Highlights in this issue:

•    Standing when others fall...

•    It's time to divide and conquer…

•    It’s all too good to be true… and more…

From Gary Booysen on the top floor

Dear Investment Academy Reader,

You can hardly have missed the work of Barry Tannenbaum this week as more and more investors come forward in their misery. Some of these gut wrenching stories will tug at your heart strings, but with others, the naked avarice is too much to illicit an empathetic response. It's distressing to hear  pensioners’ tears splashing on the radio mikes, as they plead with the public for sympathy and get none. So, this week, we’re going to look a little further into Ponzi schemes, specifically: HOW TO AVOID THEM!

So what actually happened? In the latest edition of MoneyWeek, Gareth Stokes explains that the country’s regulators are preparing a “too little too late” assault on Barry Tannenbaum, South Africa’s very own Bernard Madoff. The mastermind of the latest failed business “opportunity” is the grandson of Adcock Ingram’s co-founder. Early estimates – a local attorney claims to represent investors who contributed R400 million to the scheme – put total losses in the R2 billion to R10 billion bracket. But why do South African investors fall hook, line and sinker for financial scams? It’s not like the so-called Ponzi scheme can be viewed as fresh bait! It’s a financial con named after Charles Ponzi, who offered investors fantastic returns by exploiting an arbitrage opportunity in the early-1900s US postal coupon system!

Lesson #1: If it’s too good to be true, it generally is!

Leon Kok, chairman of the South African Investor, an exclusive investment club, warns against those who would con the world. He says: “The truth is, both the global and domestic financial service industries are crawling with here-today-gone-tomorrow cowboy fraudsters. When times are tough, investors are more likely than ever to lean towards higher risk investments to improve returns. But you best beware… The biggest Ponzi scam in history cost investors $50 billion!"

How does a Ponzi scheme work?

"Ponzi schemes are pyramid schemes where old investors are “paid off” with money from new investors. (They operate on a “rob Peter, to pay Paul” model.) Since the invested capital can’t earn enough return on its own, it eventually collapses under its own weight. The best global examples of these are the Bernard Madoff and Allen Stanford Ponzi schemes – which involved about $50 billion and $8 billion respectively. Wooed by the promise of unusually large returns – supposedly “thanks” to the manager’s skills and/or some other “secret” system – investors piled in.
 
"In Madoff’s scheme, major organisations were taken in. These include bodies like the US’s Access International Advisors and the State of Massachusetts; Switzerland’s Union Bank of Switzerland and Union Bancaire Privee; Britain’s HSBC Holdings and MAN Group; France’s BNP Paribus and Italy’s Pioneer Investments. Also odd was the fact that it took so long for the US Securities and Exchange Commission (SEC) to pick up on the dirt. It was clearly offering unsustainable double-digit returns. Madoff’s alleged fraud came out only after his own sons turned him in. Stanford’s web of companies, on the other hand, had drawn the attention of regulators for years – although they never did anything about it. But in all honestly, Stanford’s lifestyle provided many red light warnings.”

Until next week,

Gary Booysen
The Investment Academy Monkey

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