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Just recently, the Philippine Supreme Court threw out SEC’s bid to stop Performance Foreign Exchange Corporation from continuing to defraud Philippine Investors on a mere technicality, a major blunder by the regulatory body. This now opens the floodgates to other forex scam artists to rush in and once more “rape” the country with impunity.

The SEC’s biggest mistake was to try to pin down PFEC for engaging in commodity futures trading and for engaging in the marketing of financial derivatives. This was effectively and legally rebutted with PFEC’s argument that spot foreign currency trading is not done in an exchange and the buying and selling of forex does not necessarily involve actual delivery of the contracted instruments in stark contrast to foreign currency cash transactions done through banks. On this basis, the Supreme Court made the precedent setting decision that forex contracts can not be considered as commodity futures contracts. They further blundered when they alleged that PFEC ’s main product, spot foreign currency trading is a financial derivative (the height of stupidity). They were now forced to seek the Central Bank’s clarification on the issue since trading in financial derivatives is well within the Central Bank’s jurisdiction. However, the Central Bank is more up to date with developments in the financial markets and had no choice but to declare the fact that spot foreign currency trading is not a derivative of any financial instrument (not a financial derivative) which is what it is, a totally unique financial instrument traded freely and electronically between banks and/or their intermediaries.

However, there is no denying the fact that foreign currencies, when traded for speculative profits only are deemed as securities and therefore falls within the jurisdiction of the SEC’s regulatory and oversight functions as mandated by Republic Act 8799. But how then do we discern speculative trading from cash transactions as is done in the banks? Simple! Speculative foreign currency trading is done through what they call as a margin system while cash transactions are done straight off, one on one, based on the current rates of exchange. The SEC could have crafted its own regulatory policies in this context to regulate spot forex trading within the framework of Republic Act 8799 as early as late 1980’s when they started to receive mounting complaints from investors. They never did.

The problem with these Chinese scam artists in the Philippines goes way back to 1985 when the Manila International Futures Exchange was established. From that time up to the present, countless lawsuits and complaints were filed against various forex scam artists (Incidentally, none of the decisions favored the complaining investors!). And, as I said in my earlier blogs, the SEC was playing ” cats and dogs” with these forex scam artists all this while. Inspite of that, the SEC never really learned their lessons well!

The Securities Act was revised and made into a new law in the year 2000, more than a decade from the advent of commodity futures trading in the Philippines in 1985, and the influx of forex “boiler room” operators into the country in the ’90s. After more than a decade of deception and fraud by these scam artists, after billions of dollars have been lost by investors to them, after thousands of lawsuits have been filed by losing investors to no avail, the SEC is still groping around, looking for a way to finally catch these scam artists. Or, are they ……

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• The Biggest War You Haven't Heard About Yet

I am publishing herewith excerpts from the Supreme Court’s decision [G.R. No. 154131, July 20, 2006] citing the letter from the Central Bank which became the basis for the dismissal of the case filed by the SEC against Performance Foreign Exchange Corporation, to wit:

“Meanwhile, on August 13, 2001, Amado M. Tetangco, Jr., then Officer-in-Charge, Office of the Governor, BSP, in answer to SEC Chairman Lilia Bautista’s letter-request of February 8, 2001, stated that respondent’s business activity “does not fall under the category of futures trading” and “can not be classified as financial derivatives transactions,” thus:

Dear Ms. Bautista,

This refers to your letter dated February 8, 2001 requesting for a definitive statement that the foreign currency leverage trading engage in by private corporations, particularly, Performance Foreign Exchange Corporation (PFEC), is a financial derivatives transaction and that it can only be undertaken by banks or non-bank financial intermediaries performing quasi-banking functions and/or its subsidiaries/affiliates.

As indicated in your description of the transactions and the documents submitted, the foreign currency leverage trading, subject of your query, is essentially similar in mechanics to currency future trading, particularly with respect to the margin requirements, standard contract size, and daily market-to-market of open position. However, it does not fall under the category of futures trading because it is not exchange-traded. Further, we can not classify it as being financial derivatives transactions as we consider the transaction as plain currency margin trading, which by its mechanics, involve the set-up of margin and non-delivery of the currencies involved.

In view of the foregoing facts, the activities of the aforesaid corporation are not covered by BSP guidelines on derivative licensing.

We hope we have satisfactorily clarified your concerns.

Very truly yours,

(Sgd.)
AMANDO M. TETANGCO, JR.“

THE SEC WAS TRYING TO PIN DOWN PFEC ON THE BASIS OF OUTDATED DEFINITIONS OF SECURITIES AND REGULATORY GUIDELINES AS SET IN THE Republic Act 8799 OTHERWISE KNOWN AS THE SECURITIES REGULATION CODE OF THE PHILIPPINES ENACTED ON JULY 19, 2000.

WHY OUTDATED? BECAUSE REPUBLIC ACT 8799 FAILED TO ENCOMPASS THE FAST BECOMING POPULAR SPOT CURRENCY TRADING WHICH WAS BEING CONDUCTED ELECTRONICALLY OFF-EXCHANGE AND NON-BANK BASED, CREATING A LEGAL LOOPHOLE WHICH PFEC IS NOW EXPLOITING TO THE HILT.

IT IS FUNNY, THOUGH, TO NOTE THAT WHILE REPUBLIC ACT 8799 PRACTICALLY GAVE THE SEC A BLANKET AUTHORITY TO REGULATE PRE-NEED PLANS (SEE THE PROVISION BELOW) , IT FAILED TO ADDRESS AND DEFINE THE SEC’S OVERSIGHT FUNCTIONS OVER SPOT CURRENCY TRADING WHICH BY THEN WAS FAST DEVELOPING INTO A PARALLEL MARKET TO INTERBANK FOREIGN CURRENCY MARKET. TOTALLY DIFFERENT IN ESSENCE WITH COMMODITY FUTURES TRADING AND DEFINITELY NOT A FINANCIAL DERIVATIVE BY DEFINITION.

(CHAPTER IV
REGULATION OF PRE-NEED PLANS

Section 16. Pre-Need Plans. – No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans.)

I got this definition of “BOILER ROOMS” from Investopedia, (http://www.investopedia.com/terms/b/boilerroom.asp), and it clearly describes the method of approach used by PCPI and other scam operators.

“A place where high-pressure salespeople use banks of telephones to call lists of potential investors (known as a “sucker lists”) in order to peddle speculative, even fraudulent, securities. A boiler room is called as such because of the high-pressure selling.

A broker using boiler-room tactics gives customers only positive information about the stock and discourages them from doing any outside research. Boiler-room salespeople typically use catchphrases like “it’s a sure thing” or “opportunities like this happen once in a lifetime”

The SEC (http://www.sec.gov/answers/boiler.htm) further describes this as an operation conducted by dishonest brokers.

PIPC was a “boiler operation” under both definitions. But there is more to it than meets the eye. PIPC may have bandied around that it has an account with ABN-AMRO but the fact is, it is not a foreign currency trading account but a mere fund depository account. Their clients were probably misled into believing that their funds will be traded through the bank and will earn the promised interest.

During my own stint with a similar company closely associated with Michael Liew, I found out that their group, all “boiler room” operators, ( and mind you me they belong to only one group) have one clearing house for all their transactions and this is based in Macau. Whether this Macau operation is legitimately funneling all invested funds to the interbank market or not is something I did not have the chance to verify.

Here is what I surmise to have transpired with Michael and his PIPC!

On his own, Michael Liew may have conducted a foreign currency pool operation, pooling together his clients funds and trading them himself without his clients’ knowledge. The guaranteed profits can come from roll-over interest earnings on certain currency placements such as swiss francs which gives substantial daily roll over earnings on certain placements. But ahh, these interest earnings can be wiped out overnight if the price starts churning against his position. if this is what he did, and if the price did turn against his position, he really would have no choice but pack up and run as what the likes of him have done in the past. If his placements have deteriorated in value substantially, he knows he can not run away from his Macau connections. The choice was clearly to pack up and go, pay up his Macau connection and hide under their protection; or stay and face the charges that clearly will be slapped on him by his clients here in the Philippines. Evidently, he chose to flee from his clients and is now probably sipping tea with his benefactors and associates in Macau.