There are some contest sites that operate under similar terms -- everyone sees the design description/brief, everyone works and submits designs, only the chosen design (winner) gets paid. So yes, in some cases things operate how you've described. These sites are customarily (but not exclusively) populated by hobbyists or non-freelance workers.
In terms of a freelance business, NO. That's not how freelance business operates. In the business of freelance design, an artist is hired, a contract is signed which details payment and work to be performed, and then the work performed. Customarily the artist is paid regardless of whether the final artwork is used or not. In addition, many contracts have a "kill fee" or cancelation clause that compensates the artist for their time should the client cancel the project before completion.
Most professional freelancers avoid the "contest" scheme completely. It is never beneficial for a professional to work on the speculation of possible payment/return. Professionals customarily don't work for free. See http://www.no-spec.com or merely Google for "are design contests worth it?" to understand just how bad the "contest" model is for artists.
Basically, this "person you know" is taking advantage of everyone and has all the upside and none of the downside. All the artists are being ripped off. Chances are even the chosen design won't be paid adequately without a contract in place before work begins.