Ponzi scheme involving more than R3 billion bankrupts entire families, affects over 2000 people

Earlier this month, an investment manager handed himself in at the Sandton police station, admitting to having run a large Ponzi scheme. As details came to light, the scheme seemed like a script worthy of infamous Wall Street scamster Bernie Madoff.

Craig Warriner, who is currently in a Johannesburg prison, was a trustee of the BHI Trust, which invested funds on behalf of individuals. He managed the funds and claimed to have a trading strategy that delivered consistently high returns, irrespective of market conditions.

While the full extent of the fraud has yet to be revealed and the figures verified, investors who are conducting their own investigations told City Press they believed it involved more than 2 000 clients and amounts of more than R3 billion.

Many of these investors had placed their life’s savings in Warriner’s BHI Trust, including pensioners who rely on the fund for an income. Entire families have now lost their savings, after high-profile financial advisers placed significant amounts of their money into the scheme.

As one investor told City Press “This has punched the guts out of many families.”

Working from court records and interviews with investors, this is what we know so far:

Placed under sequestration

During a court appearance by Warriner, which was documented by Cawood Attorneys, which placed the trust under sequestration this week, he confessed that he had been running the BHI Trust in an irresponsible manner and “using the funds of Peter to pay Paul”. Cawood Attorneys was awarded an interim order to have BHI Trust placed under sequestration this week.

Warriner has chosen to represent himself, has not applied for bail, has pleaded guilty and has asked to be kept in a single prison cell, for fear of being recognised and attacked or killed.

The document of Cawood Attorneys reads:

He claimed that he suffered significant losses on investments with trust funds during the 2008 recession. Rather than inform his clients, he tried to trade the available funds of the trust in such a manner as to trade it back into a position of liquidity. In the process, he incurred further substantial losses. He now believes that the trust will not be able to recover from those losses.

It appears that Warriner voluntarily handed himself in after his partner Christian Ashcroft reported him to the police.

Investors said they had been informed that Ashcroft, the second trustee of the BHI Trust, had tried to make a withdrawal from his fund at the end of September and this withdrawal had been refused by Warriner. Ashcroft, who had invested his entire inheritance with the BHI Trust, had then become suspicious of Warriner and told the police of his concerns.

He is being represented by Gottschalk Attorneys and will be making a statement in due course.

Good money, short notice

Investors told City Press that they had been enticed not only by the good returns promised by the scheme, but by the advantage of having their money always available, with just 24 hours’ notice. One client told City Press that he had withdrawn hundreds of thousands of rands – or even a million – at a time, and the money had always been in his bank account the next day.

However, in early October, clients were informed that they had to provide notice before October 20 if they wished their funds to be available at the end of the month.

This suggested that Warriner’s scheme was under cash flow pressure. Although he allegedly ran investment funds for 29 years, the clients who spoke to City Press had all invested after 2009.

In light of his court statement, it appears that he may have embarked on a more aggressive acquisition strategy after 2009 to acquire more clients and fund the payouts.

It seems that Warriner used financial advisers who were influential in high network environments and had access to individuals with large amounts to invest. These advisers were part of his “inner circle” and earned excellent commissions. Many considered Warriner to be a friend and did not ask questions about his financial strategy.

Lavish Lifestyle

Warriner belonged to the Old Boys Association at St Stithians and donated a large amount of money to the school for a sports building. Some investors have described him as reclusive, while others said he drove expensive cars, bought expensive liquor and would sometimes fly to Paris, France, for a weekend. Still others said he was an enigmatic person whose lifestyle was private.

The investment scheme had no website and was only marketed through word of mouth, usually to friends and family. Like the Madoff scam, it was sold as an investment for select “insiders”. The returns were not suspiciously high, but constantly delivered between 13% and 14% per annum, even when markets were negative.

Attracted by these returns, investors placed millions into the fund. In some cases, investments came from entrepreneurs who had sold their businesses. Many were older individuals who had placed their entire retirement nest eggs in the fund.

Others sold their homes, believing that their money was better invested with BHI Trust, and used the income they received from the scheme to rent a place to live.

All of them appear to have lost their life’s savings. An investor said:

I should have diversified. It was greed. I would see my statement, telling me I was up R200 000, and I was happy. I could also get my money out in 24 hours.

Another told City Press that he did sometimes wonder how the returns were possible, “but when half the neighbourhood’s invested and everyone’s talking about it, it affirms your decision. Besides, my financial adviser was putting all his clients’ money into the scheme, as well as his own, so I thought it must be legitimate.”

Role of financial advisers

The role of the financial advisers is being questioned by clients and will no doubt be investigated by the Financial Sector Conduct Authority (FSCA).

Financial services company 1Finplan, which was party to the application to sequestrate the BHI Trust, had more than 200 clients invested with the scheme, according to court documents. In response to a query, co-owner Riaan Lessing says they are unable to disclose the value of the investments as that remains confidential information. The firm is assisting in the urgent court application.

The name of Michael Haldane from financial services firm Global & Local came up frequently in interviews with investors. The son of one victim said Haldane had persuaded his mother to invest her retirement fund in the trust, which she has now lost.

I know the idea was proposed to her by Global & Local and they appear to have punted it quite hard to their base of clients, but failed to carry out the fiduciary responsibilities that were surely required. How could they have sold this as a strategy to people seeking to secure their retirement?

At the time of going to press, Haldane had not responded to City Press’ attempts to contact him. The newspaper is aware of a number of other financial advisers who also placed significant amounts of clients’ assets with the BHI Trust.

It is impossible that these financial advisers, who earned significant commissions from BHI, did due diligence before investing. There were clearly red flags which any seasoned financial adviser dealing with high-net-worth clients would have noticed. Moreover, investing in such a high-risk asset, especially for retirees, would go against best advice and the Financial Advisory and Intermediary Services Act.

High Risk

City Press shared the investment mandate (see sidebar) with a seasoned investment professional who said it was extremely risky.

“The mandate talks about a ‘conservative investment strategy’, but this is anything but conservative. It’s a trading strategy using just eight shares. There’s no diversification, making it very high-risk. There’s enough research to show that nobody can time the market. Even if they were unaware of the fraud, any adviser worth their salt would never place all a client’s money in such a risky investment. At most, they might place between 5% and 10% in it.”

Harry Kalligiannis, the founder of Accolade Financial Planning and the chief financial officer of the SA Independent Financial Advisors’ Association, has a client who invested with BHI Trust against his recommendation. When the client informed him of the returns they were receiving, saying that in the past two years they had only had one negative month, Kalligianis became suspicious.

I asked them to show me a statement. It was just an opening and closing balance and brief mention of shares traded. It didn’t show how the profit was made or which shares had been traded. You’d expect more on a statement.
Kalligianis was convinced that this was a Ponzi scheme and again warned his client.

“I thought it highly suspicious that he never made a loss and the statements didn’t stack up. It makes me angry, because these schemes entice people with mouthwatering returns, so they take money out of legitimate investments to [sink into the schemes],” he said.

The extent to which the authorities and regulators were aware of these activities is unclear. The Financial Sector Conduct Authority will be issuing a statement however, this was not issued at time of going to print.

Whether there are any funds left and what became of all the investors’ money will only be revealed as the investigation into the BHI Trust continues. City Press’ investigations suggest that several companies and entities will be implicated.

The saga is a sad example of financial advisers with fiduciary responsibilities who were happy to make money by ignoring the questions they were legally required to ask, and investors who suppressed their own misgivings as long as the returns kept rolling in.

Ultimately, it was a structure fuelled by greed.