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A thoughtful and aggressive attack on "Affinity Fraud"

A thoughtful and aggressive attack on "Affinity Fraud"



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SALT LAKE CITY -- The task force of law enforcement agencies charged with policing white collar crime in Utah says it investigated fraud cases last year that victimized more than 4,000 Utahns to the tune of nearly one and a half billion dollars. That's billion with a "B."

A large percentage of that loot was stolen in various Ponzi schemes and other scams with a common ingredient - the victims were persuaded to part with their money by someone who they trusted because of some personal connection. It's known as "affinity fraud," and in Utah, it has apparently become the scammer's preferred modus operandi.

Because of its prevalence, state securities regulators have taken several steps to combat the trend, including a series of press releases and public service announcements warning potential victims to be more careful with their investment money.

Now, a State Senator with a background in securities law, is proposing changes which would effectively move focus from prevention to prosecution, and his reasoning and method are worthy of serious consideration.

Sen. Ben McAdams, a Salt Lake City Democrat, is proposing a change in statute that would magnify the criminal penalties for people convicted of fraud if they employ "undue influence" in soliciting the fraudulent investments. Senate Bill 101 defines undue influence, in part, as the use of a "relationship or position of authority, trust or confidence," to, among other things, "exploit the trust dependence or fear of another person."

It is similar to existing laws which elevate crimes involving child abuse if they are committed by people in a similar position of authority or trust.

"It has troubled me as a Utah native that we have become such a hotbed for fraud, and that so many people have lost their retirements or life savings because they had trust in another person," Sen. McAdams tells KSL.

An attorney who has practiced securities law, he says such rampant rapacity has an impact beyond the individual investors. "It is not good for the business climate when you have a great deal of fraud," he says, citing a "chilling effect" on legitimate investment opportunities that stifle entrepreneurialism. He suspects "tech startup" ventures have a harder time raising capital in a place where a high ratio of investments are tainted.

"It's sad, but I see a story every week about another case of major fraud," he says.

In Utah, most of those cases involve victims who let down their guard because the person seeking access to their bank account was a member of the same church. But the problem extends beyond any one denomination. While Mormons may be the most common victims of affinity fraud in Utah, the North American Securities Administrators Association has tracked decade's worth of fraud predicated on the promise, "You can trust me, we go to the same church." It has afflicted congregations of Mennonites in Pennsylvania, Baptists in Virginia and Assemblies of God ministries in Alabama.

"It's about trust," says McAdams. "Being a religious figure, or obtaining trust by a religious connection, isn't a crime," but exploiting that trust, he says, is certainly wrong and deserving of enhanced punishment.

In a companion bill, Sen. McAdams is also advocating the creation of a fraud reporting fund to reward those who are the first speak to up about suspicions that an investment scheme isn't all it's purported to be. "The tendency is for people to stay quiet, hoping to get their money back." he explains. His Senate Bill 100 would create a structure to reward such whistleblowers, potentially with large amounts of money, from the existing state Securities Investor Education and Training Fund.

Sen. McAdams says both measures have the support of the state Securities Division, and the enhanced-penalties measure is supported by the Utah Sentencing Commission, which advises the Legislature on criminal sentencing policies. He says it also has bipartisan support in the Senate, and its sponsor believes it will also fare well in the House of Representatives.

KSL believes Sen. McAdams' thoughtful and aggressive approach to affinity fraud is worthy of serious consideration on Capitol Hill. Passage of his measures would grant law enforcement additional tools in their battle against fraud, and quite possibly serve as a deterrent to those who would fleece their neighbors.

It would also send a clear statement that Utah is serious about halting a stubborn and pervasive problem that has financially crippled so many of its citizens, and endowed the state with the unsavory and undeserved reputation as a place of peculiar gullibility.

E-mail: cpsarras@ksl.com

Con Psarras

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