January - February 2008
Mad over money

Beware of those false profits

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.

GUEVARRA INSISTS, though, that the Philippines is not doing poorly in enforcement compared to neighboring countries. He says that in a recent regional conference, he discovered that the Philippines had been able to detect and stop the operations of such recent Internet-based scams like those of FrancSwiss and Performance Investments Products Corporation (PIPC) ahead of other countries. Guevarra declines to name those countries in deference, he says, to his counterparts there. But he credits the quick action of the Philippines to the existence of the National Law Enforcement Coordinating Committee (NALECC), which has various government agencies meeting monthly and thus coordinate anti-crime and anti-fraud efforts.

Guevarra cites the PIPC case, which had the NBI immediately conducting surveillance work that led to the identification of the systems administrator and the formal filing of a lawsuit. He says surveillance work is still ongoing on FrancSwiss, although it has already been slapped with a cease-and-desist order.

Guevarra adds that the perception that nothing has been done about previous investment fraud cases is incorrect. Cases from early 2000 have resulted in convictions under the offenses of estafa and syndicated swindling, he says. The principal in the Multitel International investment scam, for instance, is still in jail, he points out, while cohorts in the Matteo Management Group case are also behind bars, though its principal remains at large. As far as he knows, adds Guevarra, some other cases were resolved through settlement with the complainants.

Lucban, meanwhile, says that the SEC currently has “four to five” pending cases before the Department of Justice against companies that were involved in investment fraud, apart from the charges of estafa and swindling filed separately against them by the NBI. Yet while he says current laws are sufficient, constant vigilance is still required to detect the new forms of investment scams. “The rules are in place,” he says, “but the key is monitoring.”

Investment managers also say that detecting a scam does not require much experience or expertise; all it takes is good old common sense. “If something sounds too good to be true, it usually is,” admonishes one fund manager. He warns that if an investment scheme offers to pay a much higher interest rate than what a bank would slap on a loan, then one should be on guard.

“Common sense comes in because you must ask why that entity would want to incur a higher cost in borrowing your money when they can get it for much less elsewhere,” says the fund manager. He says that as a basic rule of thumb, short-term investments usually yield lower and not higher returns. This is because responsible investment institutions absorb all the risks for its investors.

First Grade Investment Holdings Managing Director Astro del Castillo, for his part, says it is wise for an investor to “Google” a company and check its past performance, the types of instruments it invests in, and its track record. Or one can just stick to companies that have had their performance written about and already have known track records. Business papers publish and regularly make a comparison of the performance and rates of return of accredited mutual fund companies.

FOR THOSE with P50,000 and up to spare, fund managers recommend looking into mutual funds. Here, the money of small investors are pooled together and invested in a wider variety of financial instruments, which they would ordinarily not have access to if they were investing on their own because of the high investment amount required. Especially in these times when both spouses are busy working and earning for the family, a mutual fund can help couples decide where to invest their money, and monitor the investment for them, while they continue to work and increase their savings.

While time deposits deliver an average yield of two percent to three percent per annum, mutual funds give an average return of three percent to 20 percent a year, depending on the amount of risk one is willing to take. The basic rule is, high-risk investments like stocks, offer the highest possible returns. But with it comes the uncertainty of how much profit one could make, and the potential to even lose some of one’s investment.

Three basic types of mutual fund investments exist:

  • The Bond Fund, wherein one’s money is placed in government securities and corporate bonds. This investment is risk-free and offers a fixed rate of return (like a time deposit, only the rates are higher), but also offer the lowest yield;
  • The Equity Fund, which is the riskiest and most uncertain among mutual funds, but also historically offers the highest yield. Here, one’s investment is placed in blue chip and some second-line stocks, whose performance would depend on the companies’ earnings for the year and the performance of the Philippine Stock Market. Since the stock market could be volatile and uncertain, and corporate earnings vary, one’s yield is also uncertain and could even result to a loss. (First-time stock market investors are actually advised to start with an equity fund, which have fund managers who are more knowledgeable about which companies to invest in, rather than putting one’s money directly into the stock market.);
  • The Balanced Fund, wherein fund managers divide one’s investment between bonds and stocks. It is suited for those who have some appetite for risk, but don’t want to go all-out either.

Paul Joseph Garcia, president of the Fund Managers Association of the Philippines, says the recent decline in interest rates has lowered the expected profit from bond funds. “Unlike the double-digit returns of the past two years,” he says, “we expect the average returns going forward to likely be in the mid to high single digits.” By comparison, he expects profit from equity funds to be in the mid-teens in the medium term, and forecasts that it would be the best performer in terms of returns in the next three years. Annual returns from a balanced fund will likely be in the lower teens at present, he says, adding, “Assuming equal proportion, the returns would be somewhere at midpoint of a bond fund and an equity fund.”

DEL CASTILLO recommends keeping 30 percent of one’s savings in a time deposit, for easier access in case of emergencies, 20 percent in equities, and 50 percent in a balanced fund. Garcia prefers to offer two investment options for the regular investor: The first option is to put 30 percent of one’s investments in an equity fund, and 70 percent in a fixed-income investment like a bond fund. The second option is to put everything in a balanced fund, and allow the fund manager to appropriately apportion the funds between fixed income and stock investments.

To ensure savings for the future, Garcia suggests setting aside a portion of one’s income each month for savings and at the same time investing at a regular and consistent frequency. He also says one should invest for the medium to long term to be able to ride out the short-term volatilities. But he stresses the importance of keeping one’s retirement fund intact as much as possible. “You will thank yourself later in life,” he says.

Yet while investments like mutual funds and the stock market give higher returns, experts say it is still advisable to avail of pre-need and pension plans, to ensure that there is money set aside for specific purposes. Many Filipinos have become wary of such plans after a few pre-need companies encountered financial debacles, but fund managers say that today’s pre-need products have “evolved.” They explain that the previous education plans failed become these had offered “open-end liability,” guaranteeing tuition in selected colleges regardless of inflation and investment yields. These failed to anticipate that tuition would rise as fast and as high as they did, and so these companies’ trust funds were eventually unable to earn the expenses required by their clients.

Garcia says, “These new products will now help you save and maximize returns, but they will not promise to pay for the full costs of your child’s future education expense or your pension requirements.” He does caution investors to put their money only in fixed-value plans, or those whose benefit amount is already set and known, the moment the plan is issued.

An investor can also learn more by or to make an effort to learn more by reading investment guide books, and getting referrals from people who may already have mutual fund investments. One can also ask banks about the new investment instruments available.

SEC’s Guevarra himself says that education is the best defense against investment scammers — even as he rues the fact that his institution lacks the budget to improve its information campaign. “One thing that has struck me is that regulators sill have to disseminate information to the public,” he says. “This requires resources we don’t have.”

The most important thing for an investor to remember, though, is not to be greedy, as this has been the downfall of many. This also explains why people are easily enticed by “get-rich-quick” schemes that leave them weeping in the end. As one fund manager puts it, “While everyone wants to get rich, we must understand that building wealth is generally not an overnight program unless you have the extreme good fortune of winning the lottery. Think of building wealth like planting a tree. It takes time and sufficient care to make it bear fruit.”