Investors need to wise up to Ponzi schemes

18 Aug

Author: DAWIE DE VILLIERS

Publications: Citizens Alert ZA

Date Published : 17 August 2014

Investors need to wise up to Ponzi schemes – Sharemax and directors schemed to defraud public, says Fais ombud

With many South Africans – and retirees, in particular – struggling to make ends meet, they become easy pickings for fraudsters operating get-rich-quick investment scams, also known as Ponzi schemes.

In their search for high returns on investments, South Africans seem to repeatedly entrust their hard-earned savings to operations which, at best, have short-term track records and, at worst, knowingly sell promises that they are unable to deliver on.

Investors buy into these promises without fully understanding how these operators achieve their alleged returns.

Over the past five years, the following schemes – which have had traumatic consequences for unsuspecting investors – come to mind: Fidentia, Leaderguard, Sharemax, King Group, and the Herman Pretorius saga.

There is a golden thread running through this list: each one promised a return far superior to that of the financial market, at a very low risk. In hindsight, such promises were too good to be true. But why do we continue to move from one such scandal to the next?

Spotting a Ponzi or pyramid scheme is relatively easy. Here is a checklist to arm yourself against fraudsters:

1. Insist on proof that the investment vehicle is registered with the Financial Services Board (FSB).

If it isn’t, and your money gets lost, you have no avenues of recourse open.

2. Compare the interest rates on offer with the global and local investment landscape (for example, interest rates and economic growth rates).

If the national interest rates are at 5 or 6 percent, and someone is offering you a guaranteed return of 30 percent, it is likely to be a fraudulent scheme. Having realistic expectations of investment returns is the cornerstone of any sensible investment strategy.

3. Be wary of consistent returns.

By their very nature, financial markets are fluid instruments fluctuating daily.

If a scheme offers consistent, guaranteed returns and it is not underwritten by an insurer or bank, it is most likely not invested in secure financial instruments and should, therefore, be closely scrutinised.

4. Look carefully at the track record of the institution and individual offering the investment opportunity.

And this means not just taking their word for it. Contact the FSB, contact the editor of the personal finance section of the newspaper, and ask reputable brokers for their opinion. In an economic downturn, your best bets are very well-established investment houses with solid track records and healthy cash reserves.

Don’t be fooled by professional-looking documentation or reporting.

5. Practise steps 1 to 4 above, no matter who you hear about the scheme through.

Unfortunately, many unsuspecting investors are introduced to Ponzi schemes through intermediaries, such as friends and family, and this provides them with a comfort factor. This does not mean they are safe. It is possible that those family and friends will equally become victims.

6. Don’t be comforted if the scheme has paid out regularly to those family or friends.

This is a classic characteristic of a Ponzi scheme. In order to appear legitimate, they pay out, as promised, for a period of time to allow word-of-mouth to market the scheme on their behalf. Then, when there are enough investors, they pull the plug and make off with the money.

7. Trust your instincts. Common sense and gut feel can be great defences against falling for Ponzi schemes.

Ask yourself why you have been given an opportunity to make fabulous returns on your investment. Why have you been so lucky to get this unbelievable opportunity to multiply your wealth? What’s so special about you?

8. Be extremely wary of “opportunities” to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.

No legitimate investment house employs this strategy – in short, it is a very big clue that something dodgy is brewing.

Whatever your reason for investing, it is vital to have a goal, a timeline and reasonable expectations.

By investing in regulated investment products – such as unit trusts or mutual funds – you are investing in products that have an enormous amount of governance.

Before investing, you must be sure that you are trusting your funds to a person, people or an institution that has shown that it can consistently deliver returns over an extended period of time.

Long-standing institutions with proven track records are often the wisest choice.

Please contact an accredited financial adviser to discuss these collective investment schemes.

* De Villiers is chief executive officer, Sanlam Structured Solutions.

Background

Named after Charles Ponzi, an Italian immigrant to the US who convinced New Yorkers to invest in coupons yielding fabulous returns in the aftermath of World War I, most Ponzi schemes have the following modus operandi: investors are wooed by fantastic returns, with the older investors in the scheme getting paid from the proceeds of the newer investors. But the scheme only lasts as long as it attracts new investors.

South Africans in search of high returns have also been caught out. Names that spring to mind include Barry Tannenbaum – who fleeced billions from wealthy individuals in 2009 – Masterbond, Ovation, Fidentia and, most recently, Herman Pretorius.

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