Legal Framework For Combating Fraudulent Investment Schemes In The Nigerian Capital Market -By Oyetola Muyiwa Atoyebi & Betseabasi Eyo

INTRODUCTION

A Nation’s financial system comprises the money and capital markets that serve it. While the money market is where short termed loans are sourced, the capital market is one for medium and long-term funds.^[1]All efficient financial systems are sustained by the level of investments that drives the system, and the basic objective of any investment decision is the creation of wealth via return on investment^[2].The objectives of investments range from dividends, capital appreciation or growth, capital gains or adventure^[3].

Fraudulent investment schemes refer to investment vehicles which in themselves are phony. Their originators usually commence with the intention to defraud investors.  They know such schemes would normally fail because there is usually no viable legal commercial venture to put the funds pooled from investors.

This article addresses the investment scams prevalent in Nigeria and how the legislations tackle same.

INVESTMENT SCAMS PREVALENT IN NIGERIA

A few of these fraudulent schemes that are prevalent in Nigeria include:

1. : The term “Ponzi Scheme” was coined after a swindler named Charles Ponzi in 1920. However, the first recorded instances of this sort of investment scam can be traced back to the mid-to-late 1800s, and were orchestrated by Adele Spitzeder in Germany and Sarah Howe in the United States.[4]

A Ponzi scheme is an investment fraud, disguised as a get-rich-quick opportunity. The definition of a Ponzi scheme given by Investopedia is “a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors”[5]. This scam will usually pay promised returns to early investors, as long as new investing occurs.

• A Pyramid Scheme is a type of investment scam that fraudsters often pitch as a legitimate business opportunity in form of Multi-Level Marketing (MLM) programs. In a pyramid scheme, money gotten from new participants is used to pay commissions (that may take any form, including the form of securities) to earlier participants.

• Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups. The fraudsters who promote affinity scams usually pretend to be members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that the investment is legitimate and worthwhile. These scams exploit the trust and friendship that exists in groups of people who have something in common.[6]

An example of an affinity scheme is the case of the Fadama scheme which was founded by Bishop Jonas Katung in 2006. According to the founder, the main objective of the society was to inculcate the culture of saving into members, as well as create wealth through the various businesses the society was engaged in by paying a monthly dividend of 10% of members’ contribution. After five years the scheme stopped paying its members and nobody could explain what went wrong.

• Pump and dump schemes have two parts. First, promoters try to boost the price of a stock with false or misleading statements about the company. Once the stock price has been pumped up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of the stock, and dumping shares into the market. These schemes often occur on the Internet where it is common to see messages urging readers to buy a stock quickly. Often, the promoters will claim to have “inside” information about a development that will be positive for the stock. After these fraudsters dump their shares and stop hyping the stock, the price typically falls, and investors lose their money.[7]

Boiler room fraud usually involves bogus stockbrokers, usually based overseas, calling people to pressure them into buying shares that promise high returns, but are, in reality, either worthless or non-existent.  Individuals are usually contacted out of the blue by a professional-sounding broker who offers them investment opportunities that seem too good to be true. They are often promised free research reports, special discounts and secret stock tips. The fraudsters may provide false share certificates and other documents to make the investments appear legitimate but they quickly disappear once they obtain investor funds. As with many fraudulent schemes, the victims are encouraged to keep their investment secret to ensure they receive maximum returns. This allows the fraudsters to hide the real nature of their scheme.

Sometimes, fraudulent investment schemes may take other forms like real estate investment schemes or foreign exchange scams.

THE LEGAL FRAMEWORK FOR COMBATING FRAUDULENT INVESTMENT SCHEMES IN THE NIGERIAN CAPITAL MARKET

The effect of fraudulent investment schemes in any Country’s capital market includes:

As a result of these, various laws and institutions have been put in place to help in the fight against these fraudulent schemes. We shall now consider some of these laws and institutions. 

The Investments and Securities Act (ISA) is the primary statute for combating Fraudulent Investment Schemes (FIS)^[8] in the Nigerian capital market. Specifically, FIS offend the provisions of Section 67 of the Investment and Securities Act, which lists out the requirements which a company intending to make invitations to the public to acquire/dispose securities or make invitations for money deposits must fulfil. To wit:

(a)The company must be public and not private;

(b) A statutory body or bank empowered by any Act of the National Not State Assembly to accept deposits from the public; and

(c) That the public company must comply with the provisions of sections 73 to 87 of the ISA.

The ISA in order to protect the capital market from FIS regulates the securities that are offered in the market. All securities to be offered in the market must first be registered with the SEC^[9]. The application must provide information on the organization, financial structure and nature of the business of the company including any risk factor. A person who contravenes these requirements commits an offence and is liable on conviction to a fine of one million naira, or to a term of imprisonment of 3(Three) years, or to both such fines and imprisonment. The SEC may in lieu of prosecution, impose a penalty of N1, 000, 000 (One Million Naira) and a further fine of N5000 (Five Thousand Naira) for every day of violation^[10].

Furthermore, fraudulent investment schemes (FIS) violate the provision of the ISA because they are never registered with the apex capital market regulatory institution or any appropriate authority. However, some incorporate at the Corporate Affairs Commission and confuse their clients who may pass such registration for authorization of the scheme by the appropriate regulatory body.

The Securities and Exchange Commission through the ISA is the major regulatory institution of the Nigerian Capital Market. Together with the Investment and Securities Tribunal, the SEC works to combat the prevalence of fraudulent investment schemes in the Country.

The definition of economic and financial crimes in the Act covers the scope of fraudulent investment schemes[11]. It establishes the Commission[12] which is the Financial Intelligence Unit in Nigeria charged with the responsibility of coordinating the various institutions involved in the fight against money laundering, and enforcement of all laws dealing with economic and financial crimes in Nigeria. The Commission is charged with the responsibility of investigating all financial crimes including advance fee fraud, money laundering, counterfeiting, illegal charge transfers, futures market fraud, fraudulent encashment of negotiable instruments, computer credit card fraud, contract scams etc.[13]

• ^[14].      

The Advance Fee Fraud (AFF) Act is an Act to create offences pertaining to advance fee fraud and other fraud-related offences; to provide for the arrest and trial of persons, who commit such offences and for matters connected thereto.

As a result of the proliferation of the Nigerian economic and financial scene with FIS and financial crimes, and the inadequacy of Section 419^[15] to deal with the complexities of the offence, an independent Act was enacted to cover fraud in all its ramifications. The Act is divided into three parts with eighteen sections. The Act covers various offences ranging from obtaining property by pretences,^[16] other fraud-related offences,^[17] use of premises,^[18] fraudulent invitations,^[19]and receipt of fraudulent letters,^[20] amongst others.

CONCLUSION

Despite the elaborate framework of laws and institutional bodies put in place to combat fraudulent schemes, we can see that there is still a prevalence of this malady in our capital market. Is it that these laws are not elaborate enough? Or is it a case of insufficient enforcement protocols? Whichever of the fore listed provides the best explanation, it is necessary that all individuals intending to undertake any investment or be part of any joint investment scheme, conduct their due diligence by making sure that whatever platform they are using is not only registered, but also authorized to offer this subscription to the public.

SNIPPET

Fraudulent investment schemes refer to investment vehicles which in themselves are phony. Their originators usually commence with the intention to defraud investors.  They know such schemes would normally fail because there is usually no viable legal commercial venture to put the funds pooled from investors.

KEYWORDS

Fraudulent investment schemes; Ponzi scheme; pyramid scheme, legislations on Ponzi scheme in Nigeria.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN

Mr Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Banking Law Practice and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: BETSEABASI EYO

Linda is a member of the Dispute Resolution Team at OMAPLEX Law Firm. She also holds commendable legal expertise in Banking Law Practice

She can be reached at betseabasi.eyo@omaplex.com.ng

[1] Osaze, B. E (2007) Capital Markets, African and Global, Book house Company. Nig: P,7

[2]Acorn, A.R. (2010) “Global Investment Alert, The Ghost of Charles Ponzi and Investment Regulations”, African Journal of Business and Comparative Law, Vol. 1 NO. 1, p.38

[3] Apinega, S.A. (2006) “Legal and Economic Issues in Stock Selection”. Ahmadu Bello University law Journal, vol.24-25, p.102

[4] ‘Ponzi Schemes: Definitions, Examples, and Origins’, by James Chen; Retrieved from https://www.investopedia.com/terms/p/ponzischeme.asp#:~:text=Origins%20of%20the%20Ponzi%20Scheme,Howe%20in%20the%20United%20States. Accessed on 21/03/2023; 12:28pm

[5]‘What Is a Ponzi Scheme?’, Retrieved from https://www.investopedia.com/terms/p/ponzischeme.asp Accessed on 13/01/2023; 12.30pm

[6] ‘Affinity Fraud: How to Avoid Investment Scam that Target Groups’, Retrieved from https://www.sec.gov/investor/pubs/affinity Accessed on 13/01/2023; 12.40pm

[7]‘Pump and Dump Schemes’, Retrieved from https://www.investor.gov/protect-your-investments/fraud/types-fraud/pump-and-dump-schemesAccessed on 13/01/2023; 12.45pm

[8] Hereinafter referred to as “FIS‟

[9] S.54, ISA

[10] S. 54(6) and (7) ISA

[11]Section 46 of the Economic and Financial Crimes Commission (Establishment) Act 2004

[12] Economic and Financial Crimes Commission

[13]Section 6 of the EFCC (Establishment) Act

11Advance Fee Fraud and other Fraud Related Offences Act, Cap A6, L.F.N 2004

[15] Criminal Code  

[16] Section 1 Advance Fee Fraud and other Fraud Related Offences Act, Cap. A6 LFN 2004

[17] section 2 Ibid

[18] Section 1(3) Ibid 

[19]S.4 ibid

[20]Section 1(3) ibid