Sunday, February 27, 2011

Affinity Fraud

I read about a state legislator who was introducing a piece of legislation that would give some teeth to prosecuting people who commit affinity fraud. Now what in the world is affinity fraud? Wikipedia defines it as follows:

Affinity fraud includes investment frauds that prey upon members of identifiable groups, such as religious or ethnic communities, language minorities, 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.

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.

Many affinity scams involve "Ponzi schemes" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors; when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.

I think back over my years of experience and I isolate a few close calls with affinity fraud. I remember sitting in a lounge in Montgomery Alabama back in 1971'ish. I was waiting on a cocktail waitress I dated to get off work. Just sitting there by myself and this guy sits down beside me and strikes up a conversation. After answering a few questions he posed he says to a friend of his at the bar,
" Hey Fred come over here and meet Lee Vass. He seems like a great guy and I think he will fit into our business plans quite well." I was advised that they were loading up a bus to go to Atlanta for a weekend rally. I was invited on their nickel. It was my first exposure to a man named Glen Turner. He was the grand daddy of the pyramid schemes. I counted myself fortunate that I forewent the invitation electing to go on the date I had already planned.

Several years later I remember getting a call from a church leader who presided over a group of around 10,000 of us members of his church. He told me that he was putting together a new start up business called the Small Business Institute. I told him that I represented a Fortune 400 company thusly I represented big business. Why would I want to join a small business institute? He called me several times and only wanted $5k to help him get it going. I forewent that opportuntiy and he went on to swindle several people in that congregation. He disappeared in the middle of the night and probably should have gone to prison. Last I heard he was still scott free and off trying to swindle a new group of people who regarded him as an inspired church leader who wanted to help them get rich.

Then there was Jim Jones the guy who moved an entire congregation of adherents to Gianna. They gave him everything they had and he showed his appreciation to them by lacing a supply of Koolaid with cyanide and killing most if not all of them, including women and children. This was back in the mid-80's. A term that we use nowadays comes from that scanario " Drinking the Koolaid."

We need to proceed with caution about anything that sounds too good to be true. If it does, check it out and don't do anything until you have done some serious due diligence in getting the big picture. Make sure that you don't end up drinking the koolaid.

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