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Affinity Fraud: Beware of Swindlers Claiming Loyalty to Your Group

November 1999 -  State securities regulators are warning investors to be on guard against a rise in affinity group fraud. What is affinity fraud? It’s simple, but the causes that give rise to it are often more complex.

Everyone, in some way or another, is connected to a group or association. Our interests, backgrounds and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust -- sometimes to our detriment.

In a world of increasing complexity, many people feel the need for a short-hand way of knowing who to trust. This is especially true when it comes to investing money. Unfamiliar with how our financial markets work, too many people don’t know how to thoroughly research an investment and its salesperson. So many fall prey to affinity group fraud in which a con artist claims to be a member of the same ethnic, religious, career or community-based group.

"You can trust me," says the scamster, "because I’m like you. We share the same background and interests. And I can help you make money."

Another equally effective pitch, if the con artist is not a member of the group, is to lull members into a misplaced trust by selling first to a few prominent members, then pitching the scam to the rest by using the names of those previously sold. The effect is the same: Once the connection to the group is understood, the natural skepticism of the individual member is overcome, and one more group name is added to the sales column.

Once a victim realizes that he or she has been scammed, too often the response is not to notify the authorities but to instead try to solve problems within the group. Swindlers who prey on minority groups play the loyalty angle for all it's worth.

With immigration at levels not seen since early this century, many new arrivals to our country are seen by financial swindlers as ripe for the picking. Immigrant groups are particularly vulnerable to this type of fraud because they are sometimes isolated from the larger community and their flow of information may be limited because of language and other barriers.

Some members of other long-established minority groups have accumulated savings and achieved a certain standard of living through years of hard work. Often, they want to "give back" to the community in order to help others like themselves. However, such inclinations often make these group members sitting ducks for deceitful con artists who, despite sharing the same ethnicity or culture, are really motivated solely by greed.

Religious affinity group fraud also continues to be a widespread problem, according to state securities regulators. And swindlers who prey upon people of their own religion come in all denominations.

Among the Victims...

A 35-year-old Chinese-American writer who lost $55,000; a college student from Bangladesh who lost $17,000; an elderly African-American woman from Washington, D.C. who was swindled out of $20,000; a Christian couple from Arizona who lost their home and savings and were forced to move back to Wisconsin to live with relatives.

The California Department of Corporations is investigating more than 20 cases of commodity dealers targeting Asian communities in the Los Angeles area for foreign currency and precious metals investments -- supposedly being made on their behalf on the Hong Kong exchange. In one case, the Department issued a Cease and Desist order in April and filed a civil action for an injunction in the case of a Los Angeles company called Asia Mercantile, Inc. The company advertised in the "China Daily News" for executive positions at a new bank in Shanghai, China. Victims were told the company was looking for people without any experience in the banking business, so they could be trained from scratch. All 15 people attending the subsequent seminar were from China. After three days of training, the marketing manager said that every person expecting to get a job from the "bank" in Shanghai had to put in practice what they had learned about foreign currency exchange transactions by putting up money as a test to see if they were qualified. The investments were touted as "no-risk" money-making opportunities and ranged from $15,000 to $300,000. Investors lost over 90% of the money invested.

According to the Kansas Office of the Securities Commissioner, at least a dozen Wichita State University students from Bangladesh have been left without cash -- and possibly without a chance to finish their education -- by the alleged action of a former stockbroker also from Bangladesh. He is alleged to have absconded with the students’ investments of between $17,000 and $175,000 apiece. Investigators are looking into allegations that at least 100 people from several states lost money, the total perhaps reaching into the millions of dollars.

In Florida, the Division of Financial Investigations took action against Texas Club Investments and Associates (TCIA) -- a Hispanic-run organization based in Miami that targeted Hispanics. Through advertisements in a local Spanish-language newspaper which read, "Invest from $3,250 to $32,500 and receive profits from $546 to $5,460 per month," potential investors were promised returns of at least 9.8% per month from TCIA oil wells. In fact, there never were any oil wells. According to subpoenaed bank records, funds were used by the perpetrators to pay the returns promised to investors, were withdrawn by them or were used for purposes other than oil production. Almost all of the investors suffered a net loss with the amount of loss depending upon when, how much, and how many times they invested.

The Maryland Division of Securities reports that the President of Metropolitan Investments appealed to the African-American community to buy shares in his company, which, he said, would benefit the community by providing health and other social services in Metropolitan’s building. In fact, Metropolitan did not own the building and used most of the investors’ money for pyramid schemes and other purposes unrelated to the social interests of the community.

The Utah Division of Securities relates that an individual preyed upon fellow members of the Assembly of God Church in Ogden, Utah, through the use of church membership lists. Through his company, he sold bogus "royalty interest" in such inventions as a "Mess Free Bird Feeder" and "Vice Script" automobile theft-prevention engraving system. Victims were promised returns of "25% to 100% for years to come." In most cases, no products were ever sold. Losses by church members were approximately $200,000.

The New York Bureau of Investor Protection and Securities receives a constant stream of complaints from surprised and perplexed victims of friends, neighbors, members of clubs and organizations, fellow church members, and 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 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.

How to Avoid Affinity Group Fraud

  • Beware of the use of names or testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once you’ve invested.
  • Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.
  • Ask for professional advice to evaluate the investment from a neutral outside expert not affiliated with the salesperson or adviser -- an accountant, attorney or different financial planner.
  • Ask the Department of Banking for help. Before investing any money, call the Division to learn more about the salesperson and firm. The simplest inquiry is to ask if they are registered to do business in Connecticut. Also ask if the potential investment is registered for sale in Connecticut. If either the salesperson/firm or investment opportunity is not registered, be wary of a potential scam. Don’t take the word of a salesperson! Check out the investment yourself!

For More Information

If you suspect that you may be the victim of affinity fraud, contact the Securities Division immediately.

The Securities Division may be reached at (860) 240-8230 or toll-free at 1-800-831-7225. The Banking Department is located at 260 Constitution Plaza, Hartford, CT 06103-1800.

The North American Securities Administrators Association (NASAA) is a voluntary association of 65 state, provincial and territorial securities administrators.

What Every Investor Should Know