SFO warns investors of growing affinity fraud risk

Published

SFO warns investors of growing affinity fraud risk

The Serious Fraud Office (SFO) today issued a public warning of the growing risk of affinity in a post-GFC era.

SFO Chief Executive, Adam Feeley, said "While the finance company collapse may have eroded the public trust in some investment opportunities, it has created a niche market in affinity fraud for those wanting to criminally exploit the trust of their family; friends; work colleagues; or other associates."

Mr Feeley said that the SFO had seen a growing trend in affinity frauds in recent times, which was also consistent with experiences overseas.

"The FBI highlighted affinity fraud as a growing problem in its last Annual Report, and there appears to be a widespread sentiment in the US that because the financiers of Wall Street, and elsewhere, have proven they can't be trusted, the public are better off investing with those they know. Nothing could be further from the truth."

The SFO said that in the past year it had investigated a variety of cases where there was some common link between the parties involved, including family, iwi and religious affiliations.

"Social media exacerbates the risk in this area as relationships established through Facebook, LinkedIn and other sites give victims a level of trust and confidence in people proposing investments that is completely disproportionate to their knowledge of that individual."

The SFO warning came as Christopher John Collecutt (57) pleaded guilty in the Auckland District Court following an SFO investigation.


Mr Collecutt, a foreign exchange (forex) trader operating under the name CFX Trading, faced three charges under the Crimes Act, including theft by person in special relationship, obtaining by deception or causing loss by deception, and false statement by promoter.

A total of 59 investors, mostly family and friends, lost approximately $1.5 million through investing with Mr Collecutt.

Mr Collecutt traded foreign currency on behalf of investors located both in New Zealand and overseas, and had been forex trading since around 2007.

Mr Feeley, said "Mr Collecutt cynically, and effectively, exploited his personal relationships with investors. His family and friends have learned a difficult lesson that great care is needed before investing large sums with others, no matter what their connection is with the promoter."

The investigation into Mr Collecutt's activities commenced in August 2011 and charges were laid in May 2012.

Mr Collecutt is remanded on bail for one week and will then be remanded in custody ahead of sentencing on 14 December.

ENDS

For further information

Andrea Linton
Serious Fraud Office
027 705 4550

Note to editors

Affinity fraud explained

An affinity fraud can take many forms but most commonly involves an investment scam where the fraudster is, or purports to be, a member of a particular identifiable group. This can include ethnic minorities, religious groups or individuals within a professional discipline.

Key to the crime is that the fraudster will exploit the trust and common bond that exists within such a group to deceive members into an investment scheme or other business proposition that they might not otherwise have accepted but for their knowledge and trust of the individual promoting the investment.

Often the victims of such fraud are slow to report any anomalies to law enforcement authorities because of their reluctance to undermine social cohesion with the group. Commonly they will seek to come to some arrangement within the group, and the fraudster amongst them will continue to assure investors that their investments are secure but the subject of some technical or administrative problem in being repaid.

Messages to the public on how to minimise the risk of being the subject of such a fraud include:

1. Thoroughly check every fact and figure, and do not believe anything simply because the person making the statements is known to you;
2. Be greatly suspicious of out-of-the-ordinary returns. Quick or very consistent returns on investment are classic signs of fraud;
3. Get things in writing. Fraudsters don't like putting things in writing for fear of subsequent liability.
4. Be wary of people who claim to know you by way of a third party or via social media. A social connection, real or claimed, is no substitute for a relevant professional qualification to provide financial advice.

Background to investigation

Mr Collecutt had been forex trading (from his home) for himself and his wife since 2004, and on behalf of other investors since 2007. Mr Collecutt predominantly traded in US Dollars, Australian Dollars, and Japanese Yen.

Mr Collecutt traded through the C & J Collecutt Partnership under the name CFX Trading.

From late 2008 onwards, Mr Collecutt created false weekly investment reports that were emailed to investors, calculated commission income on false profits, and used investor funds for his personal benefit.

Crimes Act offences

220 Theft by person in special relationship
(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person-
(a) to account to any other person for the property, or for any proceeds arising from the property; or
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.

(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.

(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.

(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.

240 Obtaining by deception or causing loss by deception
(1) Every one is guilty of obtaining by deception or causing loss by deception who, by any deception and without claim of right,-
(a) obtains ownership or possession of, or control over, any property, or any privilege, service, pecuniary advantage, benefit, or valuable consideration, directly or indirectly; or
(b) in incurring any debt or liability, obtains credit; or
(c) induces or causes any other person to deliver over, execute, make, accept, endorse, destroy, or alter any document or thing capable of being used to derive a pecuniary advantage; or
(d) causes loss to any other person.

(2) In this section, deception means-
(a) a false representation, whether oral, documentary, or by conduct, where the person making the representation intends to deceive any other person and-
(i) knows that it is false in a material particular; or
(ii) is reckless as to whether it is false in a material particular; or
(b) an omission to disclose a material particular, with intent to deceive any person, in circumstances where there is a duty to disclose it; or
(c) a fraudulent device, trick, or stratagem used with intent to deceive any person.

242 False statement by promoter, etc
(1) Every one is liable to imprisonment for a term not exceeding 10 years who, in respect of any body, whether incorporated or unincorporated and whether formed or intended to be formed, makes or concurs in making or publishes any false statement, whether in any prospectus, account, or otherwise, with intent-
(a) to induce any person, whether ascertained or not, to subscribe to any security within the meaning of the Securities Act 1978; or
(b) to deceive or cause loss to any person, whether ascertained or not; or
(c) to induce any person, whether ascertained or not, to entrust or advance any property to any other person.

(2) In this section, false statement means any statement in respect of which the person making or publishing the statement-
(a) knows the statement is false in a material particular; or
(b) is reckless as to the whether the statement is false in a material particular

Role of the SFO

The Serious Fraud Office (SFO) was established in 1990 under the Serious Fraud Office Act in response to the collapse of financial markets in New Zealand at that time.

The SFO operates three investigative teams:
• Fraud Detection & Intelligence;
• Financial Markets & Corporate Fraud; and
• Fraud & Corruption.

The SFO operates under two sets of investigative powers.

Part I of the SFO Act provides that it may act where the Director "has reason to suspect that an investigation into the affairs of any person may disclose serious or complex fraud."

Part II of the SFO Act provides the SFO with more extensive powers where: "...the Director has reasonable grounds to believe that an offence involving serious or complex fraud may have been committed..."

The SFO's Annual Report 2011 sets out its achievements for the past year, while the Statement of Intent 2012-2015 sets out the SFO's three year strategic goals and performance standards. Both are available online at: www.sfo.govt.nz