What is Affinity Fraud?

Affinity fraud is a type of investment fraud where an individual seeks to defraud members of their own community by persuading them to invest in a fake opportunity. This type of fraud takes advantage of the trust potential investors feel when dealing with members of their own religious or ethnic group. Seniors and military families are also frequent victims of affinity fraud. This type of fraud frequently comes with promises of low risk and the potential to earn outsized wealth.

Affinity fraud schemes can spread without much effort from the instigator. Once a member of a community believes they have a hot ticket investment, they may want to share their investment opportunity with family and friends. Affinity frauds often make their way onto social media, targeting popular channels among a specific community.

Because affinity scams play on participants’ natural sympathies, they are not always reported. The same kinship that makes the fraudster seem trustworthy may also keep victims from reporting the scam to the authorities.

Affinity Scam Definition

Affinity frauds occur when a fraudster uses their identity (real or fake) as a member of an ethnic or religious community in order to find investors for a fraudulent scheme.

An affinity fraud definition is not complete without a description of two other types of fraud: Ponzi schemes and pyramid schemes.

According to the SEC, Ponzi schemes and pyramid schemes are often at the heart of affinity frauds.

• In a Ponzi scheme, investors put money in a fake investment. The fraudster behind the scheme then presents funds from new investors as returns on the investment. Behind the scenes, the perpetrator keeps the majority of the money for themselves. They may invest some of the money, but not in the manner the investor expects.
• Pyramid schemes also rely on an influx of cash from new investors. In a pyramid scheme, recruiters find investors and promise them the ability to generate a reliable, low-effort stream of income. All the participants supposedly have to do to succeed is find new recruits. The new recruits put money into the scheme, and a portion of that investment goes toward the original recruiter. The people on top of the pyramid end up making money, while the investors on the bottom are left with nothing when they fail to find fresh recruits.

Affinity Fraud Examples

Investors should take note of the recent affinity frauds. Examples often include trendy-sounding buzzwords, like cryptocurrency, options, and artificial intelligence.

Alleged Cryptocurrency Fraud Targets Christian Congregation

The world of affinity scams and schemes is increasingly rife with cryptocurrency frauds. In a recent affinity fraud scheme, Colorado pastor Eli Regalado allegedly convinced over 300 members of his congregation to put $3.2 million into a cryptocurrency called “INDXcoin” that Regalado had created. He offered it through Kingdom Wealth Exchange, a platform that he owned and operated. According to The Colorado Securities Commissioner, Regalado had no experience with cryptocurrencies and the coin had “serious technical problems.” Regalado and his wife allegedly promoted the coin as a low-risk investment, all the while allegedly pilfering the funds to pay for their lavish lifestyle and to renovate a home. The Colorado Commissioner stated, “We allege that Mr. Regalado took advantage of the trust and faith of his own Christian community and that he peddled outlandish promises of wealth to them when he sold them essentially worthless cryptocurrencies.”

Alleged Ponzi Scheme Defrauds Dallas Indian-American Community of Millions

Another recent case involved three individuals who allegedly targeted members of their own Indian-American community in the Dallas metropolitan area. The Founders allegedly raised more than $89 million from more than 350 investors for investments in alleged venture capital funds. The SEC alleges that the three men paid investors $17.8 million in fake profits that were actually Ponzi payments. The SEC further alleged that the fraudsters misrepresented one of the founder’s expertise and previous success using an options trading strategy. (Options trading is notoriously risky.)

Egyptian Christian Coptic Community Allegedly Victims of AI Hedge Fund Ponzi Scheme

A former registered stockbroker is facing a criminal complaint following allegations that he turned to his own Egyptian Coptic Christian community to find investors for an allegedly fake hedge fund. He allegedly told his investors he would use AI to generate guaranteed returns of 30%. The SEC alleges he spent the $5 million raised from Egyptian investors on luxury goods and pricey meals.

How Can I Protect Myself from Affinity Fraud?

Protect yourself from affinity fraud by evaluating all investment opportunities with the same thorough scrutiny. An affinity scheme falls apart once investors start asking hard questions. If the person recommending an investment claims to be a stock broker or an investment adviser, ask for their Central Registration Depository (CRD) number and look it up on BrokerCheck. BrokerCheck will reveal any past allegations of misconduct and regulatory actions.

If a FINRA-registered broker persuaded you to invest in an affinity fraud, get in touch with a securities attorney. Even if your case does not fit the affinity scheme definition, we can help you determine if you can recover money through FINRA arbitration.