Bouncing or Rubber Checks

Investors at all levels have the inordinate desire to get the highest return on their investments regardless of the risk involved.

Modus Operandi

A popular method of defrauding a creditor is to issue checks drawn against insufficient funds. This is best exemplified by the case of a corporation whose ten thousand investors were issued unfunded checks as payment for their joint marketing venture contracts with the company paid an interest of five percent a month or sixty percent per annum to each investors. As an added attraction, the investors were given the option to withdraw the principal after one year. Later, as most of the investors had the inordinate desire to get the highest return on their investments regardless of the risk involved, they reinvested their capital and profits with the company.

The investors did not realize however that the excessive interest paid to them came from the profits of the company. An investor was usually given twelve checks post-dated one month apart and a thirteenth check covering the principal dated exactly one year after. Under this illegal fund raising, the authorized capital of P50 thousand grew to more than P100 million after a few years. Such an unlawful selling program of the company was said to have proliferated in the U.S. during the 1930s.

The company over expanded too fast as a result of the tremendous cash inflow. It ventured into unrelated business like publishing, supermarkets, films, and garments. Eventually, the company depleted its cash reserve when it invested heavily in fixed assets because the banks were not willing to lend them money on long term. Upon learning the method used by the company in generating its capital, the Securities and Exchange Commission warned the investing public of the illegality of the joint venture contracts issued by the company. Consequently, the investors panicked and demanded the refund of their investments all at the same time. As a result, the company ran out of cash and became bankrupt. The interest payment checks bounced for lack of funds and the investors sued the company for estafa.

An investment firm used the same method in extracting P25million from the investors on a capital of P300 thousand by paying an interest of five percent per month on their investments. The interest payment checks were later dishonored by the bank for insufficient funds. Eventually, the officials of the dubious investment firm were criminally accused in court of estafa and violations of the Securities Act. Trapped by their own greed, the investors in both cases were not sure if they could get their money back.

Detection and Prevention

The questionable operations of the company which were completely controlled by its president (an agriculturist turned businessman) surfaced when some members of the board of directors petitioned to the Securities and Exchange Commission for an investigation of the company's operations. The board of directors could not check or control the acts of its president who had huge personal cash advances from the company. The illegal transactions could not have prospered had the investors controlled their desire for easy money and had they thought twice before investing in such a risky venture. A company or bank giving a return on capital ( ROI ) much higher than the legal rate surely should have raised eyebrows and the investors should have been more cautious.

For their own protection, a group of investors should have petitioned the SEC to compel the company to produce its financial statement audited by a reputable accounting firm. Regular rendition of audited financial statements will deter any mismanagement, misuse of funds or illegal transactions.

There are more than 90,000 corporations registered with the SEC and to monitor them effectively, a computer should be used. The SEC should also encourage its field audit section to conduct surprise audits of the books of theses corporations so that any violations of its regulations or any dealing in dubious transactions will be disclosed. The knowledge that the books of accounts of companies are subject to examination at any time by the SEC is enough deterrent to wrongdoing.

The issuance of a check without sufficient fund is considered a criminal act under a new law. On this ground, the officers of the companies concerned were imprisoned for long term. The SEC subsequently took over the management of the companies to protect the interests of the investors. To avoid recurrence, amendments to the Securities Act should include a provision making all directors of a corporation civilly and criminally liable if their company goes bankrupt due to fraud.