Affinity Fraud: What It Is, Examples, Reporting It To The SEC

Affinity fraud is a type of scam where fraudsters target members of specific communities, such as ethnic, religious, military, or minority groups. These scammers come of as trustworthy members of the community, only to gain the trust of their victims and convince them to invest in fraudulent schemes.

A common tactic used by affinity fraudsters is to employ Ponzi or pyramid schemes.

In these schemes, scammers promise high returns on investments. When in actuality, they are using money from new investors to pay off older investors. All the while, the scammers are misusing the funds for personal expenses, such as real estate or other luxuries.

When the influx of new investors slows down, these schemes inevitably collapse, leaving the original investors with significant financial losses. It’s important to be aware of the signs of affinity fraud and to exercise caution when considering investment opportunities from individuals within your community.

There are many red flags to be on the lookout for. Knowing what these red flags are will help you avoid becoming a victim of an affinity fraud scheme:

• Perform a Background Check: Perform a background check on the person who is offering you the investment opportunity to see if all their information checks out. Do research on investment as well, and those who brought you the opportunity.
• Be Weary of Recommendations: A lot of communities use online groups to stay in touch with one another. These are also prime channels for promoting a certain scam. Those who come across such solicitations should be cautious.
• Promises Guaranteed Returns: Ponzi schemes and pyramid schemes both claim to bring investors guaranteed returns with very little risk involved. This is a hallmark of affinity fraud, and most likely to be presented in promotional material or presentations.
• Lack of Official Documentation: If you cannot get an investment opportunity explained in writing, you should proceed with caution. This leaves a paper trail, which schemers avoid. This is a strong sign of affinity fraud, as well as those that are kept “strictly confidential.”
• High-Pressure Decisions: Schemers love to put pressure on their victims by getting them to commit. They may say that the value of the investment is going to increase soon, and they better “act quick.” People should be cautious of this tactic and remember to do their due diligence before making any investment decision.

Just remember, past success or positive results of a particular investment do not guarantee future success or results of that investment. It’s not to say some investments do not perform well, it’s just highly unlikely given various the various market factors that exist.

Bernie L. Madoff Investment Securities (2008)

The largest affinity fraud case in history was done by Bernard L. Madoff Investment Securities in 2008, who committed a $50 billion fraud. Madoff’s Ponzi scheme targeted wealthy Jewish communities and organizations, including Yeshiva University, Maimonides School, Kehilath Jeshurun Synagogue, Ramaz, the SAR Academy, and Holocaust survivor Elie Wiesel’s foundation and his personal savings.

SEC Halts Pyramid Scheme Targeting Dominican and Brazilian Immigrants

A court order froze $7.5 millions of dollars tied to a pyramid scheme that preyed on Dominican, Brazilian, Chinese, Vietnamese, and Haitian immigrants. The scheme’s promoters enticed victims with false promises of 200% annual returns in exchange for recruiting new participants and posting meaningless ads for a purported multilevel marketing company offering nonexistent VoIP services.

SEC Halts Pyramid Scheme Targeting Asian and Latino Communities

Posing as legitimate cloud companies, a pyramid scheme bilked over $65 million, primarily from Asian and Latino communities both within the US and internationally. The scam promised astronomical returns of 100% or more in just 100 days, luring unsuspecting investors.

SEC Charges Company and its Owners with Conducting an Offering Fraud Targeting Christian Investors

Targeting almost 80 evangelical Christians, Ponzi schemers raked in $6 million through bogus stock offerings and high-interest notes linked to a fake “global voice-over-internet-protocol video services” company.

For more examples of affinity fraud, please read the investor alert put out in 2014.