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
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 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 investment4. In the case of financial investment (choses in action) the investors 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 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 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 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;

1. How adequate are the legislations in Nigeria for combating fraudulent investment schemes?

2. How effective are the existing legal institutions in combating fraudulent investment schemes?

3. What mechanisms are in place for investors‟ education on fraudulent investment schemes and how adequate are they?

Department: Law
Format: Microsoft Word

Chapters: 1 - 5, Preliminary Pages, Abstract, References
Delivery: Email

No. of Pages: 100

Price: 3000 NGN

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