Pyramid schemes are in the news again.
They are easy to fall for, with not only desperate pensioners and low-wage earners but also Captains of Industry and many otherwise-savvy investors regularly tricked into “investing” in them. The reason of course is that the con artists behind these schemes are adept at hiding their true nature, coming up like clockwork with ever more creative cover stories to lure the unwary. Very popular are “Ponzi” schemes, where the masterminds behind them promise to do everything for you – all you need do is “invest”, then sit back and reap the profits.
Don’t be a victim!
Workplaces are great hunting grounds for these swindlers, so if you are an employer it is worth warning your staff upfront about how to spot and avoid these schemes. See Sanlam’s Infographic below for some classic warning signs –
Many pyramid schemes rely on their victims putting aside their suspicions in the perennial hope that, even if the scheme is illegal and doomed to eventual collapse, they will be one of the few (roughly 12%) “Early Birds” flying away into the sunset with all the loot whilst the latecomers (the balance of 88%) are left with all the losses.
The reality is that even the “early birds” are at serious risk of losing not only their “profits” but also their original investments.
The reason for this is that a liquidator (“trustee” in the case of a person or a trust) is empowered to recover any monies paid out by a liquidated scheme during the 6 month period prior to liquidation, unless the recipient can prove that the disposition was made “in the ordinary course of business” and “without intention to prefer one creditor above another”. You should take note that this does not mean that the investor is safe if the payment was made more than 6 months prior, it just means that the onus of proof then shifts from the investor to the liquidator.
A recent Supreme Court of Appeal (SCA) case Griffiths v Janse van Rensburg NO (20269/2014)  ZASCA 158 provides a great illustration into how an innocent investor lost R224,000.
The facts of the matter were as follows:-
- A Trust attracted investors to a pyramid scheme by fraudulently promising that the scheme was “viable, lawful, not in contravention of any statutory or regulatory provisions, not a pyramid scheme and that the deposits would be utilised by the Trust to purchase from certain estate agents their rights to commissions which had been earned but not yet paid.”
- The Trust made numerous payments to initial investors however it began to experience problems in bringing in new investors.
- When the scheme eventually collapsed the Trust was sequestrated and the original trustees convicted of criminal offences.
- The trustees in the insolvency sued an investor for return of “undue preferences” totalling R224,000 being made up as follows: –
- A first investment of R100,000 repaid after 3 months with interest of R12,000 (effectively a 42% rate of interest), and
- A second investment of R100,000 repaid after 2 months with interest of R12,000 (effectively a 74% rate of interest)
- As the investor had been paid out less than 6 months before sequestration, the onus was on him to prove his defence that the payments were made “in the ordinary course of business”.
- Unsurprisingly however the SCA held that the payments were clearly – on a factual, objective basis – not made in the ordinary course of business. It did not matter for the SCA that the investor acted innocently (it was accepted that he had no knowledge of the true nature and illegality of the scheme), the Court held that he must repay to the sequestrated Trust both the R24k interest and his original R200k capital, together with interest and legal costs.
That does not however mean that he has lost all of his money for he would still have a concurrent claim against the sequestrated trust for the return of his R200k capital, but statistically that’s likely to be worth little or nothing, especially if most of the investors’ money was siphoned out of the scheme prior to it’s collapse.
The bottom line – take advice!
Take advice before you invest in anything offering suspiciously high returns. If you decide to go ahead anyway, make sure that you can afford the risk of losing it all – because you probably will.
And if after you invest you start picking up inklings of anything irregular or illegal, get legal assistance immediately. Some of the Court’s comments suggest that the investor’s claim would have been a lot stronger had he become aware of the true nature of the scheme and then demanded repayment of his capital, not on the basis that the investments were due for repayment but on the basis that they were illegal and void – an important distinction that might have saved him R200,000.