Have you ever been solicited to donate to your church's building fund? The pitch relies on your membership to the church, and your donation will be used to help other members. While solicitations for the church building fund use your membership in the congregation for legitimate goals, affinity fraud uses your membership to a specific group as a means to defraud.
Simply put, affinity fraud refers to investment scams that prey upon members of identifiable groups (i.e., race, religion, and ethnic background, just to name a few). In alerting investors about affinity fraud, the North American Securities Administrators Association (NASAA) said:
Everyone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust -- sometimes to our detriment.
One reason affinity fraud is effective is because people are constantly looking for an easy way to determine who to trust, especially when it comes to their money. With the fear of being exploited always on their minds, people assume that they can trust someone with the same background. This blind trust, however, is an effective weapon for con artists.
Most affinity fraud usually takes place via bogus offerings, ponzi schemes, and pyramid schemes run by a member of the group. Being a member of the group makes it easier for the con artist to gain the trust of the other members. Sometimes, however, the con artist may not be a member of the group. In these cases, he can lure the group's members into this blind trust by selling the investment to a few prominent members of the group. He then uses these individuals to pitch the investment to the group as a whole. In either case, gaining the trust of the group's members is an integral part of the fraud.
While affinity fraud is not a new scheme, the Internet has made it more efficient, more effective, and cheaper. Getting in touch with members of a specific group is very easy now that there are websites, bulletin boards, newsgroups, and chatrooms devoted to specific races, religions, ethinic backgrounds, cultures, and other identifiable groups. As the Internet becomes better organized and easier to navigate, more people will be looking for this type of information -- and be able to find it easier. The end result: more potential victims surfing the Internet for information about people and groups with similar identifiable characteristics. Additionally, con artists can purchase lists of e-mail addresses, surf the Internet, and use automated data-gathering mechanisms to find people with common backgrounds. This, too, leads to more potential victims.
Like other investment scams, watch out for returns that are "guaranteed" or "risk-free." Let "if something is too good to be true, it probably is" be your mantra. Glowing testimonials from members of the group should at least make you stop and think more about the investment. Any time high-pressure sales tactics are used, you should think twice about investing. The overriding theme here is to think before you invest. Don't let blind trust be a substitute for doing your homework about the investment.
Let's take a look at some real-life examples.
In SEC v. Oracle Trust Fund, the defendants raised $7.4 million from 125 members of rural Christian churches in Kansas, Nebraska, and Missouri. The defendants gained investors' trust by claiming they were "born again" and that the investment was a "duty" or "prophecy." Investors were promised that the "prime bank instruments" (nonexistent securities -- see "Bogus Offerings") they bought would pay them 20% per month for 12 to 18 months. The reality of the situation was that the investment opportunity was nothing more than a ponzi scheme.
In SEC v. Davenport, four defendants solicited personal information from elderly investors under the guise of providing estate and financial planning services. Once the defendants received this information, they encouraged the senior citizens to liquidate their certificates of deposit and invest the funds in promissory notes that promised a higher rate of return than CDs. The truth was that the promissory notes did not exist and were simply a vehicle for the defendants to steal most of the investors' funds.
On September 27, 1999, the SEC charged that a New Jersey man raised $2.8 million from 375 African-American investors, promising them a 300% annual return. The defendants claimed that investors were being offered the opportunity to participate in investment opportunities and profits historically not available to African-American investors. What really happened? The defendant simply stole investors' funds to pay for his personal expenses.
The point to make with affinity fraud is, don't blindly trust people just because their background is similar to yours. Always do your due diligence before making a decision.
Warning Signs
- The promoter won't take no for an answer
- The promoter continually preys upon your membership in a certain group
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