It was a meeting that could have taken place six months ago in a Manhattan law firm, as Bernard Madoff's shattered investors bemoaned their gullibility and contemplated how to recoup the millions they had sluiced into Madoff's Ponzi scheme.
But instead, it was 300 investors jostling for standing room in the auditorium of Sandton law firm Routledge Modise. And instead of Madoff, the man at the centre of arguably SA's largest-ever Ponzi scheme is Barry Tannenbaum, a 43-year-old South African who lives in Sydney's St Ives suburb in Australia.
With nearly R2bn already unaccounted for, and speculation that sums of up to R15bn are involved, Tannenbaum's investment scheme looks set to become SA's largest corporate scandal, dwarfing Fidentia and Masterbond.
Aspen CEO Stephen Saad and Adcock boss Jonathan Louw - Used as pawns
Among those drawn into the scheme are former Pick n Pay boss Sean Summers, ex-Bond Exchange CEO Tom Lawless and former JSE chair Norman Lowenthal. At the same time, blue-chip JSE firms Adcock Ingram and Aspen Pharmacare have been dragged into Tannenbaum's slipstream, even though the CEOs - Jonathan Louw and Stephen Saad - did not invest personally.
Tom Lawless - Another victim
The scale of losses is not yet clear: by Friday, the debtors' book (against which Tannenbaum "borrowed" from investors) officially stood at R1,76bn. The FM understands at least 400 investors - in SA and countries like the US and Australia - are involved. Among other investors, Qatar-based real estate company Barwa is said to have negotiated to invest $30m, and unconfirmed reports suggest one US-based lawyer entrusted more than $100m to Tannenbaum.Warren Drue, an attorney at Routledge Modise who invested in the scheme, declared at last week's meeting: "We've all been devastated... it appears there was no fundamental business, so the money we've invested must be gone."
Another investor confessed: "I feel violated and stupid." (See stories, "Too good to be true").
Though investors are now forming a committee to probe what happened, evidence gathered by the FM points to Tannenbaum's scheme as an old-school Ponzi scheme as used by Madoff. The US Securities & Exchange Commission defines Ponzi schemes as a pyramid scheme which "robs Peter to pay Paul". With the promise of stratospheric returns as bait, the scheme takes money from new investors and uses it to pay earlier investors. When no more new recruits are found, it collapses.
Here, Tannenbaum persuaded people to invest in his companies - Frankel International and Frankel Chemicals - by offering prodigious returns of up to 216%/year. Investors, who typically heard about the scheme from "friends", would transfer cash to Tannenbaum's RMB Private Bank account, believing it would be used in a legitimate business, and they'd be paid back a few months later. It worked fine, until all payments stopped last month.
| WHO IS BARRY?Schooled in Krugersdorp, he obtained a BSc degree from Wits in 1987. Following a stint in the army, he worked as an advertising manager for Times Media (now Avusa) and joined EuroChemicals (which trades as Frankel Chemicals) in 1992. He purchased it in 1998, and it is now 100% owned through the Frankel Trust of which Tannenbaum is the sole beneficiary. Married with two children, he lives in St Ives in Sydney, Australia, but travels to SA frequently. |
Tannenbaum, whose father was one of the founding Adcock Ingram shareholders, punted his scheme as a legitimate business buying APIs (active pharmaceutical ingredients) from foreign countries, which he then on-sold to generic drug makers like Aspen, Adcock and Novartis to make antiretroviral drugs.
Rather than the red tape involved with borrowing from banks, Tannenbaum said he would "borrow" the funds to buy APIs from investors, who would be paid handsome returns for deals typically lasting a few months. It was a scheme which extended beyond SA's borders, with Frankel having operations in Germany, Brazil, Australia and India.
But the actual business was a fraud. The FM is in possession of many documents which show the largest "purchase orders", meant to prove there was a pipeline of cash to repay investors, were forged (see ragout in the right column). Also, auditors have confirmed the financial accounts of Tannenbaum's companies had been "altered and falsified".
For example, Tannenbaum produced documents allegedly showing incoming cash flows, such as one supposedly signed by Aspen's Bert Marais confirming that "an amount of R140m will be paid to [Tannenbaum's] nominated account, ANZ Bank Australia on May 18 2009". But these were also forged.
In response to queries by the FM and investors, Aspen confirmed that "the signature on the letter is false, together with the company letterhead".
Equally, an Aspen purchase order for five medical ingredients, including antiretroviral drug Nevirapine, supposedly confirmed on an Aspen letterhead on December 4 that the medical company owed Frankel Chemicals R160m.
Yet, Aspen legal head Pieter van der Sandt describes this, and another purchase order for R8,5m in February, as a forgery. "Aspen does not order any of the chemicals as described... in addition, there are subtle differences in the styling of the forged documents and an authentic Aspen purchase order."
This is crucial, considering Frankel's documents listed Aspen as its largest client for 2008, having bought R2,5bn worth of medical supplies. Sandoz Novartis was second, with orders allegedly totalling R351m, Revlon with R342m and Adcock Ingram with R178,4m.
In an e-mail in the FM's possession, in March Tannenbaum told one of his business partners that "Aspen holds the largest value in my book, and that is based purely on the antiretrovirals and other such tender items that they (sic) rely on funding from the World Health Organisation and government".
Yet Van der Sandt confirms that "there are no monies due and payable to Frankel Chemicals by Aspen Pharmacare". Aspen had apparently done some business with Tannenbaum in the past, buying coal tar prepared and betamethasone sodium phosphate from Frankel - but nothing near the amount claimed.
And it wasn't just Aspen that got entangled in this web of deceit. The FM obtained a purchase order, dated March 12 2008, on an Adcock Ingram letterhead supposedly signed by an employee. This apparently confirmed that Adcock owed Tannenbaum and Frankel Chemicals R15,1m for a consignment of diphenhydramine (a potent antihistamine). Adcock CEO Louw confirmed to the FM this was false. "We don't even procure diphenhydramine for our critical care business."
Like Aspen, Adcock did some small business with Frankel. But, says Louw: "The numbers for those deals are less than R1,3m and nothing like the numbers on that purchase order."
It was the same story when the FM provided Novartis-Sandoz with three purchase orders between March 2008 and January 2009 for erthromycin phthalate and metformin. Sandoz SA has confirmed that the three orders were not issued by the company. "These purchase orders have been falsified. Sandoz will be investigating this matter further and will manage this accordingly."
It seems crime fighting authorities may have been watching Tannenbaum for some time, but haven't acted. Millions in investor payments passed through his account at RMB Private Bank, which falls under First National Bank.
It is understood that in 2007, RMB Private Bank reported these transactions as "suspicious" to the Financial Intelligence Centre (FIC), a body tasked with cracking down on money laundering. The FIC told the FM it was "aware of the case, and the FIC is working with relevant law enforcement agencies on it".
While this appears to indicate that Tannenbaum's scheme is a fraud, some of the investors can't reconcile this with the person they knew - a story that resonates with many of Madoff's victims.
Wayne Gadden, investor and long-time friend, doesn't believe Tannenbaum orchestrated the scheme. "Barry's a great human being. He lives in a modest home and he's so trusting: if you tell him it's raining outside, he won't even go to the window to check. I just can't fathom that he was involved in this," he says.
Accountant Howard Lowenthal, who invested in Tannenbaum's scheme, told the FM: "Over the past few weeks, Barry and I have been in e-mail contact and he has continually said, 'Sorry about the mess, I'm busy raising money so please be patient'. Now I believe we've lost part of our capital."
Another Johannesburg businessman says: "Up until last week, my head was telling me it would never work, but my heart was saying please let it work. I had R3,2m invested with him after two years, even selling part of my business to raise the cash. Now I feel stupid. It's our life savings and wasn't easy to accumulate."
How did Tannenbaum get away with it? Partly because the scheme worked successfully for a while. People who invested were either paid back large returns or believed their money was safe with him and being "rolled" into new investments. He was a guy people trusted.
But in recent months, those asking to be repaid were met with excuses. In one e-mail, Tannenbaum explains the delay in getting funds from an overseas bank: "They wrote the incorrect date! Will get the new one this morning... It was meant to be May 5 2009. I am on it... never seems to end."
Yet the scheme was running at full tilt until a few days ago. One Johannesburg-based financier says: "As recently as 10 days ago, they were trying to get me to invest R3m, but it sounded like it was too good to be true, so I knew trouble was coming and I rejected the offer."
The FM has communicated with Tannenbaum in Australia over the past week and he has admitted to a degree of wrongdoing in telephonic conversations and on e-mail. "The debtors' book was overstated," he concedes, "but I have never said the Aspen invoices are frauds."
But when questioned about how this "overstatement" happened, Tannenbaum promised to respond but hadn't done so at the time of going to print. One e-mail he sent to the FM said: "Been in meetings all day with very important guys. Looks like I'm winning the race!"
Tannenbaum hinted that "other parties" had orchestrated this situation, insinuating that lawyer Dean Rees was involved. But when asked to provide specifics, he was vague. "I am not sure who the responsible parties are, but intend finding out." Without admitting guilt, he adds: "If I go down, [Rees] is going with me." But then backtracks: "I deny the truth of the aspersions that have been levelled against me and the fanciful allegations."
To many investors, Rees is the man most under suspicion. Tannenbaum's brochures said Rees "has been involved in the business relationship with Frankel for the last 3½years". Rees owns 100% of Abated Investments, which secures funding for Frankel Chemicals... via its SA-subsidiary Suscito Investments.
Frankel has appointed Abated Investments as its global partner in sourcing of funds, logistical services in securing funding for its ongoing deals," the brochures say. Rees owned 100% of Abated Investments (which is registered in the British Virgin Islands) through Madmacks Investments.
It was Rees who, speaking as the voice of Frankel International, assumed an increasingly large role in the days leading up to the scheme's apparent collapse.
On May 23, Rees wrote to investors, saying there had been "unexpected delays" in the funds due to be disbursed as one of the banks was unhappy with the structure used to transfer funds into SA. "Due to the delays and late payments, I've been appointed as interim chief operating officer of [the wider] Frankel Group... [as] we feel it is necessary that someone is appointed to consider the interests of the investors, as I represent you in my capacity as an attorney".
On May 28, Rees said some investors had formed a committee to audit and "reconcile debtors' books, based upon irregularities that came to light". He said Deloitte had been appointed to assist.
On June 2, Rees wrote another letter, saying his status as COO had been "revoked", and Deloitte was prevented from gaining access. He said some debtors told him that purchase orders were "forged".
But at the investor meeting at Routledge Modise, Rees came under fire. One investor said: "I wrote to Dean three months ago, saying the pharmaceutical companies don't unilaterally extend credit terms [like Tannenbaum suggested]. I didn't get a response."
Warren Goldblatt, head of SA's only private law enforcement agency Specialised Services Group, which represents one of the investors, raised concerns about Rees's involvement. "I don't think Dean is in a position to spearhead this on behalf of investors... [he] emphatically informed us that [he] had successfully concluded two trades in Hong Kong and the funds would be available shortly."
Goldblatt said Rees may have benefited as he was central to Tannenbaum's operations and his involvement as the "white knight" was a conflict of interest.
However, attorney Drue defended him: "This is not a thing about Rees. Dean came forward as a white knight."
Though Rees describes himself as "an attorney acting for the investor base", he also earned "a large amount" in commissions for introducing investors. He and Darryl Leigh were allegedly paid 6% of amount invested.
But Rees denies he had any role in the scheme. "I'm as shocked as anyone by this," he told the FM. "If I believed it was a scam, why would I take two of my cars [Ferraris] and give them to my friends? Why would I put my own money into this?" Rees says he wrote off R7m, which he invested in the scheme, and having moved his family to Switzerland, "I now have to go back to SA".
Yet, as the Ferraris attest, Rees leads a lavish lifestyle, leading people to question where he gets the funds. "It's not about my lavish lifestyle," he says, "it's about getting down to brass tacks : it's about the fact that what appear to be genuine orders were actually fraudulent."
But Rees's Suscito Investments was used as a conduit for payments to investors. His Investec bank account statements, extracted from a due diligence report by PricewaterhouseCoopers (PwC), confirm that more than R152m moved through his various accounts between July 2007 and April 2008. This money was then paid out of Rees's accounts through either his trust account or Suscito.
The third player is 59-year-old retired advocate Darryl Leigh. As investor stories show ("Too good to be true"), Leigh introduced a number of investors to Tannenbaum. He and Tannenbaum had other business links too: companies' office records show he and Tannenbaum are directors of a close corporation, Tann-Leigh Properties.
Leigh refused to answer the FM's questions. "You're obviously not hearing me. At this stage, I'm not saying anything."
Like Rees, his lavish lifestyle has attracted attention. In March, Leigh's Lamborghini LP640 Roadster was involved in an incident where the head of marketing for Ericsson, Jan Embro, died in his Ultima GRT. Newspapers reported that police were probing whether Leigh and Embro "were dicing" with each other.
If Tannenbaum's scheme relied on forged purchase orders and free marketing from participants, investors weren't helped by the fact that independent sources gave it a clean bill of health. The FM is in possession of a confidential report by PwC prepared in September to provide an assurance to one of Tannenbaum's funders.
PwC was asked to check a few things: first, that raw materials purchases were actually taking place and above board; and second, that funds were properly transferred between the Investec Private Bank accounts of Tannenbaum and Rees.
It wasn't a proper audit, but PwC did find a flaming red flag. Though it traced about R200m moving between Tannenbaum and Rees's accounts, PwC said: "This is substantially less than the indicated transaction values of the raw materials [bought]." PwC was told this was because "investment returns [were being] transferred while investment capital amounts are not transferred".
EuroChemicals (another name for Frankel Chemicals) also produced audited financials for the year to February 2007, which would have given investors some comfort. Auditors IAPA signed off the accounts, saying they "present fairly, in all material respects, the financial position of the company ". These financials, in the FM's possession, said Frankel was owed R566m in "trade and other receivables", had cash of R434m and inventories of R125m. At that stage, Euro Chemicals apparently owed shareholders R693m.
But IAPA confirmed to the FM that "those financials have been altered, falsified and are incomplete". This "irregularity" was reported to the Independent Regulatory Board for Auditors.
In cases like this, people ask why the investment regulator, the Financial Services Board (FSB), didn't intervene. But neither Frankel nor Tannenbaum were registered with the FSB, as these entities just took "loans". FSB spokesman Russel Michaels says: "In a case like this, we can't do much other than refer this to the police commercial crimes unit."
WHAT IT MEANS
 Aspen, Adcock, Sandoz orders faked
Tannenbaum could face criminal charges
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Tannenbaum is likely to face fraud charges as it is believed several investors have spoken to the SA Police Service's commercial crimes unit. A website has also been set up - Click here for documents online - for investors to get information.
Goldblatt says the solution is to urgently apply to court to sequestrate Tannenbaum's estate and liquidate his companies, allowing a liquidator access to books and bank accounts. "The liquidator may then be in a position to demand repayment of any benefit that any investor may have received."
The Tannenbaum revelations are likely to blow a hole through an SA business environment whose decision makers are renowned for conservatism and sound judgment. In the same way it shocked America to learn that Madoff operated a thriving Ponzi scheme, Tannenbaum's success in duping SA's wealthy will puncture holes in SA's corporate façade.
