By Hugh Bronstein

BOGOTA, Nov 19 (Reuters) - Colombia on Wednesday ordered the arrest of seven people accused of a pyramid scheme which, with other financial scandals, prompted riots and threatened to damage the economy by causing millions of dollars in lost investments.

President Alvaro Uribe moved quickly to contain the crisis as thousands of families lost their savings on scams that promised astronomical interest rates, sweetheart real estate deals and debit cards to get electronic goods for free.

Prosecutors ordered the arrest of seven bosses of DMG, one of the main companies accused by the government of money laundering and other financial wrongdoing.

"They founded and promoted the business with illicit resources," Attorney General Mario Iguaran told reporters.

Authorities are probing possible links between the finance agencies and Colombia's multibillion-dollar cocaine trade.

A lawyer for DMG said the company's managers were innocent and were ready to cooperate with the investigation.

Thousands of DMG clients took to the streets this week to protest Uribe's decision to shut the stores where depositors were using special debit cards to buy everything from cars to refrigerators to mobile telephones.

They were promised the cards for certain time periods to be followed by the full return of their investments, which clients now say are left in limbo by the store closings.

At least two people were killed in riots last week when the bosses of other companies, which had promised up to 150 percent interest, started shutting their doors and disappearing with suitcases full of cash.

Most of the firms operated by using new deposits to pay off previous customers. When new money stopped coming in, the pyramids collapsed.

Uribe, who admits he was caught off guard by the scandal, said the government will help victims recover their losses. He declared a state of emergency on Monday allowing him to issue decrees to shut down the companies and punish the scammers.

Pyramid schemes have sparked violence in other developing countries where people have little financial sophistication.

The 1997 collapse of such schemes in Albania led to losses of $2 billion, about 3,000 deaths and political instability.

Uribe, who may seek office again in 2010, wants to end the scandal quickly as the economy gets bogged down in global financial turmoil sparked by the U.S. sub-prime mortgage mess.

The president is popular for his U.S.-backed military crackdown on leftist rebels, which has helped attract record investment to Colombia. His allies in Congress are trying to change the constitution to allow him to run for a third term. (Reporting by Hugh Bronstein; Editing by David Storey)

AlertNet news is provided by