Affinity fraud
Encyclopedia
Affinity fraud includes investment fraud
s that prey upon members of identifiable groups, such as religious or ethnic communities, language minorities, 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 scheme
s" or pyramid scheme
s, where new investor money is used to make payments to earlier investors to give the 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.
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
s that prey upon members of identifiable groups, such as religious or ethnic communities, language minorities, 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 scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
s" or pyramid scheme
Pyramid scheme
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
s, where new investor money is used to make payments to earlier investors to give the 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.
Examples
Affinity frauds can target any group of people who take pride in their shared characteristics, whether they are religious, ethnic, or professional. Agencies such as U.S. Securities and Exchange Commission have investigated and taken action against affinity frauds targeting a wide spectrum of groups. Some of the cases include the following:- The slavery reparations scam.
- On November 16, 2007, Michael Owen Traynor a Bradenton, Florida, investment broker, who had found many of his clients though his church and private school social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. Traynor was subsequently sentenced to 12 years in Florida state penitentiary.
- "Armenian-American community loses $19 Million": The SEC's complaint alleges that this affinity fraud targeted Armenian-Americans with little investment experience, for some of whom English was a second language.
- "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 $325 Million": The victims sought low risk investments. Instead, the promoter (who has been sentenced to 12 years in prison) 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.
- On December 11, 2008, Bernard MadoffBernard MadoffBernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
, an AmericanUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
businessman, was arrested on charges of securities fraudSecurities fraudSecurities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
, having been turned in by his own sons after allegedly telling them his business was a "giant ponzi schemePonzi schemeA Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
". According to the New York PostNew York PostThe New York Post is the 13th-oldest newspaper published in the United States and is generally acknowledged as the oldest to have been published continuously as a daily, although – as is the case with most other papers – its publication has been periodically interrupted by labor actions...
, Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach.". Additionally, one of Madoff's middlemen was J. Ezra MerkinJ. Ezra MerkinJacob Ezra Merkin is a former money manager and financier. He was a close business associate of Bernard Madoff, and is alleged to have played a significant part in the Madoff fraud. He served as the Non-executive Chairman of GMAC until his resignation on January 9, 2009, at the insistence of the...
of Ascot Partners. According to Samuel G. FreedmanSamuel G. FreedmanSamuel G. Freedman is an American author and journalist and currently a professor at the Columbia University Graduate School of Journalism. He has authored six nonfiction books, including most recently Who She Was, a book about his mother's life as a teenager and young woman, and Letters to a Young...
of the New York Times, Merkin was prominent in the Modern Orthodox community. This allowed him to defraud institutions such as Yeshiva UniversityYeshiva UniversityYeshiva University is a private university in New York City, with six campuses in New York and one in Israel. Founded in 1886, it is a research university ranked as 45th in the US among national universities by U.S. News & World Report in 2012...
, Kehilath Jeshurun SynagogueCongregation Kehilath JeshurunCongregation Kehilath Jeshurun is a Modern Orthodox synagogue, located on East 85th Street on the Upper East Side of the New York City borough of Manhattan. The synagogue was founded in 1872...
, the Maimonides SchoolMaimonides SchoolMaimonides School is a coeducational, Modern Orthodox, Jewish day school located in Brookline, Massachusetts. The school was founded in 1937 by Rabbi Joseph Soloveitchik and his wife Tonya Soloveitchik...
, RamazRamaz SchoolThe Ramaz School is a coeducational, private Modern Orthodox Jewish prep school located on the Upper East Side of the New York City borough of Manhattan. It consists of a lower school , a middle school , and an upper school .The Ramaz Upper School is a college preparatory school...
and the SAR AcademySAR AcademySalanter Akiba Riverdale Academy is a coeducational, private Modern Orthodox Jewish day school. The school is located in the Riverdale section of the New York City borough of the Bronx. It is well known for having no walls dividing the classrooms, which is part of the school's philosophy of...
.
- On July 27, 2009, Earl JonesEarl Jones (investment advisor)Bertram Earl Jones, commonly known as Earl Jones, is a Canadian non-practicing investment adviser who pleaded guilty to running a Ponzi scheme which CBC News has reported cost his victims "a conservative estimate of about C$51.3 million taken between 1982 and 2009"...
was arrested for fraud in Montreal. His clients were English speaking elderly in French speaking QuebecQuebecQuebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level....
. On August 14, 2009, CTV and CBC Radio OneCBC Radio OneCBC Radio One is the English language news and information radio network of the publicly-owned Canadian Broadcasting Corporation. It is commercial free and offers both local and national programming...
News reported that investors with Hershey Rosen are also suspected of being defrauded.http://www.cbc.ca/canada/montreal/story/2009/08/14/investment-adviser.html Like the Jones investors, they too are Anglophones in FrancophoneFrancophoneThe adjective francophone means French-speaking, typically as primary language, whether referring to individuals, groups, or places. Often, the word is used as a noun to describe a natively French-speaking person....
Quebec.