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Affinity fraud popped into the vocabularies and pocketbooks of more Utahns in 2010, and the scourge looks to remain a huge problem in the new year, state regulators say.
The fraud, in which a con artist targets fellow members of a group who share like interests and often emotional ties, is No. 1 on the Utah Division of Securities Top 10 Investment Alerts for 2011.
In Utah, members of The Church of Jesus Christ of Latter-day Saints have been caught in multimillion-dollar Ponzi schemes and other forms of fraud conducted by fellow church-goers. Deaf people, the Vietnamese, military families and co-workers also have been targeted.
"Affinity fraud would be on the top of my list for the past several years, and I imagine it will be on the top of the list next year, as well," said Keith Woodwell, director of the Utah Division of Securities, which enforces state investment laws. "That's because it is the overwhelming theme in most of the complaints that come into our office. Whatever the scam is, whatever the investment offer is or the can't-miss deal, generally the way we see those scams marketed in this state is through affinity fraud."
To be sure, that type of fraud wasn't the state's only problem. Last year, the Utah Securities Fraud Task Force, made up of local, state and federal agencies, said it was investigating cases that involved $1.4 billion and 4,400 people. The FBI also recently put the Salt Lake City office in its top five Ponzi hot spots nationwide, in company with Los Angeles, New York, Dallas and San Francisco, which have much larger populations.
"A lot of what we see is affinity fraud-based," said James Malpede, the special agent in charge of the white-collar crime unit at the FBI's Utah office. "So it's going to be an ethnic population, ties to a particular church, or some other relationship."
The state's Top 10 list also includes a new scam that has surfaced and roped in a number of military families, Woodwell said.
The pitch from Utah-based entities involves investing in Iraqi currency, the dinar, with potential buyers told they can earn as much as a 1,000 percent return when the currency appreciates in value, sometimes because they claim a U.N. or World Bank program will revalue it.
"It's frequently targeted to military families," said Woodwell, "Particularly men and women who have served in Iraq have been victims of this scam."
Utahns who bite are actually getting dinars delivered to their home, he said. The problem is the victims are paying way above market value, and the currency is not freely convertible, meaning it can't be easily traded for dollars.
"Even if you can convert your dinars, you're not going to get anywhere near what you paid for them," Woodwell said.
Also on the list are structured investment products, which are complex investments that can be linked to stock indexes, currencies or bonds. They commonly promise protection of your principal, but are backed only by brokerage houses such as Lehman Brothers, which went out of business in 2009 and made those guarantees worthless, Woodwell said.
"Investors need to be a little bit wary when approached with a thing like this and find out first the costs and fees and commissions you're paying that tend to be higher on these products," he said. "When you're told your principal is protected, you need to look hard and see what that really means."
One other alert concerns companies pitching investment pools that purchase nonperforming loans or distressed properties, claiming there are big profits to be made in collecting on the loans or in fixing up and selling the properties.
"There's a reason those loans are nonperforming," Woodwell said. "In many cases, there's no demand, there's no market to sell the property, even if you do fix it up."
In releasing the list, Francine Giani, executive director of the Utah Department of Commerce, asked Utahns "to add financial resolutions to their New Year's lists."
Researching an investment
O The Utah Division of Securities offers help in evaluating a potential investment at securities.utah.gov.
Top 10 investment alerts for 2011
Affinity fraud • When someone abuses membership or association with an identifiable group to convince a potential investor to trust the legitimacy of the investment.
Inverse and leveraged ETFs • Exchange-traded funds that offer leverage or that are designed to perform inversely to the index or benchmark they track or both.
FOREX trading programs • Involves foreign currency exchange markets in which the value of one nation's currency, as compared with another currency, fluctuates on a continuous basis.
Structured investment products • Securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency.
Promissory notes • Offered to retail investors, they carry significant risk. When investing, higher returns are accompanied by a proportionate amount of risk.
Start-up companies on the verge of "going public" • The lure of getting in on the "ground floor" of a hot startup business is a classic temptation for investors.
Investment pools purchasing nonperforming loans • Despite the ads on late-night TV and the Internet, or the stories told during seminars and sales pitches, turning a profit on nonperforming loans is complicated and difficult.
Automatic trading software packages • Employ due diligence on those selling the programs or promoting them to ensure you are dealing with licensed professionals.
Iraqi dinars • The likelihood of investors seeing any return on their dinars is slim to none.
Unsuitable variable annuity sales practices • Aggressive marketing of variable annuity insurance products are a concern, especially when seniors are targeted.