There are three questions that keep coming up in relation to Menzgold, the beleaguered gold trading firm which has had its operations suspended by the Securities and Exchange Commission (SEC) for dealing in securities without the proper license. The questions are:

• how did this happen?
• who is to blame? And
• what happens now?

Not since DKM has the nation’s imagination been this captured by the demise of an investment firm. The exact number of people who have been unable to redeem their investments from the company is disputed, but we can reasonably assume that they are in the tens of thousands. There have been demonstrations initially in support of, and subsequently against Menzgold. And it appears the issue is creeping into the partisan political field.

In this post I will attempt to answer the three questions with the information currently available to the public, my experience talking to people invested there or those who asked me about investing there, insightful contributions shared so far by others, and my perspective as a finance professional.

Before I get started on the questions, I will give a brief introduction of the company.

The Menzgold Story

For a complete timeline of events, I consider this article very useful.

I first heard about Menzgold, or Menzbanc as it was then called, in late 2015 from two people who had invested there. They were earning returns of 5% per month on deposits of less than GH¢5,000.00 each. These people told me that the company dealt in gold and that the returns from their gold trading was used to pay these monthly returns to. Even though I had only started to learn currency and commodity trading then, I knew it was almost impossible for any trader to bag in such consistently high returns in order to be able to pay out 5% every month (Later I got to know others were being paid between 7-10% of their capital in returns each month). I assumed this was probably a front for some other sinister operation and decided not to risk any capital to it, especially as treasury bills were returning about 20% per annum.

This is not to say that I had some prescient knowledge about the company. It is true that many people saw the impossibility of the business model of Menzgold and decided not to invest, but even we on that side generally believed that the company had some other source of funds and was paying returns out of that money. Many others too decided to risk only a little capital or to invest for only a short period.

The public warning by the BoG against the company was a turning point in the life of Menzgold. This was only a few days after the CEO of Menzgold, Nana Appiah Mensah (NAM 1), had opened a twitter account (apparently as part of a media campaign which included the signing of Shatta Wale two months later to his music label, Zylofon Music).

NAM1’s responses to warnings from the central bank were shocking in their brazen disregard for the bank’s authority. He accused the BoG of being “dishonest, irresponsible and reckless.” However, there was already blood in the water, and customers had started to complain about the delay in the payment of their returns, thus discouraging more deposits. By the time the SEC had ordered the company to stop holding itself as a dealer in any type of securities, Menzgold was already embroiled in a dispute with its customers seeking to redeem their investments. They shut down their offices in October 2018 and clients have been appealing to whoever would listen to help them retrieve their funds.

How did this happen?

It may be difficult to fathom now but Menzgold was not that much of an aberration when they first came out. The only thing that differentiated them from DKM, God is Love and other financial firms offering sky high returns was their claim of gold vault trading. The annual interest rate of 60-120% was not out of place in that environment. Menzgold outlasted these firms by structuring their operations in such a way as to avoid direct supervision by either the SEC or the BoG. Had Menzgold been the only company to offer such returns, it is likely that their demise would have come much faster than it has. (Also consider that Menzgold was coterminous with the bull market in cryptocurrencies which did provide people with such large returns and even more. Therefore they could make a case that it was indeed possible to earn such returns.)

Another reason why this scheme was able to exist and even thrive is the misconception people have about gold. While gold is indeed very valuable, its price is volatile and it has experienced a large decline in price since its peak (almost $2,000 per ounce in 2011) during the Great Financial Crisis and the hyperinflation fears stoked by the US Federal Reserve’s large-scale purchases of financial assets. Nevertheless, people’s belief that the gold market is very lucrative motivated them to invest in the company.

Related to this point is the intricate set-up of Menzgold’s operations to avoid having to procure licenses from either the BoG or the SEC. This allowed them to avoid direct closure by these two regulatory bodies. The Precious Minerals Marketing Company (PMMC) which granted a license to the firm could have dealt a huge blow to the company by informing the public that its license to buy and sell gold had been revoked. However, information from them came late in the day after the SEC and BoG had already been on the case. This structure of Menzgold allowed them to continue to operate while challenging the authority of the BoG and SEC to intervene.

What this saga has revealed is a deep distrust of banks among a section of the public. The narrative that banks make a whole lot of returns on customers’ deposits but only pay a little in interest is much deeper than I thought. Menzgold was able to position itself as the financial institution paying the real level of interest that banking clients should be earning on their deposits.

As with every hot new investment, the fear of missing out, also spurred many on. Even if you believed the operation was a scam, the thought of colleagues enjoying free money every month was enough to drive people to put at least a little money in Menzgold.

The final catalyst was the aggressive media and publicity campaign that Menzgold and its affiliates carried out. NAM1 embraced the limelight, and signed up a slew of musical giants to Zylofon Music. He sought and gained the audience of many public figures in sports, entertainment and politics. He flaunted his wealth through donations, sponsorships and endorsement deals. In short, he behaved exactly in the opposite way that one would expect someone with something to hide to behave. This certainly had an impact on people.

Who is to blame?

The Bank of Ghana is arguably the institution that has come under the most criticism for their handling of Menzgold. Their response has been that Menzgold was not regulated by them and that they gave adequate warning to the public about the operations of the company. Although I have not heard anything from the SEC in response to criticism, it is likely that they will also say they have done whatever they could do within the remit of the law. It is difficult to argue with these positions without somehow suggesting that these institutions should have acted beyond their legal mandate. In any case, because the SEC or BoG did not regulate Menzgold, were they going to take up the responsibility of retrieving depositors’ monies if they abruptly shut down Menzgold’s operations?

Another target of blame is the public figures who appeared to have endorsed the firm through their association with NAM1 or his businesses. Included are the media companies who carried Menzgold advertisements. Well, I would leave that for others to discuss. Check out this post and the replies for a discussion of that issue.

The customers of Menzgold themselves have been ridiculed for being greedy or gullible enough to invest in the scheme. I used to be equally dismissive of Menzgold’s clients but I have gradually come to have some sympathy for their case. Why should they have ignored a firm offering such high returns openly? After all, if they were doing something illegal, they would have been stopped, right? However, a section of customers had rebuffed any claims that Menzgold was not squeaky clean and had accused people of wanting to destroy Ghanaian businesses. These people have to come to terms with the fact that they significantly contributed to the delay in the actions of authorities to close down the operation.

How about the government? Yes, it should have intervened earlier in the public interest if it was clear that an organization with a dubious operation had successfully skirted its regulatory bodies. Also, it should have acted quickly in securing any assets that would be needed to compensate depositors. To say that it simply should not act is not tenable in my opinion. It is not only the Menzgold customers who are stakeholders, people must be prevented from losing hope in the banking system.

Also, finance professionals should also be faulted for taking little action towards public education. From those in the industry, to those in academia and those of us who have chosen to share our thoughts publicly. I had a few people ask me about investing in Menzgold. My answer was always for them not to invest or invest only what they could afford to lose. I believe many others have had similar experiences, yet we did not make them public. This is something I will take a lot of lessons from.

What happens now?

The obvious answer is the use of whatever legal means are available to liquidate the assets of Menzgold and distribute the proceeds among the clients. That is about as far as the state can and should go, in my opinion. (This excludes whatever punitive measures are dealt to people found culpable).

Menzgold should also serve as a case study for regulatory bodies to call for revisions to the laws that govern their operations. This would ensure that they would be able to act much faster next time. And yes, there will be a next time. There always is.