It was a year ago next month that the investment community was rocked by the news that a highly respected money manager admitted to running a scam that took in as much as $50 billion in a classic Ponzi scheme.
It turned out that Bernard Madoff used money from investors to support a luxurious lifestyle that included multimillion-dollar homes in New York, Florida and Paris.
Madoff pleaded guilty to all charges and is now serving a 150-year prison sentence, one that will keep him incarcerated for the rest of his life. Investigations into the involvement of others at his investment firm are still under way.
The Madoff investment fraud involved using money from new investors to pay returns to those that had been in the program earlier, the same technique used by Charles Ponzi back in the 1920s. In addition, Madoff was also involved with what is called affinity fraud.
According to the Securities and Exchange Commission, "Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethic communities, the elderly, or professional groups."
In Madoff's case, most of his victims were from Jewish communities all across the country and around the world. He built confidence with key members of that community who often referred friends, associates and charities to investment with him.
"These affinity frauds can be difficult to detect because victims often try to work things out within the group before notifying authorities or pursuing legal remedies. They are particularly insidious because the fraudsters prey on the trust between members of the community," said SEC commissioner Luis Aguilar.
Since the Madoff scandal was reported last December, government regulators have been stepping up their efforts to bust similar schemes before they reach such large proportions. That includes several such scams in San Diego County. Although they were much smaller in size, they were still painful to the victims.
The Carlsbad Police Department recently arrested two men who they claim had been running an investment fraud dating back to 2001.
As often occurs, authorities were unaware of the scam until a victim contacted the police department to report the suspicious activity. After hearing from the first victim, Carlsbad Police officials now say that more than 25 others have surfaced and the size of the fraud has grown to more than $1.2 million. Victims come from all parts of San Diego County and other locations as far away as the San Fernando Valley.
According to Carlsbad Police, Alan Espiritu and Cesar Moreno were arrested earlier this month and charged with targeting non-English speaking Hispanics. They offered guaranteed investment returns as high as 25 percent.
"What makes this case so awful is that Espiritu and Moreno preyed on a vulnerable group of hard-working people who lived frugal lives, saving every dollar that they could," said Detective Patty Parra, lead investigator.
Some victims were offered home loan modifications and encouraged to stop making house payments. Instead, they were encouraged to invest the money into bogus investments and several victims lost not only their investments but also their homes.
More recently, the SEC filed a complaint against a Spring Valley business owner accused of "securities fraud targeting investors in the Somali immigrant community in San Diego, Seattle and elsewhere."
The complaint names Mohamud Ahmed and his company, Shidaal Express.
"The complaint alleges Ahmed formed Shidaal Express to provide check cashing, money transfer, and other financial services to the Somali immigrant community, and a sign at one storefront location listed 'Investment Opportunities' among the services provided," according to the complaint.
The SEC claims Ahmed raised at least $3 million, including $200,000 from a San Diego mosque, by promising exorbitant guaranteed returns of five percent per month, or 60 percent annually.
As was the case with Madoff, victims rarely recover more than a few cents on the dollar of the money they invested in these types of affinity fraud. Most of the money has either been paid out to earlier investors or spent to support a lavish lifestyle.
And almost all of these schemes have something else in common: high rates of promised returns that are guaranteed.
"This is a good time to remind people to be wary of any investment opportunity that they are approached with. If something sounds too good to be true, you can guarantee that it is," said Detective Parra of the Carlsbad Police Department.
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