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Jun 25, 2013

The runaway Ponzi scheme ‘mastermind’ hiding on the Gold Coast

Why is a South African national accused of accruing billions of rand through a Ponzi scheme living in the Queensland suburb of Runaway Bay? South African-Australian journalist Larry Schlesinger examines the case.

In 1972, work begun to turn 182 hectares of tidal Gold Coast wetlands north of the Southport Broadwater Parklands into a canal-lined residential subdivision. Real estate developer Neil McCowan and advertising agent John Garnsey christened the new suburb “Runaway Bay”, promoting the area as a tranquil escape.

Take a stroll along the Runaway Bay marina today with its views of the Surfers Paradise Manhattan-esque skyline and bobbing yachts at berth and you might pass Barry Deon Tannenbaum, now a resident of the palm tree-lined suburb and the alleged operator of South Africa’s biggest Ponzi scheme.

When Tannebaum’s name last appeared in the Australian press more than three years ago he was a resident of Runaway Bay, having fled the South African Jewish enclave of St Ives in Sydney when news of the scheme broke. Wikipedia lists, as Runaway Bay’s only notable resident: “Alleged Ponzi scheme mastermind Barry Tannenbaum”.

In June 2009 The Sydney Morning Herald ran the front-page story: “Exposed: the Sydney man accused of a $1.5 billion scam“. But in the last three years, hardly a word about Tannenbaum has made it into the mainstream Australian media, despite new damning revelations in South Africa.

A failed attempt by the South African trustees of Tannenbaum’s bankrupt estate to take control of his Australian assets in the Queensland Federal Court in August last year also passed without mention, despite the judge noting that “substantial funds sourced from South Africa were transferred to Australian entities controlled by [Tannenbaum] and his wife”. These funds allegedly were stolen from hundreds of investors (some lost all their savings) and squandered by Tannebaum before he fled South Africa.

The moniker “mastermind” (which Tannenbaum denies) is given by none other than the South African Revenue Service in recently leaked documents published on finance website MoneyWeb. The documents reveal he owes nearly $80 million in taxes, interest and penalties as part of undeclared income earned when he allegedly perpetrated one of the biggest corporate frauds in South African history.

According to SARS, Tannenbaum under-declared his income between 2004 and 2009 by 444 million rand ($47 million) and now owes 747 million rand ($79 million) in tax, penalties and interest. By investigating Tannebaum’s 26 bank accounts, SARS discovered inflows of 3.91 billion rand ($415 million), of which 3.05 billion rand ($324 million) was paid out to “investors” and “agents” in the scheme. Over this five-year period Tannenbaum paid tax of just 142,000 rand ($15,000).

The money in these bank accounts is only a fraction of a purported 15 billion rand ($1.5 billion) accrued through an alleged Ponzi scheme that drew in 378 investors in the close-knit South African Jewish community by encouraging them to invest in Frankel International (of which Tannenbaum was the sole trustee), which traded under the name Eurochemicals.

Investors were enticed with offers of very high returns by allegedly forged purchase orders to supply the active ingredients for anti-retroviral drugs (used in the treatment of HIV and AIDS) to drug company Aspen Pharmacare — this in a country with one of the highest HIV infection rates in the world. One purchase order was said to be for 700 million rand ($74 million) — denied outright by Aspen.

Adding credibility to the scheme were two things: firstly, the Tannenbaums were a well-known, wealthy and respected Jewish family in South Africa; secondly, they have a deep connection to the local pharmaceutical industry — Barry Tannenbaum’s grandfather Hyme was the founder of South Africa’s largest over-the-counter pharmaceutical company, Adcock Ingram, now owned by Tiger Brands. The Tannenbaums sold their stake in the business in 1978. Frankel Chemicals was subsequently founded in 1983 as an intermediary in the supply chain of drug compounds.

Between 2004 and 2009, Barry Tannenbaum, as director of Frankel, is said to have engaged the services of a number of high-profile businessmen in South Africa as “agents” — the original investors in the scheme and at the top of the pyramid — to sell the idea to other investors that they could more than double their money by making short-term (eight to 12 weeks) advances for the purpose of enabling the purchase and importation into South Africa of pharmaceutical ingredients.

In a Ponzi scheme the early investors are paid dividends from investments made by later investors, rather than from any actual profit earned by the company. I know of friends in South Africa induced to invest who lost all their savings. The sense of Tannenbaum’s betrayal of their trust remains palpable since the story was broken by South Africa’s Financial Mail in July 2009.

The SARS investigation, which drew in all the major South African government institutions and auditors at KPMG, came to the conclusion that: “Tannenbaum was indeed the mastermind and operator of this illegal multiplication scheme.”

Following the article in the SMH and other Fairfax papers in June 2009 as well as the ABC, Tannenbaum professed his innocence, claiming in a letter to the press that “categorically” he was not “sitting with millions”. “I have not amassed some fortune that I have spirited away, and in due course an audit will bear out this statement, if people are still interested in hearing the truth,” he said before all but disappearing from the public eye. No audit has ever been carried out to clear his name.

In January 2010, the last mention of Barry Tannenbaum in the Australian press appeared when Fairfax ran a story about him fleeing St Ives for Runaway Bay. It was reported soon after an arrest warrant had been issued for Tannenbaum by the South African police. The short piece said he had fled “a stuffy little office above a strip of shops around the corner from his St Ives home” only to “pop up in the Surfers Paradise suburb of Runaway Bay”.

As an Australian resident since mid-2007, Tannenbaum has received the full legal protection of the Australian judiciary system. In August last year, the Queensland division of the Federal Court declined an application by the South African trustees of Tannenbaum’s bankrupt estate to administer and realise any assets he had accrued in Australia. The ruling was made on the basis that South Africa was not the “centre of the debtor’s main interests”, as he had “severed all ties” with the country of his birth.

The Australian court documents confirm what is known in the SARS investigation — that Tannenbaum raised $390 million between 2004 and 2009. Of this vast sum, just 0.05% was on-loaned by Tannenbaum for the purpose of purchasing pharmaceutical ingredients. According to the court documents, 44.8 million rand ($4.78 million) was used by Tannenbaum for personal transactions, “with a substantial portion being spent on gambling”.

He transferred US$31.7 million into an account held by Bartan Group Pty Ltd (Bartan — shortening of “Barry + Tannenbaum”), an Australian incorporated company, with an ANZ bank account, now in liquidation. Of this money, US$14 million was transferred into other entities controlled by Tannenbaum or to persons associated with him. The sole shareholder of Bartan is another Australian incorporated company, Bardeb Nominees Pty Ltd, with shares held solely by Tannenbaum and his wife, Deborah. Bartan was wound up by an order of the Supreme Court of New South Wales on March 9, 2010.

The Federal Court court documents note that a report issued about Bartan’s affairs in April 2010 was “noteworthy for its paucity of information concerning the affairs of that company” but does include assets of $586,523 (made up of $150 in cash with the balance being investments in two other entities) and contingent assets of some $21 million.

During the court case, Tannenbaum claimed he had assets of less than $8000 and just $1700 in the bank while his liabilities where $90,000 on his credit card, an $85,000 loan from “friends” and a $185,000 vehicle finance lease. Judge Logan remarked:

“It may very well be that his decision to quit South Africa was inherently bound up with a desire not in the future to be dealt with under the law of that country in respect of his involvement in the scheme described and a related desire to enjoy the benefits of proceeds repatriated to Australia. It is not necessary in this proceeding conclusively to determine whether or not or to what extent he has enjoyed the proceeds but there is no doubt on the evidence that substantial funds sourced from South Africa were transferred to Australian entities controlled by he and his wife.”

Tannenbaum declined to reveal his Queensland address, claiming he did not have a permanent home, directing the court to a Sydney solicitor. According to SARS, the money Tannenbaum earned was paid into various companies of which Tannenbaum was either a director or member — nine registered in South Africa and five in Australia, including the Bartan Group and Frankel International.

*This article was first published at Larry Schlesinger’s blog Freshly Worded

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4 comments

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4 thoughts on “The runaway Ponzi scheme ‘mastermind’ hiding on the Gold Coast

  1. zut alors

    As it’s Queensland his next obvious step is to start a political party.

  2. Malcolm Street

    $185k vehicle lease. Obviously hard-up… The Gold Coast and Tannenbaum deserve each other!

  3. Adam Larner

    These guys just seem to slip through the system. We had our very own Ponzi King arrested in Adelaide a couple of years ago but the press have just dropped the story.

  4. Edward James

    Well perhaps Crikey public trust journalist can tell Crikey subscribers and Mr Larry Sclesinger a little more about how this is possible? In the mean time what can Crikey readers and reporters tell us about the purchase of “that house” with AWU money? Edward James