Guarding against investment scams

AMAN SCAM BRAINS FALLS Aman Futures founder Manuel Amalilio, whose investment scheme duped some 15,000 Filipinos of about P12 billion, was arrested in Kota Kinabalu on Jan. 22. Five Aman Futures directors—(from left) Wilanie Fuentes, Naezelle Rodriguez, Leilan Lim Gan, Lurix Lopez and Eduard Lim—have surrendered to the NBI. Photo: NIÑO JESUS ORBETA

One of the frequently asked questions regarding investment scams is: Why do people continue to fall for such scams, despite numerous education or financial literacy campaigns, notices, advisories, alerts and warnings from public and private organizations as well as the media?

While many think it is the victims’ fault because of their alleged greed, insofar as regulators like the Securities and Exchange Commission (SEC) are concerned,  the ones to blame are none other than the criminally liable namely, the  scammers, con artists, defrauders and swindlers.

From time immemorial, there have been people able to make other persons’ dreams appear close to becoming a reality. Indeed, a scammer is a very talented person.

Firstly, he knows what the other person’s dream is. Next, he makes the latter believe he has the capability and resources to make that dream come true.

Enabler of dreams

Further, he is able to convince the other person to part with his money on his mere say-so. The scammer can even make the prospective victim feel guilty about passing up the opportunity to realize his dream if he does not invest immediately.

In sum, a scammer is an enabler of dreams. And, for as long as people dream and want to see their dreams come true, there will be victims of investment scams.

Since merely warning the public not to fall for investment scams may not be that effective, how then can the government of which the SEC is a part, be able to stop investment scams from proliferating like unwanted fungus?

At the early stage of a scam, it is almost impossible for government to step in, much less, stop people from becoming victims. Worse, after the scam has achieved initial success with many victims falling prey, the scammer is emboldened to dupe more people.

He can usually count on the victims not to complain or report his operation to the authorities. In fact, even after they realized that they had been had, the victims would choose to wait, relying on the scammer’s false promise that they would get their money back if they didn’t tell the police.

Word of mouth

A scammer’s promise of high returns is spread by word of mouth. Early victims, who received part of the promised high return, tell their friends and relatives about the investment gains. The result is a “network” of related victims bound by the common expectation of receiving what was promised them.

If anyone does decide to report the matter, he can go to the Department of Trade and Industry, the police, the National Bureau of Investigation (NBI), the Department of Justice (DOJ), the SEC, the local government or the media.

The SEC, upon receipt of any tip, complaint or referral about a possible investment scam, has to determine whether or not (1) the operation involves the sale of a security; (2) the scammer is duly licensed to sell securities; and, (3) the security has been registered with the SEC.

Definition of security

A security is a share, participation or interest in a corporation or in a commercial enterprise or profit-making venture, and is evidenced by a certificate, contract or instrument whether written or electronic in character (Sec. 3, Securities Regulation Code [SRC]).

Thus, the SEC has to look for that written or electronic evidence of a security. If no such primary evidence can be found, the commission may rely on someone’s sworn statement describing the security subject of the scam as well as the modus operandi of the scammer.

Investigation, complaint

However, that someone must have personal knowledge of the facts. Needless to say, a victim is the best person who can provide the initiatory statement upon which further investigation may be conducted and the proper complaints filed.

Given that none of the victims will readily complain against the scam, the SEC will have to initiate, on its own, the investigation of the reported scam.

Initially, the SEC will search its own corporate database to determine whether or not the scammer is using a corporation to perpetuate his unlawful activity. The articles of incorporation contain the names and addresses of the incorporators, while the general information sheet or financial statements and other submissions may contain other particulars.

Enforcement agencies

Where, however, the scammer has not incorporated, the SEC will have to gather facts from the field. In either case, the SEC coordinates with law enforcement agencies to conduct its investigation. This is not to discount the possibility that the other agencies are already conducting their own parallel investigations.

The investigation, whether by the SEC or a law enforcement agency such as the Philippine National Police or the NBI,  entails the surveillance of the scammer’s premises, covert operations such as entrapment, following up leads, interviewing persons of interest and the like.

All this takes time. How much time may depend on the security measures that the scammer may have taken precisely to prevent interference from law enforcers and regulators.  In a number of instances, the scammer’s group is heavily armed and holds office in impenetrable places. Thus, there is great difficulty in completing the investigation.

If the facts gathered indicate that there is reasonable basis to suspect a scam operation, the SEC may issue an advisory first and then a CDO (cease and desist order) or both advisory and CDO  simultaneously, depending on the likelihood that such operation involves the sale of unregistered security, the lack of a permit to sell the same, and the fraudulent nature of the transactions.

Warning to public

An advisory is an alert or warning addressed to the public. The SEC will post this on its website, disseminate the same to its extension offices, all government agencies concerned, the local government units in the areas of operations and the media.

The CDO is an order issued by the SEC to a person or entity to desist from committing any act constituting a violation of the SRC.  It is issued ex parte [on one side only] after a finding that there is reasonable likelihood of a continuing violation (Sec. 53.3, SRC).

Sec. 64.2 of the SRC further states that after proper investigation or verification, motu proprio [on one’s own initiative] or upon a verified complaint by any aggrieved party, the SEC may issue a CDO without the necessity of a prior hearing if, in its judgment, the act, unless restrained, will operate as a fraud on investors or likely to cause grave and irreparable injury or prejudice to the investing public.

Further, Sec. 64.2 states that until the CDO is issued, the fact that an investigation has been initiated or that a complaint has been filed, including the content of the complaint, shall be confidential. Upon issuance of the CDO, however, the SEC shall make public the order and a copy thereof immediately furnished to each person who is the subject of the order.

The offenses or violations of the SRC for which a scammer may be liable are: (a) Sec. 8 provides that no security shall be sold or offered for sale without a registration statement filed and approved by the SEC; (b) Sec. 26 makes unlawful the act of a person obtaining money or property by means of any untrue statement or employing any device, scheme or artifice to defraud or engaging in any transaction which operates as a fraud or deceit upon any person; and, (c) Sec. 28 prohibits a person from engaging in the selling of securities unless registered as such with the SEC.

The commission has the exclusive jurisdiction to file a criminal complaint in the DOJ for these violations of the SRC for which imprisonment and/or fine are the imposable penalties.

The commission can also initiate administrative proceedings toward imposing fines and penalties, and seeking the revocation of the scammer’s corporate registration.

Estafa

It, however, cannot recover damages for the victims. The victims have to file their complaint-affidavits for estafa against the scammers, with the assistance of the police or the NBI, in the DOJ or the Office of the Prosecutor.

The civil complaint for recovery of damages for the private complainant is deemed instituted in the criminal case for estafa that subsequently may be filed in regular courts.

Moreover, since securities law violations and estafa are predicate crimes under the Anti-Money Laundering Act, the Anti-Money Laundering Council may petition the Court of Appeals for the freezing of the scammers’ bank accounts and file a civil complaint for the forfeiture of the illegal profits.

Avoid scammers like plague

In closing, there is not one agency or group that can put an end to investment scams. Concerted actions against the scammers are needed. Everyone can remind friends and relatives to avoid like the plague people making promises of high returns.

Experts can educate the public on the ingenious tricks scammers use to lure them into parting with their hard-earned money. Law enforcement agencies and regulators can focus on the early detection, investigation, apprehension and prosecution of the scammers through stronger cooperation and tighter coordination.

(Teresita J. Herbosa is the chair of the Securities and Exchange Commission.)