Affinity Fraud

What Is Affinity Fraud?

Affinity fraud is a type of investment fraud in which a con artist targets members of an identifiable group based on things such as race, age, religion, etc. The fraudster either is or pretends to be, a member of the group. Often the fraudster promotes a Ponzi or pyramid scheme.

Understanding Affinity Fraud

Affinity fraud leverages and exploits the inherent trust within the group. For example, a fraudster may target a specific religious congregation. Oftentimes, the person will try to enlist the help of the leader of the group to market the investment scheme. In this instance, the leader becomes an unwitting pawn in the fraudulent scheme.

Victims often fail to notify authorities or pursue their legal options and instead try to work things out within the group, particularly when the fraudsters have manipulated respected community or religious leaders to convince others to invest.

Affinity Fraud Examples

The U.S. Securities and Exchange Commission (SEC) investigates and takes action against affinity frauds targeting a wide spectrum of groups. Recent cases included an ex-Marine's hedge fund that targeted fellow military and a day trader in Sugar Land, Texas, who defrauded investors among his fellow members of the Houston-area Lebanese and Druze communities. In another case, the SEC obtained an emergency court order to halt an ongoing Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles.

However, the largest affinity fraud in history was perpetrated by Bernard L. Madoff Investment Securities that unwound in late November 2008. Madoff’s own sons turned him in after he confessed to the men that his business was a “giant Ponzi scheme”. Madoff's firm operated a $50 billion Ponzi scheme that among many individuals and financial firms, also targeted many wealthy Jews, Jewish organizations, and charitable groups, including Yeshiva University, Maimonides School, Kehilath Jeshurun Synagogue, Ramaz, the SAR Academy, and Holocaust survivor Elie Wiesel's foundation and his personal savings. Madoff's scheme was exposed during the economic collapse of 2008 which is quite typical because frauds tend to collapse in a weak economy as many investors try to withdraw money out to cover shortfalls elsewhere.

Affinity Fraud Most Prevalent in the U.S.

The problem is global but best-documented in the U.S. A study of Ponzi schemes by Marquet International Inc. in 2011 studied 329 major U.S. investment fraud cases discovered in the previous decade of at least $1 million in losses and total reported losses of nearly $50 billion. The most common affinity groups targeted by Ponzi schemers were the elderly or retired; religious groups; and ethnic groups. These three target groups accounted for 85% of all the affinity group cases in their study.

According to The Economist, Utah sees the most affinity fraud per capita in the United States, because so many of the state’s residents belong to the LDS Church community. Members of the LDS community tend to be extremely trusting of others who belong to the church leadership, or who present themselves as belonging to it, making this community extremely vulnerable to this type of scam. In 2010 alone, Utahns lost an estimated $1.4 billion to affinity scams. Affinity fraud is most prevalent in Utah County, especially in the region between Alpine and Provo.