Too good to be true

We have oftentimes heard of stories about how people have been duped into investing their hard-earned money in schemes hatched by some very creative and convincing people, only to find out  the schemes are bogus, their investments have disappeared, and the people behind the schemes are nowhere to be found.

We are of familiar with the story of Multitel and pyramiding queen Rose and husband Saturnine Balajay, who were sentenced to seven years’ imprisonment after having been found guilty by the Makati Regional Trial Court of violating Section 8 of the Securities Regulation Code (SRC) for offering and selling unregistered securities to the public.

According to one account, they scammed at least two million people, including politicians and Cabinet members, for a total of around P100 billion.

Multitel offered a guaranteed four percent monthly interest for a minimum investment of P10,000, but had an alternative to double the investor’s money for a lock-in period of 18 months.

The SEC explained that Multitel was engaged in a classic Ponzi scheme, which operated on a “rob-Peter-to-pay-Paul principle.” The Balajays were using money obtained from new investors to pay off earlier ones. The system eventually becomes unsustainable, with the most recent investors not being able to recover even their initial investments.

Ponzi schemes are similar to pyramid schemes since both are based on using new investors’ funds to pay earlier ones.

According to investopedia.com, regardless of the technology used in the Ponzi scheme, most share the following characteristics: first a guaranteed promise of high returns with little risk; second, a consistent flow of returns regardless of market conditions; third, investments that have not been registered with the SEC; fourth, investment strategies that are secret or described as too complex to explain; fifth, clients are not allowed to view official paperwork for their investment; and sixth, clients face difficulties withdrawing their money.

The US SEC defines a pyramid scheme as an investment fraud in which new participants’ fees are typically used to pay money to existing participants for recruiting new members. All pyramid schemes eventually collapse, and most investors lose their money. Some characteristics of a pyramid scheme include: requirement to enlist a stated number of persons in order to receive a payment; no genuine product or service is sold; promise of high returns in a short period of time; promoted as easy money or passive income; no demonstrated revenue from retail sales; buy-in required; complex commission schemes; and emphasis on recruiting.

As they say, if something is too good to be true, it probably isn’t.

Not all offers to invest, however, are fraudulent. Some are legitimate businesses. But any investment contract, just like the ones being offered by the Balajays and other Ponzi and pyramid schemes, are classified as securities, which under our law, “shall not be sold or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC.”

This requirement of a registration statement, let me emphasize, is different from the registration of the investment entity as a corporation.

In particular, these schemes are called investment contracts, which are contracts, transactions or schemes whereby a person invests his money in a common enterprise, with expectation of profits primarily from the efforts of others. And just like other securities, they must first be registered with the SEC before they can be sold to the public.

Through the registration statement, the public is given full information regarding the securities that are being offered to them, with the SEC concerned with the merit of the securities themselves, as well as the issuer. There are, however, a few securities exempt from this registration requirement, including those issued by the government and those issued by banks. There are also transactions involving securities which are exempt from the registration requirement, such as distribution by a corporation of stock dividends, sale of capital stock by a corporation to its stockholders, sale of securities to fewer than 20 persons during any 12 month period, and sale to qualified (sophisticated) buyers.

Such investment contracts can come in the form of sale of secondary shares of stocks to the public without a license from the SEC.

Last month, the SEC issued a certification to the effect that some companies engaged in the sale of petroleum products are not authorized to sell securities to the public because they have not been issued registration/permit to sell securities. These include PetroMobil, FlexFuel, Jeafer Fuel, Maximum Fuel, Power Fill, Nirvana Fuel Corp., Marz Fuel, Ofir Petroleum, Astral Fuel, and iFuel.

The SEC said that several small gas companies have been offering investment programs via franchise and partnership agreements, co-ownership contracts, and subscription to shares of stock of the company, without the necessary registration to sell securities.

According to an SEC advisory, the usual scheme of such companies is to lure investors into co-investing for a minimum investment of P300,000. These investment schemes, it said, fall under the definition of an investment contract.

Based on the offers being made by such companies, the company will do all the work and the investors simply put in the money, with expectation of profits, of course. Clearly investment contracts.

In the case of Flex Fuel Petroleum Corp., their gas stations are owned by another corporations where the investors and Flex Fuel are shareholders. The corporations are registered with the SEC, but nevertheless are not authorized to offer nor sell investments to the public.

Flex Fuel claims that each gas station has 15 seats, with Flex Fuel as industrial partner getting one seat. The other 14 seats are shared by the co-owners, with each allowed a maximum of three seats. The investment for each seat depends on the location of the gas station. The co-ownership program entitled one to share profits of the gas station every quarter deposited directly to one’s bank account.

According to one Flex Fuel investor, in his case they are stockholders of a corporation that owns 10 percent of the subscribed capital of another corporation, which in in turn owns five stations of Flex Fuel.

He says they are already receiving income from their investments. Unfortunately, whether or not the business is legitimate and not a Ponzi or pyramid type scheme, sale of securities, which includes shares of stocks, unless exempt under the SRC, must be accompanied by a registration statement. Otherwise, such activity is illegal.

The issuer of the securities is tasked with securing the required registration statement from the SEC. In this case, is it Flex Fuel Petroleum Corporation or the layers of corporations that ultimately offer their shares to the investing public? According to SEC insiders, such corporations are not authorized to offer secondary shares to the public.

Unfortunately, there are a number of posts on social media from investors of some of these small fuel companies listed by the SEC, complaining that they have been duped, that they are not getting the returns as promised, and that they cannot recover their investments.

This is the purpose of requiring issuers of securities to register their offerings with the SEC – to avoid fraud especially among small, financially unsophisticated investors. And according to the Supreme Court, non-registration of such securities by itself already operates as a fraud on investors.

The SEC recently conducted a meeting with complaining investors, most of whom invested in PetroMobil’s scheme, which the commission said is similar to the one of Flex Fuel. Unfortunately, the SEC seems to be dragging its feet on the matter while more and more investors are unwittingly being lured into putting their money into the unregistered offerings.

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