by TIMI NUBLA

SEVERAL MONTHS ago, a college friend invited me to join a new investment fund that promised tremendous returns. The firm was supposedly an international company, and promised an interest rate of four percent — a day. It promised even higher returns if one were to recruit more investors and form his own “network.” Suspicious, I asked about the company’s investment portfolio and track record. But my friend had little information about these things.

I tried to warn him that the investment that he was getting into, and for which he was recruiting friends, had all the signs of a scam. But the lure of a huge and quick profit was apparently far more enticing than my unsolicited advice, and my words fell on deaf ears. A few weeks later, the same investment company was exposed in the media as another investment scam. Some investors had begun to complain about being unable to claim their profits nor withdraw their capital.

The Securities and Exchange Commission (SEC) says that 2003 still holds the record for being the year in which the most number of cease-and-desist orders (18 in fact) were issued against questionable investment companies and boiler-room operations. But last year saw investment fraud in the headlines once more, much to the consternation of state regulators, who also say the advent of Internet-based scams have made their jobs even more complicated.

SEC Corporate Secretary Gerardo Lucban laments that people in developing countries like the Philippines — which offers fewer investment options compared to other nations and has a capital market that is also less mature — are the easy targets of such investment con jobs. Yet while one regulator concedes that there is a need for a more aggressive information campaign against bogus investment schemes, Lucban says it’s not as if Filipinos are really that clueless.

A case in point, he says, is last year’s FrancSwiss scandal, which counted even celebrities among its victims. Lucban says that when they issued a cease-and-desist order against the company, which was allegedly running a Ponzi scheme via the Internet, they received calls from irate investors.

“They were blaming us because they failed to cash in first,” he says. These investors probably knew from the start what they were getting into, he adds, but went ahead and parted with their money anyway because they figured that if they got in early enough, they could still collect their profit and run before the scheme fell apart.

“They’re not really that ignorant,” says Lucban.

GREED, OF course, is nothing new and is hardly the monopoly of desperate and not-so-desperate Filipinos. Indeed, it was what Charles Ponzi counted on way back in the 1920s, when he began soliciting investments from individuals, promising them each as much a 50-percent return in just six weeks. An Italian immigrant in the United States, Ponzi traded postal coupons by buying them cheaper in other countries, and selling them at a profit in his U.S. home base. But when he started to have more investors than coupons to sell, Ponzi began paying off the old investors through money from the new ones, until it reached a saturation point and he was kicked off to jail. Today scams that follow his “pyramid” principle of false profits are still called Ponzi schemes.

A 2002 SEC advisory explains that under a “Ponzi” scheme, a promoter solicits investment money, promising returns that are much higher than what the banks offer. At the end of the specified period, the promoter pays the principal and the high interest, encouraging the investor to reinvest his money, instead of claiming his profit. The investor may be further enticed with a higher interest rate offer if he recruits other people. The promoter is then able to collect a pool of money from which he is initially able to pay the interest income of the original investors. But having no genuine investment to speak of, the promoter cannot continue the scheme for long, and will abruptly terminate the operation by suddenly disappearing, or claiming that the investment went sour.

The SEC says the first recorded pyramid scam in the country was the one perpetuated by fertilizer manufacturer-turned-movie producer Sofronio Blando in the late 1970s, through his conglomerate, Agrix. The next big investment scandal would come some 15 years later, and would have banks among those tricked into a scheme hatched by a bevy of young women. The Bancap (Bank Capital Development Corporation) women managed to run away with P2.5 billion by selling the same treasury bills over and over again to investors who were promised interest that reached 12 percent.

All sorts of investment scams have popped up since then. From 2000 to 2005 alone, the SEC issued some 51 cease-and-desist orders to companies running fraudulent operations. This is despite the enactment of the Securities Regulation Code (SRC) in 2000, which meant additional penalties for those found guilty of perpetrating investment scams. (These penalties include imprisonment of seven to 21 years, and a fine of P50,000 to P5 million, to anyone selling unlicensed securities. This means that even if a company is registered with the SEC, it still needs to show a prospective investor a secondary license to sell any form of investment instrument.)

State regulators say the dubious investment “offers” vary from the sale of bank notes and gold certificates, to pseudo deposit accounts, to direct investments in a company, and yes, pyramiding. Among the common ingredients in the various schemes are the promise of extremely higher rates than those prevalent in the market, increase in earnings through the continued recruitment of new members, and ambiguity as to where and how exactly the money was being invested.

Lucban admits that new technology has made it more difficult to trace these bogus investment companies. “It has become harder to trace the root because you’re dealing with faceless criminals,” he says. This is why, he says, the SEC has to work closely with the National Bureau of Investigation (NBI), which has the technology to track emails and get more information on website owners.

SEC Director for Compliance and Enforcement Hubert Guevarra also notes that under the SRC, a “magic number of 20 complainants” is needed before the SEC can file against an investment company for the illegal sale of unlicensed securities. Less than that number, he says, and it’s considered an “isolated transaction,” which means while the individual can file a case against the offender, the SEC can’t. Guevarra also highlights the need to strengthen the SEC’s “visitorial powers,” explaining that at present, companies can refuse entry to SEC personnel springing a surprise visit.