Put verbal agreements in writing to protect your money

In an unusual tie-up, investor allowed trader friend to keep 70% of any gains he brought in

- Tan Ooi Boon

An investor thought it was a good idea to let a friend manage his $5 million foreign exchange portfolio, since he was promised that his capital would always remain intact.

After all, the trader, who seemed confident in his ability to play the currency markets, came highly recommended by the investor's son-in-law.

It all looked like a win-win situation. Indeed, the investor was so pleased with the set-up that he let his new-found friend enjoy a hefty 70 per cent of any gains he brought in.

The good times did roll for the first six months, with the trades yielding a profit of $3 million, and this meant that the trader earned a whopping bonus of $2.1 million for his effort.

But forex markets are notoriously volatile, and it was downhill all the way after that. By the end of the first year of the collaboration, only $300,000 of the original $5 million capital was left in the trading account.

Faced with the prospect of losing $4.7 million, the investor asked the trader to make up the loss as agreed, but he soon realised that the promise to protect his money was an empty one. As he could not recoup his money, he sued the trader for the loss.

While this unusual investment partnership began after both sides discussed and agreed on the terms verbally, the investor was able to write down all the important points clearly and methodically.

For instance, the trader would help to open an account for the investor on an online trading platform where all the transactions would be carried out. The investor even gave the trader a letter of authority to allow trades to be done on his behalf.

This arrangement enabled the investor to see what trades were being made and the status of the account, but he would not make any trades himself.

They agreed that any profits would be shared, with the investor getting 30 per cent and the trader 70 per cent.