Affinity fraud occurs when a perpetrator takes advantage of religious or ethnic communities, language minorities, senior citizens, or other identifiable groups.
Perpetrators, often themselves members of the community, exploit the inherent trust and sense of commonality to increase the effectiveness of common fraud tactics, enabling them to convince potential investors that a fraudulent investment is legitimate and profitable, even under circumstances where common sense should prevail.
In one such case, the Securities and Exchange Commission (SEC) recently halted an ongoing investment fraud targeting members of the Israeli-American community, centered in the Los Angeles, CA area.
SEC Charges Motty Mizrahi and MBIG Company With Fraud
In an emergency action filed in federal court, the SEC alleged that Motty Mizrahi and MBIG Company, his sole proprietorship, defrauded at least 15 advisory clients out of more than $3 million since June 2012.
Mizrahi made fraudulent claims of sophisticated trading strategies used by MBIG that:
● Would generate "guaranteed" returns of between 2-3% per month
● Were risk-free
● Would allow clients to withdraw their funds at any time
Clients unwittingly sent money to Mizrahi's personal bank account, which he used to pay personal expenses and fund high-risk personal investments totaling losses of more than $2.2 million.
Demanding proof of MBIG's securities holdings, clients were shown fabricated brokerage statements showing a multi-million-dollar balance for a fictitious MBIG brokerage account.
Creating a Culture of Honesty and Transparency
Cases of affinity fraud occur all too frequently, evidenced by the high numbers of legal actions by the SEC or other governing bodies intended to halt such schemes.
Investment professionals have a responsibility to steer well away from potentially fraudulent practices and to promote a culture of honesty and transparency through education and proper disclosure.
First, firms should be educating clients about how to protect themselves by recognizing sales practices often utilized in fraud cases, which include:
● Guaranteed high returns-there is no such thing as "risk-free" investments
● High pressure sales tactics-a common tactic to prevent clients from doing their own thorough due diligence
● "Inside track" claims-sales pitches that promise special treatment also discourage clients from asking crucial questions that could unveil red flags
Clearly, investment firms should actively avoid such tactics, as it might draw unwanted concerns about unethical practices and damage the firm's reputation.
Second, firms should thoroughly review their methods of disclosure, making sure they are in compliance and that they are painting an accurate picture of investment performance, even in the event of losses.
Reexamining Your Methods of Disclosure
The current wave of charges against fraud serves as fair warning: Should disclosures appear somehow altered, or found otherwise not in compliance, firms are likely to draw unwanted suspicions from regulatory authorities.
Being accurate, up-to-date, and consistent with regards to disclosures makes good business sense and can prevent any undesirable suspicion of fraud.
Should your firm need assistance with shoring up its disclosures, or with any other legal matters, the expert attorneys at Jacko Law Group, PC, can help.
Add a comment
- How to Avoid Legal Problems and Foster a Culture of Regulatory Compliance
- Inside the SEC’s Proposed New Rules for Financial Advisor Advertising
- A Costly Failure to Follow Written Policies and Procedures
- California Governor Signs CCPA Amendments, Privacy Related Bills into Law
- SEC Proposes Exemptions to Application Procedures
- SEC Requests Proposals to Innovate Markets for Thinly Traded Securities
- PricewaterhouseCoopers LLP pays $7.9 to Settle SEC Improper Professional Conduct, Auditor Independence Charges
- HCR Advisors Settles SEC Charges on Failure to Supervise and Implement Compliance-Related Policies and Procedures
- Amadeus Wealth Advisors, Three Bridge Wealth Advisors Settle SEC Unlawful Proxy Charges
- Charging Fees for Inactive Accounts can be as Problematic as Churning
- Securities and Exchange Commission (SEC)
- Advisers Act
- Investment Advisers
- Policies and Procedures
- Securities Law
- Office of Compliance Inspections and Examinations (OCIE)
- California Consumer Privacy Act (CCPA)
- Ponzi Scheme
- Aging Clients
- Form U5
- Due Diligence
- Virtual Currency
- Dodd-Frank Act
- Regulation Best Interest
- Private Equity
- Private Funds
- Transition Services
- Hedge Funds
- Regulatory Examinations
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Social Media Marketing
- Broker Protocol
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Wells Fargo