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Oregon Warns Residents of Rising Affinity Fraud Schemes Exploiting Trust within Communities

Written by Wyatt Jones on Nov. 12th, 2024
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The Oregon Division of Financial Regulation (DFR) recently issued a warning to Oregonians about the dangers of affinity fraud, an investment scam that exploits trust within tightly knit groups to defraud members. The DFR highlighted that affinity fraud is on the rise, preying on bonds in communities, religious organizations, immigrant groups, and other affiliations to manipulate victims.

Affinity fraud works by fraudsters infiltrating a community or group, often posing as members or aligning closely with members’ beliefs or interests. “The strength of affinity fraud lies in how it preys on trust within communities,” said TK Keen, DFR Administrator. These scams are particularly hard to detect, as they rely on the goodwill and credibility within a group, allowing scammers to “exploit the trust and friendship that exist in groups of people who have something in common.”

The DFR explained that fraudsters often enlist respected community figures to promote the investment, and these leaders may unknowingly become victims themselves. Such involvement makes reporting even more challenging; many victims attempt to handle issues privately rather than involving authorities, further complicating regulatory oversight.

Affinity fraud schemes often promise exceptional investment opportunities. Fraudsters may either create a completely fake investment or misrepresent an actual investment, downplaying risks or exaggerating potential returns. According to the DFR, affinity fraud scams often take the form of Ponzi or pyramid schemes, in which funds from new investors are used to pay returns to earlier investors. This gives the illusion of a successful investment, drawing in more unsuspecting victims.

These schemes sometimes start with legitimate investments that fail to perform. Rather than admitting failure, the fraudster may begin using new investor funds to sustain payments to earlier investors, hoping to recover losses or delay the collapse. Eventually, when new investor funds dry up and earlier investors demand their returns, the scheme falls apart, often leaving victims with substantial losses.

The DFR and the U.S. Securities and Exchange Commission (SEC) provide guidance for avoiding affinity fraud. “We want Oregonians to ask tough questions about investment opportunities, especially if the offer sounds too good to be true,” Keen advised. The SEC offers several key recommendations:

Always verify the background of the person making the offer, regardless of how trustworthy they seem. Avoid making investment decisions based on endorsements from someone within your group, especially if the recommendation is online. Online pitches in chat rooms, forums, or group message boards may be fraudulent. Avoid investments that promise high profits with little or no risk. As the DFR warns, “very few investments are risk-free,” and promises of guaranteed returns are often red flags.

Be skeptical of investments where the details are not provided in writing. If someone refuses to give you written terms or insists on confidentiality, consider it a red flag. Never rush into an investment. Pressure tactics or claims that an offer is “once-in-a-lifetime” often indicate a scam. Even if someone you know has made money on the investment, it doesn’t mean you will.

The SEC has recently prosecuted two significant cases that illustrate the impact of affinity fraud. In one case, a CEO was charged with running a multimillion-dollar Ponzi scheme targeting the Filipino-American community. Another involved the SEC freezing the assets of an investment adviser accused of defrauding elderly clients. These cases underscore the need for vigilance and caution, particularly among vulnerable groups.

The DFR emphasizes that affinity fraud can have devastating financial consequences and is urging Oregonians to stay informed and cautious about investment offers.

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