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Affinity Fraud: When Scammers Prey on Victims’ Identities

Let’s talk today about a type of fraud well known to practitioners in the field: affinity fraud.

The SEC defines affinity fraud as “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups.

It goes on to describe a typical affinity fraud:

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.

These scams exploit the trust and friendship that exist in groups of people who have something in common. 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 their legal remedies and instead 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.

Among the best-known affinity fraudsters, of course, was Bernie Madoff. Madoff preyed on the American Jewish community, including luminaries like Eli Wiesel and numerous Jewish charities, to the tune of hundreds of millions of dollars.

As Atlantic writer Harold Pollack so aptly put it: “Madoff’s crimes were a warning to everyone about how in-group feelings of trust leave people vulnerable.”

The examples highlighted by the SEC are similarly horrific: among them are a financial planner who targeted his church, an ex-marine who targeted the military community, and a ponzi scheme aimed at African-American churchgoers.

Two Takeaways from Review of Affinity Fraud

I would highlight two takeaways from this brief review of affinity fraud. The first is to recognize that affinity fraud presents a different dynamic from consumer fraud or business fraud. This isn’t Subway selling 11-inch “footlong” sandwiches. Affinity fraudsters prey on their victims’ religious, cultural and ethnic identities. Their breach of trust is more severe, more personal. The harm caused by an affinity fraud can go beyond the pecuniary. Lawyers on either side of an affinity fraud should be sensitive to

The harm caused by an affinity fraud can go beyond the pecuniary. Lawyers on either side of an affinity fraud should be sensitive to this and should take the time to learn about the substance, jargon, norms and mores of the group at issue. An affinity fraud case is likely to raise emotions in intense and perhaps unexpected ways. The circumstances of an affinity fraud may lead to greater cognitive dissonance among its victims, for example.

Second, if a client comes looking for advice regarding an investment opportunity, be on the lookout for signs that the opportunity has some sort of affinity or affiliation attached to it. Be prepared to have the difficult conversation with your client that sharing an affinity with an investment manager is not a substitute for meaningful due diligence or contractual protection. It may seem cynical or cold to highlight shared affinity as a basis for caution or restraint rather than a basis for trust, but affinity fraud’s long and diverse history makes such advice prudent, if not necessary.

 

About Adam Hirsch

Adam represents a wide variety of clients, ranging from individuals to small business owners to large corporations. He has a particular focus on business and investment disputes, and has experience litigating such disputes in numerous state and federal courts. He has also represented business clients in arbitration and mediation proceedings. Adam also represents employees in…

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