Analysis Of Ponzi Scheme In Nigeria; Viz-A-Viz Its Legal Framework

Following the economic recession of Nigeria was the emergence of Ponzi Schemes aimed at paying out interest returns to invested parties, through a continuous borrowing process from other parties. While there are different theories on the scheme, there also exist a variety of legal and moral undertones to it.

INTRODUCTION

To say that there is an army of illegal investment schemes in Nigeria that emerge daily is to understate the reality. It was observed that the emergence of this scheme in Nigeria was notably visible during the plague of the economic recession in Nigeria. While it was opined by some individuals that these schemes came to the rescue of Nigerians in the last quarter of 2016, to help cushion the effects of economic recession, others were of the view that the scheme had no effect either on the economy or its participants.

However, it is pertinent to state that these schemes date as far back as the 1920s, to the activities of a man named Charles Ponzi, who announced an arbitrage business of buying postal reply coupons in Italy and exchanging them for stamps in the USA. According to Stelter, Berger, Odewald & Schilder, he attracted investors by promising extraordinarily high returns of 50% in 45 days. They noted that instead of investing the money to buy the coupons and exchange them for stamps, he simply used the money of later investors to pay returns to earlier investors, extracting huge profits along the way. When it eventually collapsed, over $20 million estimated to be the equivalent of $225 million as of 2011, was lost. Since then, the world has been littered with distinct versions of such schemes.

The article is aimed at critically analyzing the concept of the Ponzi scheme, its effect on the Nigerian Economy and the legal framework in respect of the same.

MEANING

According to Sadiraj and Schram (2000), Ponzi schemes are fraudulent games where individuals or companies pay out interest returns to some invested parties by borrowing funds from others. Therefore, Ponzi schemes can be described as an enticing established swindle networking, where monies of newer entrants or investors are used to pay increased returns to earlier investors rather than the profit earned through legitimate business investment. In other words, this is simply the concept of robbing Peter to pay Paul. 

Ponzi schemes have been categorized as a form of white-collar crime. These are non-violent crimes which are usually initiated and coordinated by influential individuals who are classified as intelligent, popular and initially well respected in their respective lines of work. An example is the conviction of Bernard Madoff, a highly-regarded Hedge Fund Manager and a former president of the National Association of Securities Dealers Automated Quotations (NASDAQ) for running a very sophisticated Ponzi scheme which defrauded over 50 billion dollars (Greenspan, 2011). Ponzi ‘schemers’ always seek to recruit new investors and so long as new investments are expanding at a healthy rate, the schemer keeps the fraud going. 

PONZI SCHEMES IN NIGERIA

In Nigeria, it is almost impossible to discuss the concept of Ponzi schemes without mentioning the unforgettable MMM incident which saturated news outlets in 2016. The Mavrodial Mondial Movement (MMM) scheme was one of the most well-known examples of a Ponzi scheme. It was established in 1989 by three Russian nationals, Sergei Panteleevich Mavodi, Vyacheslav Mavrodi and Olga Melnikova. 

The scheme promised its clients a 30 to 100 per cent return on investment (ROI) for money put into the system for 30 days. The scheme was designed to function as a mutual aid fund through which recruited members contribute money to assist others. Of course, like every other Ponzi scheme, it crashed about 18 months after its introduction into the Nigerian market. 

Other Ponzi schemes which have existed or are still existing in Nigeria include Ultimate cycler, Zar fund, Givers forum, ICharity, Crowd rising, Get help worldwide, Kash Doubler, Apex Forum, Reget Cash, Donorbiz, Ogafunds, and so on.

It is bewildering to know that individuals being fully aware of the perilous nature of these schemes, still engage in them. In determining the reason for the consistent patronage these schemes always get, whenever it is dressed in different attire and presented to the populace, a study has shown that about 60.3% engaged in Ponzi schemes due to the current economic conditions associated with the recession. About 19.3% attributed their participation to the quick turnover in investment within a short period of time. 

Also, 10.1% said they invest as a means of diversifying their streams of income, 8.1%, 1.5% and 0.7% reported they participated in Ponzi schemes due to poverty, inadequate interest on bank deposits and greed to get-rich-quick respectively.

LEGAL IMPLICATION OF PONZI SCHEME IN NIGERIA

In law, Ponzi schemes are simply illegal and criminal. The rationale for this is that, businesses that involve the act of collecting money from the public with the promise of repayment with interest is reserved for only banks or bodies established by law to carry out such business. In other words, any other person is legally prohibited from carrying out such business in law.

According to section 67(1) of the Investment and Securities Act (ISA), 2007:

“No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with any Body Corporate for a fixed period or payable at call …”, Ponzi schemes are therefore illegal and a felony punishable under the law as evident in subsection 2 which states thus;

If an invitation to the public is made in breach of subsection (1) of this section, all persons making the invitation and every officer who is in default or anybody corporate making the invitation shall be separately liable to a penalty of N500,000 in the case of a body corporate and N100,000 in the case of an individual.”

Furthermore, by a combined effect of sections 58(1) and 59 of the Banks and Other Financial Institutions Act (BOFIA), 2004, no person shall carry on financial business in Nigeria other than insurance and stockbroking, unless it is a company duly incorporated in Nigeria and holds a valid license granted by the Central Bank of Nigeria (CBN). Unarguably, Ponzi schemes operate without the license and authorization of the CBN and are thus, illegal.

It is noteworthy, that Ponzi schemes have also been recognized by the Nigerian Court as illegitimate and fraudulent thus, in the case of Mekwunye v. Lotus Capital Ltd. & ORS, the Appellant sought a declaration that the 1st Respondent’s Telecom Private Equity Fund is Ponzi scheme and an instrument of fraud used by the Respondents to defraud unsuspecting Nigerians, and as anticipated, the Court held in favour of the Appellant.

According to section 67(2) of ISA, engaging in Ponzi schemes attracts a fine of N100,000 (one hundred thousand Naira) for individuals (natural persons) and N500,000 (five hundred thousand Naira) for corporate entities. Additionally, under section 59(6)(b) of BOFIA, participation in Ponzi schemes attracts a punishment of 5 years imprisonment or a fine of N1 million (one million Naira) or both as the case may be.

In a bid to take steps to curb the alarming increase of Ponzi schemes, a bill sponsored by Hon. Babangida Ibrahim was introduced in the first quarter of 2022. This bill seeks to, among other things, proposed a jail term of not less than 10 years for promoters of such schemes.

CAN MONEY INVESTED IN THIS SCHEME BE RECOVERED? 

In certain jurisdictions, after a Ponzi scheme is discovered by government regulators, the SEC files a lawsuit against the Ponzi perpetrator, and a trustee is then appointed to recover as much money as possible to make payments to creditors and to redistribute any recovered proceeds pro rata to investors. In Nigeria, notwithstanding the provision of section 67(3) of ISA, which states that an investor can cancel the transaction or recover his money or even recover compensation for any loss resulting from the transaction. The monies invested into Ponzi schemes cannot legally be a subject of a suit on the principle of law that the Court cannot enforce illegality.

In elucidating the above provision, the Court in the case of OCHEDI & ORS v. CBN & ORS (2018) LPELR45316(CA), held that “The monies the Appellants seek to recover from the 1st – 6^th Respondents… are in respect of transactions; i.e. the financial business of soliciting for and accepting money from the general public as deposits for profit, by a company that did not have a valid license to carry on such business, prohibited by the above provisions of BOFIA and so illegal…For the purpose of and in the eyes of the law, the transaction between the Appellants and Wealth Zone Limited from the beginning, was clearly not only prohibited but also punished by the law and so illegal, whether the Appellants knew or not as ignorance of the law is no defence or excuse. Being illegal from the beginning, the transaction between the Appellants and Wealth Zone Limited could not have vested the Appellants any legal right that is cognizable and enforceable by a Court of law.”

This has been restated in replete of cases including UNITRUST INSURANCE CO. LTD. v. AMBICO SENDIRIAN NIGERIA Ltd. (2012) LPELR-15417(CA) where it was held thus:

“Where a contract is expressly forbidden by statute, its illegality is without question, and the Courts are forbidden to enforce it, or allow itself to be used to perpetrate illegality, or enforce same in all its ramifications. It behoves on parties to bring to the notice of the Court any illegality, and if this is done, it overrides all questions of pleadings including any admission made thereon” BELVOIR FINANCE CO. LTD. V HAROLD G. COLE & CO. LTD. 1969, WLR. 1877.” Per PEMU, J.C.A. (P.23, Paras. E-G)

In a nutshell, on the right of recovery of invested sums in a Ponzi scheme, the law is that the investor has no right of recovery, as the investor only patronized the scheme at his own risk. Notwithstanding, the owner of the illegal investment scheme may still go to jail if prosecuted by the state.

CONCLUSION

Ponzi schemes have constantly eaten into the economic development of our nation as monies which ought to be in circulation for proper investment purposes are used to fund individual greed. Ponzi schemes like any other fraudulent business, have both legal and moral undertones to them. It is therefore strongly advised that the bill proposing to apportion more jail terms to the owners of these businesses should be passed into law. This is because individuals who have no means of recouping their lost investment would feel better knowing that justice has been served to the perpetrators of this crime.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN.

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.

Mr. Atoyebi has expertise in and vast knowledge of various forms of Dispute Resolution and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: Ezinne Nnadi

Ezinne is a member of the Litigation and Dispute Resolution Team at OMAPLEX Law Firm. She also holds commendable legal expertise in Debt Recovery and Insolvency.

She can be reached at ezinne.nnadi@omaplex.com.ng