SEC Busts Another Affinity Fraud Scheme
The Securities and Exchange Commission charged Larry Dearman Sr, an investment advisor working for Focus Group Advisors, with defrauding dozens of investors between 2008 and 2012. They say that many victims entrusted him with their savings because of his affiliation with a small town Oklahoma church. According to published reports, Dearman at one time served as the church’s music minister. When a person prays upon members of a close knit group such as a church, ethnic community or professional group, the fraud is known as an affinity fraud.
Criminals engaging in an affinity fraud often enlist the leader of the group to help spread word of the scheme thus adding legitimacy to the underlying investment. Although not charged with a crime, news reports say that two of the victims were widows of pastors.
According to the SEC’s complaint, between 2008 and August, 2012, Dearman raised $4.7 million from 30 of his investment advisory clients for several “illegal schemes.” He also stole and additional $700,000 from other clients.
Investors were allegedly told their money was being invested in promissory notes that paid 10% interest and “bore little or no risk.” He failed to tell his clients that the money was not being invested as promised and that he was receiving a kickback. The SEC says he convinced other investors to raid their retirement funds and invest in a company that was fixing and flipping real properties. They say the business was owned by one of Dearman’s friends and that Dearman knew the money was being misspent.
So where did the money go? The SEC says very little of the money was spent as promised investors. Instead it was “squandered on gambling, personal expenses, payments to other businesses owned [by a co-defendant] and payments to other investors…” The latter is the classic sign of a Ponzi scheme where new money simply gets diverted to keep old investors happy. Ultimately the entire scheme collapses.
While all frauds are bad, this case is especially noteworthy for two reasons. First, many of the victims were attracted to Dearman because he involved in their church. An affinity fraud is especially devastating because it exploits the trust and friendship within a tightly knit group. If the news reports are correct, the fact that two pastors’ widows invested with Dearman probably added legitimacy to his scheme and persuaded others to invest.
Dearman was also an investment advisor. Under federal law, he had a fiduciary duty to look after his client’s best interests. That represents a very high standard of care.
Dearman was employed by an investment advisory firm during his alleged affinity fraud. The SEC says he asked some clients to make checks payable to him. Legitimate stockbrokers and financial advisors never ask for personal checks. If that happens to you, contact the SEC and the firm employing the broker or adviser. (Dearman’s employer fired him immediately after being contacted by an investor. Their prompt action probably saved other investors from losing their money.)
So what happens to Dearman and to his investors? The SEC complaint is only a civil complaint. If the allegations are true, we believe he should be sent to prison as well. The decision to prosecute, however, is one for the United States Attorney or a local District Attorney. Any criminal sentence could be enhanced because the scam was an affinity fraud and many of the victims are elderly.
The probability of recovery from Dearman and his co-defendant is remote. His prior employer, Focus, however, may be liable if his victims reasonably believed he was selling these investments through the firm. Brokerage firms have an obligation to supervise their employees and prevent “selling away” (cases in which brokers sell investments without the permission of their employer.)
Fraud and asset recovery is a narrow speciality within the practice of law. While there are thousands of collections lawyers within the United States, fraud lawyers specialize in finding hidden money and identifying other persons who may be responsible for aiding and abetting the fraudster. Anyone can obtain a judgment but it often takes an asset recovery lawyer to collect on the judgment.
If you lost your money to any type of scam or affinity fraud, an abusive tax shelter or investment fraud, give us a call. We have successfully pursued frauds across the United States and even offshore. For more information, visit our affinity fraud cornerstone content. Ready to see if you have a case? Contact attorney Brian Mahany at or by telephone at (202) 800-9791. All inquiries are protected by the attorney client privilege and kept in confidence.
Mahany Law – America’s Fraud Recovery Lawyers. We consider cases nationwide.
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