Scam or just a bad investment decision?

Luis Manzano, a well-known actor and TV host, has recently made headlines for the wrong reasons. He and Flex Fuel Petroleum Corp. have been accused of fraud by 50 individuals who filed separate estafa complaints against them.

The investors claim that they were misled by the alleged false promise of receiving a monthly income of ₱70,000 for investing ₱990,000 in the company. Manzano denied the allegations against him, stating that he too had suffered significant financial losses from the business in question and had divested his interests in the company.

The case is currently under investigation by the NBI, and we’ll leave it at that. This, however, reminds me of situations where individuals who have suffered financial losses due to bad investment decisions come to the prosecutor's office and accuse the other party of fraud.

It is very important to distinguish between a genuine scam and a mere case of bad investment decision. While promises of high returns and persuasive language may be indicative of fraud, they are not always sufficient to prove that a transaction is fraudulent.

One may be guided by the advisories of the Securities and Exchange Commission against investment scams. During the previous year, the SEC published approximately 119 advisories on its website, cautioning the public about companies that purportedly seek investments from the public without proper authorization. Several of the flagged companies are operating online.

These SEC advisories may also guide us in distinguishing between a crime of estafa and a simple case of catastrophic loss of money resulting from a poor investment decision. As the SEC has pointed out quite often, investment scams often use sophisticated tactics to lure unsuspecting investors with the promise of high returns with little or zero risk.

Most of these scams have the characteristics of a “Ponzi scheme” where money from new investors is used in paying “fake profits” to prior investors. Scammers may also use high-pressure sales techniques to prompt investors to act swiftly. This is wholly different from a situation in which someone makes lofty commitments to business partners based on a flawed business plan, without intending to defraud anyone.

In sales transaction, we have what we call “caveat emptor” or "let the buyer beware," which means that you buy at your own risk. Said concept may also be applied to investing. A potential investor should conduct thorough research and ask pointed questions about the business before deciding to invest his hard-earned money.

We don’t want to waste precious government resources by using the prosecutorial arm of the state as some sort of a “collection agency” by people who made bad investment decisions borne out ignorance or greed or both.

I know that in the Philippines it is quite hard to trust anyone with our hard-earned money. In my case, although I make it a point to set aside an emergency fund to prepare for life's unexpected events, I prefer not to leave the majority of my savings idle in a bank.

Instead, I choose to invest in assets and the stock market. But I do find myself taking a long time to decide where to invest my savings. While I have considered investing in a friend's business venture, I am hesitant to do so, as I don’t want to harm our friendship in case the business goes under. And ironically as a lawyer, personally I am not the litigious type. I prefer to just walk away from a bad deal or untrustworthy people, licking my wounds, learning my lessons, and never looking back.

“We don’t want to waste precious government resources by using the prosecutorial arm of the state as some sort of a “collection agency”.”