The evil of 'affinity fraud' is that normally savvy or skeptical people let their guard down when offered a questionable investment by a member of a group to which they belong and with whom they have a common background and interest - whether ethnic, religious, political or professional. People's pocketbooks are simply more likely to open when the approach is made by a member of their own group or when they hear that other members of their group are investing.
Affluent Indian, Chinese and Vietnamese immigrants are increasingly victims of such schemes. Immigrant groups are particularly vulnerable to this type of fraud, because they are relatively isolated from the larger community and their flow of information may be limited because of language or other barriers. Recently, for example, six executives and employees of a company called Korean International Investment Corp. solicited funds from primarily Asian immigrants by promising to conduct trades in foreign markets. The trades were almost never executed. Instead, the firm would use recent investments (principal) to pay alleged profits to earlier investors. (The type of fraud in which earlier investors are paid with the funds of later investors is known as a "Ponzi" scheme"). The firm believed that the Asian immigrants would be taken in by the glitz and the promise of high returns. The Asian market was targeted by the placement of advertisements in ethnic newspapers and by the employment of a large, multilingual sales force.
Securities regulators receive complaints from surprised and perplexed victims of friends, neighbors, members of their clubs and organizations, fellow church members, even members of their own family. They often make such statements as: "I've known him all my life", "I trusted her as if she were a member of my family"' "He was such a nice young man"; or "We had the same values and beliefs." The last of these statements was made to a securities regulator by a complainant who had lost $100,000 by investing with a member of her church group who was going to produce a film supporting the political positions and beliefs of the group. The film was not made and the scamster disappeared.
Swindlers who prey on their co-religionists come in all denominations. A scam involving the Heartland Worship Center's pastor and "missionary" took place in Florida. A parishioner set himself up as a commodity pool operator and advertised returns of over 200% annually, although he had no real commodities experience. The support and sales efforts of two church members gave great credibility to the operation, and the duo received part of the investors' money for their activities. It is not clear if any of the money was actually invested. The trio has been ordered to make complete restitution. Statistically, however, victims rarely receive their money back.
Another scheme which targeted a particular ethnic group was conducted by a Washington, D.C. African-American man who solicited investments from other African-Americans in an advertising business that would use 900 numbers. At public seminars, he delivered interest checks to earlier investors, thereby encouraging new investments. Half of the $50 million he collected was distributed to investors. He expended or lost the other half. He is currently in federal prison after pleading guilty to charges of wire fraud.
So-called "pillars of their community' have also frequently traded on their status to obtain money by means of fraud. A Long Island, New York man and his son used their connection at a prestigious Long Island golf and country club to raise money for a scheme. In the scheme, they purportedly made short term loans to small businesses, until the businesses could obtain longer term loans from banks. In fact, the loans were never made and the earlier investors were paid off with the new investments of later investors.
In another variation of affinity fraud, people in the same profession, such as doctors, accountants, lawyers, etc., have also been susceptible to fraud. In the early nineties in several Western states, thousands of doctors lost $50 million in pension and other investment money when a real estate firm in which they had invested filed for bankruptcy. Many of the doctors said they invested because they heard about the 'opportunity' from other doctors in their clinics and hospitals. Similarly, preying on his professional associates, a partner in a prestigious Virginia law firm allegedly sold from $40 to $100 million of phony investment in a liquor-brokering business to 120 investors, many of them his law partners. By the time the scheme was uncovered he had disappeared.