While the Madoff scandal transfixed everyone around the world last year two stamp ponzi schemes imploded in Spain a few years ago with very little attention. The two companies involved were Forum Filatelico and Afinsa and the sums involved approach 5 billion Euros, easily surpassing the size of the recent Madoff losses. But what is even more devastating is that unlike the Madoff ponzi scheme that operated in the shadows, Afinsa and Forum operated in the open for more than 25 years and promoted their services in mass media targeting the average Spanish investor. Like this newspaper ad:
“Is it profitable to invest in stamps? 100 pesetas invested in stamps in 1976 (19%) would be worth 15,035 today while if invested in the stock market, worth only 1,679.”
When the government finally stepped in and raided their offices and stopped their operations, the two firms left in their wake millions of investors who had in many cases lost all their life savings. In the aftermath, as with all similar cases, there are more questions than answers. For example, how was it possible for these firms to operate and grow to such a gargantuan size without someone in the government realizing that they were not regulated?
Why did the CNMV (Spain’s securities governing body akin to the SEC) not act and simply assumed that asset management firms like Forum and Afinsa were not under its jurisdiction? How could the ICAC or Institute of Accounting and Auditing be made aware of serious irregularities as early as 1991 and in the end not initiate any sanctions? Well, this last one is easy to answer. It was because Gestynsa, the auditing firm hired by Afinsa, pulled strings behind the scene to have the investigation shut down.
No doubt the Spanish government at all levels, over many years messed up big time. And no dout that bribery and the “old boys” network had a lot to do with it. Naturally, the victims organized and clamored for the government to make them whole as it was responsible in their view for not protecting them in the first place. But recently the supreme court of Spain ruled that the government is not legally liable and therefore, will not provide any form of restitution to those who suffered losses.
Of course, the state is in no mood these days to pay 5 billion Euros as they are battling to keep their economy afloat and to beat back speculators who are betting on the break-up of the Euro monetary union. Spain has become so paranoid they’ve sicked their secret service against hedge funds and foreign media who they feel is agitating against them.
But interestingly enough, the Afinsa and Forum ponzi scheme can be traced to the European Union. Joining the monetary system forced Spain to accept artificially low interest rates for too many years. This induced a lot of pensioners and average hard working folks to seek out higher yielding investments. At 14-18% annual returns, stamp investing programs from Afinsa and Forum not only offered the right amount of juicy yield, they also provided a rational explanation that served as the perfect cover story.
The only silver lining in this whole thing is that similar to the Madoff scandal, there is something, however small, left at the bottom of the pot. While the vast majority of the stamps were worthless copies, the victims may get a few cents back for every euro they lost as the two firms did have some mediocre stamps worth a few hundred million euros. But liquidating these is tricky. Obviously, if they are sold haphazardly they will depress worldwide stamp prices and reduce the over all sum recovered.
To me what is remarkable about this is not just that it hasn’t gotten much coverage outside of Spanish media (even within Spain it has fallen off the radar as it is now considered ‘old news’). But that it harkens back to the old style ponzi schemes when regulatory bodies where not even in place. How in the world can two firms capture billions of dollars of “secured” deposits and grow to 5 billion euros right under the nose of watchdogs? Then again, we can ask the same question about every single ponzi scheme in recent history.
Finally, if we step back to gain some historical perspective, from a purely market point of view, it is interesting that frauds like this usually blow up either at the top of markets or during the brutal years that ensue. How many of them have we seen? Alan Stanford, Madoff, Afinsa, Forum, etc. Why do I get the feeling this is a natural cycle we’ve seen before? People get greedy, they assume zero risk and pile in. Then they get burned and for the rest of their generation are cautious. Until the next crop of suckers shows up and we go through it all over again.
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