2008-08-21 / Business

State warns of scam artists using relationships to defraud consumers

The Office of Financial and Insurance Regulation (OFIR) recently warned Michigan investors to be on guard against a rise in investment scams that prey upon members of groups or affiliations, such as religious or ethnic communities, the elderly or professional groups, known as affinity group fraud.

A vast majority of consumers are in some way connected to a group or an association. Their interests, backgrounds, and other associations will naturally lead citizens to those organizations or affiliations that serve their needs. Knowing this, some scammers target their fellow group members, especially those that are unfamiliar with how financial markets work, by getting them to drop their guard and invest in fake products.

"Consumers should never invest in something they don't understand and should remember - if it's too good to be true, it probably is," said OFIR Commissioner Ken Ross. "We've seen examples where friends, work colleagues, church members - even family members - let their guard down due to promises of high returns and the personal relationship involved. Consumers should seek professional advice or contact our agency with any questions about an investment firm, professional or product."

OFIR has investigated a number of affinity scams that involve "Ponzi" or pyramid schemes, where new investors essentially pay off earlier investors to give the false impression that the investment is successful. The agency is also seeing bogus promissory notes that are being sold as investment products that guarantee abovemarket, fixed interest rates. Fraudulent promissory notes appear to give investors high returns and safety, but are worthless. In both of these scenarios the scam artist almost always steals the investor money for personal use.

Tips to Avoiding Affinity Group Fraud:

• If Michigan investors have any questions about an investment firm, professional or product, contact OFIR at (877) 999-6442 or www.michigan. gov/ofir.

• Beware of the use of names or testimonials from other group members. Scam artists frequently pay out high returns to early investors using money from later arrivals. Accordingly, early investors may be wildly enthusiastic about a scheme that may collapse entirely once they've invested.

• Obtain a prospectus or other form of written information that details the risks in the investment and procedures to get your money out.

• Ask for professional advice from a neutral outside expert not in your group - an accountant, attorney or financial planner - to evaluate the investment.

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