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The lowdown on Ponzi

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Five years ago, upon her friend’s recommendation, Rissa (not her real name) invested $7,000 with a company that promised huge and quick returns on her money.

She was very happy during the first few months because she earned $1,600 from her investment. To earn more, she also invested her earnings with the same company. About five months later, however, the interest payments from her investments stopped coming. When she tried to get back her money, her agent could no longer be contacted. "That was five years ago,” Rissa says, “and I still haven’t gotten my money back. Our case is still in court."

Rissa is not alone in this predicament. Noel (not his real name), the friend who had convinced her to invest her money in the company, has not gotten his money back either. He recalls: "One of the owners of the company was my friend so I trusted her. My money earned for more than a year. But when news broke out about the company's fraudulent activities, we could no longer get our money back." His loss: almost P200,000.


Hubert B. Guevara, director of the Compliance and Enforcement Department of the Securities and Exchange Commission (SEC), says that such scams are prevalent until now. In fact, he says, a number of companies now conduct their "businesses" over the Internet, creating attractive websites to lure investors. "They usually target those who have money and those who understand the forex market, and they victimize even our overseas Filipino workers," he says.

Such Internet-based investment scams belong to a category of fraudulent businesses called Ponzi investment schemes, in which a prospective investor is lured by the promise of incredibly high short-term returns. But the revenues from such schemes are not generated from any real business; instead, their earnings are raised from money coming in from new investors.

In the case of Rissa, for instance, the scammers promised her a 10 percent monthly interest on her money.

Ricardo Puig, vice-president for research at Wealth Securities Inc., says such a rate for a dollar investment is unbelievably high. He explains: "For dollar investments, interest is only 1.25 percent to 2 percent per year right now. If they offer 10 percent on your dollars, think again. For peso investments, 20 percent a month is simply too good to be true. So to make sure that you are putting your money in a legitimate investment, look at the market situation. Compare the rates offered with those that banks and mutual funds offer. Ask financial analysts if the instruments are really yielding that much. If the rates are almost the same, just put your money with the more credible company."

Puig adds that a legitimate company should be able to give back an investor’s money in seven days or less if he or she decides to liquidate the investment. “That’s an SEC ruling,” he says.

He explains the modus operandi of the scammers: “Usually, may patikim [there are enticements]. They’d give you interest for one to two months or even up to one year. Then poof! they’ll be gone.”

Telltale signs

Guevara says the SEC and the Bangko Sentral ng Pilipinas (BSP) have jointly come up with guidelines to the public on the precautionary measures to be taken when placing funds with any foreign currency trading company.

The salient points of the guidelines are as follows:

• Stay away from opportunities that sound too good to be true. Get-rich-quick schemes tend to be fraudulent.

• Avoid any company that guarantees large profits or those that promise little or no financial risk. Normally, the higher the promised return, the higher the risks involved.

• Don't trade on margin unless you understand what it means. Certain foreign exchange transactions can make you responsible for losses that greatly exceed any amount you deposited.

• Be cautious of sending or transferring cash on the Internet, by mail, or otherwise. It is very easy to transfer funds online, but it is often impossible to get a refund.

• Don't deal with anyone who won't give you his or her background. If you are not satisfied that the individual or company you are dealing with is legitimate and true, the best thing to do is to avoid transacting and dealing with it.

• Always keep or retain a copy of the contracts, agreements, documents, or any receipts issued by these foreign currency exchange companies. They will be particularly useful in the event that you need to take legal action. A printout of the page of the website alone may not always be acceptable or sufficient as evidence of the transaction.

• Contact the regulatory agencies. The mere issuance by the SEC of a certificate of incorporation to a corporation does not mean giving a permit or license to engage in investment-taking. Such activities require a secondary license.

Ponzi investment schemes

Guevara says that known to be currently engaged in alleged Internet-based Ponzi investment schemes are the following entities: Francswiss, Swiss Cash, Universal Forex System, Global America, and Private Forex Trade, Inc. They are not registered with the SEC and they have no permit or authority to solicit investments from the public.

A separate warning from the SEC stated that Private Forex Trade Inc., has, in fact, been found to be misleading the public by showing a fake SEC Certificate of Registration on its website.

"Don't just rely on websites,” says Puig. “Sometimes, the scammers invest in people, infrastructure, or offices to look credible. They also name-drop clients. So check where they are affiliated with. Check on the background of the people."

Guevarra, for his part, says: "We are going after the owners of such companies. If found guilty, the punishment will be seven to 21 years of imprisonment and a fine of P50,000 to P5 million."


Puig says it is also important to cross-check information with the SEC and with the company’s recent investors as well as to double-check where the company invests the money. “If they cannot tell you where they will put your money and they just say, ‘entrust it to us’, magduda ka na [then be wary of them],” he says.

Legitimate companies are very cautious of who they get as investors, since they are aware of the anti-money-laundering laws, he adds.

As a precautionary measure, Puig says, legitimate companies will likewise check the background of prospective investors and ask for several valid IDs. Some even require the investor to personally go to their office, and always, they will issue official receipts.

Rissa and Noel say they never got official receipts from their agent. The forms they filled out did not bear the name of the company, and the receipts they got whenever they deposited money were “just typewritten acknowledgement receipts.”

“I know other friends who put in their money with that company,” Rissa says. “Some even invested their pension money with the company. The owner of the company is now behind bars, but we still haven’t gotten our money back.”

She is now much wiser after the experience: “I am now very wary of companies that offer very high interest rates on my money. My uncle, who’s an OFW, recently asked me to invest his dollars, worth about P2 million. I placed them in a big bank. The interest may not be as high, but I am sure the money is safe there.”

Be forewarned

The following are some of the features of an Internet-based Ponzi investment scheme:

• No SEC registration

• Investment in foreign currency, preferably in US dollars

• Offers or guarantees a huge profit in a very short period

• Utilizes a binary network (i.e., upline and downline) to earn commissions

• No paper trail

• Promises little or no financial risk

• Provision for a lock-up period where an investor cannot touch the investment (i.e., 60 days)

• Assures pay-off of investments in a short time

• Uses high-pressure methods to convince investors to reinvest their earnings

• Unknown principal office, address, founders, directors, or officers

• Conducts orientation seminars informally

To report companies engaged in Ponzi investment schemes, contact Hubert Guevara, director of the SEC Compliance and Enforcement Department, 5/F SEC Building, EDSA, Greenhills, Mandaluyong City, Tel. (02) 727-3367. To verify if a company is authorized or licensed to solicit investments from the public, call the SEC Market Regulation Department, Tel. (02) 721-5058, or the BSP’s Supervision and Examination Department V, Tel. (02) 524-7011 loc 3017 or (02) 523-2582.

The Ponzi Scheme

The type of illegal pyramid operation known as the Ponzi scheme was named after Charles Ponzi, who lured thousands of residents in New England in the US in the 1920s into investing in a postage stamp speculation scheme. Ponzi made prospective investors believe that he could take advantage of the differences between U.S. and foreign currencies in the buying and selling of international mail coupons. He promised investors with a 40 percent return in just 90 days compared with the prevailing 5 percent return for bank savings accounts. The promise was so attractive that Ponzi took in $1 million from excited investors during one three-hour period alone. He paid off a few early investors to make his scheme look legitimate, but later investigation revealed that Ponzi had bought only $30 worth of the international mail coupons to put his investment scheme into motion.

Today, the Ponzi scheme continues to be adapted by scammers in one form or another, using money from new investors to pay off earlier investors until the whole scheme crumbles when a good number of investors, their suspicions aroused, simultaneously demand the pretermination of their investments. (Based on an advisory from the United States Securities and Exchange Commission)


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