HANGING BY A THREAD (PART2 ) – (SEC BLUNDERED AND PFEC GOES SCOT FREE)August 13, 2008
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 ……