Last week, the Securities and Exchange Commission ("SEC") published an investor alert on affinity fraud. The alert outlines the characteristics of investor scams that prey upon affinity groups. Often known as "confidence schemes" (think "con" man), affinity fraud schemes have been around for a long time.
Affinity fraud almost always involves either a fake investment or an investment where the fraudster lies about important details (such as the risk of loss, the track record of the investment, or the background of the promoter of the scheme). Many affinity frauds are Ponzi or pyramid schemes, where money given to the schemer by new investors is paid to earlier investors to create the illusion that the investment is successful. Eventually, when the supply of investor money dries up and current investors demand to be paid, the scheme collapses.
At its core, affinity fraud exploits trust and community within a tight-knit group of people. The group could be, among other things, a church, ethnic group, immigrant community, racial minority, or members of a particular workforce. Fraudsters who carry out affinity scams frequently are, or pretend to be, members of the group they defraud.
The SEC advises investors to research people making investment offers, even if you think you know them. Other red flags that are often obscured by overarching trust in the schemer include investments that promise spectacular profits or guaranteed results, investment opportunities you cannot get in writing, and pressure or time constraints for particular investments.
The SEC's division of enforcement regularly investigates and shuts down affinity fraud schemes targeting a wide variety of groups. You can find a list of some recent examples here. If you believe you've been involved in an affinity fraud scheme, you may have legal recourse. The team of investment fraud attorneys at Meyer Wilson has won verdicts, arbitration awards, and settlements of hundreds of millions of dollars for investors across the country. All of the firm's cases are handled on a contingency fee and no retainer is necessary.