Look at any ponzy scheme, the operative word is Greed. It has been a recurring decimal through the ages, as people tended to reap bountifully out of financial designs without properly assessing the risk involved. It is all about how to make money very quickly. Period! Added to the issue of Greed is the short memory of the people which has been rather confounding.
In Nigeria, many ponzy schemes in different robes have been unveiled with catastrophic results. But, the next time a new one comes, millions of Nigerians are likely to embrace it. They would have forgotten all too soon that the same path was taken earlier with dismal outcome. The driving force is nothing but Greed.
As it happened in Nigeria, ponzy schemes have hit hard on investors all over the world. Talk about the 18th Century South Sea Bubbles and the recent Bernard Madoff's $50 billion ponzy scheme, the result has been devastating.
SOUTH SEA BUBBLES
Reports said that in 1720, the whole of England became involved with what has since become known as The South Sea Bubble.
The same year, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which allowed the South Sea Company a monopoly in trade with South America. The company underwrote the English National Debt, which stood at £30 million, on a promise of 5% interest from the Government.
According to the reports, shares immediately rose to 10 times their value, speculation ran wild and all sorts of companies, some lunatic, some fraudulent or just optimistic were launched.
For example; one company floated was to buy the Irish Bogs, another to manufacture a gun to fire square cannon balls and the most ludicrous of all "For carrying-on an undertaking of great advantage but no-one to know what it is!!" Unbelievably £2000 was invested in this one!
The country went wild, stocks increased in all these and other 'dodgy' schemes, and huge fortunes were made.
Then the 'bubble' in London burst!
The stocks crashed and people all over the country lost all of their money. Porters and ladies maids who had bought their own carriages became destitute almost overnight. The Clergy, Bishops and the Gentry lost their life savings; the whole country suffered a catastrophic loss of money and property.
Suicides became a daily occurrence. The gullible mob whose innate greed had lain behind this mass hysteria for wealth, demanded vengeance. The Postmaster General took poison and his son, who was the Secretary of State, avoided disaster by fortuitously contracting smallpox and died!
The South Sea Company Directors were arrested and their estates forfeited.
BERNARD MADOFF SCHEME
The Bernard Madoff Ponzi Scheme's $50 billion fraud has, however, questioned the top rate given to the South Sea Bubble .It has turned out to be a scandal of epic proportions that spans generations and involved nepotism and corruption in the Securities and Exchange Commission(SEC). Like something out of a 1980's night time soap, the Madoff fraud scandal has attracted to itself prime place among the financial crimes of the century.
Madoff was able to run his fraudulent Ponzi scheme for decades without any detection by the SEC. The probe suggests that it may not have been incompetence but rather patronage that allowed Bernard Madoff to con savvy investors and banks across the globe out of billions of dollars. It has been suggested that Madoff's niece, Shana Madoff, may have acted as a go between with SEC attorney Eric Swanson, whom she married in 2007.
THE NIGERIAN BUBBLE
While the Nigerian stock market bubble may not compare with the South Sea Bubble and Madoff's madness, the effect on the people who invested their life savings has been no less devastating. Families have been thrown into debts, while those who could not stomach the devastation have chosen the bizarre by committing suicide. It has really been horrific.
The Nigerian bubble mania started with the much -advertised consolidation of the banking sector initiated by the immediate past Governor of the Central Bank of Nigeria(CBN), Professor Chukwuma Soludo. In the arrangement, each bank still desirous of keeping its banking licence was expected to grow its capital base to a minimum of N25 billion. The benchmark effectively shut many banks out, while many options such as mergers and acquisitions ,outright sale, among others were employed to save others. In the end, 25 banks scaled the hurdle. Then the rat race started as successful banks launched public offerings on the Nigerian Stock Exchange(NSE). The offerings ranged from the most questionable to unreasonable, as regularly authorities with the apparent connivance of the promoters of the banks, overvalued the prices of the shares being put on sale.
For example, banks that were priced at between N10 and N15 ,suddenly decided to showcase their strength, with the offering going for prices not below N30 per stock. Then, the advertising frenzy was unleashed on hapless Nigerians , with institutional investors, gullible Nigerians and those desirous not to be left out of a once- in- a- life-time profitable venture poured their resources into the project. Banks that were supposed to be the beneficiaries of the offering took positions by doling out questionable loans to identified people fronting for them to clear their stocks to make it scarce, all in the bid to drive up the price. Truly, the stock prices took off and went up the hill to the extent that some traded at between N50 and N60 at their apogees in the Q1 of 2008.
The bubble finally burst when the market could no longer absorb the madness in Q2 of 2008, with stock prices stumbling down the hill, reaching the bottom at the end of Q1 of 2009. The market has been volatile since then with no definite direction. An initial recovery which began in May 2009 was punctured on August 4, 2009. Market capitalization fell from the peak of N12.61 trillion in March 2008 to N4.480 trillion as at March 27, 2008, a drop of 65%. Investors lost N8.13 trillion. Even, the banking sector still underperformed the market as the sector lost about 70% to the downturn. Fingers are now pointing in the direction of the banks' promoters, the Security and Exchange Commission(SEC), the Nigerian Stock Exchange(NSE) and the CBN, for being accomplices in the shares offering scam. While the Director General of the NSE, Dr (Mrs) Okereke- Onyiuke, has been employing various means, ranging from the absurd to the outlandish in defending the role of the agency in the scam, industry watchers remain unconvinced. The case of Soludo is rather funny, as the expose in the banking sector over non-performing margin loans must be giving the world acclaimed economist some grey hairs. The margin lending in the five troubled banks is put at N456.28 billion. How this was done without the CBN he was presiding over calling for a restraint raise serious concerns over his competence.
The role played by the SEC may have contributed to the sudden departure of Al-Faki, the erstwhile Director General of the commission. Aruma Oteh , a Vice President at the African Development Bank(AfDB) has been nominated in his stead to head commission.
INVESTMENT AND SECURITIES ACT(ISA)
Much of what happened in the market, findings by Business Hallmark reveal, are in gross violation of the Investment and Securities Act, 2007.
According to Part XI, Section 105 of the ISA 2007, “a person shall not create, or cause to be created, or do anything which may create a false or misleading appearance of active trading in any securities on a securities exchange or capital trade point; or with respect to the market for the price of any such securities .”
It, also, states that “a person shall not by any fictitious transactions or devices, maintain, inflate, depress, or cause fluctuations in the market price of any securities.”
It continued, “A person shall not effect, take part in, be concerned with or carry out, either directly or indirectly, two or more transactions in securities of a body corporate being transactions which have, or are likely to have the effect of raising or lowering the price of securities of the body corporate on a securities exchange or capital trade point with intent to induce other persons to purchase, sell or subscribe for securities of the body corporate or of a related body corporate.
“A person shall not effect, take part in, be concerned with or carry out, either directly or indirectly, two or more transactions in securities of a body corporate, being transactions which have or are likely to have the effect of maintaining or stabilizing the price of securities of the body corporate on a securities exchange or capital trade point with intent to induce other persons to sell, purchase or subscribe for securities of the body corporate or of a related body corporate.
“ No person shall knowingly, recklessly or negligently make a statement, or disseminate information, which is false or misleading in any material particular and likely to induce the sale or purchase of the securities by other persons or likely to have the effect of raising, lowering, maintaining or establishing the market price of securities.”
The ISA states further that no person should make or publish any statement, promise or forecast which he knows to be misleading, false or deceptive; or Dishonestly conceals material facts; recklessly make or publish, dishonestly or otherwise of any statement, promise or forecast which is misleading, false or deceptive; or A person shall not circulate or disseminate, or authorise or be concerned in the circulation or dissemination of any statement or illegal information to the effect that the price of any securities of a body corporate will or is likely to rise or fall or be maintained by reason of any transaction entered into or other act or thing done in relation to securities of that body corporate, or of a body corporate which is related to that body corporate.”
It further states that “no person shall directly or indirectly in connection with the purchase or sale of any securities to;engage in any act, practice or course of business which operate or would operate as a fraud or deceit upon any person. A person who is an insider of a company shall not buy or sell, or otherwise deal in the securities of the company which are offered to the public for sale or subscription if he has information which he knows is unpublished price sensitive information in relation to those securities
The Managing Director/Chief Executive Officer of a stock broking who pleaded anonymity decried the situation, saying that investors who were lured into the stock market as a result of the bubble have so far been rendered hopeless.
He, however, flayed the regulators of the market for conspiring with the quoted Companies, especially the banks to mislead investors.
Although the Head of Research and Strategy, BGL Securities Limited, Mr. Ademola Olufemi, noted that insider dealing is a criminal offence which is punishable by law, he maintained that the case of the five banks' Managing Directors and their associates is yet to be proven.
He said that the CBN is empowered to take any action that would safeguard the interest of investors and depositors in the banks.
“If they are found by the court of law to have been involved in insider abuse and that they did not pass through the normal channel in disbursing loans, we might count that as fraud. But whatever happens, the approach should be in a subtle way.
“In America, some of the banks had similar problems, but because of the pandemonium it was going to cause in the system, the Federal Reserve approached it in a subtle way,” he adds.
According to him, some of the banks have been paying bonuses and dividends illegally by collecting money from the CBN to pay shareholders' dividend, organising retreat and so on, not minding the consequences to the economy in general. His words, “But we are saying that in this type of situation, the CBN should have directed them to recapitalise within three months, after which they advise the Management of the banks to leave the system. And if after those three months, they are not able to do, you fire them.
“Like the CBN Governor said, three of these banks are so systemic to the industry to the effect that if they have problem it would affect the entire banking industry. And the BOFIA gave them the authority to do what they are doing. But the only thing about it is how it is done. A lot of arguments have come out on how it is done and that whether it was right or wrong. But no matter how it was done, we need not throw away the baby with the bath water.”
He urged the CBN and the EFCC to ensure that the situation is properly handled, saying that anything on the contrary may have a devastating spiral effect on other sectors of the economy.
“What we think is that it has not been long we had disruption in the industry as a result of the recapitalisation exercise and it would not be wise for us to have another disruption so soon in the industry again,” he discloses.
Commenting on the list of banks' debtors published recently by the apex bank, Olufemi argued that there is no crime in owing a bank.
He stressed the fact that no economy can develop without adequate credit facilities. According to him, “The investing public in most developed economies of the world live on credit. In fact, part of the crisis in the market today was because of the drying up of credit. That is why the problem they had in these countries during the global meltdown was credit crunch. They termed it credit crunch because of their inability to access credit
“But we may have problem with the issue of non-performance of loans. Even non-performing loan is not a serious problem. One of the C's of credit is 'condition' and it can change in the middle of transactions. For example, the market meltdown has affected the capital market, the oil and gas industry and it is not something anybody projected for.
Goldman Sachs predicted towards the middle of 2008 that the price of oil in the international market was going to hit $200 and instead of that, it fell to $30. The company lost a lot of money then. But the American government did not sack them, instead, they gave them bailout and they were able to solve the problems they had.”
Meanwhile, corporate affairs departments of banks contacted for this story were evasive in answering questions posed to them.
The Head Corporate Communications of Unity Bank, Mr. Christian Ububout , said it is not possible for Unity Bank to have manipulated its share price when it did not at any time raise money from the capital market through initial or public offering . Telephone calls and text messages to other banks such as United Bank for Africa, Wema Bank and Sterling Bank did not get responses.