MARY FRANCEL D.

ABLAO INVESTMENT ANALYSIS

M 5:30- 8:30 PM

If it is too good to be true, it probably is. Investigate before you invest

On May 17 of this year, Baguio Midland Courier, a local newspaper, headlined an article
on Ponzi firms slapped w/ raps of 12 M. In short, another headline pertaining to an
investment scam which swindled millions of hard earned money of its recruited members. This is
just one of the many cases which we hear and read in the news, not only locally but this happens
worldwide. Victims ranges from an ordinary person, professionals and seasoned investors who
have something in common, their aim to make their money grow regardless of any reason or
purpose they have. Swindlers target this desire through offering a very enticing deal which they
know for sure wont be declined by their prospective victims.

So what is an investment scam? Where did it originated? What are the types of
investments frauds and how do they operate? What are the signals that an investment offer is a
fraud? and What are the ways to avoid getting engaged in fraudulent investment?. These are the
questions which will be tackled and answered in this write-up. Hoping that this may guide
someone who plans to invest their hard earned money.

Investment scam or Investment fraud is any scheme or deception relating to investments

that affect a person or company (Spam Laws). Investment scams can look and sound believable,
with smooth-talking salespeople, slick websites or sophisticated brochures and prospectuses
(FCA, March 2015). Investment fraud generally refers to a wide range of deceptive practices that
scammers use to induce investors to make investing decisions. These practices can include
untrue or misleading information or fictitious opportunities. Investment fraud may involve
stocks, bonds notes, commodities, currency or even real estate. The scams can take many forms-
and fraudsters can turn on a dime when it comes to developing new pitches or come-ons for the
latest fraud (FINRA, November 2015).

The most common forms of fraud and the largest and most successful scams are: Pyramid
Schemes, Ponzi Schemes, Pump-and-Dump, Offshore Investing, Advance Fee Fraud and Prime
Bank. There are many kinds of investment fraud we hear every day but they fall in any of the
common frauds mentioned. They all have one thing in common: Its too good to be true.

A true history of fraud would have to start in 300 B.C., when a Greek merchant name
Hegestratos took out a large insurance policy known as bottomry. Basically, the merchant
borrows money and agrees to pay it back with interest when the cargo, in this case corn, is
delivered. If the loan is not paid back, the lender can acquire the boat and its cargo. Hegestratos
planned to sink his empty boat, keep the loan and sell the corn. It didnt workout and he drowned
trying to escape his crew passengers when they caught him in the act. This is the first recorded
incident as of yet, but its safe to assume that fraud has been around since the dawn of commerce.

From the very first insider trading scandal in America in 1792 until the bubble burst in
1929, wherein both the public and the government were staggered by the level of corruption that
had contributed to the financial catastrophe, up to the creation of Securities and Exchange
Commission (SEC) or its equivalent regulatory bodies for each country, investment fraud still

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exists and cant be stopped. In addition, people are still the same since then, they ended up
falling for these booby traps, maybe because they just plainly dont think and are risk takers or
they know nothing at all.

This paper will focus on 3 forms of investment fraud namely: Get-rich-quick Schemes:
Pyramid Scheme and Ponzi Scheme, and Pump-and-Dump: Share Fraud and Boiler Rooms.

Get-rich-quick Schemes

Get-rich-quick schemes promise investors high returns or dividends not usually available
through traditional investments. While they may meet this promise to early investors, people who
invest in a scheme later usually lose their money. There are two scams under this, the Pyramid
Scheme and Ponzi Scheme. These two scams can also be called franchise fraud, multi-level
marketing or chain referral scheme.

Pyramid Scheme

As the name indicates, the pyramid scheme is structured like a pyramid. It typically starts
with one person- the initial recruiter- who is on top at the apex of the pyramid. This person
recruits a second who is required to invest a certain amount, which is paid to the initial
recruiter. In order to make his or her money back, the new recruit must recruit more people under
him or her, each of whom will also have to invest. If the recruit gets 10 more people to invest, he
or she will make a profit with just a small investment.

Further, the new people become recruiters and each one is in turn required to enlist an
additional 10 people, resulting in a total of 100 more people. Each of those new recruits is also
obligated to pay their investment to the person who recruited him or her. Recruiters get a profit
of all of the money received, minus their initial investment paid to the person who recruited
them. The process continues until the base of the pyramid is no longer strong enough to support
the upper structure, and there are no more recruits (Investopedia, November 2015).

Multi-level marketing (MLM) is one common form of pyramid scheme. MLM can be
legal if it involves being recruited in order to sell a product or service that actually has some
inherent value. Wherein as a recruit, you can make a profit from the sales of the product or
service, so you dont have to necessarily recruit more sales people below you. A pyramid scheme
MLM, will most likely sell a product with no independent value. The product could take the
form of report of some kind, for example, mailing lists. In this kind of pyramid scheme, you
would be required to recruit new members into the MLM in order to make a profit and keep the
MLM alive (Investopedia, November 2015).

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 The scheme cannot go on forever, even if all the
people in the world will join, there is a finite number of
people who can join the scheme. The fraud lies in the
fact that it is impossible for the cycle to sustain itself.
The most vulnerable are those who are toward the
bottom of the pyramid, where it becomes impossible to
recruit the number of people required to pay off the
previous layers of recruiters.

People are deceived into believing that by giving

money, they will make more money; however, no wealth
has been created, no product has been sold, no investment has been made and no service has
been provided.

One of the celebrated case of pyramid scam in the Philippines was the Aman Futures.
Aman Futures (Aman Futures Group) was an investment and privately held company based in
Malaysia with branches in the Philippines. It was reported that this company is a pyramid
scheme as declared by the National Bureau of Investigation (NBI) that duped some 15,000
people in Mindanao and Visayas amounting to 12- billion. The double your money was a
phrase being pitched to join the network. Manhunt for the head of the company was organized
while irate victims have ransacked an office rented by the company in Pagadian City.

Ponzi Scheme

The scheme was named after Charles Ponzi, who ran such plot from 1919-1920, who
guaranteed 50% return to investors in the US. However, much of the money he received was
used to pay dividends to earlier investors. The scheme collapsed when he was unable to attract
more money to pay investors who entered the scheme later.

Ponzi scheme is a fraudulent investment plan, however, it is not necessarily a pyramid,

which is hierarchical. In this scheme, a fraudster or hub collects money from new investors
and uses it to pay purported returns to earlier-stage investors, rather than investing or managing
the money as promised. Investors in a Ponzi scheme typically do not have to recruit new
investors to earn a share of profits. Ponzi schemes tend to collapse when the fraudster at the
hub can no longer attract new investors or when too many investors attempt to get their money
out- for example, during turbulent economic times.

The Madoff Scam is considered as the biggest investment scam in history. Bernard
Madoff of Bernard Madoff Investment Securities LLC took money from individual investors and
non-profit organizations but never invested the money. Instead, he took money from new clients
to pay his more established clients who wanted their money, thereby fooling them into thinking
that he was getting an unparalleled return on their investment. Meanwhile, he sent erroneous
balance statements to every investor so that it appeared that their money was doing well and, in
fact, multiplying in value. Over the duration of the scheme, $36- billion was invested, $18-
billion was returned to investors and $18- billion is missing.

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 In the Cordillera Administrative Region (CAR), Philippines, as many as 40 investment
companies in the region were under investigation for fraud by the Criminal Investigation and
Detection Group Central and North Luzon (CIDG- CNL) together with the Securities and
Exchange Commission (SEC) Baguio City office. Investors of these companies filed complaints
and it is estimated to have collected an aggregate amount of 12.462- million in the form of
investment. Majority of these companies offer high interest rates ranging from 24-40 percent or
double your money. In addition, these companies are licensed as a marketing business and they
do not have permit from the Department of Trade and Industry (DTI) and SEC to function as
Investment Company.

Pump-and-Dump

A scheme in which a fraudster deliberately buys shares of a very low-priced stock of a

small, thinly traded company and then spreads false information to drum up interest in the stock
and increase its stock price. Believing theyre getting a good deal on a promising stock, investor
create buying demand at increasingly higher prices. The fraudster then dumps his shares at the
high price and vanishes, leaving many people caught with worthless shares of stock. Pump-and-
dumps traditionally were carried out by cold callers operating out of boiler rooms, or through fax
or online newsletters. Share Fraud and Boiler Room is one of this scam.

Share Fraud and Boiler Rooms

Share Scams are often run from boiler rooms where fraudsters cold-call investors
offering them worthless, overpriced or even non-existent shares. Boiler rooms use increasingly
sophisticated tactics to approach investors offering them to buy or sell shares in a way that they
say will give investors a huge return. But in the end, victims are often left out of pocket-
sometimes losing all of their savings or even their family home.

Share fraud usually comes out of the blue, with scammer cold-calling investors after
taking their phone number from publicly available shareholder lists. But the high- pressure sales
tactics can also come by e-mail, post, word of mouth or at a seminar. These scams are sometimes
advertised in newspapers, magazines, or online as genuine investment opportunities. They may
even offer a free research report into a company in which you hold shares, or a free gift or
discount on their dealing charges. You will often be told that you need to make a quick decision
or miss out on the deal. The scammers might also try to sell you shares in a company you have
never heard of, often because it does not exist. If you buy these shares, it is likely you will be left
with a worthless investment.

In the United Kingdom (UK) victims of share fraud lose an average of 20,000 to this
scam averaging to as much as 200- million each year. Even seasoned investors have been
caught out, with the biggest individual loss recorded by the police being 6-million.
Insider trading is often involved in this type of scam. Insider trading is legal when corporate
insiders- officers, directors, and key employees- buy and sell shares of their company. It becomes
illegal when corporate insiders violate their companys confidentiality and secretly share or sell
private information to an outsider. The outsider will use the information not available to the

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public to buy or sell shares of the company to make a decent amount of profit. Illegal insider
trading often gets pinpointed as the cause for the higher cost of capital for securities issuers, thus
lowering overall economic growth.

In 2007, the SEC (USA) successfully sued Qwest Communications Internationals former
CEO Joseph Nacchio for masterminding a $3- billion financial fraud scheme, and for benefiting
from inflated stock prices and insider trading.
While CEO, Nacchio continually told Wall Street that aggressive revenue targets would
be reached even as the company was tanking. He earned $52 million selling stock with the
knowledge that it was headed for disaster. Nacchio was convicted of 19 counts of insider trading
and ordered to pay $19 million in fines as well as return the $52 million in illegal stock trading.
In the Philippines, Francisco Borromeo, president of Asian Capital Equity Inc (ACEI), was the
first stock broker who was found guilty of defrauding his clients in under the Securities
Regulation Code (SRC), the first conviction secured by the government almost 13 years after the
law was enacted.

Borromeo was charged of five counts of fraudulent transactions from 2000 to 2003 for
selling and trading the shares of his clients without their knowledge; using fictitious and dummy
account in selling of securities , all to the prejudice of his clients and the investing public.

Investment fraud happens anywhere and the victims can be anybody. Investment scams are
often so professional, slick and believable that it is hard to tell them apart from genuine
investment opportunities. Forbes Magazine provided 12 warning signs that an investment is a
scam.

The very first step needed in every investment decision is to pay attention. In both good
times and bad, any investment can falter for legitimate business reasons. But no one likes to
discover they have become the victim of a scam. You have to watch out for the warning signs
that the enticing opportunity you are considering warrants extreme caution.

1. High returns are "guaranteed."

Run--don't just walk away from any pitch that uses words like "guaranteed," "sure thing"
or "no risk" while claiming a sustained return much in excess of what you can get with T-
bills. Big returns come only with big risk. If it's a sure thing, why isn't the promoter on
the Forbes 400 list with Berkshire Hathaway's Warren Buffett.

2. Fellow Baptist is pitching you.

Or a fellow Lithuanian, African American, Mason, Orthodox Jew, Rotarian or whatever.

Beware any appeal that seeks to leverage a shared characteristic with you such as race,
religion or social membership. That can be a tip-off to affinity fraud, premised on your
letting down your guard because youre with a spirit you think is kindred.

3. A stock went public in a reverse merger.

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 It's perfectly legal for a private company to become public by merging with a dormant
public company. The problem is this circumvents many protections of a traditional initial
public offering, such as an underwriter on the hook if factual promotional statements
should prove false. The current wave of collapsing Chinese stocks is being led by fallen
reverse mergers.

4. There's a claim of "breakthrough technology."

Game-changing inventions do come along. But they are not likely to emanate from that
small, unknown company you are pondering. Look to see if that new technology is just
licensed from another firm and still unproven.

5. Numbers are hard to come by.

A surprising number of supposedly public companies dont file extensive financial

statements regularly with regulators. Many of them are listed on sketchy exchanges like
the Pink Sheets. Are such companies really where you want to invest your retirement or
college money?

6. Investment methodology makes no sense or is unexplained.

Ponzi-man Bernard Madoff fleeced investors of billions after refusing to explain how he
was able to generate excellent steady returns in both good and bad times. Dont accept
silence for an answer. This applies more to investments with money managers.

7. Who's that auditor?

Despite managing $65 billion (on paper), Madoff was audited for years by a three-person
accounting firm headquartered in a strip shopping mall. A big, well-known auditor is
certainly no guarantee that an investment will work out, but it does reduce the chance of
outright fraud.

8. A long-running offer isn't registered.

State and federal law permits sale of certain securities that haven't been registered, or
subject to extensive disclosures, so long as the number of investors is below a certain
number. But that's probably not the case if the promoter has been running his campaign
for years.

9. Act now or else!

Beware any investment in which you are pressured to hand over money immediately. It's
often a ploy to keep you from doing research or consulting with others who may be
knowledgeable. If you are looking at the long run, timing isn't that important.

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 10. Your money is going overseas.

Investing internationally makes a lot of sense. But sending your cash to some foreign
address you know nothing about does not. It's an added level of unneeded risk.

11. Solid third-party skinny is elusive.

In this era of Google and other search engines, it's easier than ever to research an
investment opportunity. But stop if all your finding is favorable information put out by its
promoters--who likely are getting a cut of whatever comes in.

12. It sounds too good to be true.

It's an old standard, but one still very valid. To put it another way, use some common
sense.

Internet is the con artists most attractive marketing tool almost everywhere in the world,
for: It is a global borderless trading environment, it offers instant access to 60 million people,
con artists can be anonymous through the use of fictitious names, multiple aliases, remailers,
coffee shops and libraries with internet access, state and local governments have limited
resources and defined jurisdictional boundaries while con artists can operate from anywhere with
the most modern technologies.

It is very important to be prudent in every decision and actions you take especially when
it involves your hard earned money. Yes, the law can provide thousands of regulations and
provisions protecting the right of the victims but the truth is, the justice served is just too late and
you have lost enough, your money and time as well as enduring the psychological effects of
knowing you have been fooled. Sometimes, these fraudsters even escape and leave the victims
nothing but worries and indebtedness, if they even loaned the amount they invested hoping that
their money will receive high returns. I have witnessed such scenarios in my workplace and the
result was devastating. There was a case wherein she borrowed the money she invested,
unfortunately she was one of those people who were already at the bottom of the pyramid and it
happened that a few months after she invested, the company was discovered to be one involved
in pyramid scam or Ponzi scheme. Now, she received nothing and it takes her time and effort of
going back and forth in that companys office hoping that at least 50 percent of her investment
will be given back. Rather, she ended up as one of the complainants who filed a case in the
CIDG against this company.

The lesson here is: if it is too good to be true, it probably is. Investigate before you invest.
Investors hungry for market prowess and success look for quick ways to bolster their portfolio
earnings. The problem is, many high-return opportunities are actually investment scams.

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 Millions of smart and wealthy investors have fallen victim to these investment scams. Its
a club you dont want to join. Be careful with your money, be thorough choosing any wealth
management advisors and be weary of investing opportunities that seem too good to be true.

References:
12 Warning Signs An Investment is a Scam (n.d.). Forbes Magazine. Retrieved November 27,

2015, from http://forbes.com

Aman Futures Group (n.d.). Retrieved November 30, 2015, from https://en.m.wikipedia.org
Avendao, C. (2013, March 31). First stock broker found guilty of securities fraud fine

2M.Philippine Daily Inquirer. Retrieved from http://business.inquirer.net

Beattie, A. (n.d.).The Pioneers of Financial Fraud. Retrieved November 29, 2015, from

https://www.investopedia.com
BMC Release (2015, May 17). Ponzi firms slapped w/ raps for P12 M fraud. Baguio Midland

Courier. Retrieved from http://baguiomidlandcourier.com.ph

Fontanilla, G. (2015, May 12). 40 investment scammers in Cordillera-SEC. Sun Star. Retrieved

form http://www.sunstar.com.ph
Lipbgy (2011, August 26). The Biggest Wall Street Scams of All Time. Retrieved from

http://www.investinganswers.com
Share fraud and boiler rooms (2015, January 30). Retrieved from http://fca.org.uk
Types of Investment Fraud (n.d.). Retrieved November 30, 2015, from

http://www.saveandinvest.org

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