Affinity Fraud – Beware Thy Neighbor

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Most people who live in Utah would agree that it is a great place to live and raise a family. Aside from the natural beauty and abundant recreational opportunities, Utah tends to be made up of close-knit communities comprised of friendly, welcoming and trusting people. Ironically, it is some of these same characteristics that make Utah communities susceptible to affinity fraud. In fact, according to an article by the Economist, many believe Utah to be the affinity fraud capital of the country. In 2012, according to an article by the Deseret News, the FBI estimated that more than 4,000 Utah residents had lost close to $1.4 billion to affinity fraud schemes.

According to the Securities and Exchange Commission, “Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are – or pretend to be – members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster’s ruse.”



While affinity fraud can take many forms, many involve Ponzi schemes, where new investor money is used to pay earlier investors under the guise of a legitimate investment. This type of fraud relies on an increasing number of investors to provide new money to satisfy the ever increasing repayment requirements of the expanding pool of investors. The nature of a Ponzi scheme makes it a ticking time bomb, eventually running out of new investors and capital. In addition, large amounts of money may be siphoned to fund the typically extravagant lifestyle of those perpetrating the scheme. As an old proverb states, “It is easy to spend someone else’s money.”

Ponzi schemes generally entice investors with promised high rates of return while claiming little or no risk to the investor. Often, investors are told that they are purchasing a security interest in a property or development with an extensive equity position, therefore, posing little risk to the investor. In reality, the property may have little or no equity, or worse yet, it may not even be owned by the offeror.

Payments made to investors help create the illusion of a successful investment and provide investors with increased trust and confidence, potentially resulting in additional investments from existing investors and referrals from investors to unsuspecting friends, family and neighbors about the perceived “great investment opportunity.” This results in well-intentioned individuals unwittingly helping to perpetuate the fraud being committed. Unfortunately, there are many situations where well-meaning individuals have encouraged family members and friends to become involved in such investments, often resulting in irreparable harm to relationships after the fraud is uncovered.

It is important to remember that Ponzi schemes rely on the trust and good faith of individuals and not necessarily a lack of knowledge or intelligence. There are many smart and welleducated individuals, including doctors, lawyers, accountants and even investment advisers who have lost money through investments in Ponzi schemes. Many times, individuals who find themselves victims of affinity fraud feel a sense of embarrassment and, therefore, choose not to report it.

While most investments inherently have some degree of risk, investors can minimize the risk of becoming a victim of affinity fraud by doing the following:

  1. .Beware of investments that offer high rates of return, especially those claiming to have little or no risk.
  2. .Be suspicious of any investment that you are told to keep confidential.
  3. Beware of any investment where you are being pressured or rushed into a decision before having the opportunity to perform appropriate due diligence.
  4. Be suspicious of guarantees.
  5. Beware of investments that are not in writing or provide only minimal documentation.
  6. Beware of investments claiming to have a secret or revolutionary new trading strategy.
  7. Verify the person selling the investment is registered and has the appropriate license.
  8. Ask for audited financial statements.
  9. Remember that if it sounds too good to be true, it probably is.

If you are concerned that a family member, friend or client has become involved in a fraudulent investment scheme, consider recommending that they consult with a CPA with experience in investment fraud. Even if the investment is legitimate, it’s always better to be safe than sorry.


Computer Forensics

Dan Baldwin

Dan Baldwin is a writer for Attorney at Law Magazine. He has been contributing to the magazine since 2012.

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