Recently, the raid of 21 Bangkok-based investment firms was reported not only in the press but also on the BBC World News. They have apparently been operating by offering what seem to be potentially high returns to investors in direct investments into stocks. This was through direct ‘cold-calling’ over the phone and not just to Thailand-resident expatriates. I gather that a high-pressure sales pitch was used to persuade potential investors to make an instant decision to buy, and then to transfer money directly into the firms’ bank accounts.

The alleged fraud was that no money was actually invested into any stocks. New money was used to pay old “profits”. This is a classic Ponzi scheme, about which I have written before.

When major stock markets have been falling for the past 16 months, it should seem highly suspicious that a firm should be offering a stock which is reportedly rising dramatically, which has not been identified or reported by the news agencies, or gobbled up eagerly by institutional investors. But once again, investors allowed greed to blind prudence.

It would seem that most of the expatriate employees of those firms may have been innocent parties to the alleged fraud - but were not innocent of working without work permits, for which they are being charged. They will probably get away with a fine and deportation.

The owners of the firms, and alleged fraudsters, may still escape what might be seen as their just desserts, inasmuch as if no investment was actually made, no crime was actually committed in Thai law. The investors reportedly have only a vague notion of what they were investing in, just that they were promised high returns. No investment certificates were issued, just receipts for the money they had remitted to the accounts of these firms.

To guard oneself against such malpractices one should ensure that one checks into the bona fides of the brokerage, and whether the person you’re dealing with actually has a work permit. Ask to see it, or at least a copy of it, since it must by law be kept in his office. If he doesn’t have one, don’t deal with him. Of course, if you’re dealing with the broker only over the phone (and are comfortable doing that?) this exercise becomes more complicated. But not insurmountable: there is a wonderful modern invention called a fax machine.

I would caution anyone against committing to buy any stocks over the phone, especially if the call was ‘cold’ and unsolicited. If you had already set up an account with a legitimate brokerage in a well-regulated environment like the US, UK or Hong Kong, then phone dealing is common practice. But assumedly you checked out the brokerage before opening the account.

Similarly, legitimate stocks can be checked out through the websites of either the Financial Times (www.ft.com) or Micropal (www.micropal.co.uk).

Then, ensure you receive policy certificates in your own name if you’ve bought unit-linked insurance policies, dealing notes in the case of unit trusts or mutual funds, and stock certificates in the case of direct investments into stocks. There may be a reasonable delay in sending the notes or certificates to you, but you should always ensure you get them. A receipt for your money is not sufficient, and is no evidence of a trade ever having take place - which is the situation with the 21 Bangkok-based brokerages in question.

Never pay money directly into the bank account of a broker unless you are absolutely sure that the brokerage is a legitimate, licensed firm - like Merryl Lynch for instance.

Legitimate brokerages dealing with the expatriate community here usually act as intermediaries between the client on the one hand, and major internationally recognised institutions on the other. They do not accept money from clients; they process the paperwork on behalf of the client, and the client invests directly with the institution, which he can easily check out before committing to the investment. The investment documents are always in the client’s own name.

Internationally recognised institutions in well-regulated regimes such as the Isle of Man or Guernsey provide investors with a high degree of security, by law. The protection is typically at least 90% of the client’s investment should the institution go bust. This is comparable to the investor protection legislation applicable in UK, for instance.

It is not so easy for brokerages to obtain business agreements with major offshore institutions located in well-regulated regimes like the Isle of Man or Guernsey these days: these institutions have clamped down on giving intermediary terms of business agreements to brokerages without thoroughly checking them out.

An indication of the legitimacy of the firm with whom you might be dealing would be how many institutions the firm has agreements with, and where these are located. (My firm for instance currently has agreements with over 20 well-established, internationally-recognised institutions, each offering a range of investment vehicles to suit differing needs of clients.)

In all cases of investment, one should let prudence rule your head not greed your heart. Check out the firm and the offers it is making before making any commitment. One or two days really is not going to make that much difference - unless you’re a get-rich-quick speculator, and can afford to lose the money you’re investing.