Ruminations on Ponzi schemes and the Warriner affair

Aweh dearly beloved fellow ruminants & groupies

A Ponzi scheme is a deceptive and fraudulent investment scheme that offers high returns with minimal risk to investors. In the past few weeks, another Ponzi scheme has collapsed in South Africa. Craig Warriner, a former chairperson of the St Stithians Old Boys Association, to which I belong, recently appeared in court after voluntarily surrendering to the police. He pleaded guilty to charges of theft and fraud and requested he be imprisoned in a single cell for his own safety.

Warriner had been operating an unregulated entity known as the BHI Trust, which has since been declared bankrupt. The exact number of people involved and how much they invested in the trust remains unknown, but estimates suggest it may be in the region of R3 billion ($158 million). Many individuals invested in the BHI trust based on the recommendations of their registered financial advisors, who appeared more interested in earning a 5% commission than safeguarding their clients’ interests. It is unlawful for financial advisors to endorse unregulated investments, and as a result, numerous people have lost their life and retirement savings. The investors now face considerable suffering and uncertainty as they await news about potential reimbursements, if any. The implicated financial advisors will lose their licenses and businesses, and rightly so.

The media, both in South Africa and globally, often sensationalises scandals associated with what they call elite private schools. St Stithians has educated countless individuals who have gone on to pursue various paths across the world. Both of our very different boys were very well educated at St Stithians College. Although Craig Warriner’s actions do not reflect the values of St Stithians, that does not make for compelling headlines.

While the Warriner Ponzi scheme is much smaller in scale compared to Bernie Madoff’s infamous Ponzi scheme, it followed a similar pattern. It promised dependable, risk-free returns to investors, attracting a growing number of unsuspecting individuals who were influenced by commission-driven financial advisors. Ultimately, the scheme unravelled when it could no longer meet its obligations.

Bernie Madoff was rarely involved with individual investors. He relied on feeder funds to collect money from individual clients and pass it on to him for investment. The fund managers trusted Madoff because of his reputation and the fact that he had been giving steady returns over a long period of time. The same thing happened with Warriner. He delivered consistent returns for many years until he didn’t.

Are Ponzi schemes part of the human condition? Wherever humans go there are rats and Ponzi schemes. Stephen Greenspan, an expert on gullibility, considers gullibility to be a sub-type of foolishness. He defines a foolish act as, “one where someone goes ahead with a socially or physically risky behaviour despite danger signs, or unresolved questions which should have been a source of concern for the actor. He has written a book entitled, “Annals of gullibility: Why do we get duped and how to avoid it”

But even the gullibility expert was fooled by Madoff. He had this to say, “To get around my lack of financial knowledge, and my lazy cognitive style, around finance, I had come up with the heuristic of identifying more financially knowledgeable advisors and trusting their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case”. There you have it. Trust your financial adviser. If respected people believe in the investment, then it must be secure.

What can you do to avoid being duped? Don’t assume that your financial adviser has done due diligence. You must do your own research.

What can you outsource and who can you trust? There are many high-stakes situations each one of us will face at some point. Sometimes there will be very limited time to do the research. In 2020 I needed emergency surgery to reattach a detached retina. I trusted the ophthalmic surgeon and there was no time to research all the surgeons available or even get a second opinion. The surgeon did a great job, but I guess I was also lucky. If I had chosen the wrong surgeon, I would probably now be blind in my right eye.

However, investments don’t have to be rushed. Take your time. I confess to not having a financial advisor. I have listened to many of them and the ones I distrust the most are those who are paid by commission, particularly an undisclosed commission. There are, of course, good financial advisers but how do you know who they are? Even if you choose a good financial advisor how can you be sure that they will not lose their way in the future?

Apart from death and a traumatic accident or illness, I would suggest that one of the more traumatic things you can ever face in your life is the loss of your savings, particularly as you get older and have less time to recover from this setback. Whatever expectations you had for your future life will be gone in an instant. Is there any alternative to avoiding this other than being personally vigilant? That is a question which I will leave to my wiser readers.

I want to express my gratitude for all the ideas and comments received. I genuinely appreciate them, and please continue to share your thoughts.

Regards

Bruce