Psst! Wanna get rich quick?
I know a guy who knows a guy...
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.