The SEC Targets ‘Affinity Fraud’ With California Ponzi Scheme Crackdown
Of all the investment scams and unregistered offerings that the Securities and Exchange Commission (SEC) pursues, few arouse as much vehemence as “affinity fraud” schemes that exploit the trust of members of a community.
The SEC on Tuesday afternoon announced it had charged a resident of Richmond, California, for a bogus securities offering aimed at members of the state’s Tongan population. The alleged scam is so serious it has also incurred federal criminal charges that could result in decades of jail time for its mastermind.
The SEC Pursues Enforcement Action for Securities Fraud
According to an SEC statement, Tilla Walker Sumchai of Richmond wooed retail investors over a period stretching from January 2021 to October 2021. She persuaded them to buy shares of what she dubbed “Tongi Tupe.” Many believed her claims that she had devised an algorithm that would offer high returns very fast, the regulators charge.
In one instance, the SEC alleges, the orchestrator of the scheme went so far as to promise a $146,000 return on a $3,000 investment—in a mere 16 weeks.
But rather than provide returns anywhere close to that level, “Tongi Tupe” turned out to be a classic Ponzi scheme, the SEC believes. Money from one investor went to pay another. And also to pay for the orchestrator’s travel, shopping, and trips to a casino.
In all, Sumchai raised $11.8 million from more than a thousand investors in the Tongan community.
Federal law enforcement also took an interest in Sumchai’s alleged doings. Besides the SEC’s civil action, Sumchai faces criminal charges. On Sept. 14, a federal grand jury handed down a 30-count indictment. The charges include securities fraud, wire fraud, mail fraud, and unregistered securities offerings.
Exploiting Ties of Kinship to Commit Fraud
It is clear that the SEC believes that Sumchai relied on intimate ties among members of the Tongan population to foster trust and lure investors. But the scope of the scam reportedly went much further.
According to the US Justice Department, investors roped into the scam resided in Australia and New Zealand as well as the United States.
But despite their geographical dispersion, the victims of the scam had strong affinities as members of the Tongan community. Here, in the eyes of law enforcement, is what makes the purported scam especially insidious.
People tend to trust members of the same community and to look to them for guidance and advice. The SEC and Justice Department believe that Sumchai exploited this tendency for her own gain and betrayed the trust of people who genuinely thought she had their interests at heart.
In May, the Commodity Futures Trading Commission (CFTC) went after a similar Ponzi scheme in California. One difference, here, was that the victims were members of the state’s large Hispanic community.