Following hot on the heals of the Madoff and Stanford scandals in the US, now a criminal investigation has been launched in South Africa against Barry Tannenbaum in respect of an alleged ZAR15 billion (approximately £1.15 billion) Ponzi scheme he is said to have run through his Frankel International and Frankel Chemical Corp companies.
The investigation is attracting a significant amount of attention from the British press not least because of the fact that a number of high profile UK businessmen, are said to have invested large amounts of money into Tannenbaum’s companies.
Early details of the alleged scheme share a number of similarities with those allegedly run by Bernard Madoff and Allen Stanford. In return for investment in the Frankel Investment Scheme, which described itself as an importer and exporter of active pharmaceutical ingredients used in the manufacturing of the anti-retrovirol drug prescribed to people who are exposed to, or have contracted, the HIV and AIDS virus, Tannenbaum was allegedly offering returns of over 200% per year or 11.5% per month. Mr Tannenbaum has apparently recently emigrated to Australia.
However, not only have investors to deal with the fall-out of the possible loss of their investments in the scheme, but the authorities in South Africa have also indicated that they will be investigating the investors’ actions, the source of their funds and whether any dividends received were declared to the tax authorities.
Ponzi (or pyramid) schemes operate by paying returns to investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. They are sustainable for as long as the amount of the investment into the scheme exceeds the payments going out. However, when new funds start to dry up, such as during a global recession, and when significant numbers of investors want to take their money out of the scheme, this leads to a shift in the balance and the collapse of the pyramid structure, as the scheme becomes unable to support the number of redemption requests it receives. As the global crisis continues, we can expect to see more and more of these alleged Ponzi schemes being uncovered.
It will be interesting to see whether this scheme – which, unlike the Madoff and Stanford schemes, has no apparent direct link to the US – attracts the same amount of attention in terms of third party claims by affected investors. We have seen a significant number of Madoff and Stanford-related actions being commenced around the world (albeit mainly concentrated in the US) by investors desperate to mitigate their losses. Such claims have been brought against a number of different entities including feeder funds, funds of funds, investment managers, custodian banks and auditors, together with relevant directors and officers of these entities. Insurance claims are also prevalent.
As a firm, we have the expertise to advise on all the issues arising out of Ponzi schemes, including the litigation that may flow from them. For further information on how we can help, please speak to your usual contact at the firm or any of the authors below.
To read our Law Now on the Stanford allegations, please click here.
