For those who believe in making New Year's resolutions, efforts to earn higher financial rewards are likely to be at the top of the list. These could include finding a new job or becoming a member of the newest investment club. In Jamaica today, the latter may well outweigh all others, since many persons claim to have had success.

The financial commentaries, media reports and court actions about the mushrooming number of investment schemes seem to issue a word of caution to existing and potential investors. They question the legitimacy of the schemes and ask whether the promised rates of return on investment are sustainable and whether the schemes are subject to government regulation. In short, are they illegal?

It may come as no surprise to learn that Jamaica is not the first country to encounter these issues. In fact, the 1920s Ponzi scheme in Massachusetts, U.S.A., raised similar concerns. Charles Ponzi cleverly devised a scheme to capitalise on differences between United States and foreign currencies by buying and selling international postal coupons. The idea attracted hordes of investors because Ponzi promised a 40 per cent return on investment in 90 days.

Get-rich-quick schemes

Ponzi and many of his first converts became very wealthy, because initial investors were paid very high returns to make the scheme look legitimate. But, the later investors paid a high price for the fact that there were never any real returns on investment. It became clear that the scheme remained buoyant for as long as it continued to attract new investors.

When the scheme collapsed, the records showed that Ponzi had only purchased two postal coupon he had collected enough money to purchase 180 million. His dream of establishing a bank which would share profits equally between shareholders and depositors never materialised. Instead none of the investors had complained, the scheme was investigated by the government, taking new investments was suspended and auditors were appointed to review the operation.

It emerged that the Ponzi scheme was fraudulent in that 'Peter was robbed to pay Paul' - money paid into the scheme by new investors was used to pay high returns to old investors. Ponzi was tried and initially sentenced to five years in prison for fraud. Some investors were eventually paid about 37 per cent of their investment.

While this is by no means a foreboding of the end of this most recent chapter in Jamaica's history, the parallel between cases in other jurisdictions and the recent efforts of the Financial Services Commission (FSC) is inescapable.

Regulators weigh in

In the Australian case of Atlantic 3 Financial Property Limited, the Australian Securities and Investments Commission sought declarations against the defendants that they were operating unregistered investment schemes which were required to be registered by law.

The evidence showed that the schemes were Ponzi schemes and that money paid by new investors was used to pay interest to existing investors. It was unlawful. The declarations were granted and the court was of the view that its role was to protect the public from such unlawful behaviour, so the two directors of the defendant company were also disqualified from managing corporations for eight and 10 years, respectively.

Later this month, we should know the result of similar applications for declarations by the FSC. This will certainly test the adequacy (or not) of our existing legislations.

Sherry-Ann McGregor is a partner and mediator in the law firm of Nunes, Scholefield, DeLeon & Co. Send feedback and comments to lawsofeve@yahoo.com and Lifestyle@gleanerjm.com