If you find yourself sitting in a house of worship and a fellow parishioner leans over and whispers something about a can't-miss investment opportunity, you may be wise to put your prayer book down and run for the exit. It could be a set-up for one of the fastest-growing scams in America – affinity fraud.
Scam artists, like the Platinum Partners hedge fund executives who allegedly defrauded inventors of nearly $1 billion, are increasingly preying upon people they get to know through shared interests and activities, especially religious or cultural affiliations.
One of the co-founders and a major fund raiser at the now-disgraced hedge fund was Murray Huberfeld, who was a major Jewish philanthropist, donating hundreds of thousands of dollars to various religious institutions. Huberfeld's partner, Mark Nordlicht, who was indicted last week for the alleged fraud, were a formidable fund-raising duo, who used their connections to well-heeled institutions in theJ ewish community to build their fund's assets to nearly $2 billion at its zenith.
Those connections were apparently enough to convince investors to overlook some glaring black marks on Huberfeld's record and to invest large sums of money in Platinum Partners. Huberfeld's misdeeds were many and took place over more than two decades. In 1992, Huberfeld was charged with having someone take his broker-licensing exam for him. But once he got his license legitimately, he embarked on a long career of fooling investors, including:
-In the late 1990s, Huberfeld was charged by the SEC for purchasing unregistered shares of a Canadian company; his business partner pled guilty to running an $80 million real estate Ponzi scheme that defrauded Orthodox Jews and Jewish organizations.
-In the early 2000s, Huberfeld and his business partners were prohibited by the SEC from completing three reverse mergers based on their previous disciplinary history, and he was ordered by the Federal Reserve Bank of New York and the FDIC to have written authorization before commencing work with federally insured financial institutions.
-In 2009 and 2010, officials said, Huberfeld was affiliated with Solomon Dwek, an FBI informant and admitted Ponzi-schemer, and Scott Rothstein, sentenced to 50 years in prison for perpetrating a $1.2 billion Ponzi scam.
-Earlier this year, Huberfeld was charged with conspiracy and wire fraud for allegedly bribing a union official to invest in Platinum Partners. Huberfeld has pleaded not guilty and has subsequently filed for bankruptcy protection.
But it's also been reported that even those who had felt cheated by Huberfeld were reluctant to involve authorities, preferring instead to try to solve their issues within the confines of their community. Ostensibly, his position in the community afforded him the opportunity to try to settle things outside of the legal system.
But that's exactly the type of unwarranted trust given to scam artists that allows them to take advantage of their victims. At our firm, we perform corporate due diligence on behalf of 150 private equity firms, pension funds, hedge funds, and others because investors realize that there is a heavy price to pay for ignoring warning signs – both in terms of dollars and reputation. There's also the issue of fiduciary responsibility, which could leave one open to lawsuits for not conducting due diligence prior to investing money on behalf of a group or association.
There were also several other red flags that were ignored by investors, either because they failed to perform basic due diligence or because they decided the risks were worth taking because the gains reported by Platinum were so enticing. The fund had reported double-digit returns every year since its inception and claimed to have had only one down month during the entire existence of the fund. The remarkably consistent, positive returns were one of the warning signs that some people noticed before Bernie Madoff was arrested in 2008.
There have been, and always will be, fraudsters looking to make money at the expense of naïve, overconfident, or overly trustworthy people. Corporate investigations firms use a wide variety of tactics to detect fraud, some sophisticated, including conducting interviews with key employees, former colleagues, etc. But this case is especially egregious because the warning signs were so obviou sthat a basic Google search would have been enough to scare off would-be investors.
Sadly, it seems that many investors are forgetting the lessons that were supposed to have been learned from Madoff scandal.
Joelle Scott is a senior vice-president at Corporate Resolutions (www.corporateresolutions.com),a corporate investigations firm. She has spent the last 15 years in business investigations and currently oversees the intelligence analysts at Corporate Resolutions to ensure quality control and accuracy of all investigative reports.