This warning follows the SC's raid on three companies in Kuala Lumpur on 9 October 2000 for carrying out illegal futures trading of commodities in foreign markets.

The three companies were disguised as "spot commodity" firms and styled themselves as commodities traders in the spot/cash market. They accepted cash from members of the public to supposedly trade in various commodities such as coffee, cotton, soybean and pork bellies.

However, the SC discovered from its investigations that the purported trading carried out by these companies is contrary to spot/cash trading given that elements of futures trading such as non-physical delivery of commodities, closing of positions to realize gains or losses, leveraged trading, acceptance of margin deposits and margin calls, "roll-over" of open positions and etc, were present.

The Futures Industry Act 1993 prohibits the establishment, operation and maintenance of a futures market unless approved by the Minister of Finance. The Act further prohibits the trading of futures contracts unless licensed by the SC. Breach of either of these prohibitions constitutes an offence which carries a punishment of a fine of up to one million ringgit or a jail sentence which may extend to 10 years or both.

The SC has received numerous complaints from members of the public concerning the practices of these "spot-commodity" companies. Very often, the business practices of companies engaging in these activities are dubious and the level of professionalism and ethics of their staff are questionable. Complainants claim that they have incurred losses ranging from tens of thousands of ringgit to more than a hundred thousand ringgit, within a matter of days.

Members of the public may wish to note that spot-commodities trading is not licensed nor supervised by the SC. However, should the product or trading mechanism of these so-called spot-commodity companies contain features of futures contracts, the activities will come under the purview of the SC. The SC has received information regarding the existence of other such "spot-commodity" companies operating in Kuala Lumpur and various towns throughout Malaysia. To help the public identify such companies and avoid falling prey to these scams, the SC has provided some pointers on their key features and modus operandi:

SPOTTING A "SPOT-COMMODITY" FIRM

"Spot-commodity" companies generally claim that they are "agents" for foreign trading houses, usually incorporated in jurisdictions such as Macau, Indonesia, Singapore, the British Virgin Islands and the Bahamas.

Although these "spot-commodity" companies claim to trade their products in the foreign market, very little evidence exists to show that these trades are transmitted to foreign commodities exchanges. In actual fact, the traders in these companies practice what is known as "bucketing" i.e. where they execute customers' orders for their own account instead of on the market, with the hope of profiting from an offsetting transaction at a future time.

These "spot-commodity" companies would solicit investments from investors through their "business consultants" or "managers", who are in fact traders, through cold calls.

The companies would also attract business by recruiting new staff, who are then encouraged to invest and/or bring in friends and relatives as investors. These "spot-commodity" companies would advertise for new staff to fill in posts such as Executive, Administrative Assistant or Clerk, via the classified sections of local newspapers. A prospective employee is then interviewed and given a few days of "training". At the end of the training, these employees are encouraged to invest their savings in the products and/or to attract other investors. In some cases, these employees are threatened with "no pay" unless investments are made or brought in.

To invest, the investors are generally asked to pay an initial sum called "margin deposit" which may range from an equivalent of USD3,000 to USD5,000. The investors are then advised that their investments are relayed to the company's foreign principal. Usually, investors are asked to sign a trade agreement purportedly with the company's foreign principal.

The business hours of these companies begin at night until the wee hours of the morning, to create a legitimate front of having to coincide with the trading hours of foreign commodities exchanges such as those in New York and Chicago. The traders would normally refer to Reuters, Bernama and other online information providers to further convince investors of their legitimacy.

Complainants who have come forward to the SC confirmed that their initial margin deposits were depleted within a matter of days, resulting in "margin calls". Margin calls are requests from spot-commodity companies to their clients for additional deposits in order for trading to continue. More often than not, the companies encourage the investors to continue trading to recoup their losses. Additional deposits are then made and the process is repeated, resulting in the investor suffering increasing losses. In some cases, investors' accounts show occasional trading profits. However, investors face difficulty in cashing-in their gains, and eventually, all their investments are lost. In almost all cases, investors have no control over the manner of trading in their accounts, as they would have signed-over authority to the company's traders to execute trades on their behalf.

The SC warned the public that these "spot-commodity" companies have the tendency to change their names and premises every now and then to avoid detection from relevant authorities. They might also modify their modus operandi and practices to deceive ignorant investors.

Members of the public who wish to trade in commodities are reminded to do so via a duly licensed futures broker. The SC's website provides a periodically updated list of licensed futures brokers.

The SC encourages members of the public who are in doubt of the licensing status of any company or individual trading in securities to contact the following: