Fly by Night Written Report

FLY-BY-NIGHT INVESTMENTS
A Written Report in Partial Fulfillment of the Requirements in LM12 – Principle of Finance
Salvador, Kharina Mar V.

4LM1
November 24, 2017
Submitted to:
Assoc. Prof. Alain Jomarie Santos, CPA
KMVS2
I. FLY-BY-NIGHT INVESTMENTS
Fly-by-night is used to describe a person or an act as unreliable or untrustworthy. By the
definition of the root word, it can be deduced that a fly-by-night investment is that out of the
ordinary in the sense that it is different from the legitimate investment companies.
It is not authorized by nor registered under the Security of Exchange Commission (SEC),
a commission which has jurisdiction over corporations, partnerships or associations licensed and
permitted by the government. If an investment company is unauthorized and unregistered under
the SEC, it escapes its monitoring, regulation, and supervision and thus, is illegal. These entities
are fraudulent in its operation. Such are those with deficit requirements and do not qualify to
undertake the kind of business.
Fly-by-night investments are easy to identify by following these tell-tale signs:
1. If the offer involves little to no risk of returns.
2. If the offer is exotic offers with unreasonably high returns.
3. The entity is not well-known or you might have not known about.
II. PONZI SCHEME

Ponzi scheme is an example of a fly-by-night investment. It is not an actual investment
strategy but rather an organized and dishonest plan of robbing investors of their money. The case
of People vs Menil defined the Ponzi scheme as “an unsustainable investment program that offers
extravagantly high returns and pays these returns to early investors out of the capital contributed
by later investors.”
Proprietor of said scheme collects funds from newly recruited investors to be forwarded to
the existing investors as returns of the latter’s investment. Ponzi scheme would only be able to
work if there is a regular increase in the number of recruited, new investors. It is a continuous
inducement of people to entrust money upon the proprietor and immediately abscond when the
promised period of return has approached. Said process is an unreliable because the factor it
depends on is impossibly unsustainable. Moreover, this type of scheme would usually only be
able to last for several weeks or months because of its fraudulent nature.
In the case of People v. Basala, it had been described as:
“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.”
III. CHARLES PONZI

Charles Ponzi is the namesake of the Ponzi scheme even though he was not the first to
employ such arrangement. He is considered as one of the most notorious financial fraud in history
by accumulating an estimated $7M while his investors lost approximately $20M.
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Ponzi, in the early 1900s, defrauded thousands of New England residents into investing
on postage stamp speculation scheme – promising 50% interest in 45 days or a 100% profit if
held for 90 days. He initially bought international mail coupons then resorted to passing money.
The funds he received from new investors were forwarded to the existing ones as their returns.
Circa 1920s, his scheme was being questioned for its legitimacy which led to its collapse. He was
sentenced to a five-year imprisonment.
IV. PYRAMID SCHEME VS PONZI SCHEME
Pyramid Ponzi
Earn by making one payment and Earn by simply handing over the money.
recruiting another.
Purported product may not be real or in Investment may not exist or only a small
existence or is sold only to co-distributors. percentage are actually invested.
Pay participation fee and recruit new ones Recruiting is not necessary.
to receive payments.
Funds from new ones are used to pay Funds are used to pay “returns” to earlier
recruiting commissions to older ones. investments.
V. PEOPLE V. MENIL; G.R. No. 115054-66, September 12, 2000
 Vicente Menil, Jr. and his wife were the proprietors of a business, ABM Appliance and
Upholstery, in Surigao City.
 They began soliciting investments from the general public in Surigao City and its neighboring
towns.
- invested money would be multiplied ten-fold after 15 calendar days
- P1000 maximum investment
 ~August, 1989 spouses, to clothe their operations with legitimacy, registered their business
with SEC
 The spouses had released payments on the early investors.
 On September 19, 1989, the ABM Development Center, Inc. stopped releasing payments.
 Whereabouts of the spouses were unknown.

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 Despite the assurances of payment and repeated demands made by the investors, they
released no further payments and neither did he refund any investment remitted to him.
 They went into hiding in Davao City but eventually they were arrested, imprisoned, and made
to reimburse and pay the damages.
KMVS2
SOURCES
Bettman. (2016, June 6). The most notorious financial frauds in history. The Telegraph. Retrieved
from http://www.telegraph.co.uk/money/consumer-affairs/the-most-notorious-financial-
frauds-in-history/charles-ponzi/
Bolsa de Madrid. How can a fly-by-night operation be distinguished from a legal company? [PDF
Document] Retrieved from
http://www.bolsamadrid.es/docs/Inversores/Guias/ing/servInv/5.How%20can%20a%20fl
y.pdf
Dumlao-Abadilla, D. (2015, November 5). 1M Filipinos lost P25B to investment scams. Philippine
Daily Inquirer. Retrieved from http://business.inquirer.net/202001/1m-filipinos-lost-p25b-
to-investment-scams
People vs. Balasa, 295 SCRA 49.
People vs. Menil, G.R. No. 115054-66, September 12, 2000. Available at
http://sc.judiciary.gov.ph/jurisprudence/2000/sept2000/115054_66.htm#_ednref1
Powers and Functions. (n.d.). Retrieved November 23, 2017, from
http://www.sec.gov.ph/about/powers-and-functions/
U.S. Securities and Exchange Commission. (2013). Ponzi scheme. Retrieved from
https://www.sec.gov/fast-answers/answersponzihtm.html

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FLY-BY-NIGHT INVESTMENTS

A Written Report in Partial Fulfillment of the Requirements in LM12 – Principle of Finance

Salvador, Kharina Mar V.

November 24, 2017

II. PONZI SCHEME

III. CHARLES PONZI

IV. PYRAMID SCHEME VS PONZI SCHEME

V. PEOPLE V. MENIL; G.R. No. 115054-66, September 12, 2000

 The spouses had released payments on the early investors.

 Whereabouts of the spouses were unknown.

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