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WARNING!
Beware of bogus spot commodity/index trading firms
The Securities Commission
(SC) would like to warn members of the public against placing their
investments with bogus spot commodity/index trading firms. Numerous
people have lost large sums of money after investing through these
firms.
The SC's warning follows
several public complaints made by the public to the SC and the local
media, as well as the SC's raids on such firms. The SC's raids were
recently widely publicised by various newspapers.
From the SC's raids on
these companies, it was discovered that they were carrying out futures
trading activities without a licence from the SC. The SC also found
that the operators of these firms have attempted to disguise their
operations by gradually shifting the mode of their activities from
spot commodities trading to trading in indices such as the Hang
Seng index, the Dow Jones Islamic Market Indices and other indices
quoted in other foreign capital markets. Essentially, although the
underlying products of these firms may vary, the modus operandi
remains the same.
The SC had on 1 November
2000 publicised the modus operandi of bogus spot commodity trading
firms. This was to assist investors to identify and avoid falling
prey to such companies. For the benefit of investors, the SC would
like to reiterate the points on how to spot a bogus spot commodity/index
trading firm.
How to identify a
bogus spot commodity/index trading firm
Members of the public
may identify firms that undertake illegal trading of spot commodities/indexes
by looking out for the following features:
- Such companies claim
to be "agents" for foreign trading houses, usually incorporated
in jurisdictions such as Macau, Indonesia, Singapore, Hong Kong,
the British Virgin Islands and the Bahamas.
- Although they claim
to trade their products in the foreign market, they are usually
unable to provide substantial evidence of these trades being transmitted
to foreign futures exchanges. The traders in these companies practice
what is known as "bucketing" i.e. where they execute
customers' orders for their account instead of on the market,
with the hope of profiting from an off-setting transaction at
a future time.
- These companies frequently
place recruitment advertisements for positions such as executives,
administrative assistants or clerks. Job seekers are enticed by
promises of lucrative four-figure salaries among others. The shortlisted
candidate goes through an "interview" and upon becoming
an employee, is put through a brief period of "training".
At the end of the training, the employee is then encouraged to
invest their savings in the products as well as solicit new investors
which usually turn out to be their relatives and friends. In some
cases, the employee is threatened with no pay unless they invest
their money or bring in new investors.
- Investors are usually
asked to pay an initial sum known as a "margin deposit"
which ranges from USD3,000 to USD5,000. Investors are then told
that their investments have been relayed to the company's foreign
principal and that they are to sign a trade agreement with the
company's purported foreign principal.
- The trading hours
of such companies correspond with the trading hours of the foreign
exchanges they purportedly deal in. For example, a company dealing
in the Hang Seng index would trade during daylight hours while
one that supposedly trades in the US stock or commodities markets
would do so late at night until the early hours of the morning.
- Based on the experience
of victims, the initial so-called "margin deposits"
are usually depleted within a matter of days, resulting in "margin
calls". Margin calls are requests by the company from their
clients for additional deposits to be placed for trading to continue.
The company usually encourages investors to continue trading to
recoup their losses. Convinced investors would then make the additional
deposits and the process is then repeated resulting in the investors'
losses increasing.
As part of a ploy to
trick investors, the company will occasionally show some trading
profit in the investors' accounts. However, investors will find
that they are unable to cash-in those gains.
Eventually, investors
lose all their money. In almost all cases, investors have no control
over how their trading accounts are managed as they would have signed
over authority to the company's traders to execute trades on their
behalf.
The SC strongly urges
the public to be vigilant when investing with local or foreign investment
companies. There are many unscrupulous parties who may be taking
advantage of the current economic climate to lure investors to seemingly
high-return investment activities. The public should note that almost
all types of investments are regulated by Government agencies such
as the SC. The public should check with the SC or the relevant authority
on the licensing status of the local or foreign company they are
investing through.
Steps for investors
To safeguard their interests,
members of the public are advised to make investments only through
licensed companies. A list of all intermediary companies licensed
by the SC is available on the SC's official website at www.sc.com.my.
Investors may also contact the SC's Corporate Affairs Department
at tel no: 03-6204 8000/ fax no: 03-62015078 / e-mail: cau@seccom.com.my,
to verify the licensing status of a company.
Investors may also lodge
complaints with the SC's Complaints Unit at tel: 603-6204 8999
/ e-mail: aduan@seccom.com.my.
Frequently-asked-questions
(FAQs)
Investors may refer to
the list of FAQs on illegal trading of spot commodities/indices,
which is provided below and also available on the SC's official
website.
1) What is spot trading?
Spot trading is the
buying or selling of products for immediate delivery. It encompasses
any sale and purchase agreement. Any product can be traded for
example commodities (like coffee, crude palm oil and rubber) cash,
indices etc. In genuine spot commodity trading, the purchaser
buys a commodity for example coffee, and takes physical delivery
of coffee from the seller.
2) What is the difference
between spot commodity/index trading carried out by the bogus firms
and actual futures trading?
The so-called spot
commodity trading carried out by the bogus firms is in fact futures
trading because elements of futures trading such as non-physical
delivery of commodities, closing of positions to realise gain
or losses, leveraged trading, acceptance of margin deposits and
margin calls, "roll-over" of open positions, are involved.
Buying commodities
on the spot/cash market, as explained above, really means buying
a particular commodity at its current or "spot" price
and taking physical delivery of that commodity.
In the case of indices,
it is impossible to trade or take delivery of an index as it does
not exist in any physical form. An index is merely a benchmark
against which financial or economic performance is measured. The
only way to "trade indices" is to trade in a futures
or options contract, which has an index as its underlying product.
Therefore, the so-called spot index trading carried out by the
bogus firms is in fact futures trading.
3) How are the bogus
spot commodity companies illegal?
They carry out futures
trading without a licence from the SC.
4) Where are these bogus
spot commodity trading firms normally located?
These bogus spot commodity/index
trading firms are located throughout the country, especially in
the cities and larger towns.
5) Some of the firms
are registered with the Registrar of Companies (ROC). Does this
mean that they are legitimate?
While some of the companies
are registered with the ROC, they will still need to be licensed
by the SC, to be considered legitimate, if their activities constitute
futures trading.
6) The company says that
it is not breaking the law and showed me a letter from the Commodities
Trading Commission which was accompanied by a legal opinion. The
Commodities Trading Act 1985 was also cited to vouch for the validity
of the company. How valid are these claims?
The Commodities Trading
Commission ceased to exist following its merger with the SC on
16 April 1997. The merger brought the regulation of commodity
futures under the purview of the SC. The expansion of SC's powers
was effected through the Futures Industry (Amendment and Consolidation)
Act 1997, which repealed the Commodities Trading Act 1985. Commodities
futures trading is now governed by the Futures Industry Act 1993.
Hence, any statement or opinion given in regard to the Commodities
Trading Act 1985 can no longer be applicable.
7) The company told me
that I actually do not trade through it (the company). Instead,
I am supposedly trading directly with the company's principal which
is based overseas. On this basis, the company says, they don't need
a licence from the SC. Is this true?
This is not true because
as long as the foreign company or its Malaysian agent conducts
trades for Malaysian investors, a licence from the SC is needed.
8) How do these bogus
spot commodity firms find their clients?
These companies usually
find their clients through the direct marketing method. The prospecting
for new clients is either carried out directly by the company's
traders (who are sometimes called "investment consultants/business
managers") or indirectly by new staff recruits. These innocent
new recruits will usually ask their friends and relatives to invest
their money.
9) How will I be affected
if I invest in a company which is found to be illegal?
The SC would like to
advise the public to invest only through licensed intermediaries
because investors can have the protection afforded from the securities
laws which govern these intermediaries. Investors may seek compensation
from a fidelity fund if they experience losses as a result of
a licensed company's misconduct. On the contrary, no such recourse
is available for investors who invest through illegal companies.
Licensed intermediaries and their employees are required by law
to be honest and responsible in dealing with investors' monies.
Licensed companies will face action by the SC or the exchange
if they fail to do so.
10) How would I know
if a company is licensed by the SC?
Check with the SC's
website at www.sc.com.my which provides a complete and updated
list of licensed intermediary companies. The public may also contact
the SC's Complaints Unit at 03-62048999 or SC's Licensing Department
at 03-62048000 to verify the licensing status of a particular
company.
11) What should I do
if I have already placed my money with an illegal spot commodity/index
trading company?
First and foremost,
you must refrain from investing further or topping up your investments.
You should also start collecting all documentation as proof of
your involvement and investments. Forward your complaint to the
SC. Your complaint will help the SC in its enforcement actions
and help prevent others from falling prey to such scams.
12) Should I make a police
report?
It is advisable to
do so as your case may disclose offences under the Penal Code,
for which enforcement would be undertaken by the police.
13) Can I recover my
money or at least recoup my losses?
You will have to take
civil action against the company to recover your money. Please
consult a lawyer on the available legal actions that you can take.
14) What sort of action
is the SC taking to address the problem of bogus spot commodity/index
firms?
The SC is adopting
a two-pronged approach to address the problem of bogus spot commodity/index
firms. This involves enforcement action and investor education.
In terms of enforcement, the SC has conducted and will continue
conducting raids on these bogus spot commodity/index trading firms.
We have also charged one individual for illegally operating a
futures market - he pleaded guilty recently.
To educate investors,
the SC has issued investor alerts such as this one. Periodic reminders
will be issued to the public. We have also given investors a guide
on how to spot these bogus spot commodity/index trading firms.
We hope that FAQs such this one will also enhance investor awareness
of this problem.
15) Why isn't the SC
investigating Company X? What is the SC doing about other companies
also involved in spot trading?
The SC, as with any
other enforcement authority, has to be discreet about the details
of its enforcement work so as not to jeopardise the success of
a case. While we are unable to disclose to the public the names
of the companies under investigation until more concrete evidence
is secured / until the case is at a more advanced stage, we would
like assure investors that the SC's enforcement work is on-going.
The SC has received information on many spot-commodities and index
companies through complaints from victims and even former staff
members of these companies. SC has noted the names and locations
of these companies and will be able to take action against them
at the appropriate time.
16) Where can I forward
information or submit a complaint on bogus spot commodity / index
trading firms?
Write to SC's Complaints
Unit at:
Complaints Unit,
Securities Commission,
3 Persiaran Bukit Kiara,
Bukit Kiara,
50490 Kuala Lumpur
Fax: 03-62048991
Email aduan@seccom.com.my.
The public may also
call the Complaints Unit at 03-62048999.
SECURITIES
COMMISSION
13
December 2001
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