Report on

Ponzi Scheme

Submitted By:
Levin Motio
 HISTORY OF PONZI SCHEME

Many of these computer-savvy crooks have taken their cue from an Italian
immigrant named Charles Ponzi, a dapper, five-foot-two-inch rogue who in
1920 raked in an estimated $15 million in eight months by persuading tens of
thousands of Bostonians that he had unlocked the secret to easy wealth.
Ponzi's meteoric success at swindling was so remarkable that his name became
attached to the method he employed, which was nothing more than the age-old
game of borrowing from Peter to pay Paul. The rules are simple: money taken
from today's investors is used to pay off debts to yesterday's investors 1.

Biography
The details of the infamous swindler Charles Ponzi's early life are difficult to
verify. It is believed, however, that he was born Carlo Ponzi in Parma, Italy, and
attended the University of Rome La Sapienza2.
Ponzi arrived in Boston, United States around November 1903.
Ponzi worked various jobs however he was still left penniless. He was then
caught forging a bad check and was sentenced to three years in a Quebec
prison.
When he was released from jail, Ponzi got involved in yet another criminal
venture, smuggling Italian immigrants across the border into the United States.
This too landed him in jail—he spent two years behind bars in Atlanta.
He was then released and returned to Boston and married.

The Ponzi Scheme

The idea for the scheme was made when Ponzi received a letter in the mail from
a company in Spain that contained in it an international reply coupon, a
coupon that can be exchanged for a number of priority airmail postage stamps
from another country. Ponzi then realized that he could turn a profit by buying
IRCs in one country, and exchanging them for more expensive stamps in
another country.
Ponzi's racket worked like this: He would send money to agents working for
him in other countries, who would buy IRCs and send them back to the United
1
https://www.smithsonianmag.com/history/in-ponzi-we-trust-64016168/
2
https://www.biography.com/crime-figure/charles-ponzi#:~:text=Charles%20Ponzi%20was%20the
%20infamous,86%20counts%20of%20mail%20fraud.
States. Ponzi would then exchange the IRC for stamps worth more than he paid
for them, and sell the stamps.
Not satisfied with running the profitable scheme on his own, Ponzi began to
seek investors to turn even higher profits. He promised investors outrageous
returns of 50 percent in 45 days, or 100 percent in 90 days. Ponzi paid these
investors using money from other investors, rather than with actual profit
Ponzi's scheme began to unravel in August 1920, when The Boston Post began
to investigate his returns. His scheme ran for over a year before it collapsed,
costing his "investors" $20 million. 

Charles Ponzi was arrested on August 12, 1920, and charged with 86 counts of
mail fraud.
 PONZI SCHEME IN GENERAL
Ponzi scheme
Referred to as an investment fraud that involves payment of purported returns
to existing investors from funds contributed by new investors who are
promised investment opportunities generating high returns with little to no
risk3

Pyramid Scheme
A pyramid scheme is a multi-level marketing business model where members
pay a fee to invest in the business and are then, in turn, promised payments
for recruiting other people to likewise invest in and join the business 4. 
Means sales devices whereby a person, upon condition that he makes an
investment, is granted by the manufacturer of his representative a right to
recruit for profit one or more additional persons who will also be granted such
right to recruit upon condition of making similar investments: Provided, That
the profits of the person employing such a plan are derived primarily from the
recruitment of other persons into the plan rather than from the sale of
consumer products, services and credit: Provided, further, That the limitation
on the number of participants does not change the nature of the plan 5.

Similarities and Differentiation

The Ponzi scheme and Pyramid Scheme are identical to each other but are not
the same. In terms of the so-called returns, both practices promises a higher
return in investment6.
In terms of operation, for the Ponzi scheme it only requires an initial
investment from the investors. The investors will then be paid out from the
investment of other investors. However for the Pyramid Scheme it is structured
in a way that a person would have higher returns by recruiting more people in
to the scheme. In a sense, the Ponzi scheme involves the shuffling of the

3
What is a Ponzi Scheme?, https://www.sec.gov/spotlight/enf-actions-ponzi.shtml#:~:text=A%20Ponzi%20scheme
%20is%20an,with%20little%20or%20no%20risk.
4
Pyramid Scheme, https://www.investopedia.com/terms/p/pyramidscheme.asp
5
Consumer Act of the Philippines
6
Ponzi vs pyramid, scheme, https://corporatefinanceinstitute.com/resources/knowledge/other/ponzi-vs-pyramid-
schemes/
investment money, while the pyramid scheme uses a multi-level marketing
practice, which looks like a pyramid.
Accordingly, the source of funds for the Ponzi scheme is the initial investment
while the main source for funds in the Ponzi scheme are the funds that which
are provided by the new recruited members.

Ponzi Scheme Visualization

Pyramid Scheme Visualization

 PONZI SCHEME IN THE PHILIPPINES
The Ponzi scheme in the Philippines were rampant as early as 2007, though
jurisprudence records its existence as far back as the 1980s. It became a
problem that the Senate even had to conduct an inquiry, in aid of legislation,
on the proliferation of the Ponzi scheme and other investment frauds. What
alarmed the senate during this times is the purported involvement of public
official on such fraudulent acts.
As a preface, the Philippine Legal System does not have a law specifically
addressing the Ponzi scheme. What the legal system has is a combination of
different statutes that addresses fraudulent acts and statutes that protect the
interest of persons involved in trade and industry. As such there is no law that
is called an anti-Ponzi scheme act rather we have a combination of a number of
statutes addressing the Ponzi scheme.

Definition of Ponzi scheme in the Philippines

The common definition of the Ponzi scheme was adapted in the Philippines. As
early, as 1998 the existence of a Ponzi scheme was already noted by the court.
A Ponzi Scheme is an investment program that offers impossibly high returns
and pays these returns to early investors out of the capital contributed by later
investors." These are schemes that "promise high financial returns or dividends
not available through traditional investments. Instead of investing the funds of
victims, however, the con artist pays 'dividends' to initial investors using the
funds of subsequent investors. The scheme generally falls apart when the
operator flees with all of the proceeds or when a sufficient number of new
investors cannot be found to allow the continued payment of 'dividends 7."

Legality of Ponzi scheme

In line with the fact that there is no such thing as an anti-Ponzi scheme law,
such reality poses a question of such act of conducting business is considered
to be legal. The old adage says that there is no crime if there is no law
punishing it. However, as mentioned before, through the application of
different laws in the Philippines the act of engaging in a Ponzi scheme can be
punished under the law. In order to determine the legality of a Ponzi scheme,
first we must delve into the applicable laws.

7
(GR No 10860 -02, September 3, 1998)
Applicable Laws

1. The Securities Regulation Code

Section 8. Requirement of Registration of Securities. – 8.1.

Securities shall not be sold or offered for sale or distribution
within the Philippines, without a registration statement duly
filed with and approved by the Commission. Prior to such
sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be
made available to each prospective purchaser.

The securities regulation code defines that the non-registration of all securities
before selling as a prohibited practice. The law provides, in clear statement,
that all securities must be registered with the Securities and Exchange
Commission before trading of such can be made. Accordingly, Securities are
defined within the code as any shares, participation or interests in a
corporation or in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instruments, whether written or electronic
in character. It includes:

(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness,

asset-backed securities;

(b) Investment contracts, certificates of interest or participation in a

profit sharing agreement, certifies of deposit for a future subscription;

(c) Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants;

(e) Certificates of assignments, certificates of participation, trust

certificates, voting trust certificates or similar instruments

(f) Proprietary or nonproprietary membership certificates in corporations;

and

(g) Other instruments as may in the future be determined by the

Commission.
 Section 26. Fraudulent Transactions. – It shall be unlawful
for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:

26.1. Employ any device, scheme, or artifice to

defraud;

26.2. Obtain money or property by means of any

untrue statement of a material fact of any omission to
state a material fact necessary in order to make the
statements made, in the light of the circumstances
under which they were made, not misleading; or

26.3. Engage in any act, transaction, practice or

course of business which operates or would operate as
a fraud or deceit upon any person.

The Securities Regulation Code also prescribes fraudulent acts involving the
sale or purchase of securities. Accordingly a charge for the violation of Section
26, can be filed along with a violation for Section 8.

Bear in mind that the Ponzi scheme is categorized as an investment fraud. The
Ponzi scheme only works when there’s a group of people investing into a plan
made by someone either for profit sharing or a joint venture business. This act,
already puts the definition of Securities into play, the act of investment by
others already makes their investment covered by the term of securities under
the law. And by law, such king of activity must be registered with the
Securities and Exchange Commission.

2. Revised Penal Code – Swindling and Estafa

Article 315. Swindling (estafa). - Any person who shall

defraud another by any of the means mentioned herein
below shall be punished by:

1st. The penalty of prision correccional in its maximum

period to prision mayor in its minimum period, if the amount
of the fraud is over 12,000 pesos but does not exceed 22,000
pesos, and if such amount exceeds the latter sum, the
penalty provided in this paragraph shall be imposed in its
maximum period, adding one year for each additional 10,000
pesos; but the total penalty which may be imposed shall not
exceed twenty years. In such cases, and in connection with
the accessory penalties which may be imposed under the
provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be.

2nd. The penalty of prision correccional in its minimum and

medium periods, if the amount of the fraud is over 6,000
pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to

prision correccional in its minimum period if such amount is
over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its maximum period, if such

amount does not exceed 200 pesos, provided that in
the four cases mentioned, the fraud be committed by
any of the following means:

1. With unfaithfulness or abuse of confidence,

namely:

(a) By altering the substance, quantity, or

quality or anything of value which the offender
shall deliver by virtue of an obligation to do so,
even though such obligation be based on an
immoral or illegal consideration.

(b) By misappropriating or converting, to the

prejudice of another, money, goods, or any other
personal property received by the offender in
trust or on commission, or for administration, or
under any other obligation involving the duty to
make delivery of or to return the same, even
though such obligation be totally or partially
guaranteed by a bond; or by denying having
received such money, goods, or other property.

(c) By taking undue advantage of the signature

of the offended party in blank, and by writing
any document above such signature in blank, to
the prejudice of the offended party or of any
third person.

2. By means of any of the following false pretenses or fraudulent

acts executed prior to or simultaneously with the commission of
the fraud:
(a) By using fictitious name, or falsely
pretending to possess power, influence,
qualifications, property, credit, agency, business
or imaginary transactions, or by means of other
similar deceits.

(b) By altering the quality, fineness or weight of

anything pertaining to his art or business.

(c) By pretending to have bribed any

Government employee, without prejudice to the
action for calumny which the offended party
may deem proper to bring against the offender.
In this case, the offender shall be punished by
the maximum period of the penalty.

(d) By post-dating a check, or issuing a check in

payment of an obligation when the offender
therein were not sufficient to cover the amount
of the check. The failure of the drawer of the
check to deposit the amount necessary to cover
his check within three (3) days from receipt of
notice from the bank and/or the payee or holder
that said check has been dishonored for lack of
insufficiency of funds shall be prima facie
evidence of deceit constituting false pretense or
fraudulent act. (As amended by R.A. 4885,
approved June 17, 1967.)

(e) By obtaining any food, refreshment or

accommodation at a hotel, inn, restaurant,
boarding house, lodging house, or apartment
house and the like without paying therefor, with
intent to defraud the proprietor or manager
thereof, or by obtaining credit at hotel, inn,
restaurant, boarding house, lodging house, or
apartment house by the use of any false
pretense, or by abandoning or surreptitiously
removing any part of his baggage from a hotel,
inn, restaurant, boarding house, lodging house
or apartment house after obtaining credit, food,
refreshment or accommodation therein without
paying for his food, refreshment or
accommodation.
 3. Through any of the following fraudulent means:

(a) By inducing another, by means of deceit, to

sign any document.

(b) By resorting to some fraudulent practice to

insure success in a gambling game.

(c) By removing, concealing or destroying, in

whole or in part, any court record, office files,
document or any other papers.

The Ponzi scheme is considered as a fraudulent practice, for it has the aim to
defraud its purported investors and take off with their hard earned investment,
cash or otherwise. As such, the perpetrators of Ponzi Schemes can be held
accountable under the law by using the Revised Penal Code and its provision
on Estafa and Swindling. Bear in mind again that there is no law as an –anti-
Ponzi scheme law, as such in order to make the swindlers accountable, the
Revised Penal Code can be made to apply, for their acts in operating a Ponzi
scheme can be considered as Estafa.

3. Presidential Decree No. 1689 – Syndicated Estafa

In essence, syndicated estafa is but the commission of any kind of estafa under
Article 315 of the RPC (or other forms of swindling under Article 316) with two
(2) additional conditions, namely:

1. the estafa or swindling was perpetrated by a “syndicate“; and

2. The estafa or swindling resulted in the “misappropriation of
money contributed by stockholders, or members of rural banks,
cooperative, samahang nayon(s), or farmers association, or of
funds solicited by corporations/associations from the general
public8.

8
What is Syndicated Estafa?, https://ndvlaw.com/what-is-syndicated-estafa/
 Elements of the Crime

There being no law specifically punishing the engagement of a Ponzi scheme,

the elements of the crimes mentioned in the applicable law will be the basis for
the elements.

Section 8 of the Section 26 of the Section 315 of the Presidential Decree No.
Securities Securities Regulation Revised Penal Code 1689
Regulation Code Code
Non-registration Fraudulent Transaction Swindling and Syndicated Estafa
of Securities involving Securities Estafa
The non- It shall be unlawful for The elements 1. Estafa or other
registration of any person, directly or of estafa in general forms of swindling, as
securities with indirectly, in connection are the following: defined in Articles 315
the Securities with the purchase or sale and 316 of the RPC, is
and Exchange of any securities to: 1. that an accused committed;
Commission. defrauded another
1. Employ any device, by abuse of 2. the Estafa or
scheme, or artifice to confidence, or by swindling is committed
defraud; means of deceit; and by a syndicate of five
(5) or more persons;
2. Obtain money or 2. That damage and and
property by means of any prejudice capable of
untrue statement of a pecuniary estimation 3. Defraudation
material fact of any is caused the results in the
omission to state a offended party or misappropriation of
material fact necessary in third person. moneys contributed by
order to make the stockholders, or
statements made, in the members of rural
light of the banks, cooperative,
circumstances under "samahang nayon(s),"
which they were made, or farmers’
not misleading; or associations, or of
funds solicited by
3. Engage in any act, corporations/associati
transaction, practice or ons from the general
course of business which public.
operates or would
operate as a fraud or
deceit upon any person.
 JURISPRUDENCE

Swindling or Estafa/Syndicated Estafa

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
PRISCILLA BALASA, NORMITA VISAYA, GUILLERMO FRANCISCO, NORMA
FRANCISCO and ANALINA FRANCISCO, accused, NORMA FRANCISCO,
GUILLERMO FRANCISCO and ANALINA FRANCISCO, accused-appellants.

G.R. No. 106357 September 3, 1998

FACTS

On July 6, 1989, the Panata Foundation of the Philippines, Inc., a non-stock,

non-profit corporation with principal address at San Miguel, Puerto Princesa,
Palawan, was registered with the Securities and Exchange Commission. Its ten
incoporators were Priscilla Balasa, Normita Visaya, Analina Francisco, Lolita
Gelilang, Cynthia Ang, Norma Francisco, Purabel Espidol, Melinda Mercado,
Rodolfo Ang, Jr. and Teresa G. Carandang. In addition, the management of the
foundation was entrusted to Priscilla Balasa, as president and general
manager; Normita Visaya as corporate secretary and head comptroller; Norma
Francisco as cashier; Guillermo Francisco as the disbursing officer; and
Analina Francisco as treasurer. The latter also doubled as a typist of the
Foundation.

After obtaining its SEC registration, the foundation immediately swung into
operation. It sent out brochures soliciting deposits from the public, assuring
would-be depositors that their money would either be doubled after 21 days or
trebled after 30 days. Priscilla Balasa also went around convincing people to
make deposits with the foundation at their office at the Diaz Apartment, Puerto
Princesa.

The modus operandi for investing starts when a person would deposit an
amount, the amount would be taken by a clerk to be given to the teller. The
teller would then fill up a printed form called a "slot." These "slots" were part of
a booklet, the control number indicated the number of the "slot" in a booklet,
while the space after "date" would contain the date when the slot was acquired,
as well as the date of its maturity. The amount deposited determined the
number of shares, one share being equivalent to one hundred pesos. The
depositor had the discretion when to affix his signature on the space provided
therefor.

After the slot had been filled up by the teller, he would give it to the clerk
assigned outside. The clerk would then give the slot to the depositor. Every
afternoon, the comptrollers would take the list of depositors made by the tellers
with the amounts deposited by each, and have these typed. Norma Francisco
would then receive from the tellers the amounts deposited by the public. It was
also her job to pay the salaries of the foundation's employees. For his part,
Guillermo Francisco would release money whenever a deposit would mature as
indicated in the slots.

At the outset, the foundation's operations proceeded smoothly, as satisfied

investors collected their investments upon maturity. On November 29, 1989,
however, the foundation did not open. Depositors whose investments were to
mature on said date demanded payments but none was forthcoming. On
December 2, 1989, Priscilla Balasa announced that since the foundation's
money had been invested in the stock market, it would resume operations on
December 4, 1989. On that date, the foundation remained closed. Depositors
began to demand reimbursement of their deposits, but the foundation was
unable to deliver.

Consequently, sixty-four informations, all charging the offense of estafa, as

defined in Presidential Decree No. 1689, were filed against Priscilla Balasa,
Normita Visaya, Norma Francisco, Guillermo Francisco, Analina Francisco and
eight other persons, mostly incorporators and employees of the Panata
Foundation, before the Regional Trial Court

After the filing of the informations, warrants for the arrest of the defendants in
the corresponding criminal cases were issued. However, only Priscilla Balasa,
Normita Visaya, Guillermo Francisco, Norma Francisco and Analina Francisco
were arrested, the rest of the defendants having gone into hiding.

On arraignment, the arrested defendants all pleaded not guilty to the crimes
charged. The appellants denied their participation on the charged crimes. In
her testimony, Norma Francisco also denied complicity in the crime charged,
claiming that she only did household chores in Puerto Princesa. Guillermo
denies participation in the commission of the crime charged. In his testimony,
he limits his participation in the foundation's activities to paying the holders of
matured slots. 
On March 31, 1992, Branch 50 of the Regional Trial Court of Palawan issued a
joint decision finding the accused guilty of the crime charged and of having
acted in conspiracy in committing the same. 

ISSUE

Whether or not the accused appellants were guilty of estafa

RULING

The information filed against appellants alleged that by means of false

representation or false pretenses and through fraudulent means, complainants
were defrauded of various amounts of money by the accused. Article 315,
paragraph 2 (a) of the Revised Penal Code provides that swindling or estafa by
false pretenses or fraudulent acts executed prior to or simultaneously with the
commission of the fraud is committed by "using fictitious name, or falsely
pretending to possess power, influence, qualifications, property, credit, agency,
business or imaginary transactions, or by other similar deceits." The elements
of estafa under this penal provision are:

(1) The accused defrauded another by means of deceit and

(2) Damage or prejudice capable of pecuniary estimation is caused to the

offended party or third party. It is indisputable that the foundation failed
to return the investments of the complaining witnesses, hence it is
undeniable that the complainants suffered damage in the amount of
their unrecouped investments.

The testimonial evidence presented by the prosecution proves that appellants

employed fraud and deceit upon gullible people to convince them to invest in
the foundation. It has been held that where one states that the future profits or
income of an enterprise shall be a certain sum, but he actually knows that
there will be none, or that they will be substantially less than he represents,
the statement constitutes actionable fraud where the hearer believes him and
relies on the statement to his injury. That there was no profit forthcoming can
be clearly deduced from the fact that the foundation was not engaged nor
authorized to engage in any lucrative business to finance its operation. It was
not shown that it was the recipient of donations or bequest with which to
finance its "double or triple your money" scheme, nor did it have any operating
capital to speak of when it started operations.
The Court also pointed out that 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.

Note should also be taken of the fact that appellants used "slots" in their
operation. These slots are actually securities, the issuance of which needs the
approval of the Securities and Exchange Commission. Knowing fully well that
the S.E.C. would not approve the issuance of securities by a non-stock, non-
profit organization, the operators of the Ponzi scheme, nevertheless, applied for
registration as a foundation, an entity not allowed to engage in securities.

The appellants forward that they cannot be charged under PD 1689, they deny
the existence of a conspiracy in the perpetration of the fraudulent scheme. At
this point the court noted that the evidence adduced by the prosecution
confirms the existence of a conspiracy among the appellants in committing the
crime charged. The fact that Guillermo Francisco was not an incorporator of
the foundation does not make him any less liable for the crime charged. By his
own admission, he participated in the foundation's activities by serving as its
paymaster. Norma Francisco's activities would thus show a community of
design with the other accused making her a co-conspirator and equally liable
for the crime charged. Her voluntary and indispensable cooperation concurred
with the criminal acts performed by her co-accused.

As for Analina Francisco, however, the evidence adduced as to her complicity

in the nefarious scheme is far from conclusive. While she was an incorporator
and treasurer of the foundation, there is no denying the fact that she is a deaf-
mute. As such, she is incapable of communicating and conveying her thoughts
to the complaining witnesses and other depositors. This casts serious doubt on
whether she could be deemed to have similarly conspired and confederated
with the other accused. The Court commented that she was literally deaf and
mute to the nefarious activities going on in the foundation that she did not
pose a danger to it. Furthermore, it is well settled that where the acts of an
accused are capable of two interpretations, that which is in consonance with
innocence should prevail.
 PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee
vs.
PALMY TIBAYAN and RICO Z. PUERTO, Accused-Appellant

G.R. No. 209655-60 January 14, 2015

FACTS

Tibayan Group Investment Company, Inc. (TGICI) is an open-end investment

company registered with the Securities and Exchange Commission (SEC) on
September 21, 2001.Sometime in 2002, the SEC conducted an investigation on
TGICI and its subsidiaries. In the course thereof, it discovered that TGICI was
selling securities to the public without a registration statement in violation of
Republic Act No. 8799, otherwise known as "The Securities Regulation Code,"
and that TGICI submitted a fraudulent Treasurer’s Affidavit before the SEC.
Resultantly, on October 21, 2003, the SEC revoked TGICI’s corporate
registration for being fraudulently procured. The foregoing led to the filing of
multiple criminal cases for Syndicated Estafa

According to the prosecution, private complainants were enticed to invest in

TGICI due to the offer of high interest rates, as well as the assurance that they
will recover their investments. However, the TGICI office closed down without
private complainants having been paid and, thus, they were constrained to file
criminal complaints against the incorporators and directors of TGICI.

On various dates, the RTC issued six (6) separate decisions convicting Tibayan
of 13 counts and Puerto of 11 counts of Estafa under Item 2 (a), Paragraph 4,
and Article 315 of the RPC in relation to PD 1689. The RTC did not lend
credence to accused appellants’ denials in light of the positive testimonies of
the private complainants that they invested their money in TGICI because of
the assurances from accused-appellants and the other directors/incorporators
of TGICI that their investments would yield very profitable returns. In this
relation, the RTC found that accused-appellants conspired with the other
directors/incorporators of TGICI in misrepresenting the company as a
legitimate corporation duly registered to operate as a mutual fund to the
detriment of the private complainants. In a Decision dated June 28, 2013, the
CA modified accused appellants’ conviction to that of Syndicated Estafa, and
accordingly, increased their respective penalties to life imprisonment for each
count.

ISSUE: whether or not the accused are guilty of estafa

RULING:

The Court sustained the convictions of accused-appellants

The court reiterated the elements of Syndicated Estafa which are: (a) Estafa or
other forms of swindling, as defined in Articles 315 and 316 of the RPC, is
committed; (b) the Estafa or swindling is committed by a syndicate of five (5) or
more persons; and (c) defraudation results in the misappropriation of moneys
contributed by stockholders, or members of rural banks, cooperative,
"samahang nayon(s)," or farmers’ associations, or of funds solicited by
corporations/associations from the general public.

The Court agreed with the finding of the CA that accused-appellants, along
with the other accused who are still at large, used TGICI to engage in a Ponzi
scheme, resulting in the defraudation of the TGICI investors. The court pointed
out that the modus operandi of inducing the public to invest in it on the
undertaking that their investment would be returned with a very high monthly
interest rate ranging from three to five and a half percent (3%-5.5%). Under
such lucrative promise, the investing public are enticed to infuse funds into
TGICI. However, as the directors/incorporators of TGICI knew from the start
that TGICI is operating without any paid-up capital and has no clear trade by
which it can pay the assured profits to its investors, they cannot comply with
their guarantee and had to simply abscond with their investors’ money. 

Accordingly, a Ponzi scheme is a type of investment fraud that involves the

payment of purported returns to existing investors from funds contributed by
new investors. Its organizers often solicit new investors by promising to invest
funds in opportunities claimed to generate high returns with little or no risk.

In this light, it is clear that all the elements of Syndicated Estafa, committed
through a Ponzi scheme, are present in this case, considering that: (a) the
incorporators/directors of TGICI comprising more than five (5) people,
including herein accused-appellants, made false pretenses and representations
to the investing public - in this case, the private complainants - regarding a
supposed lucrative investment opportunity with TGICI in order to solicit money
from them; (b) the said false pretenses and representations were made prior to
or simultaneous with the commission of fraud; (c) relying on the same, private
complainants invested their hard earned money into TGICI; and (d) the
incorporators/directors of TGICI ended up running away with the private
complainants' investments, obviously to the latter's prejudice.
 PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
VICENTE MENIL, JR., accused-appellant.

G.R. No. 115054-66               September 12, 2000

FACTS:

Vicente Menil, Jr. and his wife, Adrian B. Menil, were the proprietors of a
business operating under the name ABM Appliance and Upholstery. On July
15, 1989, they, through ushers and sales executives, began soliciting
investments from the general public in Surigao City and its neighboring towns.
They assured would-be investors that their money would be multiplied ten-fold
after fifteen (15) calendar days.

The people who invested in the business were issued coupons which merely
indicated the date of entry, the due date of the investment, the amount given,
the amount to be received, the name and address of the investor and the name
of the sales executive. Sales executives appointed by accused-appellant were
given these coupons which they, in turn, gave to the people they solicited from
as proof of their investment.

Sometime during the first week of August, 1989, accused-appellant and his
wife, apparently to clothe their operations with legitimacy, caused the
incorporation of their business, under the name ABM Development Center, Inc.
with the Securities and Exchange Commission.

On August 15, 1989, accused-appellant and his wife held a meeting with the
sales executives and ushers of the ABM Development Center, Inc. At this
meeting, accused-appellant informed the sales executives that the business of
ABM Development Center, Inc. was proceeding normally and that investments
were coming in. He advised the sales executives however that beginning that
date, all investments accepted by the business would only have returns of 1:7.
After this, the sales executives continued accepting investments from the
general public and the offices of accused-appellant kept on accepting the
remittances of the sales executives. By this time, daily investments amounting
to millions of pesos are being remitted to their office.

On September 19, 1989, the ABM Development Center, Inc. stopped releasing
payments. The sales investors went to the offices of ABM Development Center,
Inc. to inquire about the release of payments but there was no one around to
address their complaints. Later the accused-appellant assured that payments
were forthcoming. Despite these assurances and despite repeated demands
made by the investors, accused-appellant released no further payments and
neither did he refund any investment remitted to him.
Consequently, a case for large scale swindling was filed by the City Prosecutor
of Surigao City against the accused-appellant and his wife. Additionally, twenty
cases for estafa were filed against accused-appellant and his wife by the
Provincial Prosecutor’s Office. 

For his defense the accused insists that his investment business was legitimate
as his corporation was registered with the Securities and Exchange
Commission. He alleged that he stopped giving payments after September 18,
1989 due to circumstances beyond his control. The accused then recounted on
his experience of being harassed and hunted by the military.

On August 16, 1993, the trial court rendered a joint decision finding accused-
appellant guilty of one count of large scale swindling and thirteen (13) counts
of estafa. 

ISSUE: Whether or not the accused has committed estafa

RULING:

We affirm the conviction of accused-appellant.

Fraud, in its general sense, is deemed to comprise anything calculated to

deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust, or confidence justly reposed, resulting in damage
to another, or by which an undue and unconscientious advantage is taken of
another. It is a generic term embracing all multifarious means which human
ingenuity can devise, and which are resorted to by one individual to secure an
advantage over another by false suggestions or by suppression of truth and
includes all surprise, trick, cunning, dissembling and any unfair way by which
another is cheated. On the other hand, deceit is the false representation of a
matter of fact, whether by words or conduct, by false or misleading allegations,
or by concealment of that which should have been disclosed which deceives or
is intended to deceive another so that he shall act upon it to his legal injury.

The Court held that that the testimonial and documentary evidence presented
by the prosecution, as well as the admissions made by accused-appellant,
sufficiently prove that accused-appellant employed fraud and deceit upon
gullible people to induce them to invest in his "business." The inducement
consisted of accused-appellant’s assurance that money invested in his
"business" would have returns of 1000%, later reduced to 700%, after 15 days.
Lured by the false promise of quick financial gains on their investments, the
unsuspecting people of Surigao Del Norte readily turned over their hard-earned
money to the coffers of ABM.

In other words, accused-appellant merely paid the returns of maturing

investments from the remittances of succeeding investors. What accused-
appellant actually offered to the public was a "Ponzi Scheme," an
unsustainable investment program that offers extravagantly high returns and
pays these returns to early investors out of the capital contributed by later
investors. In People vs. Balasa, we had occasion to describe the workings of the
"Ponzi Scheme" as follows: "Named after Charles Ponzi who promoted the
scheme in the 1920’s, 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 scheme practiced by
the Panata Foundation.

The accused forwards that the acts of taking in investment was a legitimate
business practice. As proven by the prosecution, the incorporation of the ABM
Development Center, Inc. on August 21, 1989 was undertaken by accused-
appellant only to give a semblance of legitimacy to its illegal operations.
Accused-appellant started receiving investments from the public as early as
July 15, 1989 and yet it was only after he was warned by a representative of
the Department of Trade and Industry that his operation was illegal that he
went about with the business of incorporating his moneymaking scheme.

In his defense, accused-appellant points to the fact that several investors were
paid the corresponding returns on their investments. This fact, accused-
appellant argues, negates any perceived false pretense or deceit on his part and
as such, his liability, if any should only be civil in nature.

There is no merit in this argument. As previously explained, the payment of

returns to early investors is an integral part of the illegal Ponzi scheme foisted
by accused-appellant on the unsuspecting public. The fact that early investors
were paid the returns on their investments induced more people to participate
in the illegal scheme with the hope of realizing the same extravagant rate of
return. In fact, after word of these payments spread like wildfire, the amount of
investments received by accused-appellant ballooned from thousands of pesos
to several millions of pesos.

Violation of the Securities Regulation Code

In the Matter of:

Kappa Community Ministry International; Cease and Desist Order 9.

This jurisprudence involves the issuance of a cease and Desist order issued by
the Securities and Exchange Commission against the Kappa Community
Ministry. In Sum, the order records the investigation made by the agents of
SEC and their subsequent findings.

In sum, the Sec investigation team found that Kapa Ministry was operating
under different names within the region. The Modus of Kapa involves collecting
membership fees from its members and offering a 10k to 3k monthly scheme.
Such scheme involves the return of investments. It was also discovered that
Kappa, alongside its recruitment of members to join their religious organization
also offers an investment scheme with the opportunity to earn profits at the
rate of 30 percent monthly

On September 2018, the SEC was informed that Kapa is not a registered issuer
of mutual fund, exchange fund, and proprietary/non-proprietary shares of
membership certificates and time shares pursuant to Section 8 and 12 of the
Securities Regulation Code and therefore not licensed to offer such securities to
the public.

On September 2018, a memorandum from one of the investigating teams that

the acts of the Kappa community in engaging in the sale and trade of securities
were a blatant violation of Section 8.1 of the Securities Regulation Code. At this
point other reports were received by SEC and eventually granted the cease and
desist order.

On justifying the Cease and Desist order, it stated that the EIPD has adduced
substantial evidence to support the allegation that Kapa and its entities are
engaged in offering or selling to the public securities in the form of investment
contracts without the necessary license from the Commission.

Investment contract is a transaction, contract or scheme whereby a person

1. Makes an investment of money

2. In a common enterprise

3. With the expectation of profits and

4. To be derived solely from the efforts of others

9
SEC Admin Case No. 02-19-181, February 19, 2019, In the Matter of Kapa-Community Ministry International,
https://www.sec.gov.ph/wp-content/uploads/2019/11/2019CDO_Kapa-communityMinistry2.pdf
The EIPD was able to show that the investment scheme of Kapa falls within the
ambit of an investment contract. The investment scheme, though denominated
as Donation is actually an investment contract because of the following

1. The member-investor enters into a contract

2. The money invested is placed in a common enterprise and the

investor-member expects to derive profit

3. Finally the member-investor expects to earn profits from the

entrepreneurial and managerial efforts of others.

Accordingly the investment scheme of Kapa has the characteristic of a Ponzi

scheme as it promises exorbitant rate of return with little or no risk at all to
investors. The document reiterated;

“To be sure, a Ponzi scheme is a type of investment fraud that

involves the payment of purported returns to existing investors
from funds contributed but new investors. Its organizers often
solicit new investors by promising to invest funds in opportunities
claimed to generate high returns with little to no risk. In many
Ponzi Schemes the perpetrators focus on attracting new money to
make promised payments to earlier stage investors to create the
false appearance that investors are profiting from a legitimate
business.

As such, the cease and Desist Order was approved.

This case or investigation also gave rise to the current events, wherein the
Kappa case is still pending within the Philippine legal System.
For Additional Information and Added Resource

http://ateneolawjournal.com/main/varticle/244#:~:text=The%20Consumer%20Act%20of%20the
%20Philippines%20prohibits%20pyramiding%20sales%20schemes,consumer%20products%2C
%20services%20or%20credits.

https://acfe-p.org/uploads/
3/3/8/7/3387885/11_fraud_detection_prevention_and_investigation_j_aquino_sec.pdf

https://lawphil.net/statutes/acts/act_3815_1930.html

https://lawphil.net/statutes/repacts/ra2000/ra_8799_2000.html

https://ndvlaw.com/what-is-syndicated-estafa/

https://lawphil.net/statutes/presdecs/pd1980/pd_1689_1980.html

https://lawphil.net/judjuris/juri2000/sep2000/gr_115054_2000.html

https://lawphil.net/judjuris/juri2015/jan2015/gr_209655_2015.html

https://acfe-p.org/uploads/
3/3/8/7/3387885/11_fraud_detection_prevention_and_investigation_j_aquino_sec.pdf

http://legacy.senate.gov.ph/lisdata/1463612173!.pdf

https://didm.pnp.gov.ph/images/Memorandum%20Circulars/MC%202013-001%20GUIDELINES%20FOR
%20THE%20DETECTION%20AND%20INVESTIGATION%20OF%20INVESTMENT%20FRAUD.pdf

https://www.sec.gov.ph/wp-content/uploads/2020/02/investment_checklist.gif

https://www.sec.gov.ph/wp-content/uploads/2019/11/2019CDO_Kapa-communityMinistry2.pdf

SUStained syndicated estafa- cases