Restitution offers relief to investors but will they learn enough?
PEOPLE who fall for investment scams and kids who write letters to Santa Claus have one thing in common – they belief in the promise of easy and seemingly magical rewards. When the lure of the sure thing is jiggled before them, the greedy and the ignorant quickly shed skepticism and caution.
When that happens, they are likely to lose money. In Malaysia, they sometimes get back part of it.
There have been several cases of the Securities Commission (SC) going to court to seize the conmen’s ill-gotten gains so that it can be returned to the investors/victims. This is called restitution.
On Thursday, for example, we learnt about the latest development regarding an illegal futures trading scheme that operated between October 2010 and June 2011. The SC said those who had invested in the scheme could now claim for restitution.
They have until Sept 25 to submit their claim forms along with “sufficient proof of the amounts that they had invested”.
The regulator is able to offer this relief because it filed a civil suit in April 2011 against seven men for soliciting monies for the fraudulent scheme. The defendants’ trading accounts were frozen and as a result, the SC has RM665,069 to distribute to the investors.
It is probable, however, that the investors won’t be fully compensated.
According to an SC affidavit, the seven had collected about RM1.94mil from investors by guaranteeing annual returns of 24%. Of this sum, RM946,500 had been withdrawn. The total collection figure was subsequently bumped up to RM2.37mil. In a High Court consent judgement signed in August 2012, the defendants agreed to pay this larger sum, but so far, only the RM665,069 is available for the restitution exercise.
The SC says it will collate a list of individuals who have suffered loss as a result of the illegal scheme. “Once all relevant claims have been submitted, the SC will determine a rate of restitution based on the available funds, total number of claimants and the sums that are proved to have been invested,” says the regulator in a notice published in The Star yesterday.
If every investor makes a claim backed by documentation, he will get less than 30% of his investment. Of course, that won’t happen. Not all the investors will step forward and surely not all claims can be proven satisfactorily. But it is still too much to expect a full refund.
As a yardstick, consider the restitution scheme for those who put money in the Swisscash investment programme, an Internet-based scam that claimed to have invested in equities, commodities and foreign exchange, and offered returns of up to 300% within 15 months of investment. The SC instituted civil action against those behind Swisscash in 2007 and that led to restitution three years later.
The restitution scheme’s administrator received 29,885 claims from Malaysian and foreign investors who said they had pumped in approximately RM188mil. However, only 19,625 claimants met the eligibility criteria and they were paid a total of RM30.35mil.
Perhaps a more optimistic case is that of licensed fund manager Powerhouse Asset Management Sdn Bhd. In November 2007, the SC filed a civil suit because Powerhouse had breached a licensing condition when it ventured into an unapproved investment scheme involving gold structured products. At that point, the SC was seeking restitution of RM1.925mil as shortfall of investments to be returned to investors.
The suit ended with a consent judgement in which the defendants agreed to make full and final settlement of the judgment sum.
The restitution was completed in October 2008, with 75 investors getting RM10mil cash and gold wafers worth about RM2.5mil.
But there’s a difference between the Powerhouse and Swisscash cases. It can be argued that because Powerhouse was a licensed player, it was harder for investors to realise that they were putting money in a scheme that hadn’t gone through regulatory scrutiny and they were thus exposed to bigger risks.
On the other hand, with the Swisscash programme, there was no apparent attempt to pass it off as a scheme that had the authorities’ seal of approval. The investors presumably knew they were making a bet on something unconventional and unregulated.
It’s common for securities regulators around the world to seek restitution for investors, but it’s always a difficult balancing act. On one hand, it’s the regulators’ job to protect investors and uphold public confidence in the capital market.
At the same time, if investors begin to expect restitution, will they ever know enough about informed investing and will they ever absorb the fact that when something is too good to be true, it probably is?