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Legalbrief   |   your legal news hub Tuesday 25 February 2020

Now SARS rubs salt into burnt investors wounds

Losing millions in what is alleged to be SA's biggest pyramid scam is not the only thing burnt investors have to worry about. SARS is taking a keen interest in the financial affairs of those who invested money with Barry Tannenbaum, writes Legalbrief.

The Mail & Guardian Online reports that the special investigative task team is not just focused on the alleged Ponzi scheme itself - investors are also under scrutiny. The report quotes SARS spokesperson Adrian Lackay as saying: 'We're looking at both the investors and the structures that were invested in.' He said SARS would check to see whether investors paid tax on any dividends they received. 'They'll be liable for any outstanding tax,' he said, adding that criminal charges could be laid if investors were found guilty of tax evasion. Full Mail & Guardian Online report

Financial and law enforcement agencies are to work together to tackle the alleged R10bn scam that has left hundreds of wealthy South Africans out of pocket, says a Sunday Times report. In what the paper says is an unprecedented move, a team from the SA Reserve Bank, the SARS, the Asset Forfeiture Unit, the Financial Intelligence Centre and the police's Serious Economic Affairs Unit is to attempt to untangle the complex web of transactions and suspected fraud in what has been billed as SA's biggest Ponzi scheme. Businessman Tannenbaum - who moved from SA to Australia two years ago - is at the centre of the probe. Murray Michell, head of the Financial Intelligence Centre, said the joint strategy had been adopted because of the amounts involved and because 'we have witnessed, particularly in America, what happens when people are overly greedy and subvert the rules to their own interest'. As well as investigating Tannenbaum and his affiliates' affairs, the team will also examine: whether fraud or money laundering was involved; whether exchange control or Reserve Bank violations took place; and the tax compliance - or otherwise - of all involved. Full Sunday Times report

Claims and counterclaims abound as a KPMG forensic investigation seeks to sift fact from fantasy. The Financial Mail says it has uncovered evidence of apparent fraud extending beyond forged invoices and an audit report. The FM says it has obtained a letter that was purportedly sent from the Reserve Bank to First National Bank (FNB) on 15 May 2009. It discusses how an application to have funds released to a Hong Kong bank account was 'being fast tracked and should be released within the next four working days'. This letter was shown to Qatar-listed real estate company Barwa, and was meant to confirm a payment from Aspen. Reliable sources confirm Barwa put $30.3m into Frankel in two tranches for two specific transactions, the report said. The letter was used to show that the purchase of drugs overseas was legitimate. But the Reserve Bank has dismissed it as a cut-and-paste job. Who forged the documents, and who exactly is responsible for what appears to be SA's biggest financial scam, asks the FM. Fingers are being pointed at Tannenbaum as well as at attorney Dean Rees (who was paid commission for introducing investors to the scheme). Though these claims look bad for Tannenbaum, the report notes, this is possibly evidence from parties with interests to protect. It is likely to come down to finger-pointing, with Tannenbaum blaming Rees for conspiring to set him up as the fall guy. But tracing the flow of funds to establish the truth will be a difficult task for KPMG and the trustees of Tannenbaum's estate. Full Financial Times report (subscription needed)

Trustees were appointed yesterday for Tannebuam's SA assets, notes a report on the FIN24 site. Johannesburg attorney Ian Levitt, who is acting for one of the scheme's investors, said the Master of the South Gauteng High Court had appointed the trustees. Levitt said one of the trustees that he had put forward - Johannesburg-based Shirish Kalian Attorneys - had been appointed. The other trustee was KPMG International's Gavin Gainsford. 'Because a Ponzi scheme is illegal - all those people who got paid anything have to give it back now,' Levitt said. Full report on the FIN24 site

Some of Tannenbaum's bank accounts have been frozen by the Reserve Bank, according to Michael Strauss, a partner at Ian Levitt Attorneys, the law firm that brought the High Court application to sequestrate Tannenbaum's personal estate. But, according to Business Report, Strauss said he could not disclose what assets owned by Tannenbaum were still in SA because 'we have been working with the Reserve Bank and the Scorpions'. However, Samantha Henkeman, a spokesperson in the office of Reserve Bank Governor Tito Mboweni, said it would not confirm or deny claims about the freezing of Tannenbaum's bank accounts because of the Bank Act. Full report in Business Report

Tannenbaum said at the weekend he would not return from Australia, where he now lives, and refused to sell assets to pay investors. Tannenbaum denied reports he had spirited a fortune out of the country and said he was not 'sitting with millions'. He has denied any wrongdoing, notes a report on the News24 site. 'I have no intention of leaving Australia, I have no intention of disposing of whatever assets I possess,' Tannenbaum is quoted as saying. 'I state categorically that I am not sitting with millions. I have not amassed some fortune that I have spirited away.' Lawyers and investigators claim Tannenbaum lured hundreds of investors, including top businessmen, with the promise of annual returns as high as 200% linked to pharmaceutical imports. Full report on the News24 site

Attorneys representing investors in the scheme are going after Tannenbaum's Australian assets. The Cape Times reports that they will seek recognition in Australia of a sequestration order obtained in SA to allow them to sequestrate his estate there. However, Strauss said the provisional order granted earlier this month should first be made a final order, a move he expected Tannenbaum to oppose. Full Cape Times report (subscription needed)

Pharmaceutical companies Adcock Ingram and Aspen have made the news for their business dealings with the alleged scheme, Frankel Chemicals. Tannenbaum lured investors on the promise that they could make high returns by investing in his scheme. Tannenbaum claimed he could make vast sums of money by selling antiretrovirals to major pharmaceutical companies like Adcock Ingram and Aspen. Moneyweb quotes Adcock Ingram managing executive Bill Tweedie as saying: 'Adcock has purchased (active pharmaceutical ingredients) through Frankel Chemicals for a number of years. However, Frankel acts as an agent for other suppliers. For the vast majority of its purchases, Adcock deals directly with the supplier, and pays the supplier, not Frankel.' He says Adcock was completely unaware of the scheme. Aspen has declined to comment on the Frankel scheme, saying it has received 'legal advice' to keep quiet. Aspen's dealings with Frankel were similar to those of Adcock. It is alleged that Frankel misled investors about the nature of its business with Aspen and Adcock. One of the alleged claims was that it had been awarded a contract to supply Aspen with antiretroviral ingredients, and that Aspen owed it R700m. Full Moneyweb report

Correspondence between Aspen and Barry Tannenbaum's Frankel International and Frankel Chemicals Corp was fraudulently prepared, according to the JSE-listed pharmaceutical giant. Aspen said it was aware of the existence of documents purported to be purchase orders, and other correspondence between Aspen and Frankel, 'which were neither prepared nor authorised by Aspen', according to the company. According to a report on the News24 site, it said the documents had been fraudulently prepared 'using forged purchase order templates and forged signatures, representing Aspen personnel'. The Frankel investment scheme had been described as operating as an importer and exporter of active pharmaceutical ingredients (API) - mainly used in antiretroviral medicines - from foreign countries. Tannenbaum allegedly supported his proposition by showing prospective investors purchase orders from major pharmaceutical companies such as Aspen for the respective APIs valued at millions. Full report on the site

The victims are blaming themselves for their loss, says Werksman's director Paul Winer, whose firm represents several investors in the alleged Frankel pyramid scheme. A Moneyweb report quotes Winer as saying: 'The impression I'm getting right across the board is that (the investors are saying): "We made a terrible mistake, we were very stupid in what we did, we should have conducted a proper due diligence, we should have tried to ascertain how these high returns could be paid'',' Winer said. Full Moneyweb report

Among more than 400 South African victims are 22 millionaires from the Western Cape. Shirish Kalian, one of the three trustees who were appointed to administrate Tannenbaum's sequestered South African estate, said yesterday these investors poured millions into the scheme. The 22 Western Cape millionaires are estimated to have invested about R64.5m, says a report on the FIN24 site. Richard Goudvis, legal representative for 20 of the 22 Western Cape investors, said his clients were giving their full co-operation to the task team investigating the case in an attempt to recover their money. 'We are currently providing proof of the exact amounts which were invested.' Full report on the FIN24 site

Leading British businessmen are also feared to have lost millions in the scheme. The Daily Telegraph reports that Peter Long, chief executive of Tui Travel, and Richard Kirk, his counterpart at Peacocks, are among a group of UK-based businessmen that invested in Frankel International. Monaco-based Russian investors are also said to have become entangled in the alleged fraud. London hedge funds are also said to have invested in the fund. Some UK investors are said to have been introduced by James Patterson, a Monaco-based adviser. The report notes that Patterson, who is listed as a director of a number of Frankel subsidiaries, did not return calls. It said he is understood to have told investors that he has, himself, been 'duped' and denied any wrongdoing. Full report in The Daily Telegraph

Tannenbaum has been likened to jailed US businessman Bernard Madoff, who swindled a reported $65bn from thousands of investors in his elaborate Ponzi scheme. A Sunday Times report looks at the similarities between Tannenbaum and the disgraced former Nasdaq chair. The report says both men successfully managed to gain investors' confidence because they were simply such nice guys. Perhaps Madoff impressed his victims with his charity work. He dished out millions to hospitals and cultural and educational organizations, says the report. It notes that Tannenbaum also gave back to the community - the Chabad of the North Coast in KwaZulu-Natal reported on its Web site that, in 2006, Tannenbaum and his wife, Debbie, donated a new Sefer Torah to a Jewish community centre in Umhlanga Rocks. But the overwhelming similarity between Madoff and Tannenbaum, according to the Sunday Times, is that they managed to persuade business leaders of note into parting with fortunes. Full Sunday Times report

The scheme came to light when one of the investors became suspicious, and hired private law-enforcement agency Specialised Services Group, Moneyweb reports. SSG head Warren Goldblatt investigated, and found enough evidence to convince him that the scheme is a fraud. Goldblatt said the first warning sign was that the documents that were presented to investors, if genuine, could have been presented to any of the mainstream financial institutions for funding at a much lower rate. In other words, if his purchase orders were real, he could have obtained financing from a bank at a much lower rate. According to some reports, as far back as 2007, Rand Merchant Bank (RMB) reported 'suspicious activity' in Tannenbaum's bank account to the Financial Intelligence Centre. It seems as if the FIC ignored RMB's warning and failed to investigate further. The FIC has so far refused to say anything beyond 'we are investigating the matter', and has not confirmed that it received a warning from RMB. There are still many unanswered questions about the scheme, and more is sure to emerge over time, but one lesson is clear, says the Moneyweb report. Investors must be hyper-vigilant, and should fully investigate any proposed investment before committing money. Full Moneyweb report