Diday's Paluwagan Case: A Classic Ponzi Scheme in Compostela Valley

Posted Friday, April 17, 2015 by deehan1914
Name: Jimnanie R. Anter, MBA                                                                    April 15, 2015
Subject: Social Philosophy
PhD in Business Management
University of San Carlos


Before and After Bernie: Ponzi Regulation or Lack Thereof?
By Donald J. Furman and John S. DeJoy

I. Summary of article
This article is an assessment of the Ponzi Scheme and a review of its history. This will also identify the role of auditors in perpetrating these schemes and the role of the Securities and Exchange Commission to prevent schemes from occurring in the future.

Specifically, it highlights the fraud committed by Bernard Madoff, dubbed as one of the largest Ponzi Schemes in the history of financial community, after being uncovered in 2008.

Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. It generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop. 
A.   History and Background of Ponzi Schemes
-       Ponzi Schemes have been used long before Bernie Madoff by defrauders company such as William "520 percent" Miller and RaeJean "Rapmaster 20K Percent", which has dishonest attempt to defraud investors to fund their lavish lifestyles.
-       Ponzi schemes work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses. (SEC.gov).
Table 1.0 Difference between Ponzi Scheme and Pyramid Scheme

Pyramid Scheme
Ponzi Scheme
Typical “hook”
Earn high profits by making one payment and finding others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme
. Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.
Payments/profits
Must recruit new distributors to receive payments.
No recruiting necessary to receive payments
Interaction with original promoter
Sometimes none.  New participants may enter scheme at a different level.
Generally acts directly with all participants.
Source of payments
From new participants – always disclosed.
From new participants – never disclosed.
Collapse Fast
An exponential increase in the number of participants is required at each level.
Relatively slow if existing participants reinvest money.






Diagram 1.1 The chart above demonstrates the fact that pyramid and Ponzi schemes are, by their very nature, unsustainable (Source: SEC.gov).

-       If each new member needs to recruit just six others to sustain the fraud, then by going a mere 11 levels deep, a Pyramid/Ponzi scheme would have to recruit a number of investors into the fraud that exceeds the entire population of the United States. This is unrealistic to say the least. By level 13, the scam would need to recruit more people than exist on the planet. Again, this is an obvious flaw in the sustainability of the Pyramid scheme. Whether recruiting new members (Pyramid) or new monies (Ponzi) the results are the same. The fraud is simply not sustainable over the long term.


-       The schemes need to recruit new members and new money into the fraud and those members must then recruit new members in order to sustain the fraud.


A.   Who is Charles Ponzi?

-       The Ponzi scam is named after an Italian national Carlo "Charles" Ponzi, a clerk in Boston who first orchestrated such scheme in 1919.
-       He started the scheme through a coupon purchased in Italy (worth six times as much in the US as a result of devaluation in Italian currency), then redeemed the coupons in the US for stamps, and sells the stamps at a discount to businesses.
-       Ponzi began advertising his plan, promising to pay a 50% return in 45 days and soon was collecting millions of dollars for his scheme.
-       Ponzi's scheme collapsed when investors demanded their funds after word got out. He spent the next several years in prison.
-       In modern times, fraudsters have perpetrated Ponzi schemes across the globe.
B.   Regulation or lack Thereof
a.    The Security and Exchange Commission
-       created in 1934 as a result of Congressional hearings following the stock market crash of 1929 that led to the Great Depression.

Securities Act of 1933 and the Securities Exchange Act of 1934

-       were implemented to restore investor confidence by providing complete and honest disclosure as well as regulation regarding honest dealing.

Securities Act of 1933 (Truth in Securities Law)
-       requires that investors receive financial and other information concerning securities for sale, and prohibits deceit, misrepresentations, and other fraud in the sale of securities.

Securities Exchange Act of 1934

-       created the Securities and Exchange Commission, which is empowered to register, regulate and oversee the securities industry.

Investment Company Act of 1940    
-       oversees the organization of companies that engage in investing, reinvesting, and trading of securities.

Sarbanes-Oxley Act of 2002

-       created the Public Company Accounting Oversight Board (PCAOB) which requires accounting firms that audit publicly traded companies to register with the board.

b.    Auditors and the Accounting Profession
Friehling & Horowitz
-       a three-person accounting firm that is operated out of a 550 square foot office in Rockland County, New York (Bloomberg News, 2008).
-       The SEC's complaint alleges that Friehling & Horowitz aided Madoff in his fraud by claiming that they had performed the audit in accordance with Generally Accepted Auditing Standards (GAAS), when they had not done so.

American Institute of Certified Public Accountants (AICPA)
-       The national professional organization of Certified Public Accountants (CPAs) in the United States
-       All firms that perform audits are required by the AICPA to be peer reviewed by other audit firms (AICPA, 2009a).
-       The AICPA's Code of Professional Conduct requires auditors to be "independent in the performance of professional services" (AICPA, 2009b, Rule 101, Section 101.01).
-       The SEC ... alleged that Mr. Friehling and his family had investment accounts at the Madoff firm worth more than $14 million.
-       All firms that perform audits are required by the AICPA to be peer reviewed by other audit firms (AICPA, 2009a).

* It was found out that the Auditors of Bernard Madoff Investment Securities (BMIS) did not perform a meaningful audit and did not perform procedures to confirm that the securities BMIS purportedly held on behalf of its customers even existed.

C.   Why Didn’t the SEC Discover the Fraud Sooner?
- Madoff Investment Advisory service was unknown to the SEC for many years and Madoff had not registered with the SEC as an investment advisor.
- SEC was completely unaware of the Ponzi scheme because BMIS was a broker-dealer registered and regulated by the US SEC.
- Despite extensive contact and regulation, officials failed to uncover BMIS’s $50 billion fraud that Madoff revealed in mid-December 2008 and which now appears to stretch back over a decade (Schwartz & Katz, 2009).
- Until Madoff was busted during an investigation in 2006, when the SEC discovered that Madoff had more than 15 clients. At that time, the SEC required Madoff to register with the SEC, and closed its investigation.

D.   RECOMMENDATIONS

-       Require all investment advisors, broker-dealers, feeder funds, qualified purchasers, sophisticated purchasers, and accredited investors to submit the name of their audit firm, as well as the name of the firm that audits their money managers in whom they invest to a national database administered by the SEC
-       Firms that audit investment advisors and broker-dealers, whether their clients are public or private, should undergo a more rigorous peer review process to ensure to a reasonable level of satisfaction that the audit firm has the ability, expertise, competence and resources to conduct audits of such complex entities.
-       Investors (individuals and feeder funds) who invest more than $250,000 with an investment advisor be required to report the name of their investment advisor to the SEC.

-       The SEC establish a whistle blower program. Such a program will be designed to allow individuals who believe they have discovered fraud in a hedge fund or some type of a Ponzi scheme the freedom and anonymity to report their suspicions without fear of reprisal.


E.   CONCLUSION AND FUTURE RESEARCH

-       Explore how the system was exploited in perpetrating, expanding, and continuing Madoff’s, and other Ponzi schemes.
-       An evaluation of the SEC’s Securities Act of 1933, Securities Exchange Act of 1934 and Investment Company Act of 1940 should be completed.
-       Future research could consider additional regulations to be implemented to safeguard future investors considering investing in hedge funds.
-       Future research should consider the SEC’s policy on how they deal with receiving tips on possible fraud.


II. Analysis/Insight
This study is just a review on the history of Ponzi Schemes, its mechanism and the loopholes that SEC should look into. Specifically, it highlights the fraud committed by Bernard Madoff, dubbed as one of the largest Ponzi Schemes in the history of financial community, after being uncovered in 2008.

One reason that Madoff was so successful was that he was a highly respected, well-established and esteemed financial expert -- his reputation was bolstered by the fact that he helped found the NASDAQ stock exchange and served a term as its chair. What's more, at the same time he was running his scheme, he was also running a legitimate business (source: Appelbaum). He earned his investors' trust because whenever they requested a withdrawal, Madoff's investment company got their money to them promptly. In addition, unlike other Ponzi schemers, he didn't tempt investors with unbelievable returns. He reported moderate returns to his investors.

III. Critique
In the Philippines, Previous Ponzi schemes have been featured on national primetime television and yet despite all that media dissemination — there are still suckers who bite into the next Ponzi scheme.
Preventing Ponzi schemes should be a government top priority. In our locality (especially in the remote areas), several cases of fraud still exist citing lack of education and awareness as one of the main reason. However, in these modern times, sophisticated investors understand the fraud, but hope to profit by joining early. Bottom-line is, greed for money is the root cause.
The authors recommendations cited above should also be practiced here in the Philippines.
IV. Sample Case in Compostela Valley “Diday’s Paluwagan”
A.   Sample Posting of Diday’s Paluwagan Compesation Plan
Diday’s Paluwagan

THIS WILL BE OUR SCHEDULE:
PAY IN CUT OFF SUNDAY 5PM--->Posting Monday.
>Payout Tuesday-Wednesday
PAY IN CUT OFF Wednesday 5PM-->Posting Thursday
>Payout Friday-Saturday
CREATORS:
Prime Hazel Quijano Restauro
Jossica T. Castro
ADMINS:
Wilfred KrYz Restauro-->SPREADSHEET ENCODER
Xheniixhamae Restauro LLanes--PAYIN AUDIT INCHARGE/INSTAGRAD INCHARGE
TEAMS: (TEAM CONCERNS: PM YOUR RESPECTIVE LEADERS)
L& V
Leslie Alberca Membela & Valerie Chua
M&C
Marlyn Joy Omega Mistiola & Chie Paragas
B&C
Mhariel Bautista Tia & Taka Neshia
COMPLAN-STRICTLY NO REFUND POLICY.
MONEY ROTATION,HINDI PO MAGIC,HINDI PO INVESTMENT OR BUSSINESS,PINAPAIKOT LNG ANG PERA PARA MAKUHA NG BUO NG GRADUATE.
3PAY INS =1GRADUATE
600*3=1800
LESS: 50 SAFETY NET
LESS;100ADMIN FEE
LESS; 100DIRECT REFERRAL
LESS; 100 PAY OUT CHARGES & INSTAGRAD BONUSES-ETC.
Pay out 1450
PAY IN-
Para maging member need mo maginvest ng p600.
Nakapost po ang ating Mode of Payments kng saan nyo po esend ang pay ins ninyo.
Ang 600 po na pay in ninyo ay naka lock in sa cycle sa loob ng 1month or hanggang sa maka 3graduations ka. (Kahit alin ang mauuna).
ILANG ENTRY ang pwede sa isang tao?kahit ilan pwede,pero maximum pay in para sa isang pangalan in a day ay 6lng po.
PAY OUT
Ito ang matatanggap na pera pag ikaw ay makakagraduate na.1450pay out, pag naka auto re-entry 850,pag evicted na or naka 1month na sa cycle or naka 3graduations na makukuha ng buo si pay out 1450.
DR.(DIRECT Referral)
Bawat entry na marerecruit mo ay magiging refferal mo.kada recruit mo na ggraduate ay may matatanggap kn p100.
Ratio
3:1 kada may 3pay ins ay may 1tayong graduate.
Pay in =pay out
PAPAANO GAGRADUATE?
KAPAG IKAW NA ANG NASA PILA, OR KAPAG NAKAPAGRECRUIT KA NG 9 ENTRIES .TAWAG JAN AY INSTAGRAD +200RECRUITMNT BONUS PARA SA MGA INSTAGRADS.
RECRUITMENT:
BAKIT MAY RECRUITMENT?PARA MAIPAGPATULOY NATIN ANG CYCLE.DAHIL MONEY ROTATION po ito.
Auto re entry
Pag graduate mo ang makukuha mo ay 850,dahil si600 ay nka auto re entr.pra po maipush ntin at mapaikot ang cycle.
Eviction
Kapag umabot kna sa lock in due, mag aantay k ng nxt graduation.nasasayo na kng kukunin mo ng buo si pay in na1450 o sasali sa cycle.
1 MONTH LOCK IN
1 MONTH NA NSA CYCLE ANG ENTRY MO FROM THE DATE OF THE PAY IN--KNG NAKA PAG PAY IN KA NG SEPT 21 1 MONTH NG LOCK IN MO IS OCT 21, KAPAG NAKAGADUATE KA AFTER NG OCT 21 MAKUKUHA MO NG BUO ANG 1450 MO DAHIL DUE NA ANG LOCK IN MO.
"Bakit teamwork"?
dahil need tayo magtulungan pra may graduates tayo araw2.
Bakit 9recruits para maka instagrad?para po ka da may 1instagrad may 2 din sa list na ggraduate.
Instagrad advantage:
for the member-makakagraduate ka kahit malayo sa list
For the cycle- may madaming graduates at madaming re entries kinabukasan.
WHAT IF WALANG RECRUIT?WILL I GRADUATE?
YES!DAHIL NA SA CYCLE KNA, ALL YOU HAVE TO DO IS WAIT FOR UR TURN NA MAKASAHOD/GRADUATE SA PILA.
HOW DO WE COMPUTE THE #‎OF GRADUATES?
*UPON CUT OFF,WE COUNT THE #OF NEW PAY INS+#‎RE ENTRIES AND DIVIDE IT BY 3.
*WE CHECKINSTAGRADSS,AND COUNT THEM IN AS GRADUATE.
TAKE NOTE, THE NUMBER OF GRADUATES DEPENDS ON THE NUMBER OF PAY INS AND RE-ENTRY.
THIS IS NOT THE USUAL PALUWAGAN,THIS IS NETWORKING TOO! WE ENCOURAGE EVERYONE TO INVITE SO THAT WE CAN SUSTAIN THE CYCLE FOR THE BENEFIT OF EVERYONE
PAYMENT DETAILS
BDO CASH CARD: CELESTIAL RESTAURO
ACCOUNT NUMBER-601853 906 4878493
SMART MONEY (TEXT NYO REF NO.)
5577-5193-3033-9103
BPI :PRIME HAZEL RESTAURO
 2079-2332-02
PALAWAN, LBC, CEBUANA,MLHUILLIER
PRIME HAZEL RESTAURO
P-1, BONIFACIO GARCIA ST. POBLACION COMPOSTELA, COMPOSTELA VALLEY-09076608969
B.   Fraudulent Acts and other reasons for failure of “Diday’s Paluwagan”
1. Cycle will not continue if there are no new members. Hence, sustainability is based on number of recruits. A clear Ponzi Scheme.
2. Not a typical “Paluwagan” because members don’t know the other members and a member gets a bonus cash whenever he finds a new recruit to “pay-in”.
3. Safety net is insufficient.
4. Team Leaders are not properly trained.
5. DTI permit for Online Selling was used to lure people to join the “Paluwagan”.
6. Admis made members believe they will shift to coop but Admins are not experts in running one. They just gave false hopes.


C.   Sample Print Screens

Posting of Proofs like this lured many people in Compostela, Compostela Valley.

A typical Diday’s Paluwagan Advertisement on Facebook saying “turn your 600 to 1,500 in one month”.





After four months, the cycle stalled and the following is now happening.
1.    Founder changed her FB account and not responding promptly to customer complaints. Moved to another place (Compostela to Davao) and works in a call center.
2.    Members resorted to online selling but admins are not responding fast to process pre-order shipments. Thus, dissatisfied members and customers.
3.    Team Leaders/Recruiters are asked to reimburse the investments.
4.    Cycle halted and there’s a conservative average of 1,500 members in each 5 groups. They are reimbursing money from Sales at an average of 4 people per week. If we will do our math, it will take at least ten years to reimburse all people from all the teams.
5.    Some complains are erased in their FB page by admins without addressing those first. 
6.    Many members are going nuts on how to get their hard-earned money.

While the intention of other members when they recruit were in good faith, that means they didn't know that this bad event now will happen and that the structure of this "business opportunity" is not sustainable, it can't be denied that it is one's responsibility to research and dig deeper especially if the "business opportunity" is too good to be true before inviting innocent others. Now, the best thing that members will do is to file an Estafa case,  which the creator of this system hugely qualifies to the elements, but may drag for years and not financially feasible for most members. Hence, if members will allow, the creator of this "business opportunity" may run free from this.










On Being Grateful and Willing to Share

Posted Sunday, April 5, 2015 by deehan1914
I had so much going these days.
I had to deal with so much stress and I am glad I came out okay.
Yeah, there were instances that panic has reached my inner sanctum but I got people around me who made me get through all the whirlwind of tasks. Above all , I got my GOD.

Today, I had no plans to write a blog because I have been trying to check all the test papers of my students and finalize their grades. I also needed to finish so much tasks in my part-time job. Oh well, I have always been busy as bee. This week has been a little bit sort of an exemption because I just had my dental surgery. Man, it was painful and disturbing. I can't eat fast and I can't eat hot stuffs. It's been 5 days since the surgery and I can never thank enough my Mom for taking care of me. I am one blessed girl and with this, I am hugely grateful. Being grateful is what I want to share in this blog.

I have seen and heard many people complain about the life they have .They can enumerate so easily as if enumerating sad things in their life has been a skill they have mastered. It's sad to see a person doing that.  Maybe because I have not walked the life they are in bout right now that's why it's difficult for me to see things from their vantage point. Maybe I am too young and have not fully tasted the bitterness of life. However, deep inside my heart, I know, however dark the situation may be, If I have been loyal to God, I will survive. I am so thankful that God gave me a grateful heart. I feel so sad whenever I see people who are not seeing the beauty in each sunrise, wildflowers and smiles of kids. I feel sad whenever I see children not going to school and being abused. I feel sad about dogs being poorly fed. Hence, I try to do my best in my job. I always try to encourage students why learning the theories and skills are necessary. I always make sure lessons are embedded with values that will best define a successful man. I do this to at least be convinced that I did something to prevent my students' future children  from ending up on streets. I study my lessons at school and update myself constantly because I believe my students have relatives (and pets) who look up on them in times of need. I know that my students can help much when they also have been helped and guided with school things right now. This is how I see how important my job is and I am grateful of the skills that I have. Sure, there are those greater than me and I will forever look up on them. With what I have, I am glad to share. This makes me feel useful and this is addictive.

I am thankful of my duties in the church. I am thankful of being worthy to fulfill duties that not all is given. I have so many errors but I struggle to renew each day so that I will be worthy of Him.

I am thankful of my family. I have seen my Mom more nervous than how I was when I was having my surgery last Tuesday. I asked her to hold my hand during the entire process. I am grateful of the support I had when I went home. I am grateful of Brahiil for all his care too.

I am thankful of my friends. They always make me feel very good inside. I must have done something good to deserve their friendship. I can't remember what but I am thankful!

I am thankful of my jobs. I have been always keeping two jobs because I have always felt the need to work hard. I am happy to have seen how important it is to be industrious. I have seen my parents work hard. What a great gift! They constantly inspired me to do more. What amazes me now is that, I can already open the door of opportunities for others. I feel really really good whenever I know that I have worked hard and many will benefit out of those. What a great feeling to use my God-given skills to provide employment for others. I get very very tired but it's worth it. I feel happy. I feel warm.I feel so right.


I am thankful of Mighty who removes my stress. What a cute dog!









Ohh.. Indeed, the chance to use our gifts to provide employment is inspiring. I feel literally being a blessing! And ohh.. I didn't just pray for this feeling, I worked hard so that I could feel this too. Thank you for the chance!

Thank you po, Ama! Salamat sa masayahing puso na kaloob mo!




A happy heart makes the face cheerful, but heartache crushes the spirit.
                                                                Proverbs 15:13