Ponzi Scam – the Case of Panata Foundation

Greed has always been one of man’s failings. The hope of greater gain has lured many a man to throw caution, and his common sense, to the wind. This human foible, known to many, has been exploited throughout the ages by con men, charlatans and cheats to bilk the gullible public of their hard-earned money. History has thus seen the unraveling of various disingenuous stratagems which are at bottom nothing but scams. The case at hand once again proves that “a sucker is born every minute.”

These are the opening lines of the Supreme Court’s decision in the 1998 case of People vs. Balasa, a Ponzi scheme case often cited in subsequent cases. The seeds of this case was planted on July 6, 1989, when the Panata Foundation of the Philippines, Inc., a non-stock, non-profit corporation was registered with the SEC.

Nature of a Ponzi Scheme

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. 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.

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.

The modus operandi of Panata Foundation

The Ponzi scheme is the very same scheme practiced by the Panata Foundation. Panata Foundation accepts “deposits” from the public. 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,” which resembles a check. These “slots” were part of a booklet, with one booklet containing one hundred “slots.” 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. Some would sign their slot only after payment on maturity, while others would sign as soon as they were given the slot. However, without the control number and the stamp of the teller, duly signed or initialed, no depositor could claim the proceeds of his deposit upon maturity. 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. Hence, while it was the teller who prepared and issued the slot, he had no direct contact with the depositor. The slots handed to a depositor were signed beforehand by the president of the foundation.

Every afternoon, the comptrollers would take the list of depositors made by the tellers with the amounts deposited by each, and have these typed. According to the foundations rules, an investor could deposit up to P5,000.00 only, getting a slot corresponding thereto. Anyone who deposited more than that amount would, however, be given a slot but the slot had to be in he name of another person or several other persons, depending upon the amount invested. A foundation teller, all deposits maturing in August 1989 were to be tripled. For such deposits, the slots issued were colored yellow to signify that the depositor would have his deposit tripled. Deposits that would mature subsequent to August were only given double the amount deposited. However, there were times when it was the depositor who would choose that his deposit be tripled, in which case, the deposit would mature later.

The amounts received by the foundation were deposited in banks. Thus, a foundation teller would, from time to time, go to PNB, PCI Bank, DBP and the Rural Bank of Coron to deposit the collections in a joint account in the names of Priscilla Balasa and Norma Francisco.

Initially, the operation started with a few depositors, with most depositors investing small amounts to see whether the foundation would make good on its promise. When the foundation paid double or triple the amounts of their investment at maturity, most not only reinvested their earnings but even added to their initial investments. As word got round that deposits could be doubled within 21 days, or tripled if the period lasted for more than 30 days, more depositors were attracted. Blinded by the prospect of gaining substantial profits for nothing more than a minuscule investment, these investors, like previous ones, were lured to reinvest their earnings, if not to invest more.

Most would invest more than P5,000.00, the investment limit set by the foundation. Priscilla Balasa would, however, encourage depositors to invest more than P5,000.00, provided that the excess was deposited under the name of others. She assured the depositors that this was safe because as long as the depositor was holding the slots, he was the “owner” of the amount deposited. Most investors then deposited amounts in the names of their relatives.

The cases filed against the fraudsters

The foundation’s operations initially 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.

The fraudulent acts of the accused through the Panata Foundation

The informations 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.”

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. What needs elucidation is whether or not the element of defraudation by means of deceit has been established beyond reasonable doubt.

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 device, 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 accused, in pursuit of their agenda, established a foundation which, by its articles of incorporation, was established, allegedly to “uplift members’ economic condition by way of financial or consultative basis.” Organized as a non-stock, non-profit charitable institution, its funds were to be obtained through membership dues and such other assessments as may be agreed upon by its board of directors. In contravention of these by-laws and modus operandi, the people behind the foundation enticed people to “deposit or invest” funds in the foundation under a “double or treble your deposit” scheme. These investment activities were clearly ultra vires acts or acts beyond the foundation’s authority. Evidently, SEC registration was obtained only for the purpose of giving a semblance of legitimacy to the foundation; that the foundation’s business was sanctioned by the government; and that it was allowed by law to accept deposits. This pretension was carried out even on the slots it issued, the foundations’ SEC registry number being indicated thereon.

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.

Caveat emptor — Buyer beware

In their defense, the accused argued that under the legal principle of caveat emptor, it was the investors’ own greed that did them in, implying that the depositors should have known that no sensible business could afford to pay such extravagant returns. The fact, however, that the buyer makes an independent investigation or inspection has been held not to preclude him from relying on the representation made by the seller where the seller has superior knowledge and the falsity of such representation would not be apparent from such examination or inspection, and, a fortiori, where the efforts of a buyer to learn the true profits or income of a business or property are thwarted by some device of the seller, such efforts have been held not to preclude a recovery. It has often been held that the buyer of a business or property is entitled to rely on the seller’s statements concerning its profits, income or rents. The rule that where a speaker has knowingly and deliberately made a statement concerning a fact the falsity of which is not apparent to the hearer, and has thus accomplished a fraudulent result, he cannot defend against the fraud by proving that the victim was negligent in failing to discover the falsity of the statement is said to be peculiarly applicable where the owner of the property or a business intentionally makes a false statement concerning its rents, profits or income. The doctrine of caveat emptor has been held not to apply to such a case.

Economic Sabotage

According to the accused, they cannot be convicted for economic sabotage because the total amount of P125,400.00 allegedly embezzled did not weaken or threaten national economic stability. As such, the crime committed in this case was not of the same genre as the “Agrix” and “Dewey Dee” scams that “spurred the birth of P.D. No. 1689. However, whether the act will weaken or threaten national economic stability is not an element of the crime. The elements of the crime under PD 1689 are: (a) estafa or other forms of swindling as defined in Articles 315 and 316 of the Revised Penal Code is committed; (b) the estafa or swindling is committed by a syndicate, and (c) defraudation results in the misappropriation of moneys contributed by stockholders, or members of rural banks, cooperatives, “samahang nayon(s),” or farmers associations, or of funds solicited by corporations/associations from the general public.

Besides, the act prohibited therein need not necessarily threaten the stability of the nation. It is sufficient that it “contravenes public interest.” Public interest was affected by the solicitation of deposits under a promise of substantial profits, as it was people coming from the lower income brackets who were victimized by the illegal scheme.

Similarly, the fact that the entity involved was not a rural bank, cooperative, samahang nayon or farmers’ association does not take the case out of the coverage of P.D. 1689. Its third “whereas clause” states that it also applies to other “corporations/associations operating on funds solicited from the general public.” The foundation fits into these category as it “operated on funds solicited from the general public.” To construe the law otherwise would sanction the proliferation of minor-league schemers who operate in the countryside. To allow these crimes to go unabated could spell disaster for people from the lower income bracket, the primary target of swindlers.

Crime committed by a Syndicate

P.D. No. 1689 penalizes offenders with life imprisonment to death regardless of the amount involved, provided that a syndicate committed the crime. 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.” If the offenders are not members of a syndicate, they shall nevertheless be held liable for the acts prohibited by the law but they shall be penalized by reclusion temporal to reclusion perpetua if the amount of the fraud is more than one hundred thousand pesos (P100,000.00). A syndicate perpetrated the Ponzi scheme in tis case. At least five persons — Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo Francisco, and the other incorporators of the foundation — collaborated, confederated and mutually helped one another in directing the foundation’s activities.

The conviction and penalty imposed

GUILLERMO and NORMA FRANCISCO were found guilty of violating PD 1689, and each was sentenced to suffer the penalty of life imprisonment for each count, as well as to restitute to complainants the amounts they have been defrauded. The court also ordred the immediate arrest of those who escaped — Priscilla Balasa, Normita Visaya and the others. However, as for Analina Francisco, the evidence adduced as to her complicity in the nefarious scheme is far from conclusive. (This is a digest of the People vs. Balasa case.)

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