High return investment – Buyer beware!

Hardly a day goes by without Nigerians lamenting after being duped by some sort of “get-rich-quick” investment scheme. These days, the social media is replete with new schemes claiming to be able to repay double an investor’s money within just a few hours! They back up their claim with testimonies of previous investors who display bank alert text messages as purported “proof” that they were paid double their investment as advertised.

Paradoxically, the introduction of new schemes has become as regular as the collapse of existing ones! Schemes offering stupendous returns on short-term investment are not new. They date back to the 1920’s when Charles Ponzi promised a previously unheard of return of 50 per cent return on investment  in 45 days. He never invested their money in anything, but simply used whatever was collected  from new investors to pay interest to old investors. When his scheme eventually collapsed investors had lost the equivalent of $250 million in today’s money.

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“Ponzi Schemes” are named after him. They are a means of defrauding people by promising to pay unsustainable phenomenal interest on deposits. The promoters do not engage in any legitimate business, it’s referred to as “swindle networking” or a case of robbing Peter to pay Paul. As long as Ponzi schemes can recruit new investors at a healthy rate, they will keep going. Their single common denominator is that they use well known political, religious, or entertainment personalities to convince the public to part with their money. Regrettably these personalities advise people to invest when the scheme is initially paying out, only to turn around and denounce the promoters when people lose money after it eventually collapses, and deny knowledge of any scam or wrongdoing.

The most recent notorious Ponzi scheme in Nigeria was the Mavrodi Mondial Movement (MMM) which promised a return of 100 per cent within 30 days!. After only 18 months of arriving in Nigeria, it crashed as anticipated by financial experts. Ponzi schemes are illegal because investment can only legally be solicited by banks, investment houses and bodies established by law to collect money from the public with the promise of repayment with interest.

Sections 58(1) and 59 of the Banks and Other Financial Institutions Act state clearly that “no person shall carry on financial business in Nigeria other than insurance and stockbroking, unless the company is duly incorporated and holds a valid license granted by the Central Bank of Nigeria.  Although investment schemes without a license are illegal, they continue to operate under different guises, avoiding regulatory control and collapsing while the promoters disappear with the funds. Regrettably despite being fully aware of the fraudulent nature and risk of participating in such schemes, Nigerians still try their luck. This is understandable because a common feature of such schemes is that investors who deposit at the early stages are likely to be paid. Their payment is used to entice many others who will never be paid. It is in  effect a game of chance, which any person can gamble on.

Ponzi schemes proliferate  because if caught, the penalty is negligible, and depositors have no legal claim to their money. Operators of such schemes cannot be taken to court by investors because Ponzi schemes are illegal, therefore, the monies invested in them cannot be the subject of any lawsuit. It is an elementary principle of law that the courts cannot perpetuate an illegality. Where a contract is expressly forbidden by statute, its illegality is without question and the courts are forbidden to enforce it.

It is pitiful to recall the number of Nigerians who have committed suicide because they invested heavily in such schemes and lost their money, only to belatedly understand that they had no legal redress and nothing could be done to get their money back. The bottom line is that Ponzi scheme investors risk their money at their peril. A bill seeking a 10-year jail term for promoters of such schemes has been introduced in the House of Representatives. This is definitely an improvement on the Investment and Securities Act (ISA) which though it makes Ponzi schemes illegal, sadly only prescribes negligible fines of between N100,000 and N500,000 for those who may have duped people of millions if not billions!

The Securities and Exchange Commission (SEC) and Economic and Financial Crimes Commission (EFCC) must brace up to the task and carry out enlightenment programmes to warn the public against such schemes. They must explain that it’s not an “investment”, it’s a gamble! The promoters who in many cases are involved in advance fee fraud must be questioned as to how they make the money to pay such outrageous interest. Legal investments are used to buy stocks, bonds, assets, equipment and so forth for long term gains based upon gradual appreciation of investment.   Trading on the other hand has a shorter time horizon of weeks if not days, but certainly not hours! Whether investing or trading, the person parting with the funds knows exactly what is being traded or invested in. Ponzi schemes can be identified because “investors” are never told what exactly they are investing in, only that they will be paid extraordinary interest within a few hours! The only advice which can be given to those who are considering parting with money for a high yield short-term investment is buyer beware, because “a fool and his money are soon parted”.