APRC Enforcement Directors Meeting Bali, Indonesia 3-5 February Cold callings

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1 1. Cold callings Cold calling and Boiler Room operations The Malaysian Experience Modus Operandi Cold callings generally refer to the practice of high-pressure sales tactics being imposed on potential investors to sell speculative and most times fraudulent securities. The most common method of perpetrating such activities is through the use of the telephone, although the use of the Internet has been on the rise of late. In Malaysia, such activities have been brought to the attention of the Securities Commission ( SC ) through public complaints and referrals from regulators in foreign jurisdictions. SC s case In cold calling cases, the SC has found that most of the referrals made by foreign regulators is in respect of companies believed to be based in Malaysia which solicit for clients abroad, such as in Japan and Australia, to invest in stocks that are traded at a third location, for example in the United States. To date, the SC has received 16 complaints against 11 companies for such activities. In dealing with these complaints, SC s enforcement arm initiates investigations under section 12 of the Securities Industry Act 1983, which requires a person to be licensed to carry on a business of dealing in securities or to hold himself out as carrying on such a business. 1

2 Findings The SC has found that in all cases investigated, the companies carrying out cold callings are foreign based companies and do not have a physical presence in Malaysia. These companies operate from a multi-national office service provider commonly located at high profile addresses, and have virtual office arrangement with these service providers. The service providers offer a phone answering service where messages are taken on the pretext that the companies local representatives were then engaged in other telephone conversations or attending meetings. In one instance however, calls were not even received in Malaysia but were directly diverted to the foreign company s base in Bangkok, Thailand. Enforcement efforts As these foreign companies do not have a physical presence in Malaysia, it was difficult to initiate any criminal prosecution against them. Accordingly, following the completion of its investigation, SC undertook several initiatives, namely: - Issuing letters to the foreign operators instructing them to cease their activities in Malaysia as they do not possess valid licenses to do so. Issuing letters to the local service providers putting them on notice that their activities is seen as abetting the commission of an offence under the relevant sections of the Securities Industry Act and action can be taken against them. Informing IOSCO members of SC s efforts in handling such activities. Alerting the public. 2

3 2. Boiler Rooms Spot Commodity Operations Modus Operandi In relation to boiler room activities, a major area of concern for the SC is the flourishing of illegal schemes to defraud investors under the guise of spot commodity trading. We take the view that the act of inducing investors to purchase fraudulent futures contract to be part of these type of activities. These spot commodity companies claim to be servicing agents of foreign companies trading in commodities such as coffee, soya bean and silver. These foreign companies, known as the principal to its local agents, are usually incorporated and based in jurisdictions such as Macau, Indonesia, Singapore, Hong Kong, the British Virigin Islands and the Bahamas. SC s case Investigations into such operations find that the so-called spot commodity trading carried out by these companies are in fact futures trading because elements of futures trading such as the non-physical delivery of commodities, closing of positions to realize gain or losses, leveraged trading, acceptance of margin deposits and margin calls and roll-over of open positions are involved. As such, investigations are initiated under section 3 of the Futures Industry Act 1993, which prohibits a person from establishing, operating or maintaining a futures market without a licence. To date, SC has received 185 complaints against 108 companies, and has initiated 10 investigations since In March 2001 we had charged an individual for illegally operating a futures market, and he subsequently pleaded guilty in December. He was sentenced to two years imprisonment and fined RM500,000. 3

4 Findings Investigation has revealed that spot commodity companies attract investors by firstly placing recruitment advertisements in the major newspapers, targeting fresh graduates and those who have recently been laid off with good severance packages. At the interview sessions, the candidates are promised lucrative salaries and are put through a period of training to familiarise them with the trading done by the company. Upon securing a position with the company, these employees, often recruited as trade or business consultants, are told they would need to secure a certain amount of trade or investment before they can be paid their monthly salaries. The new recruits would then invest their own savings or solicit investments from their families and friends. Investors would be asked to deposit an initial sum known as the margin deposit which would range from USD3,000 to USD5,000 and sign trade agreements with the principal companies before they are can begin trading. All orders are purportedly routed to the principal abroad by a dealing executive at the servicing company, and funds are deposited by clients into a bank account in the country maintained by the principal. Investigation has revealed that these funds are then transferred abroad to the principal, and often there is a link between the spot commodity company operating locally and its principal, in terms of key management personnel. Enforcement efforts Aside from investigations initiated into such operations, other enforcement initiatives to combat such activities undertaken by the SC include the setting up of a Task Force To Combat Spot Commodity Trading with the specific aim of reducing such activities through raid, investigations and prosecutions in court as well as investor education through the newspapers, SC website and television interviews. 4

5 SC is also working with other regulatory agencies within the country such as the Central Bank of Malaysia and the Royal Malaysian Police to conduct jointoperations against companies where their activities fall within the purview of these agencies. The SC has also embarked on investor education via publicity campaigns to warn investors against such schemes. SC is also hopeful for mutual assistance from foreign regulators to investigate into the activities of the principals of the Malaysian spot commodity companies to ascertain where the funds are in fact diverted. Conclusion A multi-pronged effort is necessary to ensure the protection of investors and the continued growth of the capital market in such trying times. Amelia Tee Enforcement Director Securities Commission 5