AN EXAMINATION OF THE LEGAL FRAMEWORK FOR COMBATING FRAUDULENT INVESTMENT SCHEMES IN THE NIGERIAN CAPITAL MARKET

AN EXAMINATION OF THE LEGAL FRAMEWORK FOR COMBATING FRAUDULENT INVESTMENT SCHEMES IN THE NIGERIAN CAPITAL MARKET

Abstract:

Finance is the key to investment and growth hence the need for efficient financial systems to help development. Nigeria’s financial system comprises the money and capital markets that serve it. These two sub-sectors create financial assets and liabilities by intermediating between surplus and deficit units in the economy. While the money market is where short term loans are sourced, the capital market is one for medium and long term funds. The Nigerian capital market like other capital markets in the world is sustained by the level of investment that drives it. Investment is fundamental to the growth and development of any economic entity. The returns on investments benefit the individual and have multiplier effects on the society at large. This dissertation examines the legal framework for combating fraudulent investment schemes in the Nigerian Capital Market by employing the doctrinal method of research. The upsurge in fraudulent investment schemes in the Nigerian capital market has virtually impacted all aspects of the country, ranging from money loss; leakage in the financial system; undermining confidence in the market and psychological effects on the investor among others. Despite the numerous laws and institutions in place to help in the fight, fraudulent investment schemes continue to plague the Nigerian capital market. This research finds that this can be attributed to the ignorance displayed by investors at identifying genuine investment schemes. There is therefore, the need for the Securities and Exchange Commission to embark on massive investors’ enlightenment campaign to educate investors and potential investors about investment schemes

CHAPTER ONE.

GENERAL INTRODUCTION.

1.1            Background to the Study.

The financial system of every country regulates the mercantile environment. This is important because finance is key to investment and growth hence the need for efficient financial systems to help development. A nation‟s financial system comprises the money and capital markets that serve it. These two sub-sectors create financial assets and liabilities by intermediating between surplus and deficit units in the economy. While the money market is where short term loans are sourced, the capital market is one for medium and long term funds¹.

All efficient financial systems are sustained by the level of investment that drives the system. Investment is a sine qua non of growth and development of any economic entity. Usually, investment involves postponing current consumption to put resources in capital formation activity or production of future income. The basic objective of any investment decision is the creation of wealth via returns on investments.² The returns on investments are derived from visible manufacturing or commercial activities. These returns on investment benefit the individual and have multiplier effect on the society at large³.

Investment without doubt plays a crucial role in the economic well being of individuals and business enterprises. It is one of the vital ways of creating wealth. It is also an act that prepares one for a better future. An individual or a body with better investment potentials lays good foundation for eventual opportunities and good living in future; that is why it is essential and advisable for individuals, corporate bodies and even government authorities to invest for a better tomorrow. The objective of investment ranges from dividends, capital

¹Osaze, B.E. (2007) Capital Markets, African and Global, Bookhouse Company, Nig. p.7

² Agom, A.R (2010) “Global Investment Alert; The Ghost of Charles Ponzi and Investment Regulations”, African journal of Business and Comparative Law, Vol. 1 No. 1, p.38

• Ibid appreciation or growth, capital gains or adventure⁴. Investing in the capital or money markets provide the long or short term funds needed to develop a country.

According to the World Bank⁵, Gross Domestic Product (GDP) growth is higher for those countries, which have relatively higher investment ratio. Lately, the Nigerian economy has enjoyed global prominence. Following the 2014 April statistical rebasing, Nigeria emerged as Africa‟s largest economy and ranking twenty-sixth in the world with a Gross Domestic Product put at five hundred and two billion United States Dollar⁶. Generally speaking, investment refers to all economic activity which involves the use of resources to produce goods and services. Investments can broadly be classified into two:⁷ real and financial investments. Real investments refer to investments in tangible assets, such as machinery, land, factories and offices. These assets are used to produce goods and services for future consumption. This is regarded as capital investment^4. In the case of financial investment (choses in action) the investor‟s sole interest is in the amount invested and the future streams of income it will generate⁸.

Financial investment must be distinguished from gambling/wagering transactions which in their nature are speculative and essentially games of chance⁹. Usually, when investors invest in any scheme, their basic objective is that they receive returns. Their intention of coming to the market is not to gamble their hard earned money but to invest into real and visible manufacturing or commercial activities not phony investment schemes. Risk

• Apinega, S.A.(2006) “Legal And Economic Issues In Stock Selection”, Ahmadu Bello UniversityLawJournal, 24-25, p.102

⁵Anwer, M.S.andSampat,R.K.(1999) “Investment and Economic Growth”, Being a Paper Presented at Western Economics Association Annual Meeting, Department of Agricultural and Resource Economics, Colorado State University. p.3

• Agom, A.R.,(2015)“Investments And Securities Act: A Veritable Tool For The Development And Growth In The Nigerian Capital Market”; A Paper Presented at the Investments And Securities Tribunal Workshop Held at the

Oriental Hotel Lekki, Lagos on the 8th day of December, p.2

⁷Maimako, S.S (2014) “Risk and Return: Investment Choices And Irrational Exuberance”, being a paper presented at the University of Jos Inaugural Lecture Series 66, p. 1

• Agom op cit. 38

• Agom, A.R (2011) “The Ghost of Charles Ponzi; An Albatross for Investment Regulation in Nigeria”,Benue State university Journal of Private and Public Law, 1, No.1 p.49 and return are natural consequence of investment. The complex nature of an investment defines the peculiar exposure of investors to risk. Generally, all investors (individuals or institutions) have investment objectives and on the basis of risk tolerance can safely be classified into three categories¹⁰.The risk averters are investors who do not like taking risks. Investors who are risk lovers are more willing to take chances with given expected return than accept an equal sure amount. They select attractive investments with good yield in income and capital appreciation¹¹. The third category is the risk neutral investors. They are indifferent to risk.

Any of these categories of investors can be a victim of phony or fraudulent investment schemes. Although their choice of investment vehicle is usually influenced by safety factors and certainty of returns, rational investors would normally avoid investing in worthless ventures. Nevertheless, occasionally, even the most rational investors could be victims of fraudulent investment schemes.

In recent times, various fraudulent investment schemes have been advertised in Nigeria with promises of good returns. Prominent among them is the case of New Nation in 2014.¹² The Securities and Exchange Commission clamped down its activities which had branch network in all 36 states of the Federation, including the Federal Capital Territory. In Nigeria, fraudulent investment schemes known as „wonder banks‟ gained prominence following the saga of Resource Managers Nigeria Ltd in Port Harcourt in 1991¹³. One Mr. Ummanah E. Umanah using this company offered investment and money management services to members of the public. The scheme offered subscribers as much as sixty percent

¹⁰Osaze, E.B (2007) Capital Markets African and Global, Bookhouse Co., Lagos p. 176

¹¹Osaze, Ibid

¹²Ighomwenghian, K. (2014), SEC Draws Battle Line with Wonder Banks, Business News, February

• 2014, retrieved from dailyindependentnig.com/2014/02/sec-draws-battle-line-with-wonder-banks. Accessed 18/6/2015
• Agom (2011) op cit., p.55 interest within thirty days. This was in addition to other benefits. This outfit attracted so many investors until the clamp down by the Securities and Exchange Commission.

From the 1920s when fraudulent investment schemes gained prominence by the actions of Mr. Charles Ponzi, variants of the scheme have reverberated across the globe and on such occasion showing new sparks and jolting securities regulators.Corporate and Securities laws have learnt and developed after high points of corporate collapse and the attendant regulatory response. The South Sea Act of 1720, the Joint Stock Company‟s Act of 1844 and the Judgment of the House of Lords in the case of Salomon v. Salomon¹⁴ were bold attempts at containing corporate excesses of their times. In Nigeria, the Companies and Allied Matters Act, the Investment and Securities Act and the Codes of Corporate Governance were also regulatory attempts at containing corporate excesses. These have sharpened our corporate and securities law today.

The Fraud Saga has no doubt impacted seriously on our corporate laws generally and securities regulation specially. The lessons from the spate of corporate failures have thrown up so many challenges for securities regulation and resulted in streamlining and tightening of securities law in virtually all jurisdictions and Nigeria is no exception¹⁵. This study is premised towards that direction.

1.2    Statement of the Research Problem.

The regulation of the Nigerian Capital Market has been in place for over five decades. Although, the first major step towards formal capital market regulation was taken in 1961 when the Lagos Stock Exchange Act¹⁶ was enacted. The regulation of the market can be

• (1894) AC 22
• Agom, A.R.(2005) “Lessons from the Burst of Enron and the Challenges for Securities Regulation”,

Ahmadu Bello University Journal Of Commercial Law, Zaria, vol.2 no.1, p.142

¹⁶Sanusi, I.O (1984) “Capital Market in Nigeria: Nigerian Commercial Law, Problems and Prospects”, Ahmadu Bello University Law Journal, Zaria p. 133

traced from the colonial era when the colonial Stock Act of 1877¹⁷ was in force in Nigeria. Despite the numerous laws¹⁸ that have been enacted over time to regulate the capital market, the market is still plagued with fraudulent investment schemes.

Additionally, the Investments and Securities Act¹⁹ created the Securities and Exchange Commission as the apex regulator of the Nigerian capital market with statutory regulatory powers. The SEC has been in existence since 1988 yet fraudulent investment schemes operate openly in defiance of SEC. The legal question that arises is whether or not SEC is adequately equipped legally to fight these fraudulent investment schemes. Therefore, the questions arising from this research are;

3. How adequate are the legislations in Nigeria for combating fraudulent investment schemes?
4. How effective are the existing legal institutions in combating fraudulent investment schemes?
5. What mechanisms are in place for investors‟ education on fraudulent investment schemes and how adequate are they?

1.3. Aim and Objectives of the Research

The present research is considered necessary to examine the existing legal regime of the nation‟s capital market to ascertain its viability as a tool for fighting fraudulent investment schemes in order to ensure the continuance of the Nigerian capital market, since the capital market is one of the major driving forces of the Nigerian economy. The research therefore considered the following objectives:

¹⁷Igwe, J.U.K (1999) Investment, Nigerian Capital Market and Corporate Governance Laws, PracticeandEthics, Law Development Research Publication and Consultancy, Lagos p. 6

¹⁸Promulgation of the Nigerian Enterprises promotion Act, Securities and Exchange Commission Decree No. 71 of 1979; Investment and Securities Act No. 4 of 1999; Investment and Securities Act 2007; Companies and Allied Matters Act, 1990 etc.

• 2007

3. To appraise specific laws in Nigeria to ascertain their viability as tools for protecting the Nigerian capital market against fraudulent investment schemes in order to ensure the virility of the market.
4. To identify the weaknesses of the existing legal and institutional frameworks for combating fraudulent investment schemes in the Nigerian capital market.
5. To examine the sufficiency of mechanisms in place for investors‟ education in order to

determine their adequacy as tools for the protection of investors against fraudulent investment schemes.

1.4. Literature Review.

Existing literature in this field has comparably remained scanty; the need for an update under the current legal regime becomes compelling. We acknowledge with due respect the works of learned authors in this area of interest.

Osaze²⁰ in chapter six of his book attempts an insight into the regulatory environment of the Nigeria capital market, affirming the importance of regulation. It is submitted with due respect that his contributions are restatements of laws such as the Companies and Allied Matters Act²¹, the Insurance Act²² and the Trustee Investment Act²³. Apart from the fact that the laws he examined do not fall within the scope of this research, in discussing the regulatory institutions of the Nigerian capital market he states that the Securities and Exchange Commission is the apex regulatory body of the capital market after the Ministry of Finance and the Central Bank of Nigeria, which view is not the true position under the current Investment and Securities Act 2007 and which this work seeks to correct. This research not only examines the primary law that regulates the Nigerian capital market, it also

²⁰Osaze E.B  (2007) Capital Markets African and Global, Bookhouse Co., Lagos p. 176

• Cap C20 L.F.N.2004

 

• 2003

• 1962

examined other laws that are targeted at combating financial crimes in Nigeria, such as the Economic and Financial Crimes Commission Act, the Criminal and Penal Codes and the Advance Fee Fraud Act²⁴. This research does not merely state these laws but examines them in the light of the present Nigerian society.

Ako²⁵ in chapter seven of her book merely lists the laws regulating the Nigerian capital market and mentions the now repealed Investment and Securities Decree NO.45 of 1999. Therefore, an update under the current legal regime becomes compelling. This research will provide the update under the ISA, 2007.

The work of Olukole²⁶ in chapter six attempts an examination of legislations relating to the capital market. Like Ako‟s²⁷work, it was carried out under the old laws such as the Investment and Securities Decree 1999, Nigerian Investment Promotion Commission Decree, 1995 among others. The need for a current write-up which this research provides.

In addition, Ekiran²⁸and Eleh²⁹ examined the Nigerian capital market. Analyzing the types of markets, types of securities, market operators among others. Despite their contributions, there was no mention of fraudulent investment schemes in their book or of the legal framework for combating them. This research provides for this.

Other foreign texts reviewed include that of Tjio³⁰. In his book of eight chapters he discussed extensively the principles and practices of securities regulation in Singapore, pointing out the importance of securities regulation. Despite his contributions, the scope of his research does not fall within the precinct of this work which is not just about regulating securities but combating fraudulent investment vehicles existing in the market.

• 2005

²⁵Ako, R.M (1999) Capital Market Manual, La Rose Ltd, Abuja

²⁶Olukole, R.A (2002) The Capital Market in Nigeria, Perfect Printers Ltd, Lagos.

²⁷Ako, op cit.

²⁸Ekiran, O.(1999) Understanding of Capital Market Operations, CIBN Press Ltd

²⁹Eleh, Z.N (2004) Know Your Capital Market Inside-Out, Creation House, Lagos

³⁰Tjio, H. (2011) Principles and practice of Securities Regulation in Singapore, Lexis Nexis, Utopia Press Ptc Ltd, 2^nd ed.

It must be noted that while this research seeks to examine investment schemes which in themselves are fraudulent, and how to combat them, most of these authors reviewed did not extend that far, even when they mentioned fraud it was in relation to fraud in securities transaction and not fraudulent investment schemes.

Geoffrey³¹another foreign author examined the Malaysian Capital Market in his ten chapter book. His book centres on the Malaysian capital market with specific reference to the Malaysian Capital Market Services Act; discussing the history of the Malaysian capital market, market misconduct among others. Thus, the need for a Nigerian text which this research provides. In addition, his book does not extend to the scope of this research which centres on phony investment schemes.

Other works in journals were reviewed. In this category is the work of Akume³² and Agom³³ these Journal articles basically centre on the Securities and Exchange Commission‟s powers to regulate the Nigerian capital market generally, this research specifically looks at the role of SEC in combating fraudulent investment schemes. This research is different from theirs in scope at least.

Finally, Agom³⁴ in his journal article appears to be the only author to touch the core of this research. But then, his focus is only on Ponzi scheme which is one of the many fraudulent investment schemes covered in this research. This research is wider in scope and covers more ground. In the circumstances, research reveals that the topic of this dissertation has not been comprehensively treated and there follows the need for work in this area of the law

³¹Geoffery, S.(2010) Capital Market Laws of Malaysia, Lexis Nexis, Dolphin Press Ltd,Sdn Bhd.

³²Akume, A.A (2007) “A Critical Analysis of the Exercise of the Securities and Exchange Commission‟sPowers to Regulate the Nigerian Capital Market”, Ahmadu Bello University Journal ofCommercial Law, Vol. 1 No. 3, pp. 186-202

³³ Agom A.R (2009), “The Transmogrifying of the Securities and Exchange Commission from a Watchdogto a Bloodhound”,Ahmadu Bello University, Journal of Commercial Law, vol. 4, pp. 26-49

³⁴ Agom, A.R (2011) “The Ghost of Charles Ponzi, An Albatross for Investment Regulation in Nigeria”,Benue State University Journal of Private and Public Law, vol. 1 no. 1 pp. 49-60

1.5         Scope of Research

The scope of this work is determined by the statement of the problem and objective of the research. Accordingly, the Investments and Securities Act 2007 is the main law in focus. In addition, references are made to other laws that cover financial crimes such as the Economic and Financial Crimes Act, The Criminal and Penal Code Acts and The Advance Fee Fraud Act. The geographical scope of this research is the Nigerian capital market. References are made to other jurisdictions as learning points for Nigeria.

1.6         Justification of the Research

The necessity to expose the dangers of fraudulent investment schemes to the Nigerian society and the need to update the existing texts under the current legal regime makes this work compelling and important. The attendant ignorance displayed by the general public who are major victims of this phony scheme justifies this research as a means of enlightenment for them.

In addition, the place of importance occupied by the capital market in the economy of the nation in promoting investment makes this research important in the sense that this work has identified fraudulent investment schemes and the way investment laws and institutions could be marshaled to combat them.

1.7 Research Methodology.

The research is largely based on doctrinal method. To this end, primary sources of data such as statutes, case laws arising out of the decisions of courts have been relied upon. Secondary sources of materials such as textbooks, journals, magazines, newspapers, and the internet have extensively been used in writing this research.

1.8 Organizational Layout.

The research is organized into six chapters for adequate treatment and comprehension of the subject matter. Chapter one generally introduces the main features of this research including the problem, scope, methodology, review of related literatures and justification.

Chapter two focuses on the conceptual clarification of the terms contained in the topic of research in order to aid understanding of concepts such as; legal framework, combating, fraudulent, investment schemes and the Nigerian capital market. Chapter three extensively discusses fraudulent investment schemes, ranging from Ponzi, pyramid, affinity, pump-and-dump, boiler rooms, and real estate scam.

Chapter four appraises the legislative and institutional framework for combating such fraudulent investment schemes like the Investments and Securities Act 2007, the Economic and Financial Crimes Commission Act 2004, the Criminal and Penal codes Act L.F.N.2004; the institutional frameworks ranging from the Securities and Exchange Commission, the Investments and Securities Tribunal, the Administrative Proceedings Committee, the Economic and Financial Crimes Commission, the Police and lastly the Judiciary. Finally, chapter six draws some general conclusions based on the findings and offers some useful recommendations.

AN EXAMINATION OF THE LEGAL FRAMEWORK FOR COMBATING FRAUDULENT INVESTMENT SCHEMES IN THE NIGERIAN CAPITAL MARKET

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