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We have seen this type of scam-dal before

07 November 2023 Gareth Stokes

There are more questions than answers as another investment scandal breaks in South Africa, with over a billion rand reportedly ‘up in smoke’ at BHI Trust. But in stark contrast with the Steinhoff or Tannenbaum scandals, where the alleged masterminds continue to enjoy all the good things in life, the perpetrator of this collapse is already behind bars, having declared his guilt and handed himself over for processing and prosecution.

Floundering since the GFC

This writer’s introduction to the latest scandal was courtesy Ciaran Ryan, who penned a piece on Moneyweb.co.za under the headline ‘Craig Warriner of BHI Trust surrenders to police for alleged fraud’. Facts are still ‘thin on the ground’ but the article noted that Warriner had been attempting to trade his way out of significant losses suffered in the trust account following the 2008-2009 Global Financial Crisis (GFC). In simpler language, this individual has been pulling the wool over clients’ eyes for some 15-years, facing an ongoing nightmare to meet withdrawal requests, and playing ‘fast and loose’ with investment statements to hide the truth. 

“Warriner, a trustee of BHI Trust, handed himself over to authorities last week before appearing in the Palm Ridge Magistrates Court south of Johannesburg over a suspected investment fraud involving potentially thousands of people,” Ryan wrote. “He remains in custody; has waived his right to apply for bail; and has reportedly asked for a single cell because of death threats he has received from other inmates”. Other media reports have since emerged alleging that trust money was also used to fund a luxury lifestyle, with mentions of the usual ‘trappings’ such as Ferraris and chartered jets; but time will reveal all. 

The Moneyweb.co.za article reckons that hundreds or even thousands of investors are affected, with assets totalling hundreds of millions of rand. In an interview on Biznews.co.za, publisher Alec Hogg told David Shapiro, a market commentator at Sasfin Securities, that he knew of at least one person who had ‘lost’ R10 million. “The problem with these kinds of structures is that you battle to establish the size of the so-called fraud; it is difficult to tell the quantity or value of assets that the trust is holding on behalf of clients,” Shapiro responded. Biznews.co.za also interviewed Werner Cawood of Cawood Attorneys, who said that over 100 investors had reached out to him since news of the ‘collapse’ broke, hinting that “definitely around R2 billion” was involved. 

All conjecture and hearsay for now

FAnews readers should note that the number of investors affected by this fraud, and the sums involved, are pure conjecture at this stage. This writer also picked up on some juicy hearsay suggesting that Warriner may have had a run in with the then Financial Services Board (FSB) in the past. The anonymous post in question read: “He was reported to the FSCA (sic) some years ago; they took no action”. 

The Financial Sector Conduct Authority (FSCA) quickly issued a media release to comment on the unfolding courtroom drama. “Noting the significant media interest, we can confirm that we are investigating the BHI Trust, Warriner and other persons,” the authority wrote. “We are aware of the media reports relating to alleged criminal charges against Warriner, and are also aware of his arrest relating to charges of fraud and theft”. 

The FSCA did not offer a timeline for its investigation, choosing instead to focus on potential contraventions of the law, such as “conducting unauthorised financial services business and unauthorised collective investment scheme business”. PS, if you hold an FSP licence and had any dealings with BHI Trust, you will no doubt be nervously shifting in your seat! The authority also immediately confirmed that none of the parties under investigation in the BHI Trust scandal were authorised as financial services providers (FSPs) or licensed as collective investment schemes managers. 

This appears a strange claim, since Cawood alleged that Warriner was a representative of Axiam Capital Management, which has, or had, an FSP licence. And Cawood also mentioned that his personal financial adviser; a prominent broker group; and a stockbroker had all been party to his and his firm’s transactions with the trust, going back to 2018. It will no doubt take some time before all the skeletons are unearthed, and at this early stage we might speculate the ‘FSP and FSP licence’ landscape may have shifted between 2008-2009, when the trust first reportedly ran into issues, and present day.

Ask questions about your investments

Hogg and Shapiro both commented on the conservative returns offered by the BHI Trust, saying that these would have given little warning of the Ponzi-like outcomes that are now playing out. They also warned that those who had successfully withdrawn investments from the trust may be called to return such funds, especially if returns were ‘generated’ through creative bookkeeping. Citing the US-based Bernie Madoff Ponzi, which imploded spectacularly around 2008, Shapiro noted that “those who invested money and got returns paid out to them, eventually were called on to give back earnings that were not real”. 

When grilled on warning signs that investors should look out for, Shapiro recommended knowing the nature of your underlying investments, including where your assets are held. If your money is invested in a trust you need to ask questions about the type of trust; the trustees; who owns the shares in the trust; and whether these shares are held in your name or in the name of some or other nominee etc. “No matter who you deal with, you need to be wary … investigate and ask questions, there is nothing wrong with that,” he said. 

What happens next? According to Cawood the next steps will include protecting any assets that remain in BHI Trust, starting with a court-appointed trustee and likely followed by a request to sequestrate it. But consumers and financial advisers hoping for a speedy resolution to this matter will likely be disappointed. Shapiro warned that the court process and forensic investigation might take months, if not years. The magistrate’s court has already pushed Warriner’s next court appearance to 29 November 2023, saying the State needs time to formulate charges. 

Investors might be on their own

The FSCA, meanwhile, suggests that affected investors are unlikely to recover their lost investments. “Conducting unregistered business is a criminal offence,” the FSCA warned. “When investors buy financial products and services from entities that are not licensed as financial institutions, they do so at their own risk, and they do not enjoy the protection and risk mitigation measures associated with appropriately licenced and authorised entities”. 

Writer’s thoughts:

The BHI Trust may have been established during ‘softer touch’ regulatory times; but it continued transacting through the last decade of tougher regulation and enforcement. Will tough oversight and enforcement ever rid us of this type of investment outcome? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Gareth Stokes, 07 Nov 2023
Enjoyed the last line in your response, @Michael... Indeed, if investors were too educated the financial industry may well 'fall over'. Even the 'fair and legitimate' fees charged by some investment houses are massively detrimental to long-term savings outcomes. But then, the big 13th check has to be funded somehow?
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Added by Michael, 07 Nov 2023
Sadly, this is never going to change, no amount of information provided by the regulator or the experience of those of who have been "bitten" in a scam is going to eliminate these types of scams. At root of each and everyone of these scams is a "relationship", the more trusted the relationship the deeper the scam and the fraud. Human beings are social animals and feel an overwhelming need to belong and the be recognized and accepted by an "Alpha"personality or by the broader group. The moment an individual asserts themselves in a group, then he no longer has to do any marketing or "hard yards", the Group becomes his "credibility" and the more that the leader ascends to positions of authority and importance, e.g. Deacon of the Church, "Respected member of the Community", Head of the Old Boys association, benefactor of the school etc, the more his position becomes almost unassailable. He then conveys to the "group", that in order to protect the assets and the group , he will not be taking any funds below a particular level or that he would interview the prospective investor to determine whether they suit the profile of the "Group", in this instance "gives" the Group the final say on who is allowed to put money into the scheme. This has the effect of making the Group trust him even more and creates a situation of "us"versus "them", and them are all of those who are on the outside. I am sure there are now plenty of investors who were very smug a couple of weeks ago and are smug no more. The advisors who assisted and facilitated the pipeline of business into the scheme were influenced in the same way (albeit with the monetary reward of inflated commissions). How do you prevent this from happening? I do not thing you ever really can, but I do think you can go along way to addressing the issue if you made financial literacy a compulsory subject at school. Can you imagine every single child finishing school understanding what a financial scam looks like, and the child being taught to ask all the right questions. Not to mention the introduction of a savings ethic at a very young age. I guess that kind of education may just destroy the Financial Services industry.
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Added by Gareth, 07 Nov 2023
Hello @Craig. Yes, indeed ... I have also heard that the acronym stood for Berkshire Hathaway Investments, which should have been a glaring warning sign. Agree re your commissions observation; the question is - will we now wait for another 10-year plus 'investigate and do nothing' outcome, as in the case with Sharemax?
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Added by Gareth Stokes, 07 Nov 2023
Thanks for your comments, @Cynical Simon. Again, early days, but there were more than a handful of online comments alleging that concerns (re BHI) had been addressed to the then-FSB some years ago... Let's see what emerges in the coming weeks.
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Added by Craig A, 07 Nov 2023
I am sure i read that BHI stands for Berkshire Hathaway Investments. Surely that is a big red flag? Anyone trying to pass themselves off as BH is surely a fraud.

If the FSB/FSCA was warned about this scheme and did nothing about it (as per usual), then they should also be responsible and should be sued by the investors.

I am sure that some FSPs are rather worried too. What's the bet that the commission was way above the standard comm. It sounds a lot like the Sharemax debacle. Big incentives to sell the investment with no due diligence.

Even with all this new legislation, we cannot stop the con artists from stealing money from unsuspecting investors.
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Added by Cynical Simon, 07 Nov 2023
Investors are not necessarily experts nor are they clairvoyant. Whenever another criminal costs investors fortunes it frequently is attributed to investors not doing their due diligence . The question arises why in the light of the mountains of regulations guarding the financial system must investors be treated like they are on their own? Could it be because despite these regulations the proverbial man in the street remains a very lonely being on an extremely treacherous road.
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