Enforcement News: The Intersection of Affinity Fraud and a Ponzi Scheme

• Posted on: Jan 18 2023

By: Jeffrey M. Haber

In prior articles we have examined Ponzi Schemes and affinity fraud. E.g., here. We do so again today.

Affinity fraud occurs when the promoter of the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter frequently is – or pretends to be – a member or a good friend of the group. The promoter often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests. 

Affinity frauds exploit the trust and friendship that exist in a group of people who have something in common. Because of the tight-knit structure of the group, it can be difficult for regulators or law enforcement officials to detect an affinity fraud. 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 promoters have used respected community or religious leaders to convince others to join the investment.

Many affinity frauds involve Ponzi schemes. In a Ponzi scheme, the operator creates an investment program in which “profits” are paid to earlier investors with money taken from later investors. The “profits” are, therefore, fictitious instead of returns on investment. Ultimately, Ponzi schemes collapse under their own weight (because the supply of new money stops), taking investors, many of whom are the later ones in the scheme, down with them. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use. 

On January 17, 2023, U.S. Attorney’s Office, Eastern District of North Carolina, announced (here) that a 56-year-old man was arrested upon the unsealing of a 23-count indictment in connection with an investment scheme to defraud. If convicted, Defendant faces up to twenty years in prison per count and potential fines.

According to the indictment,¹ Defendant, a native of India and a member of the Indian-American community in Cary, North Carolina,² fraudulently induced at least 12 victims or sets of victims into giving him funds under the false pretense that he would be investing their money in a legitimate real estate development in the Orange County, North Carolina area. In some instances, the money represented his victims’ life savings. Defendant allegedly used the funds from these victims to pay back earlier investors who believed that he was returning their original investment and legitimate capital gains. 

As further alleged in the indictment, Defendant typically contacted the victims telephonically or in person to describe a local real-estate investment opportunity. Defendant allegedly leveraged his employment with the town of Chapel Hill to convince victims that he had insider knowledge of development plans with respect to the purported real estate.³ The indictment alleges that  Defendant would then request a specific amount of money within a short timeframe, sometimes the same day, to facilitate closing the transaction. Defendant allegedly promised a return of the principal investment plus a profit within a few months and sometimes ask his victims not to discuss the transaction with other members of the community or reference a non-disclosure agreement.

“Our investigation shows [that Defendant] abused the trust and confidence placed in him by fellow Indian-American community members. He promised to invest their money in property.  Instead, [Defendant] used the funds to pay back other people he swindled as part of his scheme; now, multiple victims are left without their much-needed savings,” said Michael C. Scherck, FBI Acting Special Agent-in-Charge. “Fraud can have an immediate and direct impact on people and communities, and the FBI remains determined to bring those who commit it to justice.”

Defendant was indicted on 17 counts of Wire Fraud in violation of 18 U.S.C. § 1943 and 6 counts of Conducting Transactions in Criminally Derived Property in violation of 18 U.S.C. § 1957. 

The government’s papers can be found on Pacer.gov by searching for Case No. 5:22-cr-00347-BO-BM.

Footnotes

1. An indictment is merely an accusation. The defendant is presumed innocent until proven guilty.
2. According to the News & Observer, Defendant “previously served as vice president and president of the Triangle Area Telugu Association, and as a former board member with the Hindu Society of North Carolina” (here).
3. According to the News & Observer, “[Defendant] who was hired in 2000 as Chapel Hill’s traffic engineer, abruptly resigned as the town’s traffic engineering manager on Nov. 1, 2021, after filing for Chapter 7 bankruptcy that October” (here).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.