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 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 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.