Utah Legislature Tackles Affinity Fraud

When a business owner seeks investors, it’s only natural to first seek funding from friends, family and one’s close circle of friends. But that can bring trouble if the investment opportunity goes south and investors are out funds.

The Utah Legislature approved a bill this year—SB101—that will impose tough penalties on anyone convicted of using his or her influence or exploiting a position of trust to take advantage of an investor or a vulnerable senior citizen. It was signed into law by the governor on March 25.

This bill was the result of a number of highly publicized criminal cases involving “affinity fraud” – when a person or entity preys upon members of an identifiable group (such as a religious group or the elderly) when committing financial fraud.

Affinity fraud has been a significant problem for members of the Church of Jesus Christ of Latter-day Saints (LDS) in Utah. Mormons have disproportionately fallen prey to financial schemes pitched to them by people who are members of their LDS ward or who hold positions of authority within their church. One woman who testified before the Senate Business and Labor Committee, which initiated the bill, said she had been defrauded by a man who taught a finance class at her church under the direction of the bishop of that ward.

Keith Woodwell, director of the Utah Division of Securities, said that in Utah, the percentage of affinity fraud cases is much higher than what is found in most of the U.S., closer to 50 percent.

Often, people in leadership within a group, people who may have bestowed authority and trust upon the person perpetrating the crime, have also been victims of fraud themselves. Because of the close-knit nature of the group and the confusion and embarrassment victims feel, this kind of fraud is often not reported.

When trusted relationships end in a criminal charge, it is often in the form of a pyramid scheme, where the money of later investors is used to repay prior investors until there is no money left to pay out. But it can also involve bad investment advice from a stockbroker or financial planner or a real estate deal gone sour.

The new law requires the courts to consider additional factors when hearing a financial fraud case and it specifies an affirmative defense for those charged with affinity fraud. If found guilty, the defendant in a criminal fraud case could face enhanced criminal penalties.

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