A BC Securities Commission panel issued a decision regarding the BC based ‘Manna scheme’ in August 2009. The ‘Manna scheme’ was a Ponzi fraud that cost investors losses totaling more than US$10-million. In this scheme, 800+ investors deposited around $16 million and only received $3-5.6 million back. There is little hope of recovering the rest.
Educating yourself on the nature and structure of Ponzi schemes is an important step to identify and report these scams. The Manna case highlights three important lessons to avoid a Ponzi scheme.
Lesson #1: You Should Always Have the Opportunity to seek Professional Investment Advice
One key tactic employed in the Manna scheme was isolation. Interested investors had to sign five-year non-disclosure agreements (NDAs) before they could attend presentations, meetings or receive any of the promotional material. These NDAs enticed and isolated investors. They created the illusion of a select club of investors; and discouraging people from seeking investment advice from anyone, including close friends or family members. Investors testified that these confidentiality agreements were an important part of the package presented to investors.
Fraud artists use confidentiality to protect their own interests and prevent regulators discovering the fraud. In future, if someone presents you with an investment that requires you to sign confidentiality agreement, ask yourself, who is the confidentiality agreement really protecting, you or them?
Before you sign anything, think twice, and consult a financial professional, or lawyer.
Lesson #2: Lucrative Referral Incentives Are Too Good To Be True
The Manna scheme incentivized existing investors to bring in new fraud victims. They were called ‘affiliates’ or ‘consultants’, and were paid one-time bonuses of between 10 and 15% of the amount invested by their referred investors. Affiliates and consultants also made a monthly percentage of the amount invested by referrals and, for a short period, on the amount invested by their referrals.
This pyramid structure of a Ponzi scheme is an essential component of the scheme. Investors bring in friends and family, unwittingly including them in a fraudulent scheme, which ultimately results in devastating financial losses for them. At the Manna hearing, one witness testified that he felt he had betrayed the trust of two friends.
Recent research tells us that the first casualty of fraud is the victims’ trust in other people, investments and financial markets. Not surprisingly, Canadians agree that the impact of investment fraud can be just as serious as the impact of crimes like robbery and assault.
If you are involved in an investment scheme that gives you a financial incentive to invite more investors to participate, think twice. It has all the earmarks of a Ponzi scheme. You should walk away from it as quickly as possible. Tell friends and family to do the same.
Lesson #3 – The Promise of Low Risk/High Returns is a Red Flag
The Manna scheme convinced investors to loan money by promising significant monthly returns. Investors were told their funds would be managed by experienced traders with a long history producing double-digit monthly returns trading foreign currency. Manna said it had an “annualized trading history of profit returns not less than 20% per month (240% a year).” Because of these high returns, Manna promised 7% monthly returns, later reduced to 5% and said it would pay consistent returns as high as 125.5% per year.
At the Manna hearing, the BC Securities Commission asked Dr. Peter Klein, an expert in international banking and trading, to give an opinion about the promised returns. His testimony reviewed the principles of financial theory and empirical studies. Dr. Klein concluded that it was simply impossible to generate returns of 5%, month after month, through any legal trading or investing in any financial markets.
Be wary of excessively high returns promised consistently month over month. These opportunities are scams. Ponzi schemes always offer high returns. That’s how they extract money from investors. Always research investments and ask professionals if the large consistent returns offered are actually possible. Remember that markets always fluctuate.
Protect Yourself and Others from Ponzi Schemes – Report Suspicious Investments Now
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymous using BCSC’s online complaint form.
Scam artists love the holidays and will use your good intentions of giving to their advantage. Be an informed investor and learn the warning signs of fraud this season with this Christmas-themed song. Sing the InvestRight Carol (sung to the tune of Silver bells) Holiday season, is the reason To be watchful of […]