Financial Times

SEC, Central Bank slam pyramid schemes
The two main markets regulators, Central Bank and Securities and Exchange Commission (SEC), last week issued separate warnings to the public to beware of investing in get-rich-quick referral or pyramid schemes that promise unusually high returns.

Responding to questions at a media conference regarding Central Bank's stance on the proliferation of get-rich-quick schemes in the country and promotions of Gold Quest's controversial medallion sales scheme, Deputy Governor W. A. Wijewardene said public education was the best method to counter it.

"Our viewpoint is this is a pyramid," Wijewardene said. " It is an upside down pyramid. At one time the base will not be able to support it and it will collapse."

The SEC also issued a strongly worded warning threatening possible legal action against those involved in peddling pyramids following complaints that some capital market professionals were involved.

"The Securities and Exchange Commission of Sri Lanka does not sanction or approve the promotion of investment or participation in pyramid schemes or schemes of a similar nature by any organization or person licensed, registered or regulated by the SEC," Director General Palitha Silva Gunawardene said in a statement.

"The SEC strongly recommends that all organizations and persons licensed, registered or regulated by the SEC prohibit such promotional activities being carried out by their employees within the premises of the organizations or firms, and/or in a manner which may lead the public to believe that investment or participation in pyramid schemes are in any manner sanctioned or approved by the SEC or by such Member Firms in their capacity as licensed stock brokers/dealers."

The SEC warned that it will "take appropriate legal action in this connection where circumstances warrant it." Central Bank officials point out that pyramids hurt people who join at the end, and the general public should be aware of the risk.

"When these funds are collected through several levels, very clearly there isn't enough people in this country to continue," says Assistant to the Governor, Dr. A. G. Karunasena, who was Director of Economic Research until recently.

"There isn't enough people even in India. As media personnel you can explain to the public that it is the people who join at the end that suffer losses. The people who join at first make profits."

However, Central Bank officials said it is difficult to convince people about the risks of pyramid schemes, as people have an innate desire to gamble. Wijewardene recalled receiving a letter when he was a just schoolboy asking him to post a handkerchief to the person listed on the top of a list of ten people. After posting the handkerchief he had to add his own name at the bottom and send similar letters to 10 people.

"Because I also liked gambling in those days I sent the handkerchief," Wijewardene said.. "But I did not get any handkerchiefs in return." Regulators as well as institutions like the International Monetary Fund take a serious view of pyramid schemes because they have a tendency to destabilize the economy of small nations, especially those in transition with weak legal systems.

Financial regulators in most countries take a dim view of pyramids considering the damage they can cause to economies, especially those with small populations, which reach saturation quickly. In the worst such case in 1997 proliferating pyramid schemes crippled the economy of Albania soon after it emerged from communism.

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