Affinity Fraud

Affinity Fraud

Wall Street maven Bernard Madoff’s 50 billion dollar Ponzi scheme, the largest in history (excluding the Social Security system), has generated a spate of sensational headlines. “Scope of Alleged Fraud Still Being Assessed,” “Madoff Ran Vast Options Game,” “Spielburg and Katzenburg Get Hit,” “Impact on Jewish Charities is Catastraphic.”

A Ponzi scheme, named for Charles Ponzi, an Italian immigrant who established a scheme involving thousands of investors and millions of dollars which collapsed in 1920, is a deceptive investment scam which promises exceptional returns on the dollar. The only problem is it is not earned dividends or capital gains which fuel the return but other investors’ principal. The scheme only works as long as new investors can be persuaded (conned) into buying or re-investing into the plan. Eventually the great pyramid must collapse.

One of the more famous recent schemes entangled leading members of the new government of Albania in the 1990’s. Fueled by an unrealistic view of the potential of the free enterprise system thousands of Albanians were caught up in the hysteria. The scheme involved hundreds of millions of dollars. It collapsed in 1997 provoking serious social unrest in Albania costing up to 2,000 lives by some reports.

One headline in this recent scam that especially caught my attention was an op-ed article in the Wall Street Journal entitled “Madoff Exploited the Jews” by Ronald Cass, dean emeritus of Boston University School of Law.

Dean Cass describes the phenomenon known as affinity fraud – the tendency for groups defined by religious, ethnic, social, or ideological affinity to become targets of insider confidence games. In the Madoff case it was both the social affinity of membership in the same posh country club as well as the religious/ethnic tie of being Jewish, hence the large number of well-known Jewish contributors and Jewish charities affected by the scam. “The sense of common heritage, of community, also makes it less seemly to ask hard questions. Pressing a fellow parishioner or club member for hard information is like demanding receipts from your aunt — it just doesn’t feel right. Hucksters know that, they play on it, and they count on our trust to make their confidence games work.”

According to the U.S. Securities and Exchange Commission:

Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are – or pretend to be – members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster’s ruse.

These scams exploit the trust and friendship that exist in groups of people who have something in common. 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 their legal remedies, and instead 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.


Affinity fraud is actually rather common. Some recent major frauds include that of Greater Ministries International. 18,000 investors, mostly believers, lost $448 million dollars in a scheme which collapsed in 1998. In 1995 the New Era scam bilked 1,100 investors and 180 evangelical organizations out of $135 million. Affinity fraud crosses all ideological and ethnic lines. The Wall Street Journal recently reported a $100 million Ponzi scheme which entangled members of B’nai Israel Congregation in Norfolk, VA through a trusted member of the community. Similar frauds are reported by the SEC involving African, Armenian, and Korean Americans.

All in all, I think Solomon had it right, A faithful man will abound with blessings, but whoever hastens to be rich will not go unpunished (Proverbs 28:20). Essentially he is saying to avoid get rich quick schemes. That’s why I find that the confusing entanglements such schemes tend to create are better left at the sanctuary door.