Affinity Fraud--A Radio Interview

Check out this radio segment (Segment 2) where Mark talks about affinity fraud.

Ponzi Schemes and Sophisticated Investors

So when you read about a small, $50 million dollar, Ponzi scheme coming to light, you almost always read about some gullible investors who had no idea they couldn't make 50% returns in a legitimate business deal. The list of victims was recruited from friends or family in an affinity fraud and almost always includes a bunch of doctors and dentists who have too much money and think they need a bunch more but don't understand risk and return. It is very rare that the so-called sophisticated investors who understand risk and return get duped. The following story was sent to me by a former student, Robert Madsen, who pointed out that this is what makes this story incredible...

Utah may get more serious about affinity fraud

Utah has had more than it's share of affinity fraud cases over the years. Authorities say that in the past year alone, more than 4,000 Utahns have lost over $1.5 billion due to fraud. In many cases, the fraudsters engage in what is known as "affinity fraud" which refers to any type of fraud involving the exploitation of a relationship of trust. We naturally trust those we go to church with or those who are like us in some way including ethnicity. If exploits that trust to commit fraud, it is referred to using this phrase.

In Utah, the religious community provides an easy target for someone who wants to commit fraud. As such, fraud perpetrators build trust among a group of individuals in a social setting such as at church and then they exploit those relationships by getting people to invest in bogus business opportunities. Affinity fraud was involved in many fraud cases including Bernie Madoff's famous $50 billion Ponzi scheme. In that case, the Jewish community was exploited by Bernie.

Affinity fraud has been found in every religious community but also exists in other communities such as racial or ethnic groups. A large Ponzi scheme in Florida involved affinity fraud among the Haitian community. The deaf community also has been exploited by fraud perpetrators who developed relationships of trust and then exploited them to commit fraud.

Today's Deseret News reports that one Utah State Senator is sponsoring legislation to increase the penalties for any Utahn who is found to exploit relationships of trust. The article summarizes the proposed bill as follows:

The bill, which would modify the Utah Uniform Securities Act, would exact harsher penalties on those who use "undue influence" to "exploit the trust, dependence or fear of another person or gain their confidence" and "deceptively" influence their decisions. Harsher penalties would apply, as well, if the fraud victim is a "vulnerable adult." The bill would enable prosecutors to file second-degree felony charges in such cases.

The article also explains that, in addition to this bill, Sen. Ben McAdams is proposing other legislation to provide incentives for people to "whistle blow" by bringing forth information about questionable business deals. The article doesn't go into detail about the incentives but, if it resembles federal legislation, it may provide whistle blowers with some percentage of penalties that are collected by the state when a fraud case is uncovered.

I'm all for both of these bills. I have had people come to me and tell me their story about how they lost their life savings because a trusted friend exploited that relationship. It's not uncommon for these individuals to be near or in their retirement years and then to find they have lost much or all of their assets. These are tragic stories that tear your heart out to hear about.

I personally hope this legislation will help lock some of these perpetrators up for a long time!

A free lunch without a catch...

I'm a firm believer that there are no free lunches in this world. However, here's one that may be an exception to that rule. The Utah Division of Securities and several other organizations are sponsoring a free conference on how to avoid becoming a victim of fraud. Those who register also get a free lunch!

Topics for the conference include such things as affinity fraud, Ponzi schemes, the psychology of fraud perpetrators and fraud victims, and common markers of fraud. In addition, one of the sessions I'm most interested in is hearing from Carolyn Jessop who escaped with her five children from a polygamous sect. She has written two books documenting her experiences and has been a guest on the Oprah Show and Good Morning America. She will be speaking on "How to say no when everyone around me is saying yes."

The conference is on June 30th from 8:30 am - 4:30 pm. They asked me to be on a panel session from 10-11 am. See you there!

It sounds like the Lebanese Madoff studied under Bernie or Charles Ponzi himself when he designed his strategy to scam $1 billion from his fellow countrymen.

Consider a few quotes from a recent NY Times article and you can see the common conditions of successful Ponzi schemes:

First: "He was known as a deeply religious and charitable man, with a gift for winning people’s friendship."

Pyramid schemes often involve "con men" who build confidence by "winning people's friendship" and appearing to be religious. Bernie Madoff also built confidence and many fraudsters appear to be deeply religious.

Next: "But the dollar figures have drawn less attention here than Mr. Ezzedine’s close links with Hezbollah, the militant Shiite movement. Many of the investors — mostly Shiites living in Beirut and southern villages like this one — say those party links were the reason they chose to risk their hard-earned savings with a man who offered 40 and 50 percent profits but never showed any paperwork."

In this quote we see a few more common ingredients including affinity with a group and outrageous returns. Affinity is used since it gives the perpetrator a group of people who trust one another's opinion. Once one person in the group gets excited, the rest follow and seem to turn off any due diligence based on the fact that others in their group are doing it. Bernie's scheme started in among his fellow Jewish friends.

As for the outrageous returns, when will the world learn that "if it seems too good to be true, it is probably a scam!"