Waging a war on investment scams

This is a story of fraud, crime and stolen hard-earned money and how the story happens again and again in the Philippines.

There was once a woman who promised her friends she would grow their money. They were hesitant at first but soon abandoned their apprehensions and gave in.

The woman assured her friends she put her family’s hard-earned life savings in the investment company that her father put up.

Days passed but the promises were not fulfilled. One strange morning, her father was found dead, his body almost unrecognizable. The woman’s friends learned about this but showed no sympathy.

They demanded to get their money back. But the woman said she was a victim herself. The victims turned to the police but to no avail. In the end, one of the victims ended up killing the woman.

These are scenes straight from the Filipino movie “Honor Thy Father,” which essentially revolves around a pyramiding scam and other forms of deceit.

But unfortunately, it is not just happening in the movies.

In real life, the Philippines has become a one big scam country and authorities are racing against time to address the worsening problem.

Take the case of Jose Cecilio “Jay” Peñaflor.

It was a simple text message from Jose Cecilio “Jay” Peña- flor, a classmate way back in college that enticed Janis Ann Cruz to invest in the Philippine stock market.

Peñaflor is the former employee of the Philippine Stock Exchange who is at the center of an estimated P300-million investment scam for duping several individuals who unwittingly trusted him with their savings thinking that the money would be invested in stocks.

Described by PSE president Hans Sicat as having a “silver tongue,” Peñaflor used to head the Exchange’s Market Education Department. He was illegally dismissed in 2013 but continued to hold free stock market investment seminars. He described himself in the seminar invites as a “certified securities specialist, economist and former head of the PSE Market Education.”

For Cruz, it was one of many text messages about employee stock purchase plans (ESPP) that convinced her.

Peñaflor sent what appeared to be a generic text message to many people on available ESPP from different listed companies, some of them blue-chip stocks.

“First come, first served as usual: ABS- CBN, 72,000 shares. Offer price is P40 per share, current price is P60.3 per share. Price target is P75 per share. Lodgement period is 12 to 15 trading days,” according to a text sent by Peñaflor on Sept. 2, 2015 to people who would later become his victims.

An ESPP is a tax efficient means by which employees of a corporate can purchase the corporation’s stock. This is often given at a discount. Employees purchase the stock through payroll deductions, which usually build up between the offering date and the purchase date.

While not entirely impossible, access to an ESPP the way Peñaflor dangled it to investors wasn’t really realistic.

“It’s the work of a marketing genius,” an investment banker told The STAR.

The banker said the individual employees can indeed sell their ESPPs but it was impossible for Peñaflor to have access to so many employees at any given time for him to be able to sell such ESPPs to investors.

“He would have had to access so many employees in all of these companies and that is impossible,” the source explained.

Different types of investment scams

In the end, regulators concluded upon their investigation that Peñaflor employed a Ponzi scheme.

“Clearly this is a Ponzi scheme,” said PSE’s Sicat when the scandal broke.

Cases filed against Peñaflor are still pending in various courts. As of this writing, none of his victims have been able to get their money back.

Ponzi

It’s also called a “Rob-Peter-to-Pay-Paul,” scheme.

A Ponzi scheme is named after Charles Ponzi, an Italian businessman in the US and Canada who became known as a swindler. He was the first to introduce the fraudulent investment scheme where the operator, an individual or organization, pays returns to its investors from new capital paid by new investors, rather than from profit earned through legitimate sources.

In Ponzi schemes, investors are enticed with unusually higher returns than other investments.

At the start, these schemes begin as a legitimate business, until the business fails to achieve the returns expected.

This is because the promise of high returns requires an ever-increasing flow of money from new investors.

Ponzi’s original scheme was based on the arbitrage of international reply coupons for postage stamps, however, he soon diverted investors’ money to make payments to earlier investors and himself.

The scheme is based on fraudulent investment management services. In this scheme, investors contribute their money to a portfolio manager who promises them a high return. The money for these so- called high returns will come from incoming funds contributed by later investors.

The scheme is fraudulent because they are merely transferring funds from one client to another and do not really do real investment activities.

Aside from the Ponzi scheme, there are other types of schemes. One of which is is the pyramid scheme.

The two methods share similar characteristics in which unsuspecting individuals are fooled by investors who promise extraordinary returns.

In contrast to a regular investment, these types of schemes depend on the number of investors.

Pyramiding

A pyramid scheme is structured in a way that the initial recruiter must recruit other investors who will also commit to recruit others and so on. Usually, the incentive for recruitment is that they will have the right to sell a particular product.

Each investor must pay the person who recruited them for the chance to sell them. The recipient, in turn, must share the proceeds with those at the higher levels of the pyramid scheme.

Hype and dump

Another scheme that also occurs in the Philippines but is not always on the radar of the regulators is the so-called hype and dump scheme.

In these schemes, scammers promote an incredible deal on a low-priced stock. As more and more investors buy shares, the value of the stock rises sharply.

Once the price hits a peak, the scammers sell their shares and the value of the stock plummets.

Forex trading

SEC Enforcement and Investor Protection Department director Jose Aquino said another scam that is becoming rampant nowadays is foreign exchange trading.

“For the foreign exchange, we’ve also received complaints about entities trying to get investors. They trade the dollar and they promise people certain amounts in return. One was promised that they would be given $500. There is a promise of a return that is questionable,” Aquino said.

The SEC is already working with the National Bureau of Investigation (NBI) to go after these entities, which usually do their transactions online.

SEC chairperson Teresita Herbosa said such transactions are fraudulent because foreign exchange must be coursed through the banks.

Herbosa said there are several types of investments scams, which have been victimizing investors.

Individuals engaged in scams have become more sophisticated and the Philippines has become a mecca for these individuals given the continued economic growth in the country, the rising middle class affluence and the growing penchant for easy money.