Investment naivety and lack of financial acumen do not seem to be the prerogatives of developing countries, but seems to be rampant in developed countries too. The news that a father and daughter team — Paul and Zibiah Gunter — have swindled nearly $70 million from naïve British investors has come as a shock, especially in an age when information is freely available on the Internet to double check some of the deals being marketed by potential conmen. While Paul and Zibiah have been arrested in Florida and are awaiting trial on multiple counts of fraud and money laundering, the human impact has been the same for those swindled — loss of hard earned savings and tales of woe from the victims.
One expects hardened conmen (and conwomen it seems) to be heartless, for one cannot have any shred of human decency or feeling remain to know that pensioners are being taken for a ride. What one does expect, however, is that investors ask the most basic questions when faced by such lucrative offers — if the offer is too good to be true, it cannot be true. This applies to “greenfield” or brand new investments, offering sky-high returns for taking initial risks. Sometimes, but very rarely, seemingly crazy ideas do take off and make millions. Most often however, scams take place when there seems to be a mixture of real projects or investments thrown into the pot, along with many others that are just paper investments. In the case of the Gunters of Florida, they are accused of selling fake shares in over 50 firms dormant since 2005, in what is known as “boiler room” fraud scams. A couple of dormant, but actual companies that had operated at some stage provide a convenient fig leaf of genuine operations.
It was the scale of the fraud, affecting nearly 15,000 Britons, that is shocking and points toward one conclusion: The general public is still gullible, naïve in making rational investment decisions, as well as in the final analysis, being greedy. The human tendency to try and make quick gains surfaces time and time again as evidenced by history and the many speculative bubbles around the world. The Middle East has not been immune, as evidenced by the losses incurred in the Kuwait Souk Al-Manakh, the Egyptian Al-Rayyan debacle, and the Saudi Eid and Jouma’a investment company collapses. The whole financial system seems to be gripped by quick money making fever — and who is to blame unsophisticated individual investors of being conned when their more sophisticated financial guardians are playing at the same game?
The recent revelations from France of the rogue trader Jerome Kerviel of Societe General points to a greater malaise gripping everyone. As long as institutional rogue traders were doing well and pulling in profits, they were stars and few questions were asked. When things went horribly wrong, then enraged shareholders demand heads roll. And so with the latest boiler room scam — as long as investors were assured that their (worthless) investments were making money, then investors placed more in the scam. Few stepped back and asked the basic questions such as — where is the legal jurisdiction and registration of such investments or companies? Were they operating out of regulated or unregulated financial jurisdictions? Were the shares on offer listed in any regulated primary or secondary markets? Could such shares be sold onward and through which registered markets? It is difficult to keep a balanced judgment when one is being hard pressed by unscrupulous conmen, but it is not surprising that when such basic questions are posed, the phone calls from conmen seem to suddenly stop.
Once again, investor education, whether in the developed world or in the Middle East, is a key factor to stop such scams from recurring every few years, as people seem to fall back to amnesia until the next scandal breaks out. The current Saudi stock market erratic performance are a general reflection of economic unease, especially in the world’s financial markets, and whether there will be repercussions on the local market. Unlike the UK boiler room scam, Saudi companies are legally registered and regulated. The local investor is certainly now asking fundamental and basic questions, and only rumors play a major role in erratic movements.
(Dr. Mohamed Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)