WARNING! Beware of bogus spot commodity/index trading firms

Kuala Lumpur, 13 December 2001

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: [email protected], 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: [email protected].

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
The public may also call the Complaints Unit at 03-62048999.


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