Oregon Division of Financial Regulation warns of investment affinity fraud scams

Oregon Division of Financial Regulation warns of investment affinity fraud scams
Oregon Division of Financial Regulation

Salem – The Oregon Division of Financial Regulation (DFR) is warning Oregonians about the prevalence of affinity fraud in the U.S.

Generally, affinity fraud is a type of investment fraud and occurs when the fraudsters target victims based upon shared characteristics. These scammers often pose as or become members of the same group they intend to defraud, such as religious organizations, military organizations, ethnic groups, immigrant communities, or even professional organizations such as teachers’ unions. At its core, affinity fraud exploits the trust and friendship that exist in groups of people who have something in common. Fraudsters use a number of methods to get access to the group. A common way is by enlisting respected leaders from within the group to spread the word about the scheme. Those leaders may not realize it is actually a scam, and they may become unwitting victims of the fraud themselves.

Due to the tight-knit nature of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often hesitate to report the fraud, and instead attempt to resolve the issue within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.

In the area of investments, affinity fraud generally involves either a fake investment or an investment in which the fraudster lies about important details (such as the risk of loss, the track record of the investment, or the background of the promoter of the scheme). Many affinity frauds are Ponzi or pyramid schemes, in which money given to the promoter by new investors is paid to earlier investors to create the illusion of a successful investment. This tactic encourages new investors into investing in the scheme, and lulls existing investors into believing their investments are safe.

While in many cases the invested funds are also used for the fraudster’s personal expenses and may fund lavish lifestyles, Ponzi schemes can evolve from what was originally legitimate investments. Often this occurs when the investment fails to perform as expected. In order to keep the investment going in hope that things will turn around, the perpetrator uses new investors’ money to pay off existing investors who may be growing suspicious. Eventually, when the supply of investor money dries up and current investors demand to be paid, the scheme collapses and investors discover that most or all of their money is gone.

“The strength of affinity fraud lies in how it preys on trust within communities,” said DFR Administrator TK Keen. “We want Oregonians to ask tough questions about investment opportunities, especially if the offer sounds too good to be true. Unfortunately, these offers can sometimes come from familiar sources and have devastating consequences.”

According to the U.S. Securities and Exchange Commission (SEC), here are a some tips to avoid becoming a victim of an affinity fraud scam:

— Even if you know the person making the investment offer, be sure to research the person’s background, as well as the investment itself – no matter how trustworthy the person who brings the investment opportunity to your attention seems to be. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
— Never make an investment based solely on the recommendation of a member of an organization or group to which you belong. This is especially true if the recommendation is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be a fraud.
— Do not fall for investments that promise spectacular profits or “guaranteed” returns. Similarly, be extremely leery of any investment that is said to have no risks. Very few investments are risk-free. Promises of quick and high profits, with little or no risk, are classic warning signs of fraud.
— Be skeptical of any investment opportunity that you can’t get in writing. Fraudsters often avoid putting things in writing. Avoid an investment if you are told they do not have time to put in writing the particulars about the investment. You should also be suspicious if you are told to keep the investment opportunity confidential or a secret.
— Don’t be pressured or rushed into buying an investment before you have a chance to research the “opportunity.” Just because someone you know made money, or claims to have made money, doesn’t mean you will, too. Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the salesperson bases the recommendation on “inside” or confidential information.

Two recent cases the SEC prosecuted were one involving a CEO operating multimillion dollar Ponzi scheme that targeted Filipino-American community and another involves the SEC freezing assets of investment adviser charged with defrauding elderly clients.

Anyone who believes they may have been a victim of fraud can contact DFR’s consumer advocates at 1-888-877-4894 (toll-free) or [email protected].

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