Ponzi schemes are collapsing all around the world because of the severe economic downturn. And it seems that the general public appears to have no sympathy for the victims of the fraud as they really should have known better. But, ponzi schemes (or multi-level pyramid schemes) aren’t only the domain of the exclusive few. Think of the Miracle 2000 scheme a few years back, when Sibusiso Radebe stole R36 million from thousands of unsuspecting impoverished township people.

Locally, Tannenbaum’s Frankel Investment Scheme could be the largest single fraud scheme in South African history and will number among its many victims highly intelligent businessmen and professionals. Tannenbaum is one of the most popular conversation topics around the boardroom tables and trendy power lunch eateries. We gossip as to who got taken and for how much, but mostly we are all curious as to how they pulled it off?

In essence, fraudsters like Madoff are brilliant con artists (read: psychopaths) who knew how to prey on human nature like no other, appealing to the inherent emotional weakness of their investors: greed. The most common technique to overcome the victims hesitation to invest was the ‘veil of exclusivity’. The fraudsters and their co-conspirators generally live an affluent lifestyle by stealing from their friends and neighbours while masquerading as respected members of the community.

Harry Markopolis, who first reported Madoff to the SEC in 2000, describes that Madoff would give them a flattering reason as to why he considered investors to be special, and they would fall for it. Investors who asked too many questions were politely told not to invest. Smart investors would stick to their investment strategy and walk away, whereas greedy investors would fall over themselves to hand Madoff money. Markopolis says that Madoff was brilliant in letting smart investors walk away and not being offended by it. He knew his targets were investors who didn’t ask too many questions.

A senior attorney from a leading South African law firm said in a recent interview on Summit TV that the ‘herd theory’ also plays an important role in that potential investors hear about other well known people going into the scheme so they just go along with it. As the attorney said “It’s psychological - you say to yourself “if they can go in and they find it to be fine how bad can it be?” “.

Well, you just have to ask the investors who lost billions!

For more information in identifying and investigating fraudulent schemes, please contact Ryan or Terence at Horwath Forensics on 011 217 8000.