Ponzi scheme: Why Nigerians must be sceptical by CHRIS UGWU


An average Nigerian investor, especially first-timers unaware of the workings of Ponzi schemes, has suffered considerably. CHRIS UGWU writes that investors should be sceptical of any investment that requires new investors to pay existing investors

Following the rising rate of illegal fund managers in Nigeria, the Securities and Exchange Commission (SEC) and other stakeholders have continued to raise the alarm over the activities of these outfits that have defrauded unsuspecting Nigerian of their hard earned money.

The line of trade of these illegal fund managers, which are known as Ponzi scheme in the developed market, is usually tinted with promises of high returns on investments.

What is Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.
Organisers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make progress payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.

2008 market crash
It is believed that the activities of illegal fund managers were one the reasons for the crash of the stock market in 2008. In the height of the capital market boom of 2005- 2008, many fraudulent investment schemes sprang up. Both informed and ignorant investors fell for the attractive returns offered by the promoters.
At the crash of the capital market in 2008, SEC was inundated with complaints by investors who had lost money. Checks by New Telegraph revealed that the Inter-agency committee on illegal fund managers/ wonder bank, which comprised of the Central Bank of Nigeria (CBN), SEC, Nigeria Deposit Insurance Corporation (NDIC), Corporate Affairs Commission (CAC) and the Economic and Financial Crimes Commission (EFCC) submitted 560,882 total claims against 440 companies valued a N106.9 billion.
The former head of enforcement and Complaint at the commission, Mr. Eric Elujkor, in a paper, ‘Addressing the Challenges of Ponzi Schemes and Other Scams in the Capital Market’ presented in 2012 at the SEC journalist award, said “of the 440 companies, 36 of them with value of N100 million and above accounted for N104.954 billion.
According to him, the 36 illegal operators and claims against them are: Nospectco Oil and Gas – N48.9 billion, Wealth Solution Limited – N21.5 billion, New Foundation Diversified Investment Limited – N7.8 billion, Sefteg Nigeria Company Limited – N4.34 billion and Treasure Line Interlink Limited – N2.938 billion. Others are Pennywise Royal Limited – N1.93 billion, Wealth Zone Limited – N1.8 billion, Wisdom Investment Limited – N1.77 billion, Silver Trust Global Investment Limited – N1.6billion, Wealth Gate Multibiz N1.576 billion.
Also included are Real and Coll Wealth International – N1.327 billion, Divine Success Merchandise Limited – N1.204 billion, Flagship Asset Managers Limited – N1.191billion and CyberWealth International – N956.5 million.
Also on the list are Open Gate Cooperative Investment – N752.9 billion, Wealth Creation International N567.1 million, Positive Movement N502.9 million and Success Point International – N417.7million amongst others.

Current surge
SEC has cautioned investing public on the rising waves and activities of illegal capital market operators in the country. The attention of the Commission was last week drawn to an illegal operator in the Capital Market known as Ruby Gold Ventures (Crypto Currency investment).

SEC, in a statement, noted that Ruby Gold Ventures was not registered by the Commission to perform any function in the capital market. “Its operations/activities in the capital market are therefore illegal. In view of the above, the investing public is hereby warned to stop and desist from dealing with the company in any capital market-related business.

“Please note that any person who does capital market-related business with the company and its promoters after this publication does so at his/her own risk,” SEC noted. The commission had also recently in a notice cautioned the investing public about the activities of an online investment scheme tagged ‘MMM Federal Republic of Nigeria (nigeria.mmm.net).

The apex market regulator said 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.Consequently, SEC said: “The Commission hereby notifies the investing public that the operation of this investment scheme has no tangible business model hence it’s a PONZI SCHEME where returns are paid from other people’s invested sum. Also, the Commission does not register its operation.

“The general public is hereby advised to distance themselves from this online scheme. Please note that anyone that subscribe to this illegal activity does so at his/ her own risk.”

Similarly, SEC also raised the alarm on the activities of Mrs. Oge C. Ottiwu of No. 118 Zink Avenue, Opposite Eke Market, Awka, Anambra State, who engages in capital market activities without registration within Anambra State and its environs.
According to the Commission, section 38(1) of the Investments and Securities Act, 2007 requires any person who intends to operate as a professional in the capital market or carry on securities business to be registered by the Commission before engaging in such activities. It said it was therefore illegal to carry on any kind of capital market business without registration.
“In view of the above, the general public is hereby warned that any person dealing with the named person in any capital market-related business is doing so at his/her own risk,” the regulator noted.

Zimbabweans’ experience
Only recently, there was a report that thousands of people, among them civil servants and vendors, have lost thousands of dollars to fraudulent online pyramid scheme MMM Global Zimbabwe when it collapsed. Unconfirmed report from online media noted that the social financial network, which relied on an accelerating number of new members to pay off the old, abruptly terminated its services last month leaving participants stranded.
This came as Econet’s mobile financial service platform, Eco- Cash distanced itself from the pyramid scheme. Participants claimed they were using EcoCash for their transactions. Zimbabweans and Nigerians had in the past months been joining the online investment scheme in droves in a bid “to get rich quickly”. The Reserve Bank of Zimbabwe warned people that the scheme was fraudulent and there was no legal recourse in the event they lost their money.

The Zimbabwean central bank said MMM, which advertises its operations through a website and recruiting agents, was not a registered or regulated entity. Eco- Cash said: “We have noted that some of these pyramid schemes are allegedly advertising in a manner that suggests that the Ecocash facility is a medium for prospective members to deposit their money. This is not correct.
“We advise our valued customers and all stakeholders that Ecocash is a licensed mobile payment platform that enables customers to make financial transactions such as sending money, buying prepaid airtime as well as paying for goods and services within the confines of the law of Zimbabwe. EcoCash promotes safe and legal transactions but will not be held liable for any losses arising from the use of EcoCash to engage in illegal activities such as Ponzi schemes.”

Need for investors’ education
Market analysts have called on the SEC and the Nigerian Stock Exchange (NSE) to collaborate with market operators for a better structured public awareness campaign about illegal operators to avoid a repeat of what happened in 2008.
The Managing Director/ Chief Executive Officer, Crane Securities Limited, Mr. Mike Eze, said there is need for a better structured public awareness campaign to be jointly anchored by NSE, SEC and market operators for the education of shareholders and the protection of their interests, especially the small investors. Nigerians must be skeptical of any scheme that requires new investors to pay existing investors, he warned.
On what steps could be taken to avoid Ponzi schemes and other investment fraud, Eze said: “Whether you are a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hardearned money to an investment.
“When you consider your next investment opportunity, start with these global accepted five questions: Is the seller licensed? Is the investment registered? How do the risks compare with the potential rewards? Do I understand the investment? Where can I turn for help?”

In the light of the lessons learned from the financial crisis in 2008 and other climes, there is a strong requirement to strengthen regulators’ investor education/awareness function, especially for retail investors to enable them adequate knowledge on investments to avoid getting their fingers burnt again.


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