Affinity scams prey on the vulnerable

Those who knew Douglas Sanchez thought they had every right to believe in him.

He not only was a caring pastor but the Mesa man also seemed to have all the answers regarding finances. And, with his investments, he promised members of his congregations much higher returns than they could get anywhere else.

Problem was, according to the state Attorney General’s Office, that Sanchez from 1994 to 2003 was running a fraudulent scheme that took more than $1 million in property from numerous victims, including some who were disabled and elderly.

He now is in Maricopa County’s Towers Jail awaiting trial on 24 felony charges including theft, forgery, taking the identity of another and illegal control of an enterprise. Securities investigators have called it a classic case of affinity fraud, or an investment scam that preys upon members of identifiable groups such as religious or ethnic communities or the elderly.

“It’s all about a trust situation,” said Matthew J. Neubert, securities division director for the Arizona Corporation Commission. “It (affinity fraud) could involve a club. But in most cases, it’s a religious affiliation.”

The Corporation Commission investigates at least one major affinity-fraud scam a year, and such schemes can involve a large number of investors. Across the country, the Securities and Exchange Commission said there are at least a half-dozen recent affinity-fraud cases where investors lost between $3 million and $325 million. Victims included church members, seniors and ethnic groups.

The SEC says many affinity scams involve Ponzi or pyramid schemes, where new investor money is used to make payments to earlier investors. That gives the illusion that the investment is successful, according to the SEC. The ploy lulls existing investors into believing their investments are safe. In the end, the scheme collapses when the supply of investors dries up.

The commission in September 2003 ordered Sanchez and his wife, Karen, to repay nearly $900,000 to 14 investors after its investigation. The couple signed a consent order and waived their right to a hearing before the commission. Sanchez has repaid investors $5,000, according to commission records.

The commission alleged Sanchez sold promissory notes and investment contracts. At least five investors, including two who were handicapped, were members of churches that Sanchez attended. One investor’s husband had multiple sclerosis.

Sanchez was an associate pastor at churches in Mesa and manager of DMS Power Cash Flow and Persanco, companies that served as conduits for the promissory notes and investment contracts, according to the commission.

In July, a grand jury indicted Sanchez, and he is being held on $270,000 bond. A hearing is set for 8:30 a.m. on Feb. 11 before Judge Gary Donahoeof Maricopa County Superior Court.

Theodore Campagnolo, an assistant attorney general, said Sanchez has been offered a plea bargain.

Campagnolo declined to disclose details.

Herman Alcantar Jr., Sanchez’s attorney, did not return calls. “I was just duped by this person (Sanchez), and I am so angry at myself,” said Carol Butler, who lives in Mesa and invested more than $220,000.

Butler said she invested her money, which she had set aside during 35 years as a teacher, because Sanchez convinced her he could get a 16 percent return and the profits could be used to help a relative, who was having financial challenges.

Butler said her relative received about $10,000 from Sanchez, but the money eventually stopped.

“It seems that he chose women, and he also chose people who had disabilities,” Butler said.

Penny Paxson, who lives in Surprise, said she was drawn to Sanchez because “he was always caring for those who were down and out” and that he “had a fairly good reputation for helping single moms or people who were just struggling.”

Paxson said she invested $25,000 with Sanchez.

In Arizona, the state’s biggest affinity case involved the now-bankrupt Baptist Foundation of Arizona, in which nearly 11,000 investors lost a combined $570 million.

Four BFA insiders, including the former chief executive officer, face fraud, racketeering and theft charges. A trial is set in Maricopa County Superior Court on Aug. 3, and all four have pleaded innocent.

In May 2002, the foundation’s auditor, Arthur Andersen, admitted no wrongdoing but agreed to pay investors $217 million for its role in the BFA’s collapse.

In the BFA case, insiders were accused of hiding more than $300 million in losses through sham companies controlled by the foundation. Before it crumbled in 1999, the foundation was accused of running a Ponzi scheme.

Unlike most Ponzi schemes, investors in the BFA case received some of their money back.

Sidebar

Affinity fraud

The term “affinity fraud” refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups.

Those promoting affinity scams frequently are – or pretend to be – members of the group. They often enlist leaders from within the group to spread the word about the scheme. Many times, those leaders become unwitting victims.

Many affinity scams involve Ponzi, or pyramid, schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. When the supply of investors dries up, the scheme collapses.

Source: Securities and Exchange Commission

Avoiding fraud

Here are some tips to help prevent you from falling for an affinity scam:

• Check out everything, no matter how trustworthy the person seems. Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong.

• Investigate the investment thoroughly and check the truth of every statement. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

• Do not fall for investments that promise spectacular profits or guaranteed returns. If an investment seems too good to be true, then it probably is. The greater the potential return from an investment, the greater your risk of losing money.

• Be skeptical of any investment opportunity that is not in writing. You should also be suspicious if you are told to keep the investment opportunity confidential.

• Don’t be pressured or rushed into buying an investment before you have a chance to think about it. Just because someone you know made money or claims to have made money, it doesn’t mean you will, too.

• Call the Arizona Corporation Commission at (602) 542-4242 to see if the salesperson has had discipline problems.

Source: Securities and Exchange Commission, Arizona Corporation Commission

Source:
The Arizona Republic, USA
Jan. 30, 2005
Craig Harris
www.azcentral.com
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Topic(s): Fraud

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