Affinity fraud: How to avoid investment scams that target groups

Submitted by Harold Moldoff

(This is another in a series of public service columns. The following is an alert issued by the Office of Investor Education and Assistance of the U.S. Securities and Exchange Commission.)

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:

SEC combats affinity fraud
The SEC investigates scams that prey on members of affinity groups and has taken quick action to stop such scams, including the following:

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.

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.

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.

What you can do
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 SECís Investor Claims Funds webpage for information concerning the appointment of a receiver or claims administrator in any SEC enforcement action.

BE AWARE OF FRAUDULENT ATTEMPTS TO STEAL MONEY FROM YOU. If you have questions or concerns on offers of solicitations, we encourage you to contact the Bureau of Consumer Protection at (603) 271-3641, or 1-888-468-4454 or Rye Police Department at (603)964-5522

Harold Moldoff is a volunteer Consumer Affairs Specialist with the Bureau of Consumer Protection and Antitrust, Concord, N.H. He is a resident of Rye Beach.

September, 2009