Money Matters: Affinity fraud: A wolf in sheep's clothing

By Gina Bliss
The Daily Record Newswire

Affinity frauds are investment frauds that prey upon members of identifiable groups such as religious or ethnic communities, the elderly, or professional groups. The perpetrator will often enlist respected members within the group to spread the word and lend credibility to the fraud. Those members become unwitting pawns in a fraud that exploits trust and friendship that exist in groups of people with something in common. Often the actual fraud is a Ponzi scheme.

Bernie Madoff’s Ponzi scheme was a perfect example. He operated his scheme inside an affluent Jewish community.

In the newest Ponzi scheme to make national news the exploited group is mainly federal government law enforcement employees.

For the last two decades the Federal Bureau of Investigation, the Internal Revenue Service, the Drug Enforcement Administration and Immigration and Customs Enforcement have paid Kenneth Wayne

McLeod to give seminars on how to get the most from the government retirement system. Evidently the federal government retirement system has many archaic rules and complicated choices to navigate.

Federal government employees from those agencies and others were advised to attend the seminars early in their careers and near the end of their careers when financial decisions are critical.

According to McLeod’s marketing materials, his benefits company gave 250 presentations to law enforcement agencies since 2006. McLeod was knowledgeable and charming. He talked about FBI Director Robert S. Mueller III as though they had a personal and business relationship. He dropped other names. He offered his help to anyone who wanted to give him a call.

McLeod was able to cull individual clients from these seminars and convince them to invest in his “special bond fund.” That special fund was the Ponzi scheme. There were no bonds.

Law enforcement officers and agents, perhaps even more than other groups, trust and rely on each other. The investments of new clients, many referred by friends and colleagues, were used to cover withdrawals by existing clients and McLeod’s lavish lifestyle.

When the scheme was shut down in June there were approximately 150 retired and current federal agents with investments in the “special” fund. The missing funds total $34 million according to the SEC.

When the economy is good it’s hard to detect a Ponzi scheme. The money flowing in from new investors covers the fraud. When the economy slows down requests for payouts from existing clients increase and the requests can’t be covered.

Right now there is a flood of Ponzi schemes in the news. Some people are calling them mini-Madoffs. Didn’t we learn anything from Bernie Madoff’s fraud? Well, according to the rest of the McLeod story, we did learn some lessons from Madoff.

Remember the whistle blower, Harry Markopolos? He was a financial expert and a fraud investigator. No one at the SEC would listen to him as he tried to blow the whistle on Madoff. He tried for years.

McLeod’s case has a whistle blower also. A former client called the SEC and Finra (a securities regulator) on May 17 this year. About that same time McLeod had a disagreement with the securities firm he used to register as a broker and he fired the firm.

That decision triggered a required notification to Finra. These notifications are generally routine, but since Madoff’s scandal, Finra has created a new fraud detection office. That office scrutinizes those notifications. Sharon Kravitz, an analyst, flagged it. She sent it to Cameron K. Funkhouser, executive vice president of the Office of Fraud Detection and Market Intelligence at Finra.

Funkhouser simply used Google to find some red flags. McLeod’s education and experience were substandard for the industry. He also found a news clip about a lavish Super Bowl trip where McLeod entertained dozens of his friends.

Investigators started talking to McLeod’s investors and called McLeod to come in for an interview. He declined. So Funkhouser called him. McLeod went into his sales pitch, talked about himself, dropped names, and lied about having a “special bond fund.”

Funkhouser alerted the SEC. Now the SEC had a whistle blower and an alert from Finra. They acted immediately to freeze assets and close down the fund. The SEC brought McLeod in for an interview, confronted him with evidence, and he confessed.

A few days later McLeod committed suicide. The FBI continues to investigate, and a court-appointed receiver is trying to preserve whatever assets there are for the victims.

This wolf in sheep’s clothing fooled the very people who investigate and regulate scammers like him. Some may think the government has some responsibility to these victims, many of whom put their lives on the line as part of their government service.After all, McLeod’s access to his victims and his credibility appeared to be government-sponsored.

Gina Bliss, CPA, CFE, is a senior manager at EFP Rotenberg, LLP, Certified Public Accountants and Business Consultants, who specializes in internal audit, fraud audit, and forensic accounting. She may be reached at (585)295-0536 or by e-mail at