Explain how a Ponzi scheme works? In the case of the Philippines, do you consider the Bequest Bank and AG Share cases as the same as Ponzi Scheme? Why or why not? Is the strategy adopted by Mr. Julian B. Damondong similar with that of Charles Ponzi? Why or why not?

Mini-case

Financial Scandals

Ponzi Schemes

The practice of providing old (or early) investors above average on their investment with funds raised from new (or late) investors in the absence of any real business operation to generate profits is illegal, unethical and regrettably, not a new idea. It used to be referred to as robbing Peter to pay Paul. In 1899, a New York scam artist named William Miller promised investors returns as high as 520% in one year based on his supposed insider information on profitable businesses. He scammed people out of almost $ 25 million in today’s money before being exposed and jailed for 10 years.

In 1920, the practice was given a new name Ponzi scheme in honor of Charles Ponzi, an Italian immigrant, who after numerous failed business ventures began to promote the spectacular returns to be made to be made by buying International Reply Coupons (IRC) coupons. These coupons could be used to purchase stamps in order to reply to a letter like an international self-addressed envelope in local currencies and cashing them in the US currency rates. For example, a person could buy 66 IRC in Rome for the equivalent of US$1. Those same 66 coupons would cost $3.30 in Boston where Ponzi was based. Ponzi noticed that if two countries postal charges differed from each, it opened a profit-making possibility. It is debatable whether or not Ponzi genuinely believed that he had stumbled across a real business opportunity, a kind of arbitrage.

His response was immediate. Promising investors returns of 50% on their original investment in just 45 days. However, the opportunity attracted so much money so quickly as much as $1 million poured into his office in one day that Ponzi was either unable or unwilling to actually buy the IRCs had he tried to do so he would have realized that there were not IRCs in existence to deliver the kinds of returns he was promising his investors. Instead, Ponzi chose to use funds coming in from new investors to pay out the promised returns to older investors robbing Peter to pay Paul. From February to July 1920, Ponzi attracted the sum of $10 million (over $100 million in today’s money)

It was only a matter of time before the funds coming in would be insufficient to meet the demands of older investors with their original capital and their 50% return. Ponzi was able to keep the scheme going by encouraging those older investors to keep rolling over their investment. Once rumors began to surface about questionable nature of the Ponzi enterprise, fewer and fewer people opted to rollover choosing

instead to take their money out. At that point, the whole system collapsed and Ponzi’s business enterprise was exposed as fraudulent. For his brief encounter with fame and fortune,

Charles Ponzi eventually served 12 years in prison and was deported back to Italy. He later emigrated to Brazil still presumably in search of fame and fortune. At the age of 66, he died in 1949 in the charity ward of Rio de Janeiro with only enough money to his name to cover his burial expenses. His name ever lives on the practice of “robbing Peter to pay Paul” was forever replaced with the name Ponzi scheme.

In subsequent decades Ponzi has inspired imitators:

• In 1985, a San Diego currency trader Dominelli convinced more than 1,000 investors to part with $80 million in a classic Ponzi scheme
• In the 1990s, a Florida Church-Greater Ministries International scammed nearly 20,000 people out of $500 million on the basis of a promise that God would double the money of truly pious investors
• Lou Pearlman, the theatrical impresario and businessman, who launched the screams of thousands of teenage girls with the boy-band N’ Sync. Stole over $million from investors over two decades
• As recently as January 2009, the US Securities and Exchange Commission (SEC) charged an 82-year-old man, Richard Piccoli with operating a Ponzi scheme that scammed investors out of 17 million over 5 years by promising “safe” returns of only 7% based on real estate investments that were never made.

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Questions:

1. Explain how a Ponzi scheme works?
2. In the case of the Philippines, do you consider the Bequest Bank and AG Share cases as the same as Ponzi Scheme? Why or why not?
3. Is the strategy adopted by Mr. Julian B. Damondong similar with that of Charles Ponzi? Why or why not?
4. In the case of the Ample Group, what are the manipulations adopted by Mr. Marko Ripot to persuade investors to put in money to the business?
5. Which schemes served as a platform for perpetrating both the Ample Group and the Bequest Bank fiascos?
6. Did the Board of both corporation’s act in the interest of their shareholders and the public in general?
7. In assessing the structure of both companies, are these companies in consonance with the corporate governance principles as presented in the three models?

The SEC plays an important role in policing the corporations. In what way is SEC remiss in these two cases? Elaborate.