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Finweek English Edition - - Companies & Markets - BRUCE WHIT­FIELD brucew@fin­

THE IDEA OF GEN­ER­AT­ING a solid re­turn on the ba­sis of an in­vest­ment is im­per­a­tive to the func­tion­ing of the cap­i­tal­ist sys­tem. Why else would in­vestors risk their cap­i­tal? It’s only log­i­cal for providers of cap­i­tal to ex­pect a rea­son­able re­turn on their in­vest­ments. It raises the ques­tion as to what con­sti­tutes “rea­son­able” – as in­vestors in a failed in­vest­ment scheme al­legedly run by cur­rent Syd­ney res­i­dent Barry Tan­nen­baum have dis­cov­ered to their cost.

Tan­nen­baum de­nied wrong­do­ing in a state­ment re­leased last week to the South African me­dia and claims his busi­ness, like oth­ers world­wide, was a vic­tim of the global credit crunch. How­ever, the dif­fer­ence is that most com­pa­nies in the phar­ma­ceu­ti­cal sec­tor weren’t pay­ing or promis­ing their in­vestors re­turns north of 100%/year.

The for­mal in­vest­ment in­dus­try’s ac­cepted rule of thumb sug­gests av­er­age an­nual re­turns in the eq­uity mar­ket should be roughly dou­ble those of cash – any­thing much higher than that and the risk pre­mium rises, mean­ing you need to have your wits about you. But not ev­ery high re­turn in­vest­ment is il­le­gal or aimed at fleec­ing in­vestors. Many are gen­uine, as Tan­nen­baum’s firm, which claimed to im­port ac­tive in­gre­di­ents for drugs in the phar­ma­ceu­ti­cal sec­tor, pur­ported to be.

There are scores of le­git­i­mate in­vest­ment op­por­tu­ni­ties for in­vestors un­will­ing to ac­cept pedes­trian re­turns, es­pe­cially in the pri­vate eq­uity and ven­ture cap­i­tal sec­tors where higher-than-av­er­age re­turns are con­sid­ered suit­able com­pen­sa­tion for ad­di­tional risk. Af­ter all, in­vestors need that added in­cen­tive oth­er­wise they might as well leave their cash in a fixed de­posit ac­count. It’s when in­vest­ment re­turns reach stel­lar lev­els, ad­vise the ex­perts, that you should be­come con­cerned – es­pe­cially if in­vest­ment pro­jec­tions ap­pear un­sus­tain­able and the track record pre­sented shows no ev­i­dence of any cycli­cal con­trac­tion of any kind.

If in­vest­ment re­turns are “too good to be true” why then is it that con artists

pos­ing as in­vest­ment gu­rus sucker some of the best and bright­est busi­ness leaders? For­mer Pick n Pay CEO Sean Sum­mers has ad­mit­ted to in­vest­ing a sub­stan­tial amount of his per­sonal money in the scheme, while oth­ers, such as for­mer Bond Ex­change chair­man Tom Law­less and for­mer JSE chair­man Nor­man Lowen­thal, are re­ported to have in­vested but have been more ret­i­cent about dis­cussing their par­tic­i­pa­tion. The re­al­ity is that top-level in­vestors do this sort of thing all the time. As long as you pick your in­vest­ments care­fully you should har­vest a re­turn at some point in the fu­ture.

Apart from hun­dreds of SA in­vestors caught up in the Tan­nen­baum scan­dal, the most re­cent in­ter­na­tional ex­am­ple of a con­victed fraud­ster who took in­vestors for more than US$60bn is Bernie Mad­off, who plun­dered the wealth of not only friends and fam­ily but also rich busi­ness com­pa­tri­ots. Mad­off, a for­mer chair­man

of Nas­daq and a highly re­spected busi­ness­man, used his cre­den­tials to lure money into his net. Among his celebrity clients were Os­car-winning di­rec­tor Stephen Spiel­berg, whose char­i­ta­ble foun­da­tion was an in­vestor.

Word of Tan­nen­baum’s early in­vest­ment suc­cess spread like wild­fire. He had good prove­nance – with his fam­ily be­ing among the found­ing fathers of Ad­cock In­gram. With a BSc be­hind him, a good fam­ily and the prom­ise of stel­lar re­turns, Tan­nen­baum was in an ideal po­si­tion to cap­i­talise on his clients’ de­sire to make big re­turns.

There’s a grow­ing body of ev­i­dence to sug­gest it wasn’t only South African in­vestors who lost money to Tan­nen­baum and his al­leged ac­com­plices. Me­dia re­ports in Bri­tain claim some of its fairly high pro­file busi­ness leaders, as well as Lon­don hedge funds and Monaco-based Rus­sian in­vestors, may have ex­po­sure. Just how far the net was spread re­mains un­clear.

SA’s law en­force­ment agen­cies were play­ing catch-up last week while the Tan­nen­baum drama played it­self out in the me­dia. The Fi­nan­cial In­tel­li­gence Cen­tre, Re­serve Bank, SA Rev­enue Ser­vice and the SA Po­lice Ser­vice formed a high-level team to co-or­di­nate law en­force­ment ef­forts to in­ves­ti­gate al­le­ga­tions of a pyra­mid scheme against the busi­ness­man.

In­ves­ti­ga­tors will seek to es­tab­lish whether Frankel In­ter­na­tional, an im­porter of ac­tive in­gre­di­ents used in the phar­ma­ceu­ti­cal in­dus­try, was ever a le­git­i­mate busi­ness with ad­mirable as­pi­ra­tions and whether it mor­phed into a racket mas­ter­minded by Tan­nen­baum and a ring of co-con­spir­a­tors.

Ques­tions also re­main whether ben­e­fi­cia­ries of any in­vest­ment scheme of this kind should be forced to re­turn their prof­its: af­ter all, they could be shown to be ill-got­ten gains re­sult­ing from a crim­i­nal act. But lawyers for ben­e­fi­cia­ries will de­mand the State proves their clients know­ingly ben­e­fited from the pro­ceeds of il­le­gal ac­tiv­ity. That would be a much tougher task.

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