July 25, 2017

Investment scams

I did my articles more than 30 years ago. One of the cases my principal was involved in involved an illegal investment scheme by a Pretoria Attorney, Albert Vermaas. In those days, in order to attract investment, the South African government has implemented a dual currency system. There was the financial Rand for private purposes and the commercial Rand for foreign investors, which had double the value.

Vermaas’s scheme involved “round tripping” – taking money out of the country via the financial Rand and bringing it back via the commercial Rand (or vice versa, I forgot the details). The point is that the same money came back into the country at double the value at which it went out.

Vermaas set up an investment scheme to fuel this vehicle, offering returns of 40%. Despite the fact that there was an element of underlying value add via the round-tripping, the investment scheme was basically a Ponzi scheme, where the returns of initial investors are funded by the contributions of later investors. The scheme eventually collapses when it runs out of new investors – those who got in and out early cream it, whilst the poor suckers who came into the game late lose their shirt. High profile people, including attorneys and other professionals, were caught up in Vermaas’s scheme. When the scheme eventually collapsed, many people lost their life savings and Vermaas went to jail.

That was the first big scam I was exposed to. At the time, though, Ponzi schemes were nothing new.  The concept was in Charles Dickens’ 1844 novel Martin Chuzzlewit and in his 1857 novel Little Dorrit. In the 1920s, the idea was famously put into practice by Charles Ponzi, who gave the scheme its name.

Over the years there have been many variations on the theme, but the basic premise is the same. Some people have cleverly disguised it by linking some form of product to it (if you are old enough you might remember the Kubus Scheme), but the end result is always the same.

One can perhaps excuse those caught out in the early 80s for not knowing better. South Africa was pretty isolated and the flow of information was via newspapers, radio and the limited television service of the day.

I find it intriguing that in today’s Information Age people are still caught out by these get rich quick schemes. Only last week I was consulted by a client who had lost R400,000 in a Ponzi scheme – and he was introduced to the investment club by his church!

Apart from Ponzi schemes, there are many scams going around. There are the 419 schemes that have tainted the reputations of anyone from Nigeria, the ‘I have discovered an inheritance due to someone with the same name as you’ schemes, the ‘I am a prince who needs money to get millions out of (enter war torn country’s name here) – pay me the money I need and I will give you half’ scheme, etc.

Some are quite sophisticated and elaborate, targeting specific professions. Someone recently tried to hook me with the fake sapphire scam, using the promise of conveyancing business as bait.

What all of these scams have in common is a disproportionate return on investment.  It seems that human nature is such that many otherwise intelligent and savvy people are blinded to reason and common sense when they are promised a whack of money that they don’t have to sweat for.

Financial and investment services, gambling and the lotto are all regulated and for good reason.   If you are going to give money to a total stranger who has an investment scheme that is outside these regulated systems, there is a good chance you won’t see it again.

If it sounds too good to be true, it probably is.

Author: Robin Twaddle

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