Cultural Affinity Fraud

There are many types of affinity fraud. An example of cultural affinity fraud is reflected by the below described litigation release issued by the Securities and Exchange Commission on December 22, 2010 in the case of Securities and Exchange Commission v. Amit V. Patel, Civil Action No. 0:10-cv-04937 (D. Minn.)

In the release, the SEC announced fraud charges and an asset freeze against Amit V. Patel (“Patel”), a resident of Shoreview, Minnesota, for operating a fraudulent scheme in which he raised at least $2.5 million from at least five individuals that he met in the Indian-American community and Hindu temples in Minnesota. The SEC’s complaint, filed in the U.S. District Court for the District of Minnesota, alleges that Patel, from at least 2008 through the present, also received millions of dollars more from dozens of other individuals. The complaint alleges that Patel took advantage of his cultural affinity and shared religious heritage with his victims, and exploited their trust in his standing in the community.

At the SEC’s request for emergency relief, the Hon. Joan N. Ericksen, United States District Court, District of Minnesota, issued a temporary restraining order against Patel and an order freezing all assets under the control of Patel, in addition to granting other emergency relief.

According to the allegations in the SEC complaint, Patel’s scheme had two parts. First, the complaint alleges, Patel sold at least four investors nearly $1.4 million of promissory notes by falsely promising to grow their money through a low-risk stock option trading strategy. Patel guaranteed to pay these investors fixed monthly returns ranging from 1-2% from his trading profits, and guaranteed the repayment of their principal. Patel actually misappropriated over $572,000 of this money to pay his own living expenses; to repay personal debts to family, friends, and third parties; and to make the monthly payments promised to his other investors. Patel pooled the rest of the money in his personal brokerage accounts, where he traded with a self-described high risk and speculative strategy called Iron Condor. His trading lost almost all of the investors’ money. Second, Patel persuaded at least four investors to grant him “limited trading authority” over at least $1.1 million in additional funds deposited in investors’ online brokerage accounts. Patel falsely promised to trade on their behalf using a safe and conservative strategy. Patel again invested using the same high risk and speculative Iron Condor strategy, which resulted in net losses of at least $947,815.

According to the SEC complaint, Patel violated Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8) thereunder.

A copy of the complaint, giving specific factual allegations of the SEC action is included with the post.

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