The concept behind an affinity fraud scheme is simple: Gain the trust of a group of people with something in common and scam them out of lots of money. The "groups" are often based on ethnicity, immigrant status, religious affiliation, college alumni association, or something along the same lines. These groups of people are often very trusting of one another, and if a scammer can get an "in" with the group, it is often easy to convince them to part with their money.
This week, executives of WexTrust Capital LLC in Chicago were arrested and charged by the feds with conspiracy to commit securities fraud. They're accused of running a Ponzi scheme since at least 2005, which cost consumers about $255 million.
Most of the 1,200 people defrauded by this scheme were Orthodox Jews, fitting nicely into the framework of an affinity fraud. A Ponzi scheme (also called pyramid scheme) like the one this company is being accused of running collects money from participants, pretends to invest the money, and pays "investment returns" to participants with money collected from people who are newer "investors." There are little to no real investments, and the scheme relies on the continuous recruitment of new participants to generate money to pay the early "investors."WexTrust representatives told participants that they were investing in real estate. Federal investigators found that the company didn't really have a financial interest in the properties they discussed with investors. The assets of WexTrust have been frozen while this is all being sorted out, but most times participants in these types of scams get back little of their money. Because of the nature of the scams, there usually isn't much money left to pay the people who put their hard-earned dollars into the scheme.
How do people get sucked into scams like this? Typically they're presented with fancy materials which boast about the high returns investors have received. There are often a few happy participants who are willing to vouch for the promoters of the "investments." With these endorsements from trusted members of their group (in this case, Orthodox Jews) hesitant consumers more likely to take the risk.
The most common tip-off that these "investment opportunities" are scams is the high rate of return that the promoters are offering. It's not unusual for a company to say they're paying investors 5% or 10% per month on their investments. Stop and think about it.... When have you heard of a legitimate investment vehicle that pays that much? If you're presented with one of these opportunities that sounds too good to be true, run quickly in the other direction. They are always are too good to be true.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
Consumers conned out of millions with affinity fraud