The SEC’s New Investor Bulletin on Affinity Fraud

Last week the SEC’s Office of Investor Education and Advocacy issued a new Investor Alert to help educate investors about affinity fraud, a type of investment scam that preys upon members of identifiable groups, such as religious or ethnic communities or the elderly.  Below is the full text of the alert:

What is Affinity Fraud?

Affinity fraud almost always involves either a fake investment or an investment where the fraudster lies about important details (such as the risk of loss, the track record of the investment, or the background of the promoter of the scheme). Many affinity frauds are Ponzi or pyramid schemes, where money given to the promoter by new investors is paid to earlier investors to create the illusion that the so-called investment is successful. This tricks new investors into investing in the scheme, and lulls existing investors into believing their investments are safe. In reality, even if there really is an actual investment, the investment typically makes little or no profit. The fraudster simply takes new investors’ money for the fraudster’s own personal use, often using some of it to pay off existing investors who may be growing suspicious. Eventually, when the supply of investor money dries up and current investors demand to be paid, the scheme collapses and investors discover that most or all of their money is gone.

How Does Affinity Fraud Work?

Fraudsters who carry out affinity scams frequently are (or pretend to be) members of the group they are trying to defraud. The group could be a religious group, such as a particular denomination or church. It could be an ethnic group or an immigrant community. It could be a racial minority. It could be members of a particular workforce – even members of the military have been targets of these frauds. Fraudsters target any group they think they can convince to trust them with the group members’ hard-earned savings.

At its core, affinity fraud exploits the trust and friendship that exist in groups of people who have something in common. Fraudsters use a number of methods to get access to the group. A common way is by enlisting respected leaders from within the group to spread the word about the scheme. Those leaders may not realize the “investment” is actually a scam, and they may become unwitting victims of the fraud themselves.

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 legal remedies. Instead, they 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.

How to Avoid Affinity Fraud

Here are a few tips to help you avoid affinity fraud.

  • Even if you know the person making the investment offer, be sure to research the person’s background, as well as the investment itself – no matter how trustworthy the person who brings the investment opportunity to your attention seems to be. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
  • Never make an investment based solely on the recommendation of a member of an organization or group to which you belong. This is especially true if the recommendation is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be a fraud.
  • Do not fall for investments that promise spectacular profits or “guaranteed” returns. Similarly, be extremely leery of any investment that is said to have no risks. Very few investments are risk-free. Promises of quick and high profits, with little or no risk, are classic warning signs of fraud.
  • Be skeptical of any investment opportunity that you can’t get put in writing. Fraudsters often avoid putting things in writing. Avoid an investment if you are told they do “not have the time to put in writing” the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential or a secret.
  • Don’t be pressured or rushed into buying an investment before you have a chance to research the “opportunity.”Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the salesperson bases the recommendation on “inside” or confidential information.

Recent Affinity Fraud Schemes

The SEC’s Division of Enforcement regularly investigates and prosecutes affinity frauds targeting a wide spectrum of groups. Here are examples of some recent cases.

SEC Charges Ponzi Scheme Promoter Targeting Primarily African-American Churchgoers

Ponzi scheme promoter sold promissory notes bearing purported annual interest rates of 12% to 20%, telling primarily African-American investors that the funds would be used to purchase and support small businesses such as a laundry, juice bar, or gas station. Promoter also sold “sweepstakes machines” that he claimed would generate investor returns of as much as 300% or more in the first year.

SEC Charges Company and its Owners with Conducting an Offering Fraud Targeting Christian Investors 

Ponzi scheme promoters raised almost $6 million from nearly 80 evangelical Christian investors through fraudulent, unregistered offerings of stock and short-term, high-yield promissory notes issued by their company, which was marketed as a voice-over-internet-protocol video services provider around the world.

SEC Shuts Down Ponzi Scheme Targeting Persian-Jewish Community in Los Angeles

SEC obtained an emergency court order to halt an ongoing $7.5 million Ponzi scheme that targeted members of the Persian-Jewish community in Los Angeles. The SEC’s complaint alleged that the promoter, himself a member of the Persian-Jewish Los Angeles community, raised funds from 11 investors and used nearly $1.6 million investor funds to buy jewelry, high-end cars, and VIP tickets to sporting events. He lured investors with promises of exorbitant returns in purported pre-IPO shares of well-known companies.

SEC Charges South Florida Man in Investment Fraud Scheme

Fraudster raised nearly $11 million claiming returns as high as 26%. He typically met and pitched prospective investors over meals at expensive restaurants in and around Fort Lauderdale. His clients typically came to him through word-of-mouth referrals among friends and relatives. A significant number of the victims of his scheme were members of the gay community in Wilton Manors, Florida.

SEC Halts Affinity Fraud Aimed at the Hispanic community

Defendants raised $817,500 from investors representing to them that their funds would be used to develop a financial services firm serving the Hispanic community. The promoter used a large part of the investors’ money to engage unsuccessfully in high risk “day-trading” of stocks, pay personal living, travel and entertainment expenses or make other, unexplained expenditures with no connection to the purported start-up business activities.

SEC Charges Real Estate Developer in Miami Affinity Fraud

Miami-based developer conducted an affinity fraud and Ponzi scheme involving real estate investments that raised $135 million from more than 400 investors, primarily from the South Florida Cuban exile community. Among other things, the developer paid existing investors with new investors’ funds and assigned the same real estate collateral to multiple investors.

SEC Halts Online Affinity Fraud

Fraudster raised at least $2.4 million from at least five individuals in 2008 and 2009. He offered and sold promissory notes and convinced investors to grant him trading authority over money contained in online brokerage accounts. While doing so, he misrepresented his intended use of the money, the risks of his trading, the source of the money used to pay the guaranteed fixed returns, and falsely guaranteed repayment of investors’ principal.

What Should You Do If You Suspect Affinity Fraud?

If you think you may be aware of a possible affinity fraud – or may have lost money in an affinity fraud – please contact the SEC through the SEC Complaint Centerhttp://www.sec.gov/complaint/select.shtml. You can also contact your state’s securities administrator. You can find links and addresses for your state regulator by visiting the North American Securities Administrators Association’s website.

Additional Information

For additional educational information about affinity fraud, see our publication “Stopping Affinity Fraud in Your Community” available here on Investor.gov, the SEC’s website for retail investors. For information on investing generally, including how to help avoid fraud, visit Investor.gov or the Office of Investor Education and Advocacy’s homepage on SEC. gov. You can also follow us on Twitter at @SEC_Investor_Ed. Finally, if you would like to speak directly with one of our staff about this or other investing issues, please contact us toll-free at (800) 732-0330.


The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Where money meets faith, bring skepticism

This is a repost of a good article on affinity fraud by  that appeared in the Washington Post this week:

Where money meets faith, bring skepticism

Robert “Dr. Shine” Freeman, a Maryland minister, took the command “let us pray” and turned it into “let us prey.”Because that’s what he did. He preyed on his people. Prosecutors said Freeman, 56, hid assets to avoid paying hundreds of thousands of dollars in debts. He recently pleaded guilty to obstructing bankruptcy court proceedings and received a 27-month prison sentence. He was ordered to pay more than $630,000 in restitution to four church members who took out loans to buy cars and a mansion.

What Freeman did falls under “affinity fraud.” Affinity fraud is when people use a personal connection such as religion or ethnic status to gain people’s trust and their money.Nearly one in four Ponzi schemes involve affinity-group targets, according to a study by consulting firm Marquet International of major Ponzi schemes in the United States since 2002. The three most common affinity groups targeted by Ponzi schemers, accounting for 85 percent of such cases, were the elderly or retired, religious groups and ethnic groups. Continue reading “Where money meets faith, bring skepticism”

Why FINRA’s New Rules on “Suitability” Are Important for Investors

FINRA, the regulatory organization that governs broker-dealers, has now implemented a major overhaul of its suitability rules that could have a big impact on investors who feel that they were misled by their stock broker. The new rules went into effect on July 9th and require brokers to (1) perform reasonable due diligence on investment products they recommend, (2) understand those investments, and (3) have a reasonable basis to believe that a security or investment strategy is “suitable” or appropriate for the given investor.  Suitability evaluations must be undertaken with respect to every investor and his or her particular situation. Among other things, a broker must look at an investor’s age, investment experience, time horizon, liquidity needs and risk tolerance when making an investment recommendation.  In short, every investors situation is unique and investment recommendations must take that into account. Continue reading “Why FINRA’s New Rules on “Suitability” Are Important for Investors”

ADVICE ON NOT GIVING INVESTMENT ADVICE

This article is published with permission from the authors, Jason D. Rogers and Brad R. Jacobsen of the Vantus law Group.   

Many people would believe that investment advisers are only those that give opinions on which stocks, bonds or mutual funds to buy.  However, under applicable securities laws “investment adviser” is much more broadly defined than commonly thought, potentially including those who simply give general financial counseling or planning or those who recommend the purchase of a particular asset.

The question of whether or not a person is an investment adviser frequently arises in a real estate, insurance or other sales context.  Such salespeople would not generally think they are subject to the securities laws, but, depending on their activities, they may be. Continue reading “ADVICE ON NOT GIVING INVESTMENT ADVICE”

FORBES: You Should Avoid Church and Rotary In Retirement Planning

This

article appeared in Forbes Magazine

 this month:

Avoid Church and Rotary In Retirement

MITTERFIRMIANSREUT, GERMANY - JANUARY 14:  Vis...

Robert Laura, Contributor

As shocking as this may sound, when it comes to planning and investing your retirement savings, religious and civic organizations are quickly becoming places to avoid.  In the not-so-distant past, you could rely on the fellow who lead the pledge of allegiance or said the deeply devotional group prayer, but the growing trend of Affinity Fraud suggests those closest, and most like you, should be kept the furthest from your life savings.

Unlike “hate” crimes that are committed across racial, ethnic or religious lines, Affinity Fraud targets members of identifiable groups, such as religious or civic organizations, ethnic communities, elderly people and even professional associations.  Fraudsters infiltrate a group and seek to exploit the trust and friendship among its members. Often times they get a long-standing or high ranking member(s) of the group to unwittingly endorse the scheme and the scam spreads faster than a California wildfire. Continue reading “FORBES: You Should Avoid Church and Rotary In Retirement Planning”

Idaho Investment Advisor Matthew Hutcheson Indicted

Mr. Hutchenson
Matthew Hutcheson is an Idaho-based investment advisor and recognized authority on fiduciary standards.  He has testified before U.S. Department of labor in 2008 in support of increasing disclosure requirements for advisors to improve the observance of fiduciary standards.  In 2010 he testified before congress on the need to increase regulatory standards to improve fiduciary conduct.  In 2011 Hutcheson was hired by the California State teachers’ Retirement System as consultant on vetting and screening advisors.  On 17 December 2010 the San Francisco Chronicle referred to him in a headline as “Nation’s Top Fiduciary.”

On 10 April 2012 Hutcheson was indicted on 17 counts of wire fraud and 14 counts of theft.  Mr. Hutcheson pleaded not guilty and was released a day later into third-party custody.

U.S. Attorney’s Press Release: http://www.justice.gov/usao/id/news/2012/apr/hutcheson04112012.html

Fiduciary advocate indicted

April 15, 2012 6:01 am ET

Well-known fiduciary advocate Matthew D. Hutcheson was indicted last week on federal charges that he used retirement plan funds for home renovations and to buy an interest in a ski and golf resort.

The plan adviser was arrested Wednesday in Idaho and indicted on 17 counts of wire fraud and 14 counts of theft. Mr. Hutcheson pleaded not guilty and was released a day later into third-party custody.

Mr. Hutcheson has been on the advice industry’s radar for some time. He hosted a radio show called “The Retirement Hour with Matt Hutcheson” and authored a course called “Retirement Plan Management: Compliance, Reporting and Ethics.”

According to the U.S. Attorney’s Office in Boise, Mr. Hutcheson was a fiduciary and trustee to a trio of multiple employer plans: the G Fiduciary Retirement Income Security Plan, the National Retirement Security Plan 401(k) and the Retirement Security Plan & Trust.

$2M IN ALLEGED TRANSFERS

In 2010, Mr. Hutcheson allegedly directed the record keeper of the G Fiduciary Plan to send a total of $2,031,688 via 12 wire transfers from the plan’s account, which was kept at Charles Schwab & Co. Inc., to accounts that were controlled by the adviser or were for his personal benefit.

Federal authorities also claim that in 2010, Mr. Hutcheson set up an entity called Green Valley Holdings to acquire a golf course and ski lodge at the Tamarack Resort in Idaho. He allegedly funneled $3 million in plan assets out of the Retirement Security Plan & Trust to help buy an interest in Tamarack, according to the complaint.

Federal authorities are seeking about $5.3 million in forfeitures from Mr. Hutcheson. Further, each count of wire fraud is punishable by up to 20 years in prison, while each count of theft from an employee pension benefit plan is punishable by up to five years.

A call to Mr. Hutcheson went to a voice mail system that was not set up. His attorney, Dennis Charney, did not immediately return calls. Neither responded to e-mails requesting comment.

State of Fraud

This is a good article that appeared in the April 2010 edition of Utah Business.  It looks into why Utah has so much securities fraud and echos many of the same conclusions discussed elsewhere in this blog.

State of Fraud

Why is Utah Rife with Fraudulent Investment Schemes?

by Gaylen Webb

It’s been about four years since Val Southwick, the Bernie Madoff of Utah con artists, received his ticket to the state penitentiary for the biggest fraud scheme in Utah history. Today, Southwick sits quietly in a cell in Gunnison, serving out his nine consecutive sentences. Although he pled guilty and expressed remorse at his sentencing, he routinely declines media interviews and is mum about his fraud conviction and the tactics that supported his grand deception. Continue reading “State of Fraud”

The SEC Issues an Alert on Social Media and Investing

The SEC recently issued this Investor Alert warning all of us who use the Internet to be wary of people who contact you online to try to lure you into a scam.  This is a reprint of the alert:

Investor Alert: Social Media and Investing – Avoiding Fraud

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to help investors be better aware of fraudulent investment schemes that may involve social media. U.S. retail investors are increasingly turning to social media, including Facebook,YouTube,Twitter, LinkedIn and other online networks for information about investing. Whether it be for research on particular stocks, background information on a broker-dealer or investment adviser, guidance on an overall investing strategy, up-to-date news, or to simply discuss the markets with others, social media has become a key tool for U.S. investors.

While social media can provide many benefits for investors, it also presents opportunities for fraudsters. Social media, and the Internet generally, offer a number of attributes criminals may find attractive. Social media lets fraudsters contact many different people at a relatively low cost. It is also easy to create a site, account, email, direct message, or webpage that looks and feels legitimate – and that feeling of legitimacy gives criminals a better chance to convince you to send them your money. Finally, it can be difficult to track down the true account holders that use social media. That potential for anonymity can make it harder for fraudsters to be held accountable. As a result, investors need to use caution when using social media when considering an investment. Continue reading “The SEC Issues an Alert on Social Media and Investing”

The LDS Church Issues a Strong Position on Affinity Fraud

I am pleased to see that after years of urging from me and others who have seen affinity fraud perpetrated within LDS church congregations for years (especially in Utah County) the church has finally stepped up to the plate and taken a stronger position on this issue.  They did so at the annual Fraud College event that took place on February 15, 2012 at the University of Utah, and on their website.  The church was asked to speak at the first Fraud College 2010, but they declined that year, and they declined again in 2011.  This “head in the sand” response to the problem was infuriating to federal and state law enforcement officials – and to me. Click here to see the
Xarelto Lawsuits to see if you or a family member has a case.

Thankfully the Church leadership finally decided this year that they needed to acknowledge and confront the growing incidence of church members — often in positions of trust within the church — victimizing other church members.  The FBI has stated that Utah is a hot spot for financial fraud and estimate that $2 billion worth of fraud is “under investigation or being prosecuted in Utah courts.”

The speaker at the conference was Michael Otterson, managing director of the Church’s Public Affairs Department.  And he didn’t mess around.  He compared fraudsters to child molesters because they “exploit one of the things we value most: the trust that makes our communities what they are.”

Continue reading “The LDS Church Issues a Strong Position on Affinity Fraud”

UPDATE: Lessons to be Learned from Jeffrey Mowen

Here is an update on this story from the Salt Lake Tribune.  There is another moral to this story that is evident in these prosecutions, and that is you need to be careful who you solicit money on behalf of, and its better not to do it at all.  If you are not licensed to sell securities and accept a fee for raising money on behalf of another person it could get you into a lot of trouble — regardless of whether its a scam or not:

Utahns among six sanctioned over Ponzi scheme

By Tom Harvey
The Salt Lake Tribune
Published: March 7, 2012

Federal regulators have imposed sanctions on six Utah and Colorado men for their involvement with Jeffrey Mowen, the Utah County man who plead guilty to fraud charges for running a Ponzi scheme that took in about $18 million from investors on promises of returns of 2 percent or more a month.

The Securities and Exchange Commission said the six solicited millions of dollars of investor money that went to Mowen using false claims about where the money would go and about the security of the investments.

Sanctions were imposed against Thomas R. Fry, Cedar Hills; Michael W. Averett, Pleasant Grove; Michael G. Butcher, Loveland, Colo.; Gary W. Hansen Berthoud, Colo.; James B. Mooring, Highland; and Bevan J. Wilde, Highland.

Mowen SEC Sanctions

In a 2009 lawsuit the SEC said the six had raised about $41 million from 150 investors in various states. Of that, about $18 million went to Mowen, who used about half of it to make interest payments to investors so it appeared his operation was profitable in what’s known as a Ponzi scheme.

Mowen, who is now serving a 10-year prison sentence, misappropriated another $8 million for personal use, including buying a large collection of luxury and antique motor vehicles, with another $650,000 going to his then wife.

The lawsuit said Fry led the group of promoters in distributing false information about the investments. They also failed to do adequate research to ensure the information was legitimate, it said.

Fry ignored the fact that Mowen had been under investigation and eventually was convicted of securities fraud, the lawsuit said. When Fry learned that Mowen had been convicted, he failed to disclose that information to investors or other promoters.

Fry and the others settled the lawsuit against them and were ordered not to commit anymore violations. The SEC is seeking repayment of funds they earned in the process.

In recent administrative actions, the SEC barred the six from participating in investment sales, services and promotions, including penny stocks.

A seventh man named in the lawsuit, David G. Bartholomew, continues to defend himself.

tharvey@sltrib.com

_____________________________________________________________________________

Tom Harvey reported in the Salt Lake Tribune yesterday that Jeff Mowen finally pled guilty to one count of wire fraud and will spend ten years in prison.  I have not previously written about Mr. Mowen, but now that he has pleaded guilty I feel like I can write about it.  I met with Jeff Mowen several times when he was trying to hire me as his defense attorney.   He never actually hired me and he certainly never paid me a dime, but I am not going to reveal any potentially privileged communications in this post. Continue reading “UPDATE: Lessons to be Learned from Jeffrey Mowen”