Affinity fraud continues to plague Utahns and Mormons

Affinity fraud affects Utah more than any other state, with more than $1.4 billion in losses. (Photo by Kirsten Baltich)
Affinity fraud affects Utah more than any other state, with more than $1.4 billion in losses. (Kirsten Baltich)

The case of a Davis County man wanted for an alleged scheme that officials say took the life savings of Utah residents and brought in tens of millions of dollars shows the vulnerability of Utahns to financial scams. The 63-year-old suspect, set for an initial court hearing in July in Salt Lake City, is alleged  to have used the cachet of two Utah institutions — the LDS Church and the Boy Scouts of America — to bilk his victims.

Confidence between members of a religious group has its drawbacks when used by confidence-men, or ‘conmen.’ When a fellow member of a ward, cultural group, neighborhood or school builds affinity and then exploits that trust to profit from it, it’s known as affinity fraud.

The state with the highest rate of affinity fraud is Utah, where more than 60 percent of its population belongs to the LDS Church. The FBI calculates that there were more than 4,400 victims in 2012 with a net loss of $1.4 billion. It’s not that LDS Church members and Utahns haven’t been warned. In 1982, then BYU President Jeffrey R. Holland warned students about such schemes. Warnings have appeared many times over the years in conferences and church publications with a similar theme — if it sounds to good to be true, it probably is.

“I was working … on the BYU—Hawaii Campus only to open the Sunday edition of the Honolulu Advertiser to read this headline: ‘Mormon Utah called a test market for scams,'” Elder Holland said. “‘Utah’s large Mormon population has become a prime target for con artists and swindlers.'”

Many cases of fraud were revealed in the 1980s because of economic decline. Fraud skyrockets when the economy booms, but it is exposed in downturns. The highest case profile of affinity fraud in history was exposed during the recent great recession. This was the case of Bernie Madoff, who used his affiliation as a Jew to target the Jewish community.

Mark Zimbelman of BYU's school of accountancy is an expert on financial statement fraud. He discusses why Latter-day Saints are so susceptible to affinity fraud. (Photo by Elliot Miller)
Mark Zimbelman. of BYU’s School of Accountancy, is an expert on financial statement fraud. He discusses why Latter-day Saints are susceptible to affinity fraud. (Elliot Miller)

“Madoff would still be going right now probably if it wasn’t for the great recession,” said Mark Zimbelman, of BYU’s School of Accountancy. “Warren Buffet once said, ‘When the tide goes out, that’s when you see who’s swimming naked.’”

Zimbelman is BYU’s expert on financial statement fraud. He discusses the reason why members of the LDS Church often fall prey to con artists.

“There’s also a mentality … that if we’re righteous we’re going to get wealthy … so when we hear about somebody in the community, our friend or some church leader, who has some great investment we think, ‘Well that’s a blessing for us and we’ve paid our tithing and so forth,'” Zimbelman said. “They decide they don’t need to do their homework because someone else is in it that they trust.”

Affinity fraud affects victims on a large scale but also has local applications. Travis Hardin, a BYU student, lived at the Riviera Apartments during Fall 2010 semester. One of his roommates was charismatic and claimed to be a BYU basketball player. He was popular within his apartment complex and the Helaman Halls community, but his fame came crashing down when another roommate exposed him.

“You just didn’t realize that his real life was showing through the whole time,” Hardin said. “Everything was a lie; he even lied about what his last name was.”

Hardin’s fraudulent roommate had previously served time in prison for committing check fraud. He invited Hardin and others to move into a house with him. He even collected down payments from them, but the house never actually existed.

Fasi Filiaga Jr., a member of the LDS Church, ran a company called Spread Trade Systems, an organization that taught individuals how to invest in stocks and options. He ran his seminars via the Internet, bringing in students from all over the nation and from various religious denominations.

Over a series of years, a relationship of trust flourished between Filiaga and his students. He then invited them to take part in his investment management group. They would give him money, and he would invest it for them.

One particular student, Eric Nelson of Utah County and also a member of the LDS church, remained skeptical of Filiaga’s investment group, even though their commonality as Mormons helped Nelson relate with Filiaga. Nelson studied the company and attended the investment meetings for a full year before he and his wife decided to invest.

“It was a fraud from the beginning. The money given to Fasi was never invested; it went to him and his company,” Nelson said.

Over the duration of his investment group, Filiaga swindled $2 million out of his students. Filiaga was not charged for his crimes until Nelson and other victims filed a class-action lawsuit against Filiaga. As a result, Filiaga is serving time in prison. Con artists often say their investments will bring returns of more than 20 percent in a quarter and that one should act fast.

“If you know where the treasure is, you’re not selling maps to show people how to find the treasure; you’re digging up the treasure yourself,” Zimbelman said. “Any kind of return like that, any kind of outrageous interest rate (20 percent), is … virtually guaranteed that it’s a ponzi scheme.”

In 2011, Utah’s governor signed an affinity fraud bill into law. Its aim is to exact harsher penalties on those who exploit confidence against vulnerable adults, like the elderly or mentally handicapped. As fraud is usually exposed in times of economic downturn, data is unavailable to show the effects of the law.

“It’s too early to tell if the law deters affinity fraud; we don’t have a large enough sample size yet,” said Keith Woodwell, director of the Utah Division of Securities. “The bill doesn’t work retroactively, but we’ve had a handful of cases since 2011 that have had harsher penalties applied.”

As measures are taken to deter fraudulent activities, it is ultimately up to individuals to steer clear. Zimbelman advises people to do their homework, to diversify their portfolios and when propositioned with an investment opportunity to think, ‘why do they want me?’ and ‘how do they make their money?’ When investment opportunities sound to good to be true, they usually are.

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