Saturday , May 26, 2018

Uyboco: How to analyze a scam (Part 2)

LAST week, we discussed some often-used arguments in Ponzi-type scams like the recently closed Jacama Sales and Marketing. We dealt with the first two arguments in the previous article -- that nobody is complaining, and that the company offered certain products for sale, thus proving it is legitimate. Today we’ll talk about the next two arguments often brought up, namely:

1) That they have the necessary government permits, and that the Securities and Exchange Commission (SEC) had no business meddling in their affairs because the company is registered as a sole proprietorship, and thus is under the jurisdiction of the Department of Trade and Industry (DTI).

2) That they have a detailed analysis showing how the company is sustainable.

First point, just because I can wave around a piece of paper with a seal from a government office, does not guarantee that I am operating legally. The reason is quite simple. At the time of registration, I can make everything appear to be legal and above-board, but during actual operation, when I ALREADY have the necessary permits, I can perform certain actions which are actually illegal.

The business permit of Jacama allowed it to operate as a “retailer of general merchandise such as grocery items, food supplements and other dry goods and wholesaler of appliances (booking office).” Did it offer such products? Yes, however, it also offered something else -- it offered a promise, in the form of dated vouchers that you could exchange for cash from the company, guaranteeing you a 150% return on your initial cash outlay in 3 months -- and that, is what is called a security.

Republic Act 8799 (otherwise known as the Securities Regulations Code), defines securities as “shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character.“

The vouchers that Jacama offers in exchange for your “investment” are as good as “contracts” between you and the company. This is the reason why you are willing to pay four times the market value of a product that you would not otherwise buy from them in the first place. You are not just buying a bunch of gift certificates, or a cellphone, or a bottle of pills, or a grocery basket, you are really after the security -- the contract or promise that Jacama will pay you a certain amount over the next 90 days.

Now, since it is in the business of selling such securities, the company should secure the necessary permits to do so. Section 8 of RA 8799 says, “Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission.”

Whether or not the company is a corporation, partnership or sole-proprietorship, the moment it engages in the sale of securities, it automatically falls under the jurisdiction of the Securities and Exchange Commission (Sec. 5 of RA 8799).

The closure order thus has a very strong legal basis, and is not just a government conspiracy to prevent the poor from getting rich (as many protesting the closure are claiming). No, this is government actually doing its job to protect the general public from an illegal operation.
Now, answering the second point, just because I can show you some formulas or write some numbers on a board showing you that my investment is sound and secure, does not necessarily make it so. You have to actually understand what is going on and see if it makes sense.

There is a Youtube video of someone explaining why Jacama is supposedly sustainable. That video is still available as of this writing. You can search “youtubejacama safety net” to see this video for yourself. To a layperson, that video may seem sensible but if you analyze it carefully, it is damning evidence that this is indeed a scam.

Just over a minute into the presentation, you will see that the company earnings is dependent on the person who buys AFTER you do. The presenter assumes that there is a line of people waiting behind you to also buy into the scheme. He assumes it as a fact, and then uses that to conjure his magic trick. He shows you that the company can pay you back 150% of your investment and still make money (making it appear sustainable).

But here is the trick, in order to pay you your 150% and still be sustainable, there MUST be 3 other people who also buy into the scheme. Following this line of logic, when those 3 people join, there must be 9 other people who join after them so that they can be paid. To pay those 9, you need 27 more people.

To pay those 27, you need 81 more people, and so on and so forth. This will go on and people will be happy investing and reinvesting until it comes to a point where it is impossible to sustain anymore simply because there are not enough investors (or re-investors) in the next round to sustain the current one. For example, if 30 million people join in one day, that means the company needs to find 90 million other investors in order to pay out those 30 million people. That number alone is already more than the population of the entire country.

When it reaches that point, that is when the perpetrator takes all the money he has acquired and disappears, and leaves a multitude of “investors” suddenly holding worthless pieces of paper that they cannot encash anywhere. As I stressed last week, this has been the story of such investment scams for close to a hundred years since Charles Ponzi first thought of it in 1920.

Please study your history. It always ends the same sad way. I hope you learn from this and not have the same sad ending that thousands before you had to endure and agonize over. Do not succumb to the lure of easy or quick money. It’s not worth it.


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