Enforcement News: Affinity Fraud and Ponzi Schemes – Two Sides of the Same Coin?

By: Jeffrey M. Haber 

The intersection of affinity fraud and Ponzi schemes is a recurring theme in securities enforcement. Although each theory is distinct, they frequently appear together in SEC enforcement actions.

Affinity fraud focuses on the means by which trust is cultivated and exploited,[1] while a Ponzi scheme focuses on how an investment enterprise is funded and sustained.[2] When combined, the result can be devastatingly effective: shared religious, ethnic, cultural, or social ties create an environment of trust that facilitates investment, while existing investors often become informal ambassadors whose referrals help attract the new capital necessary to keep the scheme operating.

The SEC’s enforcement action against Kwabena Boateng (“defendant”), and the two New Jersey-based companies he controls (Intercontinental Wealth Network LLC and I Wealth Network LP), illustrates this dynamic.

Background

According to the SEC’s complaint, defendant immigrated to the United States from Ghana in approximately 2016 and became part of a community of Christians of Ghanaian heritage residing primarily in New York and New Jersey. During the period at issue, defendant allegedly developed a reputation within that community and maintained relationships with many of its members. The SEC alleged that a substantial number of the investors who later participated in defendant’s investment program belonged to the same Ghanaian Christian community, and that some were immigrants residing in the United States.

The complaint alleged that defendant promoted an investment opportunity through a pooled investment vehicle referred to as the “I-Fund.” According to the SEC, defendant represented that he managed the I-Fund and solicited individuals to invest through a variety of means, including face-to-face meetings, telephone conversations, email communications, and text messages. The SEC further alleged that defendant made presentations concerning the I-Fund and investment opportunities associated with the other defendants to at least two churches and a prayer group affiliated with the Ghanaian Christian community.

The SEC’s complaint described a fundraising effort that relied heavily on preexisting personal relationships and community connections. According to the SEC, many investors became aware of the I-Fund through established religious, social, and cultural networks. Some investors were introduced to the opportunity directly by defendant, while others learned of it through family members, friends, fellow congregants, or other individuals who had previously invested. The SEC alleged that these referrals contributed to the continued growth of the investor base and enabled information about the investment program to spread throughout the community.

The complaint further alleged that many of the investors had limited experience with financial markets and investing. According to the SEC, defendant knew that investors trusted him because of shared religious beliefs, common Ghanaian heritage, and longstanding social relationships. The SEC contended that these factors were significant in investors’ decisions to entrust funds to the I-Fund and to recommend the investment opportunity to others within their personal networks.

The SEC alleged that defendant and the related entities ultimately raised at least $16 million from more than 200 investors.

Takeaway

The SEC’s enforcement action highlights the close relationship between affinity-fraud allegations and alleged Ponzi-scheme operations. While the two theories address different aspects of an investment fraud, the facts alleged in the complaint demonstrate how they can work in tandem. Affinity fraud focuses on the exploitation of trust within an identifiable community, whereas a Ponzi scheme focuses on the use of new investor funds to sustain the enterprise. In the SEC action, the same community relationships that allegedly generated investor confidence also allegedly supplied the referrals and new capital necessary to expand the investment program.

The enforcement action also illustrates why the SEC scrutinizes investment opportunities promoted through close-knit religious, ethnic, and social networks. According to the complaint, many investors learned about the investment opportunity through churches, prayer groups, family members, friends, and fellow congregants. Such networks can accelerate investor participation because recommendations come from trusted sources rather than traditional financial intermediaries. As a result, individuals may rely more heavily on personal relationships and community standing than on independent diligence regarding the investment itself.

Finally, the enforcement action is notable for its emphasis on investor referrals. The complaint alleged that existing investors helped introduce new participants to the program, allowing the investment opportunity to spread throughout the community through word-of-mouth endorsements. This type of growth is significant because it can serve both as evidence of affinity-based solicitation and as a potential mechanism through which an alleged Ponzi scheme attracts the continuous flow of new capital needed to continue operating.

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

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

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________

[1] Affinity fraud generally refers to schemes that target members of an identifiable group, such as a religious, ethnic, or professional community, by exploiting preexisting relationships and trust among group members.

[2] A Ponzi scheme is generally characterized by the use of funds obtained from new investors to sustain the appearance of a profitable investment operation and to satisfy obligations to earlier investors.