What is Affinity Fraud?

A unique type of investment scam is affinity fraud. This scheme specifically targets members of identifiable groups, such as religious groups, ethnic communities, or the elderly. Affinity fraud has become widespread enough that the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an Investor Alert to warn the public.

Affinity fraud seeks to use the closeness and trust of groups that individuals are members of to perpetrate fraudulent schemes. Frequently, the individual behind the fraudulent scheme will pretend to be a member of the group he or she is targeting to encourage trust. Some of the groups that are targeted are specific denominations of religions, racial minorities, or a particular workforce. Members of these types of groups tend to trust each other and their group’s leaders because of the interest that they share together.

One common way that individuals gain access to groups is by convincing the leaders of groups to discuss the “investment opportunity” with their members. Frequently, the leaders are unaware of the fraudulent scheme and become victims as well. In most cases, the scheme involves a fake investment or lies about important details. For example, an individual committing affinity fraud may not disclose the risks involved, history of the investment, or his or her background.

Frequently, the scam underlying affinity fraud takes the form of a Ponzi or pyramid scheme. In these schemes, new investors are convinced to give money to promoters, who keep part of that money and use the rest to pay individuals who invested earlier in time. This creates the false impression that the “investment” is performing well. Quite often in these schemes, the only generation of money is from convincing new investors to join. When new investors cannot be found and older investors demand their money or request to cash out, the scheme falls apart and investors suffer financial loss.

One of the problems with affinity fraud is that when groups become victims of this scheme, they often do not report it or seek legal remedies. This is because groups often attempt to handle the situation internally, particularly if the group’s leaders were encouraging investment. However, victims of affinity fraud are encouraged to report schemes encountered with the SEC’s Complaint Center or the SEC Whistleblower office. Individuals can also contact their state’s securities administrator. More information can be found at the North American Securities Administrator Association website.

There are many ways that investors can help minimize the chance that they will become victims of fraudulent investment schemes, including:

1. Always researching the investment opportunity and the person promoting it, regardless of whether you know the individual. Further, keep in mind that it is important to find out who is behind the investment; do not simply trust a leader of your group who claims to have found a great opportunity;
2. Being cautious of any opportunity in which a promoter does not provide anything in writing: the specifics of any investment opportunity should be provided in writing if requested. It is also a potential red flag if the promoter of the investment requests that investors not tell anyone about the opportunity; and
3. Not investing in opportunities in which the promoter promises specific levels of returns; almost all investments contain some level of risk and guarantees of certain rates of returns are a red flag.

If you have suffered financial loss as a result of a fraudulent scheme, it may be possible for you to hold those responsible accountable. For more information, speak with an experienced securities law attorney today. At the Silver Law Group, we represent individuals in arbitration and mediation proceedings, as well as in state and federal court.