Investor Alert: Affinity Fraud

Affinity scams are among the most common types of financial fraud that affect retail investors. They may involve real or fake investments, but they are almost always a form of Ponzi scheme or Pyramid Scheme. These fraudulent investment schemes have worked for decades now because they are very effective in the short-term at preserving a veneer of profitability. Plus, they are difficult for investors, regulators and law enforcement officers to detect.

How Ponzi and Pyramid Schemes Work

Ponzi and Pyramid scheme typically use new investor funds to pay returns to the previous class of investors. Funds may be invested in actual assets, or not; however, even the funds are invested legitimately, they are often making little to no returns or generating losses. In other words, whether or not the funds are invested, it is new investor money — not positive returns — that keeps the scheme going. These scheme collapse when new money becomes unavailable.

Ponzi and Pyramid schemes are difficult to detect because, on the surface, they often look like legitimate investment funds. Those operating the scam may provide real or faked account statements. They may be credentialed investment advisors or complete charlatans. However, without access to the actual cash flows and investment allocations of the fund itself, investors and regulators alike can be fooled into thinking a phony fund is the real thing.

How Affinity Frauds Work

Affinity scams are frauds that rely on affinity groups in order to perpetuate themselves, hence the name. Affinity groups are groups of people, from small to very large groups, who are affiliated based on a common interest or identity. Examples of large affinity groups include religious groups and racial minorities, ethnic groups, law enforcement personnel, members of a country club, or an alumni network.

Those operating an affinity fraud will rely on the trust and good will of those in the group to spread the word about their services, thus expanding the reach of the fraud. They may also use a leader of the group to lend credibility to their deceit, whether or not the leader knows a fraud is in the offing. Because affinity groups are typically close-knit, regulators and law enforcement can have a hard time penetrating the fraud. Often members of the group who have been affected will be reluctant or slow to come forward, and if group leaders have been involved, their reputations may be at stake, delaying the course of justice.

How to Avoid Affinity Fraud

  • No matter how well you think you know the person running an investment operation, do a background check. FINRA and the SEC both offer extensive resources for looking into the history of financial professionals.

  • Do not base your decision over whether to invest on the recommendation of a lay person. Affinity group leaders have been notoriously unreliable in their recommendations, and several have actually been complicit in the scams themselves.

  • Don’t fall for “guaranteed profits” or returns that seem too good to be true. Fraudsters thrive in the financial market because of our innate desire to want reward without risk. Don’t be their next victim.

Pennsylvania & New Jersey Securities Litigation Law Firm

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If you or someone you know has been a victim of investment fraud or broker misconduct, please contact our attorneys for a free consultation at 215 462 3330 or by using our online contact form.