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 firstname.lastname@example.org.
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:
The SEC Complaint Center
Your state’s securities administrator. You can find links and addresses for your state regulator by visiting the North American Securities Administrators Association’s website. That organization also has investor tips for avoiding affinity fraud.
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.
How to be sure your deposits are fully insured
For the last 75 years, especially during times of economic uncertainty, families have counted on the certainty of federal deposit insurance. “The American people can rest comfortably knowing that their FDIC-insured deposits are 100 percent safe,” said FDIC Chairman Sheila C. Bair. “In fact, there’s no safer place in the world for their checking, savings or retirement money.” How can you make sure all your deposits are safely protected within the federal insurance limits?
Learn the rules for deposit insurance coverage. In particular, be aware that Congress has temporarily raised the basic deposit insurance coverage from at least $100,000 to at least $250,000 per depositor, through (under current law) December 31, 2009. That means, through 2009, if you (or your family) have up to $250,000 in your deposit accounts at one insured bank, you don’t need to be concerned about the safety of your money.
Also remember that you may qualify for more than the basic insurance coverage at one insured bank if the funds are held in different “ownership categories.” For example, under existing law, if a couple has deposits in single accounts, joint accounts and Individual Retirement Accounts (IRAs) at the same bank, through year-end 2009, they could qualify for up to $1.5 million of FDIC insurance coverage (see table).
An Example of How FDIC Insurance Can Add Up
- Husband’s Single Account: $250,000
- Wife’s Single Account: $250,000
- Husband and Wife’s Joint Account: $500,000
- Husband’s IRA: $250,000
- Wife’s IRA: $250,000
- Total Insurance Coverage: $1,500,000
In addition, if you have deposits in another category called revocable trust accounts — typically payable-on-death and living trust accounts — you’d receive up to $250,000 in FDIC insurance coverage for each beneficiary.
That means a revocable trust account owned by a husband and wife naming four beneficiaries would be insured up to $2 million. (The husband is insured up to $1 million because he has named four beneficiaries, and the same applies to the wife.)
If you have more than $250,000 at one insured institution, find out if it is fully insured. It’s especially important to take a closer look at your deposit insurance coverage after an unusually large deposit, such as after a home sale, an inheritance, or if you “roll over” a large company pension into an IRA at a bank.
Another time to review your insurance coverage would be after the death of a joint account owner or a beneficiary on a revocable trust deposit account. Likewise, look at your deposit insurance if you have accounts at two institutions that merge.