By Atty. Julius Gregory B. Delgado
LEGACY, AMMAN, KAPA, ALMAMECO, RIGEN, FOREX: SURVEY OF JURISPRUDENCE ON PONZI SCHEME
(First of Three Parts)
Almost two years ago, I wrote a series on the controversial Kapa Ministry of Pastor Joel Apolinario. It was a Ponzi Scheme masquerading as a religious donation with the promise of receiving payouts coined as “blessings”. As opined by this observer in the series, this scheme was probably hatched to seek protection under the veil of the separation of the Church and the State. This representation was also fortunate to have been a part of the private prosecution team retained by the Bangko Sentral ng Pilipinas to go after the Legacy Banks, a Ponzi scheme using rural banks. What this author has observed in devices or schemes are two basic components: 1) a criminal mind brilliant enough to design a scheme which would look like legitimate, legal, and above-board with the goal of enticing the public to part their hard-earned money; and 2) a willing victim who wants instant huge profit. But what is really a Ponzi Scheme?
But what is a Ponzi Scheme? The first case decided by the Supreme Court which described Ponzi Scheme is the case of People vs. Balasa, et al., G.R. Nos. 106357 & 108601-02 decided on 03 September 1998. The case was about a so-called Panata Foundation of the Philippines, Inc., a non-stock, non-profit corporation based in Puerto Princesa, Palawan. Under the Foundation’s by-laws, its purposes, among others, are the following 1) uplift the economic conditions of the members through financial or consultative basis; 2) encourage members in a self-help program; 3) grant educational assistance; and 4) implement Anti-Drug Campaign. The Foundation started to solicit Php5,000.00 in exchange of so-called “slots” and promised to double or treble the money in twenty-one (21) days. The scheme enticed many more Palaweňos to invest until suddenly the Foundation could not pay maturing slots. The incorporators, officers and employees were prosecuted for Syndicated Estafa which led to their conviction, except for the deaf-mute who was acquitted because of reasonable doubt.
Under the erudite ponencia of the late Justice Flerida Ruth Romero, the Supreme Court defined Ponzi Scheme in this manner:
“Parenthetically, what appellants offered the public was a ‘Ponzi scheme,’ an investment program that offers impossibly high returns and pays these returns to early investors out of the capital contributed by later investors. Named after Charles Ponzi who promoted the scheme in the 1920s, the original scheme involved the issuance of bonds which offered 50% interest in 45 days or a 100% profit if held for 90 days. Basically, Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. This was the very same scheme practiced by the Panata Foundation.
However, the Ponzi scheme works only as long as there is an ever-increasing number of new investors joining the scheme. To pay off the 50% bonds Ponzi had to come up with a one-and-a-half times increase with each round. To pay 100% profit he had to double the number of investors at each stage, and this is the reason why a Ponzi scheme is a scheme and not an investment strategy. The progression it depends upon is unsustainable. The pattern of increase in the number of participants in the system explains how it is able to succeed in the short run and, at the same time, why it must fail in the long run. This game is difficult to sustain over a long period of time because to continue paying the promised profits to early investors, the operator needs an ever-larger pool of later investors. The idea behind this type of swindle is that the ‘con-man’ collects his money from his second or third round of investors and then absconds before anyone else shows up to collect. Necessarily, these schemes only last weeks, or months at most.”
In People vs. Balasa, supra, the Supreme Court went on to rule that these so-called “slots” are actually securities. The Supreme Court also held that Panata had no license to sell securities considering that being a Foundation, the said entity is a non-stock, non-profit corporation.
However, even with the stern warning by the Supreme Court in People vs. Balasa, supra, when it affirmed the ruling sentencing the accused of life imprisonment, it seems that we, both the predators and would-be victims or prey, have not learned our lesson. The Supreme Court will again find itself ruling on several cases of schemes, albeit tweaked and re-engineered, which are essentially Ponzi Scheme. (To be continued in the Second Part)