Tannenbaum and the alleged Ponzi Scheme Extrapolating the numbers

Update 16 June It appears as there may be even more to this. The various authorities in SA are working together and intend investigating the investors for using the scheme as a way to get money out of the country and/or avoid tax. They have said that those investors that come forward with info will be seen in a different light to those that don't. My view is that these allegations, if true, go a long way to explain why the wealthy experienced businessmen invested without asking too many questions. For decades, those that have money in SA have looked for and found ways of sending it offshore. Usually they would pay a premium of eg 10% to someone who accomplished this for them. Since it was illegal, there was desire for a paper trail and many deals were done on a handshake with someone from within the inner circle or recommended by someone from the inner circle. With this opportunity, it could be that some investors may have invested on this basis and used it as a mechanism to get money offshore. Alternatively, they may have seen it as an opportunity to wake up hidden offshore illegal "lazy money" from earning a measly few percent in an offshore bank to rapidly growing the offshore funds tax free. By definition that money was not cash they needed in SA anyway so when this smooth talking salesman sold them the opportunity and dropped all the other big names, they jumped at the chance.

Tannenbaum and the alleged Ponzi Scheme Extrapolating the numbers

Much has already been written on the allegations that the South African entrepreneur Barry Tannenbaum (who is now living in Sydney)was running a classic style Ponzi scheme. The purpose of this post is to discuss my take on it, a few of the implications of this scheme as well as some guesses as to the psychology behind both the alleged scheme perpertrators and those that were convinced into parting with their cash.

I do not wish to rehash the allegations here as these are covered extensively elsewhere in the media eg on the site www.saponzi.co.za. If you are reading this, you are doing so because you already have read most of the allegations and articles and are looking for new undisclosed info. I do not have any such new info as I was not and am not directly involved. I am not commenting on the guilt or innoncence of those involved as that will be a matter for the courts. I am giving my view on what I thought when I first heard of this venture. I was told about this scheme around 3 months ago by an acquaintance whose aunt had allegedly just invested. At the time my initial reaction was one of fascination. In light of the Madoff scandal, I was extremely skeptical. I have seen many Ponzi schemes come and go over the years as I work closely with the investment community. This one seemed to have all the hallmarks of a classic scheme except that the promised returns were higher than any I had ever seen.

I was told that what was being promised was a return of 20%. I immediately thought Wow - 20% PA, in this recessionary environment! That is an impressive return - if true. I was dumbfounded when my acquaintance corrected me by saying that this was over an 8 to 12 week period not PA. I thought about that (literally for a few seconds) and felt that can not possibly be correct and he has made a mistake. He responded that his relative had invested and rolled over the investment a couple of times already. Now it was becoming ridiculous. I could at a stretch almost buy the argument that as a one off short term loan this was on offer to solve an immediate cash flow issue. If however, the business was so good and that orders had been secured with listed companies (backed by contracts detailing large amounts owing), my view was that a reputable business should be able to get terms from a bank (using the contracts as security) that are a small fraction of what was on offer.

I thought to myself if I was to invest in this business like a typical long term investor would invest in say a listed company over a 5 to 10 year time scale, what return would this yield? I got out a compound interest calculator and started playing with some numbers. I took the view of someone investing $10 000 and rolling it 4 times a year and leaving it there for 10 years. This yielded a balance of $14,697,715. Wow! I was told that the minimum investment was $100 000 and that numerous high profile wealthy people had allegedly invested large sums, some in excess of $10m. Now I knew that either I was the subject of a candid camera joke, or, I believed, many people were about to lose a lot of money. Plugging $10M into the same calculator yielded a return of over 14 Billion. But wait there's more. I was told that those that committed higher amounts reportedly got even higher interest either through being able to roll it over more times PA eg every 2 months for a total of 120% PA or higher nominal interest rates. Back to the calculator and the "smart" investors that put in $10 million would each be worth half a trillion dollars in 10 years! There is no-one in the world that had that kind of money. Bill Gates and Warren Buffet have around 50 Billion after a lifetime of being the world's most successful entrepreneur and investor respectively. OK so I hear you say, well this is only if these returns continue over 10 years and clearly they won't. Fine. My initial calculations were to get a sense of the promised returns and whether they were at all plausible. Let's take a 5 year horizon. Our $10 000 over 5 years grows to $383 376. Putting $26 000 in would make me a millionaire in 5 years. What an easy way to become a millionaire. Still too long. OK how about those big investors that invest $10 000 000 for 2 years. They walk away with nearly $90 000 000.

I have been in business for over 25 years and invested in many companies and been involved with clients and their many businesses for many years and have never seen a business that could generate a $90 000 000 excess profit in 2 years to cover finance costs like that. (And that was only for 1 investor - what about the rest). This was not even a "major" business. It was a small player supposedly supplying the large listed companies by buying chemicals from other foreign suppliers. Whilst markets are not always that efficient, it beggars belief to think that a small business could buy and sell goods at the required volume with mark ups so high as to sustain those financing costs not to mention all the other costs of purchasing, securely transporting, importing, wharehousing, taxes etc. If there was such a mark up, the smart guys at the listed pharma componies would simply buy direct, even if the supplier charged a higher rate than it charged this middle man.

I concluded that in my view, there was only one way these kind of returns could appear to be real and that was if they were indeed an illusion. I felt it was simply too good to be true. I didn't need to do any further analysis. In my view it was simply impossible to sustain this.

If however I were given the opportunity to invest (which I wasn't), and I did want to investigate it further and was considering puttin in significant cash, the first thing I would have done is asked for proof of the contracts. If these were not supplied, I would decline to invest. If they were supplied, I would contact the relevant companies to verify their authenticity. If the companies declined to talk to me as they likely would, I would ask the scheme managers to give permission to the company to talk directly to me under an NDA. If they refused, I would walk away. If they gave permission I would be in contact with them and only accept the docs as authentic if I received a signed confirmation directly from the a representative of the company that is in a position to verify the docs. Of course it would never have got that far if the scheme was not legitimate because the scheme managers would never let me talk to the company if the docs were fraudulent.

At the time, I felt that my acquaintance didn't have the correct story or if he did, there was something questionable about the scheme and I gave it no further thought other than to keep an eye on the news to see if this business ever made the news.

WHen the story broke last week, I was shocked. Not that the scheme allegedly is fraudulent, but of the calibre of the investors. I can understand the average man in the street being convinced to put money into these kind of ventures, but for some of SA's top business people to have done so left me kind of numb. I have no doubt that these are smart people. Unlike the Madoff scheme whereby returns were high but still only around 10% PA and many investors in his scheme did so through the pooled "respectable" feeder funds etc with proper prospectuses etc, this scheme had allegedly offered what is claimed to be between 80 and 200% returns and the money was given directly to the scheme with what seems very little paperwork. If anyone was truly offered 200% then $100 000 invested over 10 years compounded 4 times PA yields 1 Trillion plus. $10m becomes $256m in 2 years. Come on!

In particular there has been a report that investors were required to sign an NDA with the company which in itself is not surprising, however it allegedly contained a clause that stated that if the investor breaches the contract, the company doesn't pay any interest (fair enough) but also retains 50% of the capital! If true, the person ultimately doing the company the favour of loaning it money (granted for fantastic returns) stands to lose 50% of their capital if a confidentiality clause is proven to be breached!. This to me is a remarkable clause. I have never seen a clause like this in an NDA. Normally the NDA would set out remedies that would require the party that breached the NDA, to pay damages as determined by a court. Whilst a clause like this may not have held up in court it is amazing that these high profile business people signed this document if indeed they did. Proving a leak is often very difficult but if somehow the company (even if it is untrue)convinces a court that an investor leaked the info, the investor has already agreed to forfeit half his capital.

The question then is why did these people hand over their money? Greed is often cited in these kind of cases when they don't work out and rich people are involved. This may well be the case however I don't believe it is always that simple. If they had made lots of money they would have been cited as "astute" investors. Articles would be written on their achievements and these deals would be written in glowing terms. THose that didn't invest would lament the wasted opportunity and be upset with themselves for not believing and taking the risk. Everyone wants easy ways to increase their finances. Is it greed to put some of your retirement money in shares because returns in the bank are too low? Is it greed to borrow money to purchase a better house than you can pay cash for? Greed or the want to better yourself and your families fortunes or really in some sense in the eye of the beholder. Those that are held up as successful, typically worked very hard, were smart and took risks THAT PAID OFF. They usually weren't considered as greedy when they made their money as they are considered now when they try and increase it. Maybe therein lies the distinction? Because they have so much already we think they are greedy for trying to get more. Maybe they are but in their quest for more they often create jobs, give more to charities, pay more taxes help friends with businesses etc so it is not necessarily so bad if they aspire to make more. Also as has been shown money can be lost in a heartbeat in the markets, in a business or indeed in a ponzi scheme. Trying to maximise wealth I don't believe makes you a bad or greedy person. It depends what you do with it re charities etc.

Many people take the view "so what" they can afford it and it serves them right for being so greedy. There were those who could not afford it that will lose everything and those that do lose it are the entrepreneurs that could otherwise have invested in legitimate enterprises that employ people and generate wealth. Having less, they will now be more cautious and invest less both because they have less and secondly because they want to preserve the rest of their wealth. This is bad for everyone.

I suspect that the power of the recommendation and the calibre of the "other investors" as well as the apparently personable nature of the perpertrators and the fact that many were in the same community lulled investors into letting down their guard.

As to the alleged perpertrators, if this is a fraud, it may well not have started out that way but possibly a small real business had some cash flow problems that started with a loan from a friend that couldn't be paid back. As such more could have been borrowed rather than admit the failure and soon there was no turning back.

It will be interesting to see how this plays out as Tannenbaum and the others allegedly involved all continue to maintain that they are innocent and continue to live in expensive homes driving expensive cars etc. If so, where is the missing money? Tannenbaum's house cost around $1.6m about 2.5 years ago so whilst expensive, is a drop in the ocean compared to the allegations of $2 billion missing. I expect the $2B quoted number includes compounded interest that never really existed so the real capital lost would be significantly less. Of course those that believed they had that balance and live a lifestyle based on it will very much feel the loss almost as strongly as the capital they put in.

If they are guilty, they should be stripped of all assets and face criminal consequences. The sad part that those investors that have been destroyed as well as the innocent children of the perpertrators will find it very difficult to recover from this.

Kevin Rudd - "Scouts Honour

In the Channel 9 Sunday program - he claims (under “scouts honour") that he and his wife doorknocked 32 000 houses in 6 months! That equates to around 178 houses a day every day for 6 months!. Even assuming a generously long day of 14 hours (whereby he would be doorknocking from 8 am till 10 pm), he would have doorknocked on 12 houses per hour. That is one every 5 minutes every day 7 days a week for 6 months! Come on - this is his statement under “scouts honour”. See the interview at Rudd interview on Sunday program around 3 minutes to 4 minutes in the video.

Sydney Morning Herald deliberate misquote

Why does the Sydney Morning Herald feel it is their responsibility to "translate" an English quote into English? Worse still, why do they then, after changing the quote, still quote it as if it is the exact quote the person made? An example is the Sydney Morning Herald's changing of a quote from "Now you stab mommy" to "Now you stab mum". 'Now you stab mum', husband tells toddler. To change a quote in this manner is inexcusable. Does the SMH really think that the word "mommy" would not be understood by their readers in Australia? If so that is extremely patronising. All the rest of the world's media kept the quote intact. 'Now you stab mommy', husband tells toddler Does the SMH think that changing the word "mommy" to "mum" would evoke more outrage? If they absolutely have to explain a quote, they can do so in the copy still keep the quote intact as follows: "Now you stab mommy" - American kids call their mother Mom or Mommy, while Australian kids call their mother mum or mummy. The headline has the modified quote while in the copy the modified quote is also used but the word mum has parentheses around it which the SMH must feel legitimises the false quote and makes it OK. It doesn't.

The real concern here is not this specific instance, but if they are willing to change a quote such as this, what other quotes are they willing to change to suit their view of a story?

Global Warming whitewash

It has become so politically incorrect to whisper that man may not be responsible for the warming of the planet that one has to do so in private and only to those willing to listen with an open mind. How can it be that we won't suffer cataclysmic events down the track as a result of our inaction when "everyone" agrees that this is what will occur?

Australia's channel ten have absolutely taken this to a new sickening level in their Cool Aid show about global warming. Instead of taking the opportunity to examine the issues, they instead took the position of a condescending superior who "knows everything" and unless you listen to them "we will all suffer". Let's look at just a few of the items discussed.

1. They claim that eating red meat is bad for the environment and we should all eat more vegetables. This is an absurd argument. I don't dispute that the consumption of red meat contributes to carbon emissions but to claim these effects are less than those of vegetables are disingenuous. If there was a large swing to vegetables from meat, where would these vegetables come from? Vegetables need land to grow on - more arable farm land - less trees to absorb CO2. Vegetables need huge amounts of water for irrigation. In drought stricken Australia where is this water going to come from? Diverting rivers into dams for irrigation has huge impacts on the environment. If the farmers cannot irrigate, they cannot grow food and Australia will have to import more food. Ah but according to the program, importing food is bad for the planet. Vegetables also need pesticides to ensure high yielding crops. Pesticides are not great for the environment either and lead to other environmental problems. Of course we can farm without pesticides and have a fraction of the yield at a much higher cost. etc etc etc. The food system and its relationship to the environment is complex and all the above plus more need to be factored in and it may well be that vegetables (when all the requirements to produce them is accounted for) have a higher carbon footprint then meat. This was not considered at all on the program.

2 Replacing incandescent lightbulbs with fluorescent light bulbs. Scratch the surface and go beyond the feelgood "easy to do" view and look at what this really means. We are being asked to throw away hundreds of millions of WORKING light bulbs into land fills and stimulate production of hundreds of millions of new bulbs so we can save energy! Individual bulbs may save energy and if existing bulbs are replaced as and when they no longer work it is one thing but to have a wholesale discarding of working lights is extremely costly to the environment. The factories producing these bulbs will chew through a huge amount of power. In addition, how are these new bulbs disposed of when they no longer work? What is their impact on the environment? Where is the toxic mercury that these lights use going to be stored when they no longer work? Where does the argon or neon gas that is used in the lights produced - the cost to produce these gases is higher than that used to produce a vacuum in an old style light? All of this must be taken into account before simply telling everyone to change their bulbs.

3 A hydrogen car was shown as the future of cars. While that may be true and they may be much cleaner when on the road, there was no mention of where the hydrogen gas will be produced and how it will be transported for use in cars. From CNET FAQ: Guide to alternative fuels

"Although the car doesn't belch pollution, making hydrogen typically produces large amounts of carbon dioxide at the factory. To make hydrogen, most producers combine methane with water and heat up the mix to 815 degrees Celsius, which produces 9.3 kilograms of carbon dioxide for every kilogram of hydrogen. Hydrogen is also expensive to make, store and transport. You can't send it down regular pipelines. Then there is that problem of building hydrogen filling stations.
Competitors aren't scared.
"Hydrogen is hopeless," said Martin Eberhard, CEO of Tesla."

Also it is unlikely that the water being drunk by the presenter really was emitted by the car. These cars typically emit water vapour that would have needed to be collected and cooled. It is more likely that was a glass of tap water.

4 Air travel was highlighted as one of the worst producers of Carbon and simplistic statements were made telling people to cut back on air travel as much as possible. For the most part people don't travel on planes for the journey - they do so because it is the quickest and sometimes the only way to get to the destination they need to be at. Not flying would for the vast majority, not stop them travelling but instead make them use other transport - predominantly cars for local travel. Consider that one 747 one hour flight would be replaced by about 200 cars on the road for around 10 hours. This means more fuel for the cars, more wear and tear on the cars and roads more production of cars and roads etc... Then factor in the loss of productivity resulting in lower GDP, lower income less disposable income - less able to purchase more expensive "green" energy etc. Then there is the hypocrisy of the program itself - flying reporters overseas to see a hydrogen car or to interview Al Gore. Why not interview him via satellite? Al Gore the environmental evangelist that has 3 houses and energy bills of over $30 000 per year. Oh wait he's OK - he buys carbon credits!

I could go on discussing just about every one of their points. My issue is not that the options they say we should take are necessarily bad - saving energy and being more efficient is good for a multitude of reasons including saving money - but they should be honest in the analysis and understand that there is no such thing as a free lunch. Changing from one method to another usually has consequences somewhere else down the line that often negates the initial benefit.

Worst of all however, they treated the entire program as if there was absolutely no doubt as to cause and effect and the ultimate consequences. This is the most dishonest claim of all. There are numerous prominent scientists that disagree with the theory. There are multitudes of opposing theories, but these are not the politically correct ones and so don't get the funding and recognition that the prevailing one gets. Just because "most scientists" say something, doesn't mean it is true. At a point in history, most scientists thought the earth was the centre of the universe. Before Einstein, "most scientists" believed that time was not relative and that Newtonian mechanics were 100% accurate. There are theories that the sun has increased its output and is causing the warming, (there is even evidence that temps on mars have been rising), there are theories that increased cloud cover as a result of solar radiation has caused the warming. There are theories that the instability of the earth's orbit has contributed to the warming. Then of course there is the extent of the warming itself that is glossed over. 0.7 of a degree over a century - most of which occurred in the first half of the century. The earth then cooled for 30 years to the point where environmentalists were claiming we were headed for another ice age. Then warming again till the mid nineties and then largely flat since then. The theory of cause and effect is in doubt too. Does carbon cause warming or does warming cause carbon? Natural cycles have occurred since the creation of the earth resulting in ice ages and thaws that had nothing to do with humans.

Another point the program failed to make is that carbon makes up a tiny percent of the greenhouse gases. The major greenhouse gas is water vapour! Uh oh what about those hydrogen cars? The illustrations of what would happen to "your city" when the seas rise was alarmist nonsense. Even the worst predictions show sea levels rising about 60cm over a century. Not 10's of metres as shown in the program.

Where is the balance and honesty in the media?

Orphanage Bombed - 61 schoolgirls killed!

Where is the outrage - why is the Guardian and the Independant not running full pages asking for the killing to stop? Over 800 people have died in the last week.

The reason this is not getting the coverage is because it can not be blamed on Israel. This was Sri Lanka. Consequently there is no UN resolutions, no demands for cease fires, no graphic pictures of bodies being shown day and night on the MSM networks. Why are the human rights groups not calling for investigations and labelling it a war crime?

The answer is that the world MSM media is totally morally corrupt. If Israel kills a civillian human shield by accident while defending itself, the venomous anti Israel rhetoric appears instantly.

This single Sri Lankan attack killed more children than any single Israeli attack killed people in the current Lebanese conflict. The Sri Lankan government reported that the orphanage was in fact a training and transit camp for the LTE's cadres. My point is not that this was justified or unjustified as I don't know enough about it, but rather that the MSM coverage is completely different to the coverage that Israel has received.

http://www.hindustantimes.com/news/181_1769247,001302310000.htm

Further to this point, there is currently a genocide occuring in Sudan where hundreds of thousands have been killed over the last year. Where is the MSM, where is the outrage, where are the UN committees and resolutions? If this carnage got a fraction of the coverage that Israel got, Nato would be pressurised into doing something. The media simply doesn't care.

The Massacre that wasn't - Once again

In the tradition of Jenin, Iraq and Qana comes another highly inflamatory claim of a massacre by none other than the Lebanese Prime Minister Fuad Siniora. Yesterday he shouted to the world that the Israeli's had massacred 40 civillians in the city of Houla. Once again the world media jumped at the chance to scream massacre without waiting for the facts or even the most rudimentary confirmation.

"An hour ago, a horrific massacre took place in Houla village as a result of the intentional Israeli bombardment that resulted in more than 40 martyrs," Siniora told an Arab foreign ministers meeting in Beirut.

This was carried by reuters, the Washington Post, the Daily Telegraph, CNN, BBC etc

When it was blatently clear that there was only a single person killed, he retracted his statement to say:
“The massacre in Houla, it turned out that there was one person killed,” Mr Siniora said.
“They thought that the whole building smashed on the heads of about 40 people … thank God they have been saved.”

Of course there is no detail of how they were "saved" nor is anyone asking where are the "saved" people and how were they "saved." Where are the reporters on the ground, the ambulances etc? In the lack of the evidence of them being saved we can only assume they were never there to start with.

Nevertheless Sionara has achieved his goal and the damage is done. People remember the claim not the footnote retraction that half the media don't even bother to print.

If the supposedly moderate democratic PM of Lebanon who just wants peace can make such an outrageous claim without any evidence, how can any numbers of casualties being touted in Lebanon be believed?

Mostly civilians - says who?

The mainstream media have accepted as fact without question that most of the dead in Lebanon are civilians. On what do they base this? Since they do not/can not count the dead themselves they have to rely on Lebanese sources as well as anti Israel organizations such as Human Rights Watch. What defines a civilian? There are numerous definitions but typically it is "a person who is not a member of a military" or from Wikepedia "In times of armed conflict a civilian is any person who is not a combatant." A combatant is defined by Wikepedia "as a person who takes a direct part in the hostilities of an armed conflict who upon capture qualifies for prisoner of war under the Third Geneva Convention (GCIII). "

In this conflict Hezbollah dresses in civilian clothing and attacks from within civilian areas. Does that make someone who stores and hides rockets for Hezbollah a civilian or a combatant? I would argue that they are a combatant. When that person, be they a grandmother or a 12 year old, is killed there is no doubt that the Lebanese doctors et al would describe them as civilian.

What is interesting is that despite the above "grey area" the media simply repeat the Lebanese line as fact without verification and without mentioning Israel's count. Despite this, Israel has stated that 400 Hezbollah fighters have been killed. Note this is not even taking into account the "grey area" of "granny rocket hiders", only actual fighters - typically males in their twenties that were killed in actual conflict ie bearing arms. We know this as Israel is making the names public by reading them on air in Arabic, and so it is a far more reliable source of numbers than what the Lebanese are claiming without any proof. The Australian newspaper reports "Israel has begun to broadcast in Arabic the names of about 400 Hezbollah fighters it claims to have killed, presumably obtained from identity tags." http://www.theaustralian.news.com.au/story/0,20867,20041082-601,00.html

Leaving aside the "grey area" civilians which are highly likely not to be in a list broadcast by Israel, this means that of the 700 or so casualties that eg CNN is reporting more than half are militants not civilians. The phrase therefore "most of them civilians" is untrue.

Every media outlet just assumes that most are civilians and accept it as fact. History has shown that the Arab nations and spokesman have consistently blatantly lied about casualty numbers and Israeli early figures are far closer to the mark. Remember the "thousands massacred at Jenin" which turned out to be "23 Israeli soldiers and 52 Palestinians, 22 of whom were unarmed civilians, the rest being Palestinian militants. This was generally the figures agreed to by numerous investigations including the UN, HRW and Amnesty. All the while Israel denied the claims of a massacre but the mainstream media were clamoring over themselves to print the Palestinian claims.

Who can forget "Comical Ali" the media propagandist from Iraq that was claiming huge US casualties while Baghdad was falling?

More recently of course is the Qana incident in which the media quickly accepted Lebanese claims as fact that 56 were killed and still print that figure despite even the Lebanese Red Cross and others confirming that there were half that killed.

Examples of the biased media relating to accepting the Lebanese numbers as fact are everywhere: CNN
"So far the conflict has killed 92 people in Israel, including 35 civilians; in Lebanon, security forces put the death toll at 716, most of them civilians."
http://edition.cnn.com/2006/WORLD/meast/08/07/mideast.main/index.html


BBC have found 200 more than CNN!
"More than 900 Lebanese, most of them civilians have been killed in the conflict, the Lebanese government says. More than 80 Israelis, most of them soldiers, have also been killed."
http://news.bbc.co.uk/2/hi/middle_east/5251370.stm

How can Reuters be trusted with their reports when they have admitted that photos that they have published have been doctored?

Furthermore it should be noted that while Hezbollah is a militia that comprises of professional soldiers (there is no "draft"), Israel's army is made up of civilian conscripts the vast majority are reservists that by law are required to become soldiers when called upon to defend the country. One could almost argue that most Israeli army casualties are more "civilian" than Hezbolla's civilian dressed fighters.