Greed gets the better of South African investors – again
Last week the Financial Mail led with a story that could balloon into South Africa’s largest financial scandal yet. The numbers touted by the financial media suggest between R2bn and R10bn invested in the so-called Frankel Investment Scheme will prove unrecoverable. According to the Financial Mail former Pick ‘n Pay chief executive Sean Summers, professional tennis coach Alan Rock, accountant Howard Lowenthal and broker Wayne Gadden are among the victims. Summers alone is rumoured to have invested R50m of what he refers to as ‘free’ cash in the scheme.
News agency Reuters reports that attorney Ian Levitt is representing investors who committed upwards of R400m to the scheme. The opportunity, described as a typical Ponzi scheme, was exposed when the recession bit. Ponzi schemes typically rely on new money to pay existing investors their promised returns. As new investment dwindles – and existing investors demanded their capital back – these schemes simply implode. Investors end up with nothing!
Who measures returns over six weeks?
What possessed some of South Africa’s leading businessmen to invest in an opportunity that must have screamed danger? After scanning the numerous news reports we’ve come up with three possible motivations. The first is typical of all financial cons – an irresistible return. It appears that most investors were promised a 20% return on their investment every six weeks. Apart from the six week cycle being a bizarre period to measure return over this pushes the annual return on ‘investment’ to 173% – clearly excessive when considering even the best run listed companies struggle to achieve 30% per annum gross profit!
The second is a ‘plausible’ business case. Investors believed they were involved with the import of active pharmaceutical ingredients (APIs) for use at various local pharmaceutical companies in drug manufacture. And the third is trust. The ‘business’ was run by Barry Tannenbaum, grandson of one of the co-founders of Adcock Ingram, through a range of companies including Frankel International and Frankel Chemical Corp. Tannenbaum allegedly used forged/falsified Aspen Pharmacare purchase orders as part of the ‘investment’ case. Tannenbaum was also in a position to drop names from an impressive list of investors to lend credibility to the opportunity.
Quoted in a Sapa news report Werksmans attorney Paul Winer tried to explain what motivated people to chase these overstated returns. “They were earning what you can’t get from any other investment,” said Winer. Tannenbaum also used ‘big name’ investors to lure new money to the scheme. According to Winer: “If you’re told that Mr X, a well-known and respected businessman has invested in a scheme, other potential investors then think it has to be a good investment too.”
Deny everything... and run for Australia
Days after the scandal broke, Tannenbaum denied any wrongdoing. “I state categorically that I am not sitting with millions. I have not amassed some fortune that I have spirited away,” he said in an emailed statement sent to Reuters. He blames his company’s (and investors’) hardship on the economic crisis. Tannenbaum is currently living in Sydney and has “no intention of leaving Australia [or of] disposing of whatever assets he possess.” Levitt has started proceedings to freeze Tannenbaum’s assets in South Africa and Australia.
There’s not much authorities can do to put a stop to so-called Ponzi schemes. By the time they’re alerted to the scandal the damage is usually done. But they can try to piece together the business and build a case for criminal prosecution. In a joint statement released on Sunday, 14 June 2009, state agencies said a comprehensive investigation would be launched. They announced a task team that would include investigators from the Financial Intelligence Centre, SARS, the Reserve Bank, the SAPS’ Serious Economic Offences Unit and the National Prosecuting Authority. These investigators will have to address allegations of tax evasion, fraud, foreign exchange violations and money laundering. We hope they spend some time investigating the massive commissions reportedly paid to attorney ‘facilitating’ the transactions and pay close attention to how the money was so easily ‘whisked’ offshore.
Editor’s thoughts:
We’re always amazed at how easily massive amounts of money are moved back and forth across South Africa and offshore. If banks and other companies authorising the movement of such funds improved due diligence a scandals such as the Frankel Investment Scheme would be dead in the water. Do you think banks do enough to ratify large international money transfers? Add your comments below, or send them to [email protected]
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