Ponzi Scam and the Menil Case

We have a number of discussions on the Ponzi and pyramiding scams in this blog. There’s a discussion of an actual case, the Panata Foundation case. The 2000 case of People vs. Menil, Jr. (G.R. No. 115054-66) involves a strikingly similar scheme. It’s really amazing how this scam still works despite almost a hundred years of existence. Maybe people have this nagging doubt that such get-rich scheme is highly suspicious, but rational thinking is oftentimes clouded by the very same reason — the prospect of getting rich quickly.

Vicente Menil, Jr. and his wife, Adrian, were the proprietors of ABM Appliance and Upholstery. In July 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 15 calendar days. Each investor may invest a maximum amount of P1,000 for which they were assured a return of P10,000. The ushers and sales executives were given a 10% commission from the total amounts remitted. Sometime in August 1989, the perpetrators incorporated ABM Development Center, Inc. (“ABM”), apparently to clothe their operations with legitimacy. At around the same time, the accused told his sales executives that all investments would only have returns of 1:7 which investors will receive after 15 working days. As such, if a person gave P100, his investment will receive only P700. As millions of pesos began pouring in, delays in the payments started, then by September 1989, payments eventually stopped. Cases were filed against the accused, who were arrested in Davao City.

What the accused 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. The Court described the workings of the “Ponzi Scheme” in an earlier case:

“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.

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 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 ‘conman’ 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.”

As part of his defense, the accused argued that several investors were paid the corresponding returns on their investments. This is unmeritorious, according to the SC, as the payment of returns to early investors is an integral part of the illegal Ponzi scheme. 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. The acccused were convicted for estafa (but not large scale estafa under PD 1869, as there was no showing that it was committed by a syndicate). A syndicate is defined in the same law as “consisting of five or more persons formed with the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme.”

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