Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are, or pretend to be, members of the group. These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many of these groups, it can be difficult for regulators or law enforcement officials to detect these scams. Additionally, victims often fail to notify authorities or pursue legal action, and instead try to work things out within the group.
Many of the affinity scams we read about involve religious/ethnic groups, and the elderly. Another group that we may not read about as much, but is very frequently targeted, is the professional athletic community. A study published earlier this year by Ernst & Young (“EY”) reported that professional athletes lost almost $500 million between 2004 and 2016. The study detailed the losses by sport, noting that the highest losses came from athletes in football and boxing.
The report also noted that the incidence of fraud increased steadily over the period reviewed. This is partially due to the fact that the amount of money to be stolen from the athletes continues to increase. EY reported that in 2016, the average salaries of athletes in the National Hockey League, National Basketball Association, Major League Baseball, and the National Football League ranged from $2.1 million to $6.2 million, which is the highest recorded in at least five years.
According to the U.S. Securities and Exchange Commission (“SEC”), many affinity scams involve Ponzi schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful.
According to EY’s report, the following are examples of common schemes specifically targeting athletes:
• Individuals posing as financial professionals: Individuals pretending to be financial advisors, improperly using funds from athletes.
• Unauthorized investments: Financial advisors of athletes making unauthorized investments on their behalf. Often these are risky investments that benefit the financial advisor.
• Unauthorized use of cash: Representatives of athletes, sometimes even family members, using their money to make unauthorized purchases.
• Misappropriated earnings: Individuals designated to control and manage cash flows for the athletes are not properly distributing earnings.
• Misleading investors: Financial advisors misleading athletes with false information and suggestions on what to do with their money.
Some notable scams involving professional athletes include:
• In 2011, Kurt Branham Barton, former CEO of Triton Financial, was indicted on 33 counts, including securities fraud, money laundering, and wire fraud. Barton allegedly used ex-NFL stars and church contacts in a $50 million Ponzi scheme.
• In 2013, the Financial Industry Regulatory Authority (“FINRA”), flagged the financial firm Success Trade for selling $18 million in fraudulent and unregistered promissory notes to 58 investors, 30 of whom were professional athletes.
• In 2016, Ash Narayan, managing partner of the Texas-based RGT Capital Management, defrauded several different professional athletes by channeling money into The Ticket Reserve, an online sports and entertainment ticketing business. Narayan earned the trust of the athletes by stressing his Christian faith, interest in charity, and claiming he was a Certified Public Accountant. Without the consent of the investors, Narayan channeled more than $33 million into the business from 2010-2016.
What can athletes do to protect themselves
While everyone is at risk for these types of fraud, athletes have an elevated level of risk due to the fact that the majority of their time is dedicated to their sport. Outside of the sport, many of them have other roles through endorsements and sponsorships. This leaves a heavy reliance on other people to manage the financial aspect of their life.
For professional athletes, as well as any other individuals making investments, the following measures should be taken to protect your money:
- First, always establish a relationship with a properly accredited financial advisor. In order to do this, the following areas should be considered during the vetting process:
- Background checks
- Conflict of interest check
- Reference checks
- Investment strategy, and history of success
- Training and education
- Reputation among others in the industry
- Once you have decided on someone to engage as your representative, the following protections should also be considered:
- Sign a formal contract with your financial representative.
- Include a right to audit in your contract.
- Periodically review financial information.
- Require regular disclosures and performance updates from your financial representatives.
No matter how trustworthy a person seems, it is important to check everything out before engaging anyone to manage your money. An investment should never be made based solely on the recommendation of someone else. If something seems too good to be true, it probably is. With the proper due diligence, and continued skepticism, the risk of being defrauded can be reduced.
If you believe you may be a victim of fraud, contact us today!