Bullion investors not blameless

30
Nov
2012
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By Rita Sim | rita.sim@cense.my
22 November 2012

EXTRAORDINARY RISKS: Take a good, hard look at why such schemes work

ON 12 March 2009, when Bernie Madoff appeared in court to plead guilty to 11 counts of fraud, money laundering, perjury, and theft, Vanity Fair writer Marie Brenner described the victims of his fraudulent investment schemes as “designated mourners” who “performed for the throng of reporters” outside the courthouse.

Madoff, former Nasdaq chairman, had been the mastermind of a Ponzi scheme in the United States, which caused estimated losses of US$65 billion (RM199 billion).

Brenner’s unsympathetic description of Madoff’s victims came to mind again when local authorities raided and froze the accounts of Genneva Malaysia Sdn Bhd and three other gold investment companies recently. While the depositors and investors of the companies have been up in arms, crying about the millions of ringgit that they could potentially lose, not everyone has looked kindly on them.

Deputy Finance Minister Datuk Dr Awang Adek Hussin bluntly said: “We cannot say the investors were blameless; they invested and there were risks.”

The risks were not just those ordinarily associated with investments, such as market prices and global currency fluctuations. Aside from the fact that gold trading is a purely speculative investment, there were other glaringly obvious problems with the business model promoted by Genneva.

First, the customers bought the gold, priced at between 18 and 20 per cent above market rate, but were promised guaranteed monthly returns of two to three per cent. Instead of getting the physical gold bullion, however, customers were only depositing cash with the company. The “buy back” scheme then promised that the company would buy back the customers’ investment after a contracted period.

Anyone can see that the entire scheme is riddled with holes. This leads to the question: why were customers so easily taken in?

Even now, the investors insist that it was not a Ponzi scheme and are blaming everyone else — Bank Negara Malaysia, police, Domestic Trade, Cooperatives and Consumerism Ministry and Companies Commission of Malaysia — except themselves and the companies.

It is not that I want to be unsympathetic towards people who have lost their hard-earned savings. If it had happened to any of my family members or friends, I would want the authorities to provide legal protection and assurance that the investors will be able to reclaim their capital.

I would also want the enforcement authorities to monitor these kinds of trading and investment activities, so that people will not be duped next time.

But more importantly, I don’t want a “next time” to be on the cards. And that means taking a good, hard look at why such schemes work in the first place. These promises tap into our inner greed, often exacerbated by desperation and vulnerability when we are facing difficult times.

Our first line of defence is common sense. Unfortunately, too often, people do not ask themselves “Is this too good to be true?”

History shows that people are most easily deceived when they are promised the improbable, especially when it comes to money, health and love. They are willing to believe in cures for cancer, higher-than-normal returns and “Casanova” con men.

The Internet has opened up a vast playground for tricksters and con men, who use emails mimicking bank notices to phish for personal information, claiming that you have won a lottery, or pretending to be an acquaintance who is stranded and in need of money.

As for big-money investment schemes, things are only getting more innovative with the likes of land investment scams, fine-wine fraud, and even investments for collectables, like art and classic cars.
For as long as there are gullible souls, there will be those who prey on them.

The Genneva traders insist that they were not “investors”. In that sense, they are right. They were gamblers, playing with their life savings in quicksand. And now they are victims who have lost grievously.

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