Commentary: Why greed and envy spell trouble

Date: July 5, 2021

First published in Straits Times on 4 July 2021

So it has happened again. Investors have once again fallen prey to an alleged fraudulent scheme that promised unusually high returns. One would have thought that the offer of a 15 per cent return quarterly would be sufficient to raise the alarm bells and send many running for cover.

Instead, it was reported recently that investors have possibly lost up to a mind-boggling $1 billion in a scheme involving nickel deals run by Envy Asset Management and Envy Global Trading. What is even more astounding is that the victims are not just the moms and pops.

The list of wealthy and astute persons, whose money may be irrecoverable from these so-called nickel deals, includes prominent lawyers and investment professionals – all presumably expert individuals.

One would have thought that they would be more than capable of avoiding a scheme that supposedly offered returns that were beyond any normal expectation.

There is an old investment adage that “if something seems too good to be true, it probably is”. What this means is that there are no free lunches in financial markets and that any investment which offers abnormally high returns must be viewed with a healthy dose of scepticism and taken with a huge bucket of salt.

It sounds simple enough, yet this relatively simple bit of market wisdom is sometimes forgotten in the eagerness to make money and willingness to believe that a quick buck is possible.

In an investment climate where interest rates have been kept depressed by the world’s major central banks, one might argue that the search for yield – which is common among investors around the world – enticed these people into buying into this scheme because of the attractive money it promised.

Yet by the same token, one could quite legitimately argue that if it were really so easy to make money from nickel deals and if the prospective returns were really so attractive, then an efficient market, thousands upon thousands of very intelligent traders and analysts with decades of experience would surely jump in, and the massive trades would have eroded any chance of super profits.

Moreover, if you think that a free lunch is possible, then think again. History is littered with many scams and all manner of fraudulent schemes that have succeeded for one simple reason – they prey on an innate human weakness, namely greed and the willingness to believe in easy money.

Still, this is not the first time that smart individuals have lost large sums through a scheme which offered eye-catching returns. Recall that it wasn’t that long ago that thousands of investors, including professionals and well-known Hollywood celebrities, lost a total of US$64.8 billion (S$87.4 billion) in a massive Ponzi scheme run by the former chairman of Nasdaq, Bernie Madoff.

For those unfamiliar with the term, a Ponzi scheme is one where money taken from new investors is used to pay high returns to older investors. In Madoff’s case, investors were promised and paid double-digit returns over a period of many years, and the seemingly solid track record of the scheme lured more and more investors to join.

Of course, by its very nature, a Ponzi scheme has to collapse when the pool of gullible persons runs dry, which is what eventually happened in 2008. Madoff was sentenced in 2009 to 150 years in prison and died earlier this year while serving that sentence.

One episode in which Securities Investors Association Singapore (Sias) was actively involved in 2014 was that of Profitable Plots, a UK land banking firm that promised 12.5 per cent returns within six months. Investors’ money was used for other purposes instead, including paying off debts. The directors of the company were later jailed eight years.

In these Ponzi schemes, some investors may have smelled a rat. However, they might have thought they could earn good money and exit before the scheme collapsed. Unfortunately, they got the timing wrong and paid the price with their entire investment.

It is very painful to read about such cases where entire retirement savings have vanished overnight. Investments that advertise high returns will always come with high risk, but the reverse is not true – if you take on high risk, there is no guarantee that you will make a lot of money.

Sias has encountered many such cases over its 21 years of looking after the interests of the investing public – as long as greed is at the forefront and not common sense and logic, such scams will keep on coming and people will continue to fall victim.

Sias’ advice is simple – if the headline returns are high relative to the risk-free rate, be suspicious, sceptical and walk away. Practise the Ask, Check and Confirm routine – ask as many questions as you need to understand what’s being offered and how the returns are to be generated. Then check and double-check the credentials of the proposer or seller and whether it is regulated by the Monetary Authority of Singapore, and go back and confirm everything again and again.

At the slightest doubt, consult a licensed financial adviser before parting with your money. Many who lose money to scams allow greed to overpower their fear of losing money. It might be a good idea to start practising the reverse.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)