Affinity Fraud Hits Close to Home


Affinity fraud is a big problem and it is growing. The affinity aspect of it refers generally to the fraudster’s standing as an insider among a group of people who share a common interest. This standing as a member of the group, so to speak, makes the fraudster presumptively trustworthy. Unfortunately, affinity settings are breeding grounds for investment fraud.

Affinity-based gullibility is a vulnerability that afflicts even the most sophisticated, including a retired federal agent who had investigated white collar crime cases, who was one of many victims of Ephren Taylor, an investment adviser and purported ordained minister, who was introduced to the congregation and vouched for by Bishop Eddie Long of Atlanta’s New Birth Missionary Baptist Church. (See The Economist article “Affinity fraud ? Fleecing the flock ? The big business of swindling people who trust you”).

Most affinity frauds take the form of a ponzi scheme, in which distributions to investors are not “returns on investments” ? there are no investments ? but are money from new investors (victims). The house of cards often collapses in bad economic times when investors try to withdraw their money to meet other obligations.

The problem is global but most evident here in the USA. According to the article, a consultancy called Marquet International has documented over 300 ponzi schemes totaling $23 billion in losses to victims ? more than half of which were affinity frauds. Moreover, half of all affinity frauds ? at least in the southern U.S. ? are set in a church, according to Joseph Borg, securities commissioner of Alabama.

It used to take some time and effort to capitalize on the presumption of trustworthiness even in an affinity setting. But internet social networking has reduced that time down to a few days, according to the article.

“Everyone is looking for a shorthand way to judge character, and affinity settings offer that, at least in theory, Jeff Robinson, head of the Utah County Attorney’s investigation bureau, was quoted as saying. The problem is so prevalent in Utah, which has a large population of kind and trusting Mormons, that Governor Gary Herbert uses billboards to warn potential victims ? the billboards show people who appear to be very respectable and trustworthy with the caption: “I’m your friend. I’m your neighbor. I’m a con man.”

Unfortunately, the only preventative is to trust no one when it comes to your money. If you receive investment advice from a fellow church member, be suspicious. Never allow an investment advisor to have actually custody of your money and provide you with “home-made” statements of account, which is what Bernard Madoff did. Only a reputable financial institution that is independent from the investment advisor should have custody of your money and provide you with account statements. By following that rule, you lessen the chance of your becoming the next ponzi scheme victim.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.