Investors in Philippine Pyramid Scheme Lose Over $2 Billion

NY TIMES ^ | 3/30/03 | CARLOS H. CONDE

[Liz]

MANILA, March 28 — For 16 years, Edward Austria toiled as a pipe fitter in the oil refineries of the Middle East, sending most of his earnings home to his wife and three children in Manila.

A few weeks ago, the fruit of all those years in the desert vanished when the investment company his cousin helped set up — essentially a pyramid scheme — collapsed. With it vanished the almost $1 million Mr. Austria had amassed, and another $460 million put in by about a million other Filipinos.

Shortly thereafter, two other pyramid companies collapsed, bringing the number of victims to about two million and the amount of money lost by them to more than $2 billion, officials said, calling it the biggest pyramid fraud in Philippine history.

Reynaldo Wycoco, director of the National Bureau of Investigation, said his office had been deluged with victims' complaints. "It's almost physically impossible to get all of their individual complaints," he said. Many of them, he said, "are poor folk who were tricked into investing their money in exchange for high returns." Others are wives of overseas workers, police and military officials — even politicians.

The Philippine Senate has held hearings on the issue, and now the scandal threatens to expose irregularities within the government itself.

A pyramid scheme, which is illegal in the Philippines, uses one person's money to pay another. An operator entices people to invest, promising unusually high returns, up to 60 percent a year. He also asks investors to recruit others, promising them the same rates, and a commission for bringing in new customers.

The only way to continue paying such high returns is to recruit ever more investors. Eventually, the scheme collapses.

Mr. Austria and his wife, Roseline, became involved in the pyramid scheme in 1998, when Mrs. Austria persuaded her husband to invest about $750 in Multitel Telecoms Investors Corporation, which a cousin had helped set up. The Austrias also increased their investments afterward, using Mr. Austria's earnings from the Middle East.

The returns were so lucrative that, by 1999, Mr. Austria quit his job and returned to the Philippines to enjoy their newfound wealth. A large chunk of the couple's income from the scheme was reinvested.

When the cousin and the company's founder, Conrado Ariola Jr., had a falling out, Mr. Austria chose to stick it out with Mr. Ariola, who formed another company. A few weeks ago, the schemes unraveled.

Mr. Ariola is thought to have fled the country. Earlier this month, some of his victims received envelopes containing his photograph. Scribbled on the back was "Catch me if you can!"

The cousin, who was arrested on March 11, said she invested her 950,000 investors' money in Europe and intends to return it.

Now, the National Bureau of Investigation is looking into reports that police and military officials also invested in the schemes, using unexplained wealth possibly gleaned from gambling and illegal-drug payoffs, a lawyer in the case said.

The bureau is also investigating reports that the millions of dollars the police and military officials had invested actually came from funds earmarked for intelligence work. "These intelligence funds are discretionary funds that are rarely audited," said Mr. Austria's lawyer, Argee Guevarra.

Mr. Guevarra said the pyramid schemes succeeded as long as they did because of the complicity of banks that accepted huge deposits without question. He also said some tellers, in return for commissions, persuaded depositors to invest.

Then there are the politicians. In addition to testimony hinting that senators may have been among the investors, two were implicated after it was disclosed that they had written congratulatory messages for Multitel at its inauguration in 2000.

"Why would people put their hard-earned savings in schemes where the level of returns is so disproportionately higher than normal market trends?" asked Alex Magno, a columnist in The Philippine Star. "Because senators of the republic told them it was O.K. to do so."

Jose Tomas C. Syquia, director of the Philippine Securities and Exchange Commission's Compliance and Enforcement Department, said that pyramid schemes can be irresistible. Many in the present crop of victims had invested in failed pyramids before — including Mr. Austria, who managed to cash in this earlier investment in time to turn a good profit. Apparently, many thought they could bail out this time before the racket collapsed.

"We cannot stop people from being foolish," Mr. Syquia said.

[Liz]

Maybe Nigerian scammers will get in on that gravy train and leave Americans alone.