The Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy on Wednesday issued an Investor Alert to help educate investors about affinity fraud, a type of investment scam that the agency is seeing more of that preys upon members of identifiable groups, such as religious or ethnic communities or the elderly.
As the SEC explains, 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 promoter by new investors is paid to earlier investors to create the illusion that the so-called investment is successful," the SEC says.
Fraudsters who carry out affinity scams frequently are (or pretend to be) members of the group they are trying to defraud. “Fraudsters target any group they think they can convince to trust them with the group members’ hard-earned savings,” the SEC says.
For instance, a recent SEC action was against a Ponzi scheme promoter who sold promissory notes bearing purported annual interest rates of 12% to 20%, telling primarily African-American investors that the funds would be used to purchase and support small businesses such as a laundry, juice bar, or gas station. The promoter, the SEC says, also sold “sweepstakes machines” that he claimed would generate investor returns of as much as 300% or more in the first year.
At its core, the SEC says, “affinity fraud exploits the trust and friendship that exist in groups of people who have something in common.” And “because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam.” Victims often fail to notify authorities or pursue legal remedies. Instead, they try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.