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Stemming the proliferation of illegal investment outfits in Nigeria

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Uduk, Acting SEC DG


He staggered as one who had lost his way. Blood seeped into his eyes and he was sweating profusely. He was at his wits end. He was considering how to end it all. Intense heat was radiating from his body as he slumped. He doubled up on the ground and groaned in pain. As he closed his eyes in utter agony, he looked like the image of his former self. Uchechukwu Okeke had fallen victim of one of the Ponzi schemes.

Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. The organisers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. Okeke, a phone and accessories dealer at the popular computer village has been defrauded of N5 million.Narrating his ordeal, Okeke said on that fateful day, one of the promoters accosted him at the bus stop to introduce him to the investment scheme that could yield quick capital appreciation as high as 70 per cent of the original deposit.

Unfortunately, he was moved by such mouth -watering returns attached to the business that he followed the stranger to the office where he met with other “supposed’” investors. According to him, he accepted to become part of the venture and made an initial deposit of N2.5million. Surprisingly, after one month, he received his principal and the 70 per cent accrued benefit. He was overwhelmed by the greed to make more money and he decided to deposit N5million.

As usual, on getting back to the premises after one month for receiving returns on his investment, he found out that the company had been sealed under lock and key and the neighbors feigned ignorance of the activities of this unlawful outfit within their neighborhood. Uche is helpless and hapless. He could not continue with his phone business again. He had been thrown into abject poverty without anyone to run to for assistance.

Indeed, the proliferation of these unlawful investment outfits in the nation’s capital market across the country has become a source of worry to the entire capital market community.Ponzi schemes came into limelight in the 1920s when a man called Charles Ponzi assured investors of 50 percent returns on postage investment in England within 90 days. Today Ponzi schemes with all the illegality and promises of unrealistic returns have burnt the fortunes of many ambitious investors who wanted to make huge profits without risk.

According to a finance theory, every form of investment comes with a certain level of a risk. The only exception is investment in government securities such as Treasury Bills and Bonds. Even these in reality are prone to inflation risk. In the case of Ponzi schemes, the popular saying in finance, ‘the higher the return, the higher the risk’, does not apply because these schemes often promise very high returns with little or no risk.Here, investment funds are pooled with others, and investors receive returns that are paid from the deposits of new investors. Rarely is the money invested in real investment vehicles, much less ones that actually can return what is being offered.

In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.The payments made by several gullible investors at the base of the pyramid, are used to settle maturing obligations to those at the top. For the scam to be sustained, the base must be continuously expanded through aggressive recruitment of new entrants.

The scammers always paint rosy pictures about their lucrative use of the money collected from investors so as to gain their confidence.However, in reality, the money is simply quarantined and disbursed as obligations mature.This fact became evident when Major General Godwin Abbe, then Military Governor of River State led reporters to the warehouse of Umana Umana in Port Harcourt to show them heaps of money dumped in that site.

The bubble usually bursts when fewer people are entering the scheme and default becomes prevalent. Then, the scammers would have made enough money to smile home leaving the trapped investors to leak their wounds.Ponzi and various other fraudulent collective investment scams occur at intervals of time when people have forgotten what happened in the past and when new generations without awareness of the past emerge.

They can also surface when they sense that investors are hungry for extraordinary returns and have increased their risk appetite. These are some of the factors that facilitated the recent emergence of Nospectro and MMM.Regrettably, efforts by the apex regulator of the Nigerian capital market to flush them out of the market have remained futile, as the organisers of the schemes have continued to dupe thousands of investors under the guise that such investment would yield high financial returns or dividends

Such scams are very damaging to the trust and integrity of the financial system as it is difficult to win back the confidence of swindled unsuspecting investors who innocently and ignorantly joined the schemes. There is usually the mistaken belief that authorities are aware and have sanctioned them until it becomes too late to know that they are grand deceptions.

Whenever a Ponzi scam is in vogue, gullible investors withdraw money from banks and sell down on genuine investments to finance their participation in the scams. This drains the financial system of financial assets that otherwise would have been committed to productive uses.It is hazardous to both investors and the financial system. The thriving business of finance houses failed in early 1990s being major casualties of the Ponzi pandemic in Nigeria when most of them lost their depositors’ funds, which were placed with Forum Investment based in Lagos.

The prolonged downturn in the capital market, induced by significant divestment by foreign investors and compounded by lingering liquidity tightness, waning public confidence, among others has led to significant losses by investors.The stock market which remained bullish between December 2005 and March 2008, suddenly became bearish in April 2008 and has remained nearly so since then with only marginal recovery.

Unfortunately, with the unprecedented lull in the market, many investors have fallen victim of scams and Ponzi scheme outfits that suggest invested money will yield quick capital appreciation sometimes as high as 90 per cent of the original deposit.The law is very stringent on requirements for operating collective investment schemes in Nigeria.

The Securities and Exchange Commission (SEC) position on Ponzi schemes.The SEC has issued several warning notes to the investing public, urging them to refrain from investing their money in outfits not registered with the commission. The commission has also advised the public not to subscribe to any financial investment plan without first checking the registration status of the operating company on the commission’s website.

Specifically, the SEC must register any investment scheme targeted at the investing public together with the managers of the scheme. This is the first step toward investors’ protection. Therefore, any investment scheme that is not registered is automatically categorised as illegal and potentially fraudulent.The commission maintained that even if the company was registered with SEC, the potential investors should endeavor to find out from the commission whether the commission has approved the company’s activities.SEC had in the past issued a warning note to Nigerians over the activities of an investment fund tagged ‘MMM Federal Republic of Nigeria’ declaring it to be fraudulent.

The commission in a statement on its website had described the facilitators as online fraudsters, who carry out their illegitimate business via Nigeria.mmm.net portal/platform, and were promising investors a monthly investment return of 30 per cent.The SEC maintained that the venture had no tangible business model, as returns would be paid from other peoples’ invested funds.“The attention of SEC, Nigeria has been drawn to the activities of an online investment scheme tagged ‘MMM Federal Republic of Nigeria (nigeria.mmm.net).

“The platform has embarked on an aggressive online media campaign to lure the investing public to participate in what it called ‘mutual aid financial network’ with a monthly investment return of 30 per cent.“The commission hereby notifies the investing public that the operation of this investment scheme has no tangible business model hence it is a Ponzi scheme, where returns are paid from other people’s invested sum. Also, the commission does not register its operation.

”SEC, therefore, advises the general public to distance themselves from the online scheme. Please note that anyone that subscribes to this illegal activity does so at their own risk.”The Acting Director-General, SEC, Mary Uduk, at a recent forum in Lagos warned Nigerians to stay away from fake financial experts who would promise to double their money within a short time.She explained that the commission was committed to sensitising investors and protecting them from the antics of such fraudsters, especially promoters of Ponzi schemes.

The acting SEC DG said, “The purpose is also to ensure that you do not fall victim to the antics of fraudsters who purport to be able to double any amount of money you make available to them as investment value.“These fraudsters or promoters of Ponzi schemes are the false prophets of the investment environment; they are the ill wind that blows no good and at whose sight you must flee. They are to be avoided. This is one message you must take home to family, friends, relations and acquaintances in order to save them from the agony of loss of their hard-earned money. Uduk continued: “Those pyramid schemes have not been approved by SEC, and we have been telling investors that anybody that is selling any scheme that is not approved by SEC, investors should not buy.

“If they buy, then they are on their own because people are being pushed to buy those kinds of schemes. And I think it is also a fault on our own parts because by the time somebody tells you that if you buy this thing you will get 50 per cent discount, you know it is not true.“So we too as individuals do not have to be greedy, because it is all driven by greed. How can somebody give you 50 per cent return? Where is he going to get the 50 per cent? Where is he going to put the money? What is he going to do?“And this has been the trend that we have seen in recent times and we have been continuously telling people through radio jingles not to accept all those schemes not sanctioned by SEC.”

The SEC boss advised Nigerians not to subscribe to any financial investment plan without first checking the registration status of the operating company on the commission’s website.Also in the last two months, SEC has embarked on enforcement to seal off illegal fund managers who have been collecting huge sums of money from unsuspecting members of the public.

Early this month, the commission sealed off the premises of Dantata Success and Profitable Company Ltd in Kano as well as Growing Circle in Lagos for engaging in illegal fund management activities.According to the commission, the companies were shut down for carrying out investment operations that fall within fund management without registration with the apex regulator.

The commission had established that the activities also constituted an infraction of the Investments and Securities Act (ISA), 2007.According to SEC, “They do not have registration with the SEC and the commission has powers according to Section 13 (w) of ISA 2007, to shut down any company carrying out capital market activities without due registration.”“The mode of operation of the company is that for a new entrant, registration is N10, 000 and the person is not entitled to products while the second category has a registration fee of N16, 000 that entitles the registrant to receive products.

“For anyone to come under the company, he has to come under an up liner since the company engages in networking business. In the case of Growing Circle, the least stage is a starter point with minimum registration of $50 with an incentive of $15 for a member who introduced two down liners.”It was gathered that the company also engages in free seminars at its head office for people to learn more about the products and the money making business with an unbeatable compensation plan and huge bonuses.

The strategy of Dantata success and profitable company is to solicit for funds from unsuspecting members of the public by enticing them with returns of monthly interest on investment of between 25 percent to 50 percent depending on the nature and investment type.They also indicated a registration period of 5th February to 15th February in one of their numerous notices directing all prospective customers to make deposits into their bank accounts. The company sells its forms to prospective investors according to their investment plans ranging from N1,000 to N3,000. The minimum amount investable is N50,000 while the maximum is N5,000,000

The investment period of the scheme is pegged at a minimum of 30 working days to a maximum period of 12 months with offer of interest rates on short- and medium-term basis. It claims to be involved in a trading, general merchandise supply, oil and gas, transportation, import, export and general contract.The SEC disclosed that however, after registering, the members claim they do not get any products from the company and all efforts to retrieve their funds proved abortive, hence the complaint to the SEC.While the company claimed to have a factory in Ogun State, the said factory could not be located even though the products were on display at their Lagos office.

The SEC management said the closure was to end unlawful activities of the company against unsuspecting investors and therefore urged investors to ensure they only deal with fund managers that are registered with the commission.“The accounts of the company have been frozen, the promoters have been arrested by the Nigeria Police Force and are undergoing interrogation. The Commission wishes to notify the investing public that the company is not licensed to carry out investments business of any type and as such its operations are illegal.”

Reactions from market operators on patronage of illegal outfits.The Managing Director, Cowry Asset Management Limited, Johnson Chukwu explained that investors patronise Ponzi schemes due to ignorance and greed.According to him, a lot of people who invest in the scheme do so for lack of knowledge of basic economics or business expertise. “People invest in Ponzi schemes for two principal reasons; ignorance and greed. A lot of people who invest in Ponzi scheme do so for lack of knowledge of basic economics or business common sense.

“For instance, I am not aware of any business venture that consistently generates 50 per cent net annual return (Net Profit Before Interest and Taxes – NPBIT) on a yearly basis. So if a scheme is offering someone a monthly return of 5 per cent which amounts to an effective annual yield of over 60 per cent, it becomes obvious that such a scheme cannot sustain the payment from its income and therefore must be creating a deficit which can only be funded from contributions from other investors.

“The illusion of meeting such payments becomes punctured once the rate of contributions slows down, hence the crystallisation of the always impending default. The second reason is that of greed which makes informed people to believe that they can earn the return and exit the scheme before the bubble will burst but sometimes they also get trapped.

“The most appropriate way to checkmate Ponzi schemes is to create enough awareness of the modus operandi of such schemes so that the general public will understand that the rewards offered by Ponzi schemes are not sustainable and only serve as bait to attract uninformed investors.“It may also be necessary for SEC to set up toll-free lines for investors to confirm the registration status of Investment houses seeking their patronage,” he added.

The Managing Director of InvestData Limited, Ambrose Omordion said: “Many people are patronising the outfit because the stock market is down. They don’t have knowledge of what the capital market is all about. SEC has warned that Nigerians should be careful about investing in these fraudulent outfits.“People that put their money in wonder bank are still complaining. Government should go and find out who are behind this scheme. Again, government should make capital market liquid so that people will not look for alternatives.”

A statistics and mathematics lecturer for Finance and Economics at the Pan Atlantic University, Prince Osaro said: “The system itself has no regulation, there is no law guiding such financial practices in Nigeria. Just start a small financial system and coin it under a financial name and use it to rob people. “Government has the regulatory power to check them but government is leaving it open because nobody is really shouting about it, nobody is taking anyone to court about this and this is corruption. And corruption in Nigerian constitution is death. If they can catch one of those people and try him legally, and the person goes to jail for life or is being hanged, I think others will learn their lessons.“People who are gullible keep putting their money in such outfits and they keep loosing their money. We have that greed to double our money but if you get into it, you will see the problem. It is crazy.”

According to a stockbroker and Chief Executive Officer of Sofunix Investments and Communications, Sola Oni said the fundamental principle that underpins investment is the trade-off between returns and risks which is the higher the risks, the higher the returns.According to him, this applies to all reasonable investments. Return on investment in government bonds, which is regarded as risk free is moderated by a combination of variables, though the principal is secure.

“However, operators of Ponzi schemes defy this investment principle by canvassing risk free and highest returns. Unlike other investments that have legal backing, Ponzi schemes are unregistered and the operators can easily vanish into thin air.“The bait that the promoters of these global scams deploy is that unsuspecting client can commit all his finances and even borrow more for the investment with an assurance of doubling the money within the shortest period.They usually utilise the money of the last investor to pay the first one.”He urged investors utilise the services of investment advisers to ensure that they do not commit their fund into a bottomless pit of fraud stars.

“Any investment in this category that is not registered by the SEC is illegal. Many Nigerians have lost their life -savings to these schemes. It is borne out of greed on the part of enlightened investors and a combination of greed and ignorance on the part of uninformed ones.”The Managing Director of High Cap Securities, David Adonri said Nigeria has suffered the menace of Ponzi or pyramidal scams at various time.He said the scams are generally structured like unit trust fund but noted that the difference is usually in the abnormal returns promised by operators of Ponzi in comparison to the normal returns obtainable in mutual funds.

“This is an important signal that should put discerning investors on enquiry. With an adequate financial literacy campaign, more awareness can be created to direct several innocent investors who would have been attracted to Ponzi to embrace appropriate mutual fund(s) that satisfy their risk appetite.“With full listing of mutual funds on the Nigerian Stock Exchange, access to high quality, safer and tradable mutual funds are now assured in the secondary market.
“These illegal investment schemes swindled several greedy Nigerians who threw caution to the wind. The most recent scheme or scam called MMM was concocted in South Africa and imported to Nigeria about three years ago.“At the time the scam ended several victims were gasping for breath. A common feature of these scams was that the regulatory authorities registered neither the operators nor their financial instruments. They usually lure in their victims by initial mouth -watering returns, which are unsustainable before folding up.

“Another worrisome development is that none of the perpetrators of these scams have been punished in Nigeria to serve as a deterrent. However, through financial literary and enforcement of regulatory actions against perpetrators of these scams, future occurrence can be curtailed.” A Professor of Capital Market and Head, Banking & Finance Department, Nasarawa State University, Prof Uche Uwaleke said Ponzi or pyramid schemes for long had negative consequences for individual investors and the economy in general.

“ They may appear beneficial in the short run but with the passage of time become harmful due to their unsustainable nature. Recent experience with MMM and similar schemes in the country which have since collapsed left a lot of people bruised financially with some even committing suicide after throwing away all their savings.

“Many promoters of such fraudulent schemes are nothing but 419ners and fraudsters because their modus operandi basically is a pyramid structure in which existing investors are settled with money collected from new investors.“So, you can clearly see that for such a scheme to continue to stay afloat it requires an uninterrupted flow of funds from new investors and when that is no longer forthcoming or existing investors cash out, the scheme suddenly packs up.

“Ironically, Ponzi schemes tend flourish during periods of economic downturn and are prevalent in societies with high rate of unemployment and poverty. This is because these conditions render a lot of people vulnerable to money doubling tricks fraudulently packaged to escape the economic hardship.“It was not surprising therefore that the MMM scheme spread like wide fire during the period of economic recession in Nigeria. It was a scheme that was promising investors as much as 30 per cent return monthly or 360 per cent per annum in an economy where the average annual return on investment was around 16 per cent at the time.”

He advised the investing public to be wary of any investment scheme with highly attractive propositions and mouth-watering returns.“A rational investor should probe further if any investment offering is appearing ‘too good to be true. Where possible, the advice of experts should be sought before taking any investment leap. The first step is to even check whether the firm is registered with the SEC. Operators of Ponzi schemes tend to bypass the SEC given that their real intention is to swindle the unsuspecting public.

“The SEC should continue to clamp down on such fraudulent schemes as they have been doing in recent times. Members of the public should also be willing to volunteer information to the SEC, EFCC and the police regarding activities of unregistered investment firms.“Above all, the CBN and the SEC should intensify the awareness campaign on the dangers of patronising Ponzi schemes because of its potential to erode investors’ confidence, which is detrimental to the current efforts at increasing financial inclusion in the country.”


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