A sucker is born every minute

P(hineas) T. Barnum of the Barnum and Bailey Circus fame was supposed to have uttered the observation about a sucker being born every minute. Whether he did say that remark or not is not as important as the truth of the observation itself. Over the past two weeks, there had been a lot of crying and gnashing of teeth over the failure of financial schemes that turned out to be financial scams.

Hundreds of millions of dollars were lost to the scam artists. As I listened to and read the tales of woe from hoodwinked “investors”, I could only shake my head and tell them that it was all avoidable if they had more financial literacy and less greed. Again, to paraphrase that useful advice, if an offered deal is too good to be true… it is time to be extra suspicious.

From media accounts, the FrancSwiss scam victimized a lot of middle income OFWs and showbiz types who apparently had more money than financial sense. FrancSwiss was nothing more than an online Ponzi type pyramiding scheme. It is one of the oldest tricks in the game. The victims should have asked more questions on what exactly is the business model that is supposed to earn the kind of returns promised.

Then there’s another financial scam which victimized the rich and the aspiring rich as well as those who think they are rich just because they party with the rich. As much as $250 million in investors’ funds may have been lost after the Singaporean owner of a supposedly foreign exchange trading outfit disappeared.

Michael H.K. Liew, the sweet talking owner of Performance Investments Products Corp. in the British Virgin Islands (Performance Investment, BVI), knew how to win the confidence of the Makati yuppies he eventually left high and dry. To make himself look legit, he set up office at the Citibank Towers in Makati. He then incorporated locally and signed up Cristina Gonzalez-Tuason, from a prominent local clan with good political connections as General Manager.

Last Thursday, Gonzalez-Tuason requested the help of the NBI and Interpol to locate the Singaporean Liew after she was besieged by an angry mob of former friends. “I, together with the other investors of Performance Investments (BVI) have reason to believe that Mr. Liew unlawfully took [the] money of Performance Investments (BVI) to the grave prejudice of its investors, like myself,” she said in her letter.

Tuason asked the NBI “to determine Mr. Liew’s current whereabouts for his immediate apprehension and to trace, and if possible, retrieve, the funds he unlawfully took.” While she gave no indication of the amount involved, one of the victims told me total investors’ losses at between $140 million and $250 million.

I know we are dollar rich these days but that’s still a lot of foreign exchange lost by this developing country. As we can plainly see, if we only had a decent capital market here, local investors will have more decent choices than that offered by scam bugs like Singaporean Liew.

Mr. Liew’s investment scheme involves the trading of sophisticated financial products called “futures derivatives,” which allow the investor to trade on margin, which magnifies their gains, but also amplifies losses when the market moves against them. After putting in a minimum of $40,000, an investor is then asked to identify a pair of currencies ( i.e. dollar-euro or yen-pound, or any combination) where he or she would like to place the investments.

Without even assuming fraud, the investment is already risky as it is. It involves the concept of “future derivatives” and foreign exchange, both extremely risky and not easy for the ordinary investor to understand. I asked one of the victims if she knew the nature of the risks she had taken and she has no idea what derivatives are, nor how the foreign exchange part worked to make money.

All she knew was that she was supposed to earn a 12-percent annual return on her dollar placement. Earnings are to be wired to individual investors’ accounts in ABN-Amro and other banks. Early last week, investors were told that Liew had disappeared and that the bank accounts which held their investments had been emptied and closed. The Performance Investments (BVI) office in Singapore was reported to have told investors that the funds invested in three different banks, with one account in Hong Kong were already closed by Liew.

If those yuppies only had the habit of reading the financial papers or the business section of newspapers, they would have remembered the sad saga of Long-Term Capital Management (LTCM). They would have realized that investments in derivatives and foreign exchange are extremely risky even in a fraud-free environment and with Nobel Prize caliber number crunchers working for you.

It will be recalled that LTCM was a hedge fund founded in 1994 by John Meriwether (the former vice-chairman and head of bond trading at Salomon Brothers). On LTCM’s board of directors were Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Prize in Economics. These two Nobel Prize-winning economists developed complex mathematical models the fund needed to take highly-leveraged positions to make a significant profit.

Initially enormously successful with annualized returns of over 40 percent in its first years, in 1998 it lost $4.6 billion in less than four months. The New York Federal Reserve had to put pressure on the Fund’s creditors to rescue it from a catastrophic fall. The Fed justified its intervention on the basis of the potential of LTCM’s failure to in turn precipitate a financial crisis. The creditor banks were enticed into extending credit to LTCM because their financial losses in a general financial crisis could be greater than what they stood to lose if LTCM defaulted on its loans. The fund finally quietly folded in early 2000.

Anyway, what can the victims of the Singaporean’s scam do now aside from seeking the help of the NBI? Well, they can also seek the help of the Anti Money Laundering Council (AMLAC). The Council is well equipped to not only block the accounts of the parties involved, but also to trace where the money has gone. AMLAC works with the Paris-based Financial Action Task Force (FATF) and if there is any international body that knows all about where money is flowing, this is it. The best part of AMLAC is that it is headed by Atty Vicente Aquino, that rare bureaucrat who strikes me as both competent and honest. Victims can e-mail him at [email protected].

But knowing where your money has gone is not the same as being able to get it back . If this Singaporean is any good, he would have made sure his loot is secure, if he indeed fled with it. It is also possible he lost everything in a bad bet in derivatives involving foreign exchange, a risk he warned his investors about. They should also know who they are giving their money to.

Moral lesson of the sad affairs of FrancSwiss and Performance Investment Products is that investors should know what they are doing. If they don’t understand the business model being offered, they should refrain from putting their nest eggs in it. They should not focus on the promised return on investment and gloss over the potential risk.

The mistake of some of the less well heeled among the investors in Performance Investment is to take the presence of prominent family names like Cojuangco, Tuason, etc. in the list of investors as a kind of Good Housekeeping seal of approval and safety. As it turned out, the rich also didn’t quite know what they were doing. But then, the rich can afford to lose a few millions here and there. Merely pretentious yuppies simply can’t afford that kind of loss.

The entire quote is “There’s a sucker born every minute... and two to take ‘em.” That certainly happened last week.

Sleeping like a baby

While the US stock market was at an all time high, the ups and downs frightened a lot of small investors.

A guy went to his financial adviser at the bank and asked if he got worried.

He replied that he slept like a baby.

He was amazed and asked, “Really? Even with all the ups and downs?”

He said, “Yes. I sleep for a couple of hours, then wake up and cry for a couple of hours.”

Boo Chanco’s e-mail address is [email protected]