Economic crunch pushes investors to ‘high yield’ ponzi schemes

The economic recession and prolonged downturn in the capital market have induced significant divestment by foreign investors, while lingering tight liquidity , waning public confidence, among others have 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 various ponzi schemes that suggest invested money will yield quick capital appreciation sometimes as high as 90 per cent of the original deposit.

A 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.

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.

SEC worried about proliferation
Indeed, the proliferation of these unlawful investments outfits in the nation’s capital market has become a source of worry to the Securities and

Exchange Commission (SEC).
Efforts 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.

SEC has issued several warnings to the investing public, urging them to refrain from investing their money in outfits not registered with it. 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 its website.

The commission maintained that even if the company was registered with SEC, the potential investors should endeavour to find out whether it had approved the company’s activities.

Specifically, SEC had recently issued a warning to Nigerians over the activities of an investment fund tagged ‘MMM Federal Republic of Nigeria’ declaring it to be fraudulent.

SEC in a statement on its website, described the facilitators as online fraudsters, who carry out their illegitimate business via Nigeria.mmm.net portal/platform, and are promising investors a monthly investment return of 30 per cent. SEC said the venture had no tangible business model as returns would be paid from other peoples’ invested funds making it a Ponzi scheme, a fraudulent investing scam promising high rates of return with little risk to investors that generates returns for older investors by acquiring new investors.

“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.”

Also in a recent forum, the SEC warned members of the public against buying ponzi or pyramid schemes not approved by the Commission.
According to the Director General of SEC, Mounir Gwarzo, “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 DG 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.

He added that the Commission was collaborating with the police and other relevant law enforcement agencies to check the activities of the operators of such schemes.

Investors’ ignorance, greed boost proliferation
Reacting to the development, the Managing Director, Cowry Asset Management Limited, Johnson Chukwu, explained that investors patronize ponzi schemes due to ignorance and greed.

According to him, a lot of people that 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 that 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 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 for 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 should warn Nigerians to be careful about investing in these fraudulent outfits and should go a step further to arrest people that establishes these 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.”

He urged SEC to roll out enlightenment campaigns to educate investors on what capital market investment is all about and the risks of associated with patronising these schemes.

A Finance and Economics lecturer 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 trial him legally, and the person goes to jail for life or being hanged to death, I think others will learn their lessons.

“But nobody is saying anything. Nigerians will just say ‘let him go, God will judge him’, and the person will run to Dubai or where nobody can trace him. People who are gullible keep putting their money in such outfit 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 you will get your friends and families. It is crazy.”