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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
“Chain distribution plans” or “pyramid sales schemes” 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 the 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. (Article 4[k] of The Consumer Act of the Philippines)
Concealed behind the allure of vast returns and guaranteed profit, the Ponzi Scheme hides in a dark side of deception and fraud. From its origin in the early 20th century to its modern-day processions, the scheme has consistently remained to be a public concern.
In a 2015 case decided by the Supreme Court of the Philippines, Ponzi Scheme has been described as:
“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 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. It is not an investment strategy but a gullibility scheme, which works only as long as there is an ever-increasing number of new investors joining the scheme. It is difficult to sustain the scheme over a long period of time because the operator needs an ever-larger pool of later investors to continue paying the promised profits to early 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.” (People of the Philippines vs. Palmy Tibayan and Rico Puerto, G.R. Nos. 209655-60, January 14, 2015)
Meanwhile, Pyramiding or Pyramid Sales Scheme is defined under Article 4(k) of the Consumer Act of the Philippines, as follows:
“Chain distribution plans” or “pyramid sales schemes” 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 the 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.”
The success of the scheme hinges on a constant stream of investments coming from the latest investors enabling the payment of returns to those who came before. As new investors continue to participate and invest funds, the scheme continues to appear successful. Yet, the scheme’s downfall becomes inevitable when the influx of new capital slows down or stops in total. This abrupt decline will lead to the scheme’s rapid collapse, resulting in extensive losses for the majority of investors.
Ponzi Scheme and The Consumer Act of the Philippines
In relation to the present consumer protection laws like The Consumer Act of the Philippines, Ponzi schemes are regarded as a form of fraud or deceptive business practice. Article 53 of The Consumer Act of the Philippines further provides:
Article 53. Chain Distribution Plans or Pyramid Sales Schemes. — Chain distribution plans or pyramid sales schemes shall not be employed in the sale of consumer products.
Consumer protection laws are intended to safeguard consumers from unfair or fraudulent business activities that could harm them financially. If a person or entity is found to be operating a Ponzi scheme, they could be in violation of consumer protection laws because they are misleading consumers into investing in something that ultimately does not deliver as promised.
Remedies Available
If you happen to be a victim of a Ponzi scheme, you may file a civil and/or criminal complaint. Here is a general overview of the types of cases you might file:
- Criminal Complaint for Fraud or Estafa
In many cases, Ponzi schemes involve fraud or estafa, which are criminal offenses. The Revised Penal Code says:
Paragraph 4, Item 2(a), Article 315. –
Art. 315. Swindling (Estafa). – Any person who shall defraud another by any means mentioned hereinbelow shall be punished by:
x x x x
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 a fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business, or imaginary transactions; or by means of other similar deceits.
Section 1 of Presidential Decree No. 1689, says:
Section 1. Any person or persons who shall commit Estafa or other forms of swindling as defined in Articles 315 and 316 of the Revised Penal Code, as amended, shall be punished by life imprisonment to death if the swindling (Estafa) is committed by a syndicate consisting of five or more persons formed with the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme, and the defraudation results in the misappropriation of money contributed by stockholders, or members of rural banks, cooperatives, “samahang nayon(s),” or farmers’ associations, or funds solicited by corporations/associations from the general public.
Taking the case of People of the Philippines vs. Palmy Tibayan and Rico Puerto, Syndicated Estafa is a possible case to be filed in partaking in a Ponzi Scheme. Whereby:
In this light, it is clear that all the elements of Syndicated Esta/a, committed through a Ponzi scheme, are present in this case, considering that: (a) the incorporators/directors of Tibayan Group Investment Company, Inc. (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.
- Civil Lawsuit for Damages
You can also consider filing a civil lawsuit against the individuals or entities responsible for the Ponzi scheme. The New Civil Code, says:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same.
Art. 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.
Avoiding Ponzi schemes requires a combination of skepticism, due diligence, and an understanding of financial principles. Remember that Ponzi schemes thrive on the trust and greed of unsuspecting investors. By staying informed, conducting due diligence, and practicing caution, you can protect yourself from falling victim to these fraudulent schemes.
Read also: Sales Promotion under the Consumer Law (Republic Act No. 7394)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding taxation and taxpayer’s remedies, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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