How Ponzi scheme fed mastermind’s gambling addiction
New book reveals Barry Tannenbaum as a con artist who stole investors’ cash to satisfy his voracious appetite for poker
PONZI scheme mastermind Barry Tannenbaum launched South Africa’s biggest white-collar pyramid scheme partly because of a rampant gambling addiction on which he spent hundreds of thousands of rands a day playing online poker, according to sensational new court documents.
The scheme suckered some of South Africa’s business elite, including the former heads of OK Bazaars, Pick n Pay and the JSE, as well as overseas investors.
They ploughed R12.5-billion into a scheme that Tannenbaum punted as a business that bought drug components to make antiretrovirals.
But Tannenbaum instead used their money to repay new investors and simply forged massive purchase orders from drug companies such as Aspen to cover his tracks.
Tannenbaum, the grandson of Hymie Tannenbaum, who started South Africa’s second-largest pharmaceutical company, Adcock Ingram, in Krugersdorp more than a century ago, has been billed as South Africa’s Bernie Madoff.
He emigrated to Australia in 2007, about two years before the scheme crashed in mid-2009. Efforts to extradite him appear to have stalled after the lead prosecutor on the case, Glynnis Breytenbach, was sidelined in the National Prosecuting Authority.
His motivation for constructing the scam remained a mystery until now.
However, transcripts from an Australian federal court paint a picture of a man with an out-of-control gambling problem who constructed South Africa’s largest scam simply to fuel his habit.
When questioned under oath by lawyers acting for the liquidators of his estate in South Africa in the Brisbane court, Tannenbaum claimed that he would “play a little” but said his gambling was “nothing exhaustive”.
But the lawyers confronted him with bank records, which showed he spent up to R62.5-million on gambling within a few years. He had won back R36.7million of it, but ultimately made a loss of R25.8-million.
On one day — August 3 2005 — Tannenbaum spent R228 735 on two gambling websites, silversands.com and piggspeak.com. Yet shortly before his Ponzi scheme began to really ramp up, he declared his income at only R28 500 a month.
When the lawyers asked who had lent him the money to gamble, Tannenbaum responded: “Friends.”
When asked whether these friends were in fact his investors and whether he had “used investors’ money to gamble”, Tannenbaum said: “Not necessarily always, no. It depends if they were just investors or just loans.” One court exchange went thus:
QUESTION: During these years from 2004 to 2009 . . . when there was heavy gambling by you . . . the only way you could fund this gambling was from . . . the money that investors put into your account, isn’t it?
TANNENBAUM: Possibly so, yes. And another exchange:
QUESTION: When you were gambling heavily, you couldn’t have repaid the [investors] because you were using their money to gamble.
TANNENBAUM: Possibly not, it
depends.
QUESTION: You couldn’t have paid them back if they wanted the money back . . . do you accept that?
TANNENBAUM: Possibly, yes. He then admitted that poker was “what I enjoy the most” and said he would spend “a couple of hours” at night gambling online. “You just get hooked on it, I suppose.”
When his wife Deborah was subpoenaed to testify, she was asked whether she knew that he gambled.
“Absolutely not, absolutely not . . . as far as I know, he didn’t gamble.”
These details are contained in the book The Grand Scam, which details how Tannenbaum first launched a “furniture investment” scheme in 2004, before hitting on the idea of the drug components as a way to get cash from “investors”.
He constructed a fantastic tale of a company called Frankel Enterprises, which was supposedly clocking up annual sales of $450-million (about R4.5-billion) from its office in Bedfordview, Johannesburg, and he recruited a number of lawyers to act as his “agents” to punt the scheme to hundreds of investors.
However, Tannenbaum simply cooked the books. Frankel’s real turnover for that year was R11.8million and it made an overall loss of R361 702.
A forensic report presented to the Australian court by Steve HarcourtCooke says that “less than 0.05% of the funds invested in the scheme were used for the purpose of pharmaceutical raw materials . . . The scheme’s true business was to obtain new funding from investors to repay earlier investors.”
Shortly before the scheme imploded
He spent up to R62.5-million on gambling within a few years, winning back R36.7-million of it but ultimately making a loss of R25.8-million
in June 2009, property developers Richard Goudvis and Craig Delport flew to Australia to confront him with evidence that a R140-million “invoice” from Aspen was a forgery. Aspen had confirmed in a letter to Goudvis that “the purchase orders are forgeries. Aspen does not order any of the chemicals as described from Frankel.”
They met him at a coffee shop near his office in Sydney, and Goudvis says that when confronted, Tannenbaum cried and said he was sorry.
“At that stage, we didn’t know the entire thing was a Ponzi scheme. We thought it was just one invoice from Aspen. We didn’t realise how big it was,” Goudvis said.
Although Tannenbaum admitted that certain documents had been forged, he has always denied constructing a Madoff-style Ponzi scheme. “There is no proof I committed fraud,” he said.
Although some of Tannenbaum’s investors have remained out of pocket, others banked large windfalls.
A company called Jawmend Rossi— owned by businessmen Jonathan Jawno, Michael Mendelowitz and Rob Rossi — “lent” R601.4-million to Tannenbaum between 2004 and 2009.
They were repaid R740.4-million through 124 “loan transactions”.
In one deal in July 2007, Jawmend Rossi lent R5-million to Tannenbaum and was repaid R7.75-million just 34 days later — an interest rate of 574% if one annualises it.
However, Jawmend Rossi says that “we advanced loans to Tannenbaum [and] each short-term loan was made in the ordinary course of business”.
Although arrest warrants have already been issued for Tannenbaum on charges of fraud, no official extradition request has been lodged with the Australian authorities. However, he did flee his Sydney home after getting death threats in mid-2009.
Tannenbaum is now working at an insurance company near Surfer’s Paradise in Queensland, Australia.