The Fraternal Order Of Fraud Victims

Investment scams targeting social, religious, and ethnic groups are on the rise

Three years ago, Tai Kim was barely making ends meet. Despite working 12-hour shifts in a print shop in Boston, the 32-year-old Cambodian immigrant, who came to the U.S. in 1989, was struggling to support his wife and two children in nearby Lowell, Mass., as well as family back home.

Then a friend introduced Kim to Seng Tan, an elegant Cambodian-American woman who said she wanted to help her people live the American dream. If he invested $131,933 in her vitamin and cosmetics company, World Marketing Direct Selling Inc. (WMDS), he would get $2,500 a month for life, she said. Many of Kim's friends in Lowell, which is home to more than 30,000 Cambodians, had invested and were getting checks regularly. Kim thought: Why not?

With Tan's help, he refinanced his house in April, 2003. The bank she recommended approved his $145,000 home-equity loan in just a week, with no appraisal. Kim gave her $131,933, and for two years, $2,500 checks rolled in monthly.

Last July they stopped. Tan offered excuses: a computer glitch, Hurricane Katrina. But in November, Kim learned that WMDS was a sham. On Nov. 15, the Securities & Exchange Commission filed a complaint against Tan and two associates. Federal prosecutors in Boston have since filed 11 counts of mail fraud against the trio. Investigators say the three bilked $30 million from hundreds of Cambodian-American investors from Massachusetts to Minnesota. Lawyers for all three deny the charges.

Like Kim, many of the alleged victims invested funds from home-equity loans. Kim anguishes about how he will make home loan payments that have nearly tripled. "What will happen to my family, here and in Cambodia?" he wonders. "This is very painful. I will carry it with me my whole life."

As the wave of corporate crime subsides, the SEC is zeroing in on small-time swindlers. It doesn't keep statistics on affinity fraud, but federal and state enforcers say schemes that prey on members of ethnic, religious, and social groups are on the upswing. "Affinity fraud is rampant," says Alabama Securities Commission Director Joseph P. Borg. "It seems like every third case has some affinity element to it."


One reason is the growing affluence of immigrants and other religious and social groups, fueled by the real estate boom. "More people have accumulated wealth but lack the educational background to know who to trust for investment advice and opportunities," says Lisa Fairfax, associate professor of law at the University of Maryland.

Affinity scams typically take the form of Ponzi schemes, in which money from new investors is channeled to existing investors. Fraudsters create the illusion that they're distributing profits from a business or securities portfolio, but they use the money they collect to pay earlier victims and keep the rest. Investigators on the trail of WMDS found checks drawn on a company bank account that had paid for a $38,000 diamond ring and $200,000 for a Las Vegas trip.

Affinity swindlers play on their victims' sense that they are shut out of mainstream society. "The pitch is: 'The haves [know] a secret they're just not telling you. But we know it and we can get it for you,"' says SEC Enforcement Director Linda Chatman Thomsen.

The trend has prompted securities regulators to step up investor education outreach to vulnerable groups. Last September, after Haitian Americans in South Florida were ripped off in an affinity scam, the SEC and state authorities hosted a town hall meeting where Creole speakers gave tips on investing wisely. In other states, regulators are trying to get the word out through partnerships with AARP and churches. But the wave of fraud is spreading the message: The ties that bind can also bilk.

By Amy Borrus

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