By Greg Wright,
MBA, CFE, CFP®, CLU, ChFC
Certified Fraud Examiner
Certified Financial Planner™
Affinity financial frauds are perhaps the most common financial fraud. Affinity frauds refer to investment scams that take advantage of specific social groups, religious affiliations, races, or ethnicities. Many affinity groups are close-knit and very trusting of those who share a common identity.
For example, a Jehovah’s Witnesses pastor, Charles Russell, in 1913, was accused of bilking his followers by charging church members exorbitant rates for a “Miracle Wheat” that was found to be the same as regular wheat. The scandal, according to a newspaper editorial at the time, accused Russell as using his religion as “nothing more than a money-making scheme.” Many Jehovah’s Witnesses still maintain his innocence.
Utah is the epicenter of affinity fraud and the Church of Latter Day Saints (Mormon) has the highest per-capita rate of affinity fraud in U.S. The SEC’s Salt Lake office even handles many out of state affinity fraud cases involving multiple states because of their expertise as well as the fact that affinity frauds can impact investors that live all over the country.
Convicted Hindu fraudster, Neal Goyal's Caldera Investment Group was so brazen that he did not even bother to trade or invest and kept the funds in cash, treating his Hedge Fund like his personal checking account. According to prosecutors, the limited trading that Goyal did perform was unsuccessful and resulted in significant losses. However, his fake investor statements for 2011 to 2013 showed returns of 17% to 38.7%.
A Hedge Fund generally avoids direct regulatory oversight, bypass licensing requirements applicable to investment companies and operate with greater flexibility than mutual funds and other investment funds. Goyla’s Hedge Funds do not appear to have been audited or have had any outside oversight.
Every morning, he left his five-bedroom Lakeview home overlooking a park, and drove a black Mercedes-Benz to his swank massive corner office on Michigan Avenue with floor-to-ceiling views of the Chicago River. There, with ten computer monitors and eight employees, he pretended to be an investment manager. It was all a show.
Instead of investing the money, Goyal reportedly funded his business; bought two homes; leased luxury cars; purchased expensive artwork, jewelry and vacations travel to Hawaii and Tahiti; and made investments in a tavern and Urba Baby, a clothing boutique operated by his wife.
Goyal started raising money for his Blue Horizon funds in 2006, taking money from his circle of friends and family while he attended law school. He launched the Caldera fund in 2009 and, stopped any trading activity that same year. The following year he opened his plush Michigan Avenue Chicago office.
According to the SEC, Goyal told investors that the funds he managed would invest in securities following a "long-short" trading strategy. He was reported to have charges one percent of assets under management and 20 percent of investment profits.
However, since it appears that Goyal did little trading and simply operated a Ponzi using new investor funds to pay redemptions to existing investors and fund his lavish lifestyle. He concealed the poor results of the few investments he did make by sending investors phony account statements that grossly overstated the performance of the funds.
According to the Chicago Tribune, a Knoxville victim, Dr. Manisha Thakur, told the judge that when her husband raised doubts about investing their savings with Goyal, she reassured him that they both knew Goyal's physician aunts. "I said, 'He's an attorney by profession. I don't think someone like that would lie.' And equally important is the family he came from," she said. "But cold and calculating and essentially a con man is all that it appears Neal was."
"He made a fool of us, including his parents," said Dr. Sanjay Thakur, who told the judge Goyal came to his Knoxville, Tenn., home as his father was dying and assured them their money was safe and they could access it to pay for his medical bills. "He (Goyal) said, 'I have a (law) degree. ... Bernie Madoff was not a lawyer.”
Just months before his Ponzi scheme collapsed, he took his entire staff on an all-expenses-paid week-long trip to the Dominican Republic, their reward for their 50% investment return. Goyal, his wife, four of his employees and their dependents went on that trip, renting a yacht, and enjoying a the amenities of a five-star resort.
Affinity frauds are especially dangerous. The fraudster often will cause you to believe, “You can trust me, because I am just like you. You and I share the same background and interests.” These fraudsters may be members of your church, your cultural community, or recommended by your family and friends. It is the nature of most of us to want to trust especially those that share our identity.
Don’t be an investment victim.
Don’t be an investment victim.