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By David Malamed
Illustration: Geneviève Côté
Community and religious group members often find themselves victims of affinity fraud and should beware of the too-good-to-be-true pitch
All fraud is despicable but one type seems especially heinous. And that is affinity fraud, which refers to a scam perpetrated upon members of a common group, often within religious or ethnic communities. Sadly, there is no shortage of examples of such frauds.
One prominent case involved Prosporex Investment Club Inc., which victimized 1,700 people, of which a significant number were members of Toronto’s Caribbean community. Many of the victims learned of the investment opportunity through their church or through friends in their community. The scam garnered the perpetrators more than $29 million, of which only $5.3 million was returned to investors, according to a decision released by an Ontario Securities Commission panel in October 2011. The OSC panel found that Prosporex had breached the Ontario Securities Act and “acted contrary to the public interest by engaging in fraudulent conduct, unregistered trading, and an illegal distribution of securities.”
Starting in 2007, Prosporex recruiters promised investors returns of up to 20% a month, which the company said would result from pooling investors’ money that would be invested by professional traders in foreign ex-change markets. Paul Edwards, pastor of Ekklesia King-dom Ministries in Toronto, told CTV’s W5 that he and his wife gave Prosporex $15,000 after a member of his flock promised their money would double within a year of getting in on this opportunity.
Pastor Edwards and his wife didn’t have extra cash to invest, so Prosporex arranged for them to obtain a loan from AGF Trust Co., a respected financial institution. A number of investors did the same, all with AGF. Within a year Edwards logged into a password-protected website to find that the promise of spectacular returns had come true. Pastor Edwards’ initial $10,000 had grown to $18,500 and his wife’s $5,000 was now worth $8,500. That good news spread rapidly within the church and the community.
But by 2009, the news turned sour. The OSC began investigating Prosporex and in a 2010 report concluded that the company’s principals had “utilized multi-level, or pyramid, marketing techniques whereby investors were compensated to recruit others.” Panicked investors tried to get their money back, but it was too late. The bulk of the $29 million was gone. To make matters worse, AGF insisted the loans had to be honoured, asserting it had no idea anything untoward had taken place. Maura Fowler, a mother of three, lost $7,500 in the scam, a sum she had borrowed from AGF. She told W5 that what Prosporex had done to her felt like “financial rape.”
In March 2012 the OSC imposed sanctions, including permanent prohibitions on securities trading and substantial fines on the correspondents in the scam.
The Prosporex case, like most affinity frauds, preyed on human vulnerabilities. Central to the effectiveness of affinity scams is the sense that those in a close-knit community, one with strong common bonds, would never violate that trust. This belief is likely heightened when the community is a religious one, where everyone is seen as following the same spiritual path. An additional factor is that many affinity victims, especially those in a religious group, are seniors and more prone to trusting a pitch from someone within their faith. “Who would steal from a church?” is just a short step from “Who would steal from a fellow church member?”
Unfortunately, some unscrupulous souls are all too willing to do just that. Enough so that the British Columbia Securities Commission (BCSC) supported an initiative called God’s Fraud Squad to alert the province’s religious groups to affinity schemes.
The genesis of the idea, so to speak, originated with Seamus Mackrell, a Catholic priest in Chilliwack, BC. He was working as a spiritual caretaker at Chilliwack General Hospital in 2003, he told the Globe and Mail, when he noticed a number of people from the Fraser Valley area, regarded as BC’s Bible Belt, were coming in with depression and all sorts of stress-related injuries. “When I’d sit down with them, I’d find out that it was all because of fraud.”
Not far away, Presbyterian minister John Haycock, who also worked at a hospital, observed a similar pattern. “When the priest and the minister compared notes, they were struck by what they saw,” the Globe reported. “The wave of religious con victims coincided with a rise in what securities commissions throughout North America consider one of the most serious scam threats facing investors: affinity fraud.” Together they formed God’s Fraud Squad.
Since 2003, it has spread the word to churches in BC. To carry out their work, the reverends have been financed by the BCSC with monies from fines and penalties it levies. “British Columbia has thousands of churches and dozens of different congregations in many different languages,” a BCSC statement notes. “The BCSC aims to … stop faith-based scams in progress. Our goal is to make sure that leaders and members of BC faith communities know the BCSC’s role in protecting investors, and how to report investment fraud if it happens to them.”
And it certainly does happen. “From 1995 to 1997, Gary Stan- hiser, a man posing as an ex-pastor and investment adviser, sucked $11 million from 300 investors in the Fraser Valley’s Seventh Day Adventist community,” according to the Globe. “Between 2001 and 2005, another con man selling fake securities cheated the Fraser Valley’s Mennonite community out of about $3.5 million. Most often, the scammers employ Ponzi, or pyramid, schemes in which money from new investors is used to pay earlier investors. The last to join generally lose the most.”
But it’s not only churchgoers who are targets of affinity fraudsters. Ethnic groups are also susceptible. One of the largest individual frauds in Canadian history was an affinity scheme perpetrated on the Ismaili community in Canada and worldwide. It began about a dozen years ago when Salim Damji, who claimed to be a dentist, told members of the Toronto Ismaili community about a can’t-miss opportunity.
He let it be known a company he owned, Strategic Trading Systems (STS), held the rights to a tooth-whitening product known as Instant White, which he was about to sell to Colgate Palmolive Corp. Before this happened, however, he wanted to offer his community members a chance to invest in STS. The premise was that once the deal was finalized, STS would skyrocket in value. According to Damji, investors would recoup $20 for every dollar they put in, a 2,000% bonanza. Over a two-year period approximately 5,000 Ismailis worldwide took the bait, to the tune of $78 million.
Unfortunately, Damji’s story was pure fiction. Incredibly, he had concocted the scheme after watching the product sold on The Shopping Channel.
In April 2002, some time after Colgate and the OSC became aware of Damji’s claims, he was arrested and sentenced to six years and three months in prison. By that time, however, most of the money was gone and never recovered.
No matter how much people are warned about affinity scams, some perpetrators are so trusted it’s hard to fathom anyone would doubt their sincerity. Perhaps the most blatant example of this vulnerability is Ephren Taylor, known as the black Bernie Madoff.
A charismatic speaker, Taylor had a most impressive résumé. According to a 2011 Associated Press report, at 12 he sold video games he designed and by 18, he and a friend created a job-search engine that he claimed was valued at more than US$3 million. (However, a subsequent lawsuit questioned that figure.) In 2006 he was tapped as the CEO of City Capital, now based in California, and he was quick to boast in interviews that the move made him the youngest black leader of a publicly traded company in the US.
An author of books about his financial expertise, Taylor was a frequent guest on TV programs, where he served up investment advice. He even landed a spot speaking to a youth leaders summit at the 2008 Democratic National Convention, AP said. And rapper Snoop Dogg chose him to manage a charitable endowment.
Taylor especially targeted audiences at African-American churches with a list of his impressive accomplishments and an uncanny business sense. He called his presentations Wealth Tour Live.
“He had the blessing of top clergy as he gave financial seminars from the pulpit on Sundays, promising rock-solid investments — only many of the churchgoers said they haven’t seen a dime,” The Economist reported this year. “Two lawsuits filed [January 2012] claim the 29-year-old Taylor was a con artist who targeted worshippers throughout at least five states on the East Coast since 2004, swindling tens of millions of dollars in a Ponzi scheme.”
His pitch was a classic affinity con. “He knew if he went to a Christian African-American and said, ‘I can take your hard-earned investment money, and you’re going to earn more money, but more importantly you’re going to do good for your church and community,’ that they would fall for it hook, line and sinker,” said Cathy Lerman, an attorney suing Taylor in North Carolina on behalf of victims. “He was a master of creating a marketing presence. He would say: ‘If you want to check me out, just Google me.’ ” He had no problem convincing people he was an ordained minister, even though he had no formal seminary training, according to court documents.
It is easy to see why so many church members, and their friends, believed in Taylor and eagerly gave him money to invest.
In late 2009, for example, Eddie Long, pastor of the 25,000-member New Birth Missionary Baptist Church in Atlanta, introduced Taylor at one event with the words: “[God] wants you to be a mover and shaker … to finance you well to do His will,” The Economist reported. “Taylor offered ‘low-risk investment with high performances,’ chosen with guidance from God.”
Most of the congregation jumped at the opportunity to make the 20% guaranteed returns Taylor promised, to the tune of about US$1-million worth of investments collectively. Of note is that Long has been named as a codefendant in a suit against Taylor. Long also recently settled, for US$15 million to US$25 million, claims that he had inappropriate sexual relationships with young men.
Several lawsuits have been launched against Taylor, who has since disappeared. It has been reported that he is under investigation for a number of criminal offences but, at the time of writing, no charges had been laid.
Although affinity fraud can occur anywhere, it is more common in certain areas. While BC is likely the affinity fraud capital of Canada, Utah, which is 60% Mormon, has that dubious honour in the US.
In 2010, regulators and the FBI were investigating cases there with 4,400 victims and perhaps US$1.4 billion (or US$500 for every Utahn) in losses, according to The Economist. “The numbers have surely climbed since, with the three largest cases alone involving combined losses of up to US$700 million, says one investigator. Mormons tend to be both trusting and welcoming of newcomers, says Keith Woodwell, head of Utah’s Division of Securities. As soon as you pull up to your new house, neighbours appear to help you unpack. A scammer who gets his foot in the door can exploit this closeness.”
How can people protect themselves? It can be difficult but financial advisers, such as accountants, can play a critical role.
Make sure clients always check out any individual they plan to invest with. Taylor, it seems, had a criminal record for fraud earlier in his career.
Remind clients that the too-good-to-be-true maxim is sound advice and not just a cliché. Warn them of the age-old gimmick of fraudsters pressuring victims into investing quickly, before a deal is no longer available. Underline the need to have every aspect of the opportunity clearly spelled out in writing. Fraudsters prefer not to do this; legitimate investment experts understand why this is the correct thing to do.
Despite this advice, many potential victims believe a seemingly devout and good person would never defraud them. Keep a file of affinity fraud examples and show them to clients. And remind them that pray and prey are sometimes more than just homonyms.
David Malamed, CA·IFA, CPA, CFF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto. He is also CAmagazine’s technical editor for Fraud