Saturday, July 25, 2009


Affinity Fraud: A Major Problem that the General Public Knows Little About

With the large downtick in the economy, there has been a noticeable uptick in fraudulent activity. INVESTOR BEWARE!!! Recently, Securities and Exchange Commission (“SEC”) Commissioner Luis Aguilar delivered a speech in Atlanta on May 28, 2009, at the Third Annual Fraud and Forensic Accounting Education Conference where he talked about fraud at home and abroad. Commissioner Aguilar spent time in his speech talking about affinity fraud and Bernie Madoff’s Ponzi Scheme. When you utter the words “affinity fraud” to most members of the general public you undoubtedly draw a blank and a puzzled expression. What is affinity fraud? Well, affinity fraud is the name given to a fraudulent scheme that targets members of a specific demographic. Victims of affinity fraud are often targeted because of their race, ethnicity, age, class, gender, national origin, religion, immigrant status, social, cultural, or professional affiliations. Affinity fraud organizers portray themselves as members of the targeted group or as individuals who can relate to members of the group in order to garner the group member’s trust and money.

Peeling back the layers, Ponzi and Pyramid schemes often exhibit elements of affinity fraud in that a particular demographic is targeted and victimized. A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to the investor. The Ponzi scheme generates returns for old investors by acquiring new investors. Eventually, Ponzi schemes collapse when new investors can no longer be acquired. A Pyramid scheme is an illegal investment scam based on a hierarchical setup. “New recruits make up the base of the pyramid and provide funding, or so-called returns, given to the earlier investors/recruits above them.”

The dialogue in an affinity fraud scheme is often basic. “You can trust me because I’m African-American just like you,” the scam artist will often say. The affinity label or demographic identification can go on and on and on. “I’m a Baptist like you.” “I’m a member of your fraternity.” “You know you can trust me because I’m elderly like yourself.” I think you get the picture. The scam artist will conclude by saying “because we share the same experience and background invest your money with me, I’ll get you a fabulous return.”

Affinity fraud has become such a large problem that recently the SEC publicized the problem in a publication designed to educate the public. Affinity fraud is on the radar screen of state regulators, securities and corporate commissions, and attorneys general. Indeed, affinity fraud schemes have been uncovered in Canada, Australia, and New Zealand and throughout the world.

Bernie Madoff and Affinity Fraud

In recent months, unless you have been living under a rock, or lived on a deserted island as a result of a plane crash, we have all heard the name Bernard “Bernie” Madoff at least mentioned and discussed. One thing is certain: Bernie Madoff will live in infamy!!! Usually, in legal circles we lament the leniency of white collar crime sentences. In June, Bernie Madoff was sentenced to 150 years in prison. This month, Madoff was moved to a federal prison in North Carolina, to serve his sentence for his part in a $50 billion Ponzi scheme. This represented an extremely harsh and unprecedented sentence for a white collar crime. United States District Court Judge Denny Chin had no remorse for the 71 year-old Madoff, and balked at the 12 year sentence suggested by Madoff’s lawyers based on his age. Perhaps this time for a white collar criminal, the time fit the crime.

Madoff’s “client” or “victim” list ran over 160 pages in length and included over 13,500 names. The Madoff scandal amounts to “…a $50 billion Ponzi scheme that preyed heavily on fellow Jews and ultimately drained the fortunes of numerous Jewish charities and institutions.” One important factor lost in the Madoff scandal is how he used his religious affiliation and background to target other Jews who trusted him. In some ways, Madoff exploited his religion to extend his fraudulent scheme.

Examples of Recent Affinity Fraud Schemes Investigated by the SEC

A selected group of recent affinity fraud schemes uncovered by the SEC include the following:

Ponzi scheme solicited elderly members of Jehovah’s Witnesses congregations
The SEC complaint alleges that the defendants operated a Ponzi scheme and used investor funds to pay lavish personal expenses. The defendants raised over $16 million from more than 190 investors nationwide. Many of the victims were elderly members of Jehovah’s Witnesses congregations and were promised returns of up to 75 percent.

Ponzi scheme targeted African-Americans and Christians
Defendants perpetrated an affinity fraud, raising at least $16.5 million from mostly African-Americans and Christians by falsely representing they would receive returns through investments in, among other things, real estate, small businesses, and "markets of the world."

"Church Funding Project" costs faithful investors over $3 Million
This nationwide scheme primarily targeted African-American churches and raised at least $3 million from over 1000 investing churches located throughout the United States. Believing they would receive large sums of money from the investments, many of the church victims committed to building projects, acquired new debt, spent building funds, and contracted with builders.

125 members of various Christian churches lose $7.4 million
The fraudsters allegedly sold members non-existent "prime bank" trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.

Practical Advice on How to Avoid Affinity Fraud

Often, regulators and governmental authorities move in too late to protect the general public from affinity fraud. The Madoff scandal is a prime example of the late and ineffectual policing of affinity fraud schemes on the part of governmental actors. Ironically, the SEC thought it was important to educate the public about affinity fraud; but ignored or failed to investigate concrete allegations against Madoff that had been brought to the SEC’s attention months and years before the Madoff scandal became public knowledge. The government can’t always help you avoid affinity fraud. YOU MUST PROTECT YOURSELF FROM AFFINITY FRAUD. Here are some tips and suggestions to follow:

· Make sure that the seller/promoter and investment are registered and licensed in your state. Call your state securities regulator.

· Seek the advice of a neutral professional, not affiliated with the investment or group, who you trust to evaluate the risks and merits of the investment. This could be an attorney, accountant, or financial planner you trust.

· Investigate all statements and representations, even those coming from friends or loved ones; after all they may have been duped themselves. Do your own due diligence.

· Be extremely cautious of investments that are “no-risk” offer or “spectacular” and “guaranteed” profits and returns. VIRUTALLY ALL INVESTMENTS INVOLVE RISK. If it is too good to be true, it probably is too good to be true.

· Get it in writing! If an investment is not described in writing this should raise a major red flag. If someone tells you to keep an investment confidential, be cautious. Obtain a prospectus or other written information on the investment.

· Scam artists are tech-savvy. Watch out for unsolicited emails from people you don’t know that introduce you to an investment opportunity.

· Take your time to investigate. Don’t feel pressured to rush into an investment before you have had time to think about it. “Once in a lifetime” opportunities may ruin your financial life and well-being.


  1. I am curious as to how precisely the SEC oversees various sellers or promoters? From what you are describing it sounds like ponzi schemes or pyramid schemes can propgate undetected until they have grown so conspicious that investors begin contacting the SEC. Even in Madoff's case allegations had been made and the authorities had been contacted, yet it took his son's to turn him in for investigators to take the claims seriously.

  2. professor grant:

    while the sec failed to truly investiage madoff when it had been contacted repeatedly by various parties alleging wrongdoing, what role do you think "regulatory capture" played in the sec's failure? aren't regulators and employees of investigatory bodies always keeping an eye on entering the public sector, which disincentivizes them from really "regulating" or ferreting out fraud? the government does not pay like the private sector does. . . .

  3. Dear Rachel,

    Quite honestly, SEC oversight at times can be a little porous with regard to sellers and promoters of investment schemes. Federal and state laws and regulations are in place to mandate the registration of a host of securities and investments. However, unscrupulous scam artists totally avoid the law.

    Not to denigrate the SEC or state regulators, I think that investigators do the best they can with the resources and staff that they have at their disposal. Wise and savvy investors have a major role to play in avoiding being the victims of fraudulent activity. A skeptical, cautious, and diligent investor is a scam artist’s worst nightmare.

    You are correct in your observation that Ponzi and Pyramid schemes often go undetected for a long period of time. In some ways, I think that the SEC was blinded by Madoff's stature and reputation on Wall Street, built up over a number of years. How could someone like Madoff, who was so revered and respected on Wall Street, even consider propagating a major Ponzi scheme in broad daylight in front of state and federal regulators? Certainly, the SEC may have felt the answer to this question is that it would be virtually impossible.

    One interesting point to recall is that Madoff confessed his sins to his sons. It took great courage for Madoff's sons to turn him in to authorities. I guess a guilty conscience can not rest or find solice. Thank you for your comment.

  4. Dear Anonymous,

    Thank you for your very thought provoking comments. You bring out an excellent point regarding "regulatory capture" that needs to be explored in the context of the Bernie Madoff scandal and the SEC. In an ideal world, the SEC works in the "public interest" and is well-intentioned in protecting the public good. "Regulatory capture" refers to the more cynical problem of the regulated capturing governmental authorities whose job it is to regulate their industry or sector. Regulatory capture theory focuses on the role of interest groups and the interested in driving and shaping public policy.

    For the legal staff at the SEC, when their days are over at the SEC, their next logical career path often leads them to work for the very corporations or entities that may have been regulated by the staffers in the past. Obviously, the private sector has the means and ability to pay higher salaries than the government.

    I tend to err on the side of the optimist. I like to believe that the SEC is well-intentioned, and out to protect the public interest. However, my pragmatic side and experience shows me that regulatory capture does exist. Yes, I do agree with you, regulatory capture certainly is a big problem in heavily regulated industries like the securities industry.

    One thing is certain: good intentions or not, the SEC dropped the ball in stopping the extension and scope of the Madoff fraud when it had good information and complaints to investigate and take meaningful action. Unfortunately, we may never know whether regulatory capture played a role in the Madoff scandal. Perhaps a thorough investigation is needed. Congress, are you listening?

    Again, thank you for your comments.

  5. How about a non profit corp. scamming an elderly lady out of her retirement? Madoff had nothing on this church organization who continues to coerce me into signing documents that will give me my own life insurance. I've been fighting these people for 3 plus years and no one wants to help. The separation clause is what these scammers are hiding behind. My lawyer gave up.

  6. Victims of Elandia fraud, the Ahkoy Family is suing Elandia in Pacific and Florida courts.

    Ponzi schemer Allen Stanford is in the hands of the FBI, and Trip Camper and Ed Berkhof are STILL at large. According to recent articles, "FMC Acquires SMS.." FMC Telecom founder Frank Cassidy is either a NEW partner in crime for Ed Berkhof OR he is simply ANOTHER victim fallen prey to Ed Berkhof's web of lies and empty promises to "take a company public". Investors beware! Ed Berkhof is neither a President, COO or Investor of anything. Ed Berkhof is a con artist and a has-been third rate bass player from Florida trying to find a payday.

    When will the FBI stop these Ponzi scam artists? Thieves like Allen Stanford, Bernie Madoff, Trip Camper and Ed Berkhof are leaving a path of destruction and a wake of fallen victims of fraud.

    View links below for more information on Elandia/Ahkoy:

  7. I believe if the SEC and Congress dont take action to further regulate investment brokers and advocate greater transparency.... citizens should be granted certain self help powers against ponzi scheme creators

  8. It was interesting to see all the billions of dollars lost through affinity programs. Ponzi schemes seem to be the most notable. Where does common sense come into play, don't people realize someone has to lose in order to get to the top.

    No one mentions the herbal based product affinity programs like shape-rite, herbal-life and my favorite body-magic($170 for a corset made in China), that target minority communities. Companies making unstandardized inferior products for which you then pay to distribute. Advertising the American dream of becoming a wealthy business owner only to discover the only way to get rich is to bring in more distributors. They pay and you get a percentage of their enrollment fee and it keeps going on and on until finally the business disappears.