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Gregory Tendrich, PA Gregory Tendrich, PA

How “Affinity Fraud” Costs Investors Millions

Many securities scams can be classified as “affinity fraud.” As described by the U.S. Securities and Exchange Commission, this refers to cases where the scammers “prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups.” The scammers exploit this group affinity to lure members into financing largely worthless investments or Ponzi schemes. Often times, leaders of the affiliated group become active participants in the securities fraud, helping to ensure members do not become suspicious or report the scammers to the authorities.

United States v. Hawkins

One of the largest affinity fraud schemes in recent years involved a sham company known as Petro America. This was the brainchild of Isreal Owen Hawkins, a Kansas City man who formed Petro America in 2006. He claimed Petro America’s goal was to purchase crude oil contracts from Africa and the Middle East. But as federal prosecutors later discovered, Petro America had no oil contracts or active business of any kind. Indeed, as a federal appeals court later described it, “Petro America had no board of directors, engaged in no profitable business activities, kept abysmal financial records, and never took any substantial steps to ‘go public.’”

What Petro America did have was stock, which Hawkins sold through private, unregistered offerings. Even after Missouri securities regulators ordered him to stop such stock sales, he continued to do so. Hawkins made special use of churches and religious leaders to attract investors. The FBI agent in charge of investigating Petro America noted in a 2010 affidavit, “Hawkins and his associates use religious language and make frequent references to the ‘Petro America Family.’” Later, two ministers pleaded guilty to criminal securities fraud in connection with Petro America. Another minister, convicted after a jury trial, served as Hawkins’ “right hand man,” according to witness testimony, and actively solicited investors.

Ultimately, the U.S. Attorney’s office in Kansas City said Hawkins and his associates scammed investors out of more than $10 million with promises of “hundreds of billions of dollars” in profits on oil and gas assets. But Petro America’s only assets were a small music distribution company worth only about $160,000 and a “vaguely-defined interest in a packaging company” which never generated any revenue. Most of the money raised from Petro America’s stock sales ultimately went to finance the personal lifestyles of Hawkins and his co-conspirators.

The U.S. Attorney charged more than a dozen defendants in connection with the Petro America scam. On July 29, a federal appeals court in St. Louis upheld the criminal convictions and sentences of Hawkins and four other defendants. Hawkins is now serving a 30-year prison sentence and must pay restitution to investors.

Avoiding Affinity Scams

The Petro America scam was outlandish—at one point, Hawkins claimed his company was worth $284 billion—but it succeeded, in large part, because many investors bought into the religious message. Many investors are susceptible to solicitations from people they know and trust, such as community or religious leaders, and that makes them easy targets for scammers.

Investing should never be an emotional decision. You should always perform due diligence on a company before purchasing its stock. But even if you do fall for an affinity scam, you are still entitled to assert your legal rights as an investor. Contact Florida securities fraud attorney Gregory Tendrich today if you need to speak with someone right away.

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