Ponzi schemes entice investors with mouth-watering returns on investments. But their illegal status in the eyes of the law means victims may find it difficult to use the courts to recover their money, ROBERT EGBE writes.
It was not just because she lost money that Amaka Eze felt hurt. The single mother was also pained by the memory of how much effort she put into enrolling three other persons in what turned out to be a money-down-the-drain venture.
Eze and thousands of others invested in Family Food Support Association, a networking business said to be run by a businesswoman Chinyere Emeka-Atu.
The investors, including petty traders, parted with N9,000 every month on the agreement that they would get very high returns in a short time
They were allegedly promised a return of N200,000 cash and N90,000 worth of foodstuffs after nine months of investments in the association’s scheme.
As of last month, they had lost investments to the tune of over N600 million in Lagos alone.
That was when it dawned on them that they had fallen victim to a Ponzi scheme
“I suffered so much to bring three other people together and we invested in this networking business, but after all our sacrifices, the coordinator has refused to give us back our benefits. We plead to those in authority to help us the masses to get justice,” she said.
Aggrieved, Eze and other victims stormed a Tinubu Magistrate’s Court in Lagos, on April 25, to watch Emeka-Atu’s prosecution for the alleged fraud. The case is ongoing.
The Economic and Financial Crimes Commission (EFCC) on December 8, 2021 declared wanted the Chief Executive Officer (CEO) of MBA Trading and Capital Investment, Maxwell Odum, over alleged N213 billion fraud.
On May 3, 2021, persons claiming to be victims of the alleged scam stormed Christ Embassy Church at Rumuigbo, Port Harcourt, Rivers State, where they alleged Odum worshipped and made huge donations. Another group on August 11, 2021, protested at the EFCC headquarters in Abuja.
In a notice issued on its website and signed by Wilson Uwujaren, EFCC spokesperson, the anti-graft agency is accusing Odum of “conspiracy, obtaining money by false pretence and money laundering to the tune of N213 billion”.
Other aggrieved victims of another suspected Ponzi scheme are fighting to recover over N11,795,090,000.00 at the Lagos High Court sitting at Osborne, Ikoyi.
The victims, including a commercial bank and an investment firm, told Justice Toyin Oyekan-Abdullahi that they were negatively affected by the alleged investment scam of Imagine Global Holding Company Ltd, Imagine Global Solutions Ltd, Mr. Bamise Samson Ajetunmobi and Mrs Elizabeth Anuoluwapo Ajetunmobi.
Assuring them of justice, during a November 3, 2021 proceedings, the judge said: “The court will not allow the citizens of this country to keep weeping because of the absconding investors.”
The judge’s allusion to abscondment was in reference to news reports that the Ajetunmobis had obtained the citizenship of Antigua and Barbuda, with the country’s Prime Minister Gaston Browne stating on October 20, 2021, that they would be captured if they entered the Caribbean country.
What are Ponzi schemes?
The United States Securities and Exchange Commission on its website investor.gov defines Ponzi scheme as “an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organisers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
“With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.”
Thus, they generally follow the concept of robbing Peter to pay Paul
Ponzi schemes are named after an American, Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
In Nigeria, operators of the schemes lure victims by promising them incredulous returns on investment (ROI) as high as 55% after their first month of investment, a bait swallowed by thousands of Nigerians who have since got their fingers burnt.
Ponzi scheme status under Nigerian law
The House of Representatives on January 20, this year, passed for second reading a bill to repeal and re-enact the Nigerian Capital Market, Investments and Securities Act.
The bill seeks, among other things, to prohibit Ponzi schemes and other pyramid investments.
If the bill, sponsored by Ibrahim Babangida (APC, Kano), finally becomes a law, promoters could face 10 years imprisonment if convicted by the court.
The bill was read the second time on Thursday, after a debate on its general principles.
Notwithstanding that, if there was any doubt about the illegality of Ponzi schemes, such has already been cleared by the Investment and Securities Act (ISA), 2007 and the Banks and Other Financial Institutions Act (BOFIA), 2004.
Both laws reserve the act of collecting money from the public with the promise of repayment with interest for only banks or bodies established by law to carry out such business.
In other words, any other person, such as Ponzi operators, are legally prohibited from carrying out such business in law.
Senior Advocate of Nigeria (SAN) Mr. Oyetola Muyiwa Atoyebi agreed.
Atoyebi, managing partner of O. M. Atoyebi, S.A.N & Partners, referenced Section 67(1) of the Investment and Securities Act (ISA), 2007, which states that “No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with any Body Corporate for a fixed period or payable at call …”
He noted further that the Act, in Subsection 2 makes a breach of the section punishable under the law, by stating that “If an invitation to the public is made in breach of subsection (1) of this section, all persons making the invitation and every officer who is in default or anybody corporate making the invitation shall be separately liable to a penalty of N500,000 in the case of a body corporate and N100,000 in the case of an individual.”
The lawyer noted further that “by a combined effect of sections 58(1) and 59 of the BOFIA Act, no person shall carry on financial business in Nigeria other than insurance and stockbroking, unless it is a company duly incorporated in Nigeria and holds a valid licence granted by the Central Bank of Nigeria (CBN).
“Unarguably, Ponzi schemes operate without the licence and authorisation of the CBN and are, thus, illegal.
“It is noteworthy that Ponzi schemes have also been recognised by the Nigerian Court as illegitimate and fraudulent thus, in the case of Mekwunye v. Lotus Capital Ltd. & ORS, the Appellant sought a declaration that the 1st Respondent’s Telecom Private Equity Fund is a Ponzi scheme and an instrument of fraud used by the Respondents to defraud unsuspecting Nigerians, and, as anticipated, the Court held in favour of the Appellant.”
He added that under Section 67(2) of ISA, engaging in Ponzi schemes attracted a fine of N100,000 for individuals (natural persons) and N500,000 for corporate entities.
“Additionally, under Section 59(6)(b) of BOFIA, participation in Ponzi schemes attracts a punishment of five years imprisonment or a fine of N1 million or both as the case may be,” Atoyebi said.
Victims or accomplices?
The ridiculously high RoI should ordinarily be enough to make anyone suspicious that the schemes are probably illegal. The Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) also regularly warn the public to be wary of such mouthwatering investment offers. Nevertheless, almost not a day goes by without tales of Nigerians falling for one Ponzi scheme or the other.
This suggests that many are aware that the deals are more or less a scam but invest in them in the hope that they’ll get their money and fabulous profits before the boom goes bust.
A co-founder at PennyTree, Mr. Adeleke Awotayo-Ayeni, explained that while some people were innocent victims of Ponzi schemes, many others made a conscious choice to invest their money in it.
He spoke last month at a PennyTree Twitter Space event, on the topic, “Ponzi Schemes: Why Do Nigerians Keep Falling?”
Awotayo-Ayeni said: “Ponzi schemes promise outrageous returns that no legitimate business would be able to provide. People just want to make quick cash without necessarily working for it; they would prefer to invest money and get double the amount within a short time.”
In such instances, it appears that the law does not consider such persons as mere victims to be pitied and helped, but as criminals to be punished.
As noted earlier, victims’ bid to recover their investments have led to prosecution of Ponzi scheme promoters.
Top EFCC counsel Mr. Rotimi Oyedepo emphasised this fact, noting that the EFCC was prosecuting many of such cases around the country.
Data from the agency’s website corroborates Oyedpo. It suggests that the EFCC is prosecuting or has prosecuted no fewer than 20 of such cases since 2019.
For instance, the EFCC, on March 8, 2022, secured the conviction and sentencing of a notorious Ponzi scheme operator, Umanah Umanah, before Justice Agatha Okeke of the Federal High Court sitting in Uyo, Akwa Ibom State.
Umanah was said to have lured his victims through bogus promises of return on investment of up to 50 per cent in seven days through his company, No Burn Global Limited, with a network in many states.
Can money invested in Ponzi scheme be recovered?
Atoyebi noted that in certain jurisdictions, such as the US, after a Ponzi scheme is discovered by government regulators, the US SEC files a lawsuit against the Ponzi perpetrator, and a trustee is then appointed to recover as much money as possible to make payments to creditors and to redistribute any recovered proceeds pro rata to investors.
He argued that Ponzi scheme investors in Nigeria may not be able to recover their investments through the courts.
Atoyebi said: “In Nigeria, notwithstanding the provision of Section 67(3) of ISA, which states that an investor can cancel the transaction or recover his money or even recover compensation for any loss resulting from the transaction. The monies invested into Ponzi schemes cannot legally be a subject of a suit on the principle of law that the court cannot enforce an illegality.”
The Silk referenced the judgment in the case of OCHEDI & ORS v. CBN & ORS (2018) LPELR45316(CA), in his position.
There, the court held that: “The monies the Appellants seek to recover from the 1st – 6th Respondents… are in respect of transactions; i.e. financial business of soliciting for and accepting money from the general public as deposits for profit, by a company that did not have a valid licence to carry on such business, prohibited by the above provisions of BOFIA and so illegal… For the purpose of and in the eyes of the law, the transaction between the Appellants and Wealth Zone Limited, from the beginning, was clearly not only prohibited, but also punished by the law and so illegal, whether the Appellants knew or not as ignorance of the law is no defence or excuse. Being illegal from the beginning, the transaction between the Appellants and Wealth Zone Limited could not have vested the Appellants any legal right that is cognizable and enforceable by a Court of law.’
He noted that this has been restated in many cases including UNITRUST INSURANCE CO. LTD. v. AMBICO SENDIRIAN NIGERIA Ltd. (2012) LPELR-15417(CA) where it was held that “Where a contract is expressly forbidden by statute, its illegality is without question, and the courts are forbidden to enforce it, or allow itself to be used to perpetuate illegality, or enforce same in all its ramifications. It behoves on parties to bring to the notice of the court any illegality, and if this is done, it overrides all questions of pleadings including any admission made thereon” BELVOIR FINANCE CO. LTD. V HAROLD G. COLE & CO. LTD. 1969, WLR. 1877.” Per PEMU, J.C.A. (P.23, Paras. E-G)’.
‘Investors in Ponzi scheme have no right of recovery’
Atoyebi said: “In a nutshell, on the right of recovery of invested sums in a Ponzi scheme, the law is that the investor has no right of recovery, as the investor only patronized the scheme at his own risk. Notwithstanding, the owner of the illegal investment scheme may still go to jail if prosecuted by the state.”
Advice to regulators
He noted that Ponzi schemes have “eaten into the economic development of our nation as monies which ought to be in circulation for proper investment purposes, are used to fund individual greed. Ponzi schemes, like any other fraudulent business, have both legal and moral undertones to them.
“It is therefore strongly advised that the bill proposing to apportion more jail terms to the owners of these businesses should be passed into law. This is because individuals who have no means of recouping their lost investment, would feel better knowing that justice has been served to the perpetrators of this crime.”
