THE MORE THINGS CHANGE, THE MORE THEY STAY THE SAME!

by | Dec 1, 2023

BHI Ponzi: R3 billion (2008 – 2023)

Sadly, once again investors have fallen foul of a Ponzi scheme. Craig Warriner of BHI Trust recently handed himself over to the police for alleged fraud and confessed that he is guilty of all charges that will be brought against him with regards to the Trust.

It is believed that the BHI Trust was once worth R3 billion and had hundreds of investors. The Fund was apparently an equity investment in existence for more than fifteen years but suffered significant losses during the 2008 global financial crisis and was unable to trade itself back to a position of liquidity.

Warriner, a St Stithians old boy operated the scheme through an unregulated Trust called BHI. Warriner who drove around in a Ferrari and travelled on his own private jet made himself out to be an expert day trader, yielding consistently high returns without any downside risk despite market conditions. It seems as if he had a similar modus operandi as Bernie Madoff, attracting the Sandton elite as investors and then sadly as the need for new cash demanded (rob Peter to pay Paul) found distribution through financial advisors, i.e., Global & Local, and apparently other investment firms who were enticed by a 5% upfront commission to recommend this unregulated high-risk scheme to their client base.

Unfortunately, these investors are likely to lose everything. Ponzi schemes are nothing new the world over and for as long as people are unable to keep their greed in check, we will continue to see this happen.

From a South African perspective, we have had our fair share over the past couple of decades, to name a few:

Masterbond: R650 million (1983 – 2005)

The scandal then was the largest white-collar crime to date. About 20,000 people invested millions, buying a portion of sea (Mykonos / Langabaan) through shares that did not exist and on non-existent land in fictitious shareblock schemes. The mastermind Coetzee was found guilty of 188 charges of fraud and sentenced to prison.

Fidentia: R1.4 billion (2007)

Over one billion Rand went missing from funds administered by Fidentia, including funds meant to support widows and orphans of mine workers. The mastermind, J Arthur Brown, lavishly spent the savings of 47,000 widows and orphans, wasting over R500 million of their money on spending spree’s. He was eventually sentenced to 15 years in jail for running a pyramid scheme and using investor’s funds for personal gain.

Barry Tannenbaum: R12.5 billion (2005 – 2009)

From 2005 to 2009 the heir of one of SA’s blue-blooded families, grandson to founder of Adcock Ingram, Barry Tannenbaum created the biggest con in SA history. Tannenbaum reeled in more than 880 investors promising high returns of 200% per annum linked to pharmaceutical imports, which were supposedly used in the manufacture of AIDS drugs.

It was nothing more than a lie, which was used to suck in the country’s business elite. In 2007, two years prior to the fraud being uncovered he skipped SA to settle in Sydney, Australia. Strangely South Africa never issued a formal extradition request.

WARNING!

There will always be con artists and Ponzi schemes, but these can easily be avoided. Don’t be greedy and stick with long standing reputable companies and always remember the simple but true saying of “if it sounds too good to be true, it probably is”.

With recent events unfolding in South Africa regarding a massive Ponzi scheme involving the well-known BHI trust, I thought it prudent to discuss the implications and history of Ponzi schemes in South Africa as well as around the globe. I would like this article to educate anyone who is not familiar with these schemes and allow clients and or the general public to recognise illicit behavior in a financial setting quickly, before it is too late to get out.

First and foremost, for as long as man has had a financial system, as early as 300 B.C, fraudulent dealings have been an underlying issue, when Hegestratos, a Greek sea merchant, who took out an insurance policy against his ship and its cargo, the policy was known then as a bottomry, this was the earliest example of fraud. Since then, there have been countless illicit dealings between the general public and those who are entrusted to control their money. It always boils down to greed.

What we are currently seeing unravel in South Africa is the use of a Ponzi scheme as the proverbial wolf in sheep’s clothing, what is a Ponzi scheme? The term “Ponzi Scheme” was coined after a swindler named Charles Ponzi, who in the 1920’s, promised investors 40% returns on their investments in 90 days, compared to a traditional 5% in normal savings accounts. However, the first recorded instances of this sort of investment scam can be traced back to the mid-to-late 1800s and were orchestrated by Adele Spitzeder in Germany and Sarah Howe in the United States. In the classic Ponzi scheme, a con artist offers investments that promise very high returns with little to no risk to their “client” (victim). Returns are said to originate from a business, or a secret idea run by the con artist. In reality, the business does not exist, or the idea does not work in the way it is described.

Unfortunately, most Ponzi schemes are made to look incredibly professional, with talented salesmen selling a product that sounds too good to be true, unfortunately, most of the time this is true. In the case of BHI trust, the application forms even stipulated that the investment was not governed or registered under any law and that it was unregulated, this is the first red flag. As a responsible investor, always ensure that your investments are within the law and you are protected by some form of regulation, should something go wrong in the long run. With a professional financial planner, you would never be asked or obliged to sign anything to put your hard-earned capital into an unregulated investment, for the safety of your capital as well as the financial planner’s reputation and or license.

Another red flag when referring to Ponzi schemes is the promise of unrealistically high returns in short amounts of time. Investing, as we know, is a long-term game, a game of patience, caution, and a carefully constructed plan.

Ponzi schemes generally have no viable business model and very rarely generate any legitimate profits of their own. It is often a case of taking the money given from client A to pay client B, fraudulently simulating a return for client B, unfortunately this is not a sustainable business model as eventually with no real returns, the money will run out and many investors will be left with no returns because the initial capital pool has dried up due to client withdrawals and unusual high fees. Ultimately, the people in charge of the scheme make off with a large sum of money to live lavish lifestyles from the high fees they have earned, while the victims are left with empty pockets.

Unfortunately, many investors are too slow or just simply do not have the know how to realize the situation they find themselves in and don’t want to admit that they have fallen victim to a Ponzi scheme. Other than the understandable embarrassment that most investors would feel as a result of falling for this trick, most do not want to expose the scheme for what it is out of fear that the con man will take off with their already invested capital. While Ponzi schemes can be highly complex and multifarious, they all follow the same overall theme: investors are promised they’ll make a higher-than-average return than can be achieved through a conventional investment.

In the case of BHI Trust, it seems that some investors were promised returns upwards of 20% a year, one investor has shared an investment statement reflecting a rolling 12-month return of 15.18%, even in a downturned market, this is major red flag. Some seem to be surprised by the unfolding events at BHI trust, involving some R3 billion of clients invested funds, however, due to the unfortunate circumstances these investors found themselves in, along with a healthy helping of deceit as well as little to no knowledge of the warning signs that were consistently popping up, these investors have found themselves in a very difficult position, with very few options to turn to now that the game is up.

From the perspective of compliance, none of the forms that BHI utilized had met the requirements set out by the FAIS (Financial Advisory and Intermediary Services) Act along with lacking any FSP numbers which could not be found for any of the parties involved. Along with these incredibly alarming issues, there was no website, no branding or marketing material, with the founder of the scheme keeping a notoriously low social media presence, with his main area of targeting new clients being his old boys school network, all classic Ponzi scheme techniques.

Throughout history we have seen many Ponzi fraudsters use those closest to them to deceive the general public who are the ultimate targets, Bernard Lawrence “Bernie” Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, he even managed to deceive his own two sons along with many other individuals in his inner circle to begin to gain trust of the larger public audience he would ultimately prey on.

Even though we at RWM hope this is the last time that the general public are betrayed like this by those that they should trust at the highest level with their funds, investors should always pay attention to the following:

  • A Ponzi scheme is dependent on its ability to continually attract new investors. Without an ongoing stream of new investors, the promoter is unable to pay the previous investors, and the whole scheme will unravel. If you are pressured into finding new investors or offered rewards for introducing new investors, alarm bells should be ringing.
  • Ponzi schemes will falter if too many investors withdraw their funds. In order maintain the amount of investors they have; the promoter will offer investors higher returns if they don’t cash out. While on paper investors believe their investments are gaining incomparable ground, the truth is that most Ponzi schemes don’t make any investments on behalf of their investors at all. If you’re pressured or rewarded for reinvesting, the sirens should be blaring.
  • Ponzi fraudsters are also notorious for creating a false sense of urgency by leading the investors to believe the deal is only valid for a limited period of time. The investment opportunity is often shrouded in secrecy, and the investor is pressured to ‘act now’ while the ‘once-in-a-lifetime’ window of opportunity stands obscurely and suspiciously ajar. Pressure to invest within a certain period of time is foreign to sound investing principles and should be considered a red flag.

With this in mind, before investing in any company, here are some steps you can take to verify the investment:

  • Visit the Financial Sector Conduct Authority website and conduct a search using the name of the company you intend to invest in. Ensure that the company or investment is listed and has a financial services provider (FSP) number that appears as follows: FSP XXXXX
  • Google search the name of the company to ensure that it has a legitimate website that reflects its FSP number, registered address and company details.
  • Request the investment performance history from the company to determine whether the returns reflected are in line with the rest of the market.
  • Get a second opinion from an independent financial advisor who holds the Certified Financial Planner® designation. An advisor with integrity and with your best interests at heart will likely not charge for a consultation and should be able to assist you with your research.