money was in their accounts.
125
members of various Christian churches lose $7.4 million
The fraudsters allegedly sold members non-existent "prime bank" trading
programs by using a sales pitch heavily laden with Biblical references and by
enlisting members of the church communities to unwittingly spread the word
about the bogus investment.
$2.5
million stolen from 100 Texas senior citizens
The fraudsters obtained information about the assets and financial condition of
the elderly victims who were encouraged to liquidate their safe retirement
savings and to invest in securities with higher returns. In reality, the
fraudsters never invested the money and stole the funds.
If you have lost money in an affinity fraud scheme or have information about one of
these scams, you should contact:
You also can check the SEC’s Investor Claims Funds
webpage for information concerning the appointment of a receiver or claims
administrator in any SEC enforcement action.
http://www.sec.gov/investor/pubs/affinity.htm