Affinity Fraud and Ponzi Schemes

Affinity fraud can occur when a broker targets a specific group of prospective clients based on a common affinity they share, which can be by attending the same social place or having the same ethnic background for example.

You can be; if your broker engaged with you based on this shared affinity, causing you to feel a deeper level of trust in this broker, and then engaged in misconduct related to your account(s).

Investors who fall victim to affinity fraud are more likely to fall victim to Ponzi schemes because they often believe in their broker and may unknowingly disregard any potential red flags, due to this commonality and deeper level of trust.

Have you heard of the phrase, “borrowing money from Peter to Pay Paul?” Well, that is exactly what a Ponzi scheme is. Brokers will collect new money from new clients, to pay existing clients. An existing client will believe they are earning income from their investments when in reality, they are just receiving funds from a new client’s investment.

A man named Charles Ponzi conducted an investment-based scheme in the 1900s. Mr. Ponzi started his own company and sold stock. Mr. Ponzi convinced people to invest with him because of unrealistic profit margins (50% interest in a short period). He started with under 20 investors, and then it grew rapidly because he needed new money to pay off his debts (what existing clients believed to be their investment income). It is estimated that Mr. Ponzi stole approximately $15 million from clients, which is worth about $220 million today.

Have you heard of Bernie Madoff? He conducted the largest Ponzi scheme in history, worth approximately $65 billion. Investors flocked to him as they were amazed by the supposedly incredible returns he was earning for clients, even during an economic downturn. When in reality, Mr. Madoff needed new clients to give him their money, to pay off his debts or what investors believed to be income from their investments. Unfortunately, it was later discovered that Mr. Madoff sold fictitious investments and utilized fictitious statements to upkeep the scheme. Due to this egregious misconduct, thousands of investors were swindled out of millions of dollars.

Generally, yes, but the question to ask is was a company involved from whom I can get my money back? Believe it or not, many Ponzi schemes take place in small branch offices of brokerage firms, investment firms, and banks, and result in failures in supervision. If that is the case, it is likely worth pursuing.