Financial Planning

Beware False Prophets Peddling False Profits

Affinity fraud strikes again. How can you avoid it?

Move over, Jim Bakker: There’s (potentially) a new (alleged) criminal pastor in town. The SEC and Justice Department have just charged a Houston megachurch pastor and his business partner, a “financial planner” with priors, for bilking elderly folks out of $3.4 million by selling them pre-Revolutionary Chinese bonds, which they pledged to eventually resell for profit. Both men maintain their innocence, and it is up to the civil and criminal courts to do their thing. But with this case earning several headlines, it seems like a good time to remind investors of one key trick criminals often use: affinity marketing. Or if you prefer less jargon, targeting a specific group of investors with whom they might claim a special relationship—think a church group, senior center, ethnic community or neighborhood. While not every financial professional targeting these groups is up to something dirty, it is crucial for investors to be stay vigilant and not trust someone because of their occupation or social connections alone.

Here, courtesy of the SEC’s announcement, are the details of this case:

The SEC's complaint alleges that, in 2013 and 2014, Kirbyjon Caldwell, Senior Pastor at Windsor Village United Methodist Church in Houston, and Gregory Alan Smith, a self-described financial planner who the Financial Industry Regulatory Authority has barred from the broker-dealer business since 2010, targeted vulnerable and elderly investors with false assurances that the bonds—collectible memorabilia with no meaningful investment value—were worth millions of dollars.  Caldwell and Smith raised at least $3.4 million from 29 mostly elderly investors, some of whom liquidated their annuities to invest in this scheme. Caldwell and Smith are alleged to have taken approximately $1.8 million of investor funds to pay for personal expenses, including mortgage payments in the case of Caldwell and luxury automobiles in the case of Smith. Offshore individuals received most of the remaining funds.

According to the complaint, Pastor Caldwell’s role was rounding up investors for Smith’s scheme. He claims he invested his own money as well and still has faith they will pay off, which makes him either a fellow dupe or the perhaps world’s most steadfast con artist. The courts can decide that one. But whether or not he is guilty, there is still a problem here: a member of the clergy using his influence over a specific group of people to help sell an investment. Trust me, I’m a pastor, I was spiritual advisor to George W. Bush and Barack Obama, just have some faith and you’ll make money, is a predatory, ad hominem argument. It translates as, check your brain at the door, trust me implicitly and don’t ask too many questions. When someone like this is preying on your faith, trust and sense of loyalty, it can be difficult to say, “Sir, I am of the belief that it is a sin for you to sell me a bond that has been in default since 1939 and that the Communist leadership has no intent of repaying, only for you to make off with the cash.” Also difficult: questioning whether a member of the clergy has either the time or the expertise necessary to make sound investment recommendations. It seems the victims here relied on their relationship with Caldwell, perhaps rationalizing thusly: “Yes, it is a fallen world, and yes, false prophets have stained the church since biblical times, but not my pastor—I have been attending this church for years, and he is a wonderful man. I trust him.”

Even when it doesn’t involve the church, affinity marketing is equally insidious. It relies on exploiting a carefully developed sense of trust. I’m one of you! You can trust me! Bernie Madoff took advantage of his status in the Jewish community. Mortgage refinance schemes purport to specialize in helping people in less affluent (and often majority-minority) neighborhoods. Some went after immigrants with limited English knowledge. Most run-of-the-mill Ponzis star brokers who preyed on family, friends and neighbors. Then there is the ex-Marine who targeted fellow veterans and service men and women. Former NFLer Will Allen went after professional athletes. Ex-NBAer Tate George targeted other NBA players. A daytrader from Sugar Land went after Houston’s Lebanese and Druze communities. In Atlanta, a self-styled “Social Capitalist” targeted African-American churchgoers. A fake hedge fund manager preyed on Los Angeles’s Persian-Jewish community. Another SoCal-er targeted the Hispanic community. One Florida man went after the gay community. Another targeted Miami’s Cuban exiles. A fake New York money manager zeroed in on Brooklyn’s Caribbean and African-American communities.

It breaks my heart that the preceding paragraph is so long. It also raises a question: Why does affinity fraud work so well? I’m not alone in thinking it is because doing due diligence on a financial professional takes time and Googling. Receiving a pitch from a trusted member of your community can seem like a shortcut. Your neighbors, friends and fellow churchgoers already did the due diligence for you! And in the case of Caldwell, Presidents Bush and Obama did the heavy lifting! Elderly folks are especially prone to this, as they generally have less familiarity with online research tools like FINRA’s BrokerCheck database or the SEC’s Investor.gov tool. But younger and older folks alike often have a strong desire not to offend longtime associates by doing an amateur background check on them or otherwise questioning their integrity. If the peddler is also armed with testimonials from pillars of the community, doing independent research can feel like an indictment of those other followers as well.

But using “don’t mix business and personal relationships” doesn’t work as a rule of thumb, either. I know many, many people who do business with friends, siblings, parents, children or fellow parishioners who are not criminals and who do a very good job for them. The key is compartmentalizing: ensure your business relationship with someone is separate from your personal relationship with them. Do your own homework. Don’t rely on testimonials from other friends and neighbors. Be skeptical of anyone who waltzes into your home or organization claiming, “I’m one of you! I can make you money!” Use BrokerCheck to see if they have been subject to disciplinary action. Use Investor.gov to see whether and where they are registered to do business. Ask the hard questions others don’t, and ask to see supported answers in writing.

Doing your homework may make you feel mean, but it could save you a lot of money and heartache.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.