Legal News – Affinity Fraud: Wolves in Sheep’s Clothing

By Abigail Warren, Fall 2017 IAC Student Intern

Earlier this year, the SEC  announced fraud charges against a Michigan pastor.  The pastor, and owner of a real estate company, allegedly targeted members of his congregation, along with laid off auto workers, promising to roll their money into IRAs and invest in his company.  The pastor allegedly collected 6.7 million from over 80 investors, even though he was not registered to sell securities, guaranteeing high returns and inflating the value of his real estate company. The SEC says he allegedly invested none of the 6.7 million, scamming groups in his community who entrusted their money to him.

Unfortunately, these allegations sound like affinity fraud, an all too common issue.   In affinity fraud, fraudsters prey on groups, such as religious organizations, the elderly, immigrants, retirees, and ethnic groups.  Often, they are a group member or they use a trusted member to recruit potential investors, the scam even unbeknownst to the friend “spreading the word.”  Affinity fraud is also gaining online presence, with fraudsters using social media sites to target online groups.  According to the SEC, most affinity fraud surfaces as Ponzi or pyramid schemes, soliciting fake investments for personal use.  Due to the nature of these “affinity” scams, the damaged often investors opt out of reporting the fraudster, preferring to handle it within the group.

Among affinity fraud’s characteristics, the SEC warns investors to look for “red flags” such as “spectacular or guaranteed returns.”  For tips on how to avoid affinity fraud visit the SEC and FINRA.

If you suspect affinity fraud contact the SEC or your state regulator.