A Multi-Jurisdictional Perspective

10 Are some classes of consumer-investors of collapsed pyramid and Ponzi schemes vulnerable? A multi-jurisdictional perspective Prof. Tibor Tajti (Thaythy)1 List of abbreviations and acronyms bus. – Business Bankr. – Bankruptcy CEE – Central and Eastern Europe CGAP – Consultative Group to Assist the Poor EU – European Union FTC – Federal Trade Commission (United States) HUF – Hungarian Forints (national currency) MLM – Multi-level Marketing Scheme NB – National Bank OXFAM – Oxford Committee for Famine Relief (UK) SEC – Securities and Exchange Commission (United States) SFO – Serious Fraud Office (United Kingdom) UCPD – Directive 2005/29/EC (11 May 2005) concerning unfair business-to- consumer commercial practices in the internal market [European Union] UDIS – Unlicensed Digital Investment Schemes UK – United Kingdom US – United States 1 Professor of law and Chair of the International Business Law Program at the Department of Legal Studies of Central European University(CEU), Budapest–New York– Vienna [https:// www.ceu.edu]. Contact email: [email protected]. This paper served as the basis for the pre- sentation of the author at the international conference ‘Fair and non-discriminatory access to financialservices’ organized by the Faculty of Law of the University of Copenhagen on 26–27 September 2019. The author would like to express his gratitude for the exchanges related to this study to Professors Catalin Gabriel Stanescu (University of Copenhagen), Asress Adimi Gikay (Brunel University, London, UK), Károly Bárd (CEU), Csongor Nagy (Law School Szeged, Hungary), Su Su Mon (Yangon University, Myanmar), Ni Ni Win and Nan Kham Mai (both from Mandalay University, Myanmar), and Akshaya Kamalnath (Auckland University of Technology, New Zealand), to Matthew deCloedt (CEU SJD candidate), my former master’s students Ma. Ricca Pearl Sulit from the Philippines (now attorney at the Department of Finance of the Philippines) and John Jay Laylo (now attorney-at-law in Manila), as well as to Maria Bertel (University of Innsbruck, Austria) and Juha Tuovinen (Finland), researchers at CEU in 2019/2020. Consumer-investors of collapsed pyramid 237 Introduction The Prime Policy question: the legitimacy and repercussions of the “greedy and gullible” assumption2 Notwithstanding the growing scholarship on both pyramid and Ponzi schemes as specific types of financial fraud and vulnerable consumers, very few publications are devoted to the theoretical and practical implications of how collapses of pyramid and Ponzi schemes affectconsumer-investors, especially those pushed to the peripheries of the socioeconomic system: the vulnerable classes. This is to a great extent attributable to the assumption that the consumers who dare to in- vest in these particular types of scams are inherently “greedy and gullible,” who therefore are fully aware of how extremely speculative and risky such investments are and that the schemes are doomed to collapse.3 Consequently, they cannot qualify as vulnerable deserving extra-regulatory protections. The assumption survives irrespective that precise empirical and quantitative data on the various classes of impacted consumer-investors often are lacking and thus neither the existence, nor the want of vulnerable classes of consumer- investors could conclusively be proven. Often, the negative stance is based on a single, or a few eclectically selected high-profile cases, typically originating from one (or few) jurisdictions, hardly epitomizing the full spectrum of known types of schemes. The answer to the initial question of whether all consumer-investors of these scams per se and unconditionally are to be treated as “greedy and gullible” is crucial because if the verdict is in the affirmative that would make any inquiry into the question of whether the existence of vulnerable classes of consumer-investors is to be recognized academic and superfluous. What this chapter desires to show is that the issue is much more nuanced, context-dependent, and variegated and what inevitably doubts the sweeping nihilism hidden in the greedy and gullible line of argumentation. This normative position, however, is limited to and qualified by the admittance that not all consumer-investors of pyramid and Ponzi schemes 2 This idea is expressed in different wordings yet normally it is greed and gullibility – or “unbound and unreasonable trust” – mentioned as main reasons why investors into pyramid and Ponzi schemes are condemned by the public and part of the academia. As Mervyn K. Lewis put it: “A common view is that the victims of Ponzi schemes have only themselves to blame. After all, they handed over the money for investment, in which case they are either greedy or gullible.” [Emphasis added] Mervyn K. Lewis, Understanding Ponzi Schemes – Can better Financial Regulation Prevent Investors from being Defrauded? (Edward Elgar, 2015), at 119. [Hereafter: Mervyn 2015]. 3 For a list of publications representing the “highly judgmental [cultural accounts] blaming consumer irresponsibility and even dishonesty” see Jean Braucher, ‘Theories of Overindebtedness: Interaction of Structure and Culture’ Theoretical Inquiries in Law 7.2 (2006), at 324. [Hereafter: Braucher – Overindebtedness 2006]. For the publications representing the other, for consumers more benevolent ending of the spectrum of overindebtedness theories, see Id. note 3 at 324. 238 Prof. Tibor Tajti (Thaythy) deserve heightened regulatory protections. The task of law is, indeed, to replace the sweeping greedy and gullible assumption with a balanced formula that does not a priori and unconditionally reject the idea that pyramid and Ponzi schemes and vulnerable consumer-investors are completely incompatible categories. Averting right at the beginning the accusation of not seeing the forest for the trees, a brief reminder that the greedy and gullible narrative might unduly narrow the ensuing elaboration’s focus is due. Namely, the overarching concern that permeates ensuing discussion relates to one of the chief moral values embraced by contemporary legal systems: elimination and punishment of fraud. Pyramid and Ponzi schemes are nothing else but scams, “artworks” of swindlers and con artists, peculiar and dangerous forms of financial fraud. Hence, it is the moral duty of all legal systems to eradicate them, though optimally their emergence should be prevented. As empirical evidences have amply proved, unfortunately that is hardly possible: the number of cases in which they have escaped detection even by experts numbers in the hundreds if not thousands. In other words, if it would have been possible to prevent their formation, there would be no need for the supplementary greedy and gullible narrative, nor for this writing. How and whether these moral considerations on the tasks of legal systems impact the question of whether the consumer and especially the vulnerable consumer- investor deserves the auxiliary regulatory protections of the legal system, however, are to be left to a future study. The ancillary cognitive problem: how easily detectable the true nature of schemes is? When pondering on whether and what kinds of policies would be justifiedin this context, it ought to be borne in mind that the schemes generate as well cognitive problems as understanding their true nature and consequently their detection, may amount to a major challenge especially for financially illiterate consumers additionally being devoid of financial means to obtain expert advice. This is so because they tend to appear in such “legitimate” guises that prevent easy re- cognition of their fraudulent nature for what it is apposite to bestow them, especially Ponzi schemes, with the characterization of “chameleons of finance.” Ample empirical evidence is available from all over the world proving that often even the expert staff of various governmental bodies, from company re- gistries, to consumer protection, to financial supervisory agencies have failed to realize what in reality was ongoing behind the façade. The more case studies from more niches of the globe are taken a look at, the more conspicuous and pervasive this realization becomes. From a policy point of view, the lesson boils down to the following. As experts have often failed on this front, obviously it is neither equitable nor legitimate to expect consumer-investors to outperform professionals. Modern systems tend to take notice of this hurdle and regulatory agencies routinely resort to the technique of red flagging, displaying the key features based on which average consumers should be in the position to unmask the Consumer-investors of collapsed pyramid 239 schemes.4 As red flags have proved to be impotent tools in quite a number of cases, obviously they cannot be reckoned with but as limited-utility supple- ments. This is another ancillary argument in favor of cutting back the reach of the greedy and gullible assumption. A further point on the online risks increasingly lurking on consumer-investors needs to be made. Namely, the possibility of replicating off-line patterns by creating digital Ponzi schemes further exacerbates the task of capturing the true nature of schemes thanks to the spreading of such new technologies as block- chain and cryptocurrencies, or inventing novel methods of exploiting the ex- panding mobile telecommunication networks. Now the promoters of the schemes cannot only more easily and cheaply reach an ever greater number of vulnerable investors, but the geographic horizons of their activities have radically been expanded, too.

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