UPDATE 3-S.Africa fraud worth up to $1.2 billion uncovered

Thu Jun 11, 2009 2:16pm EDT

* At least 200 investors said to be involved

* Purchase orders for AIDS drugs allegedly faked

* Could be South Africa's biggest corporate fraud

* Investors from U.S., Australia, Germany, So. Africa (In paragraphs 17-20, adds detail from Tannenbaum email referring to efforts to secure Och-Ziff funding; adds Och-Ziff denial of dealings)

By Rebecca Harrison

JOHANNESBURG, June 11 (Reuters) - Hundreds of investors have been fleeced of up to 10 billion rand ($1.2 billion) in what could be South Africa's biggest corporate fraud, a private investigator and lawyer representing investors said.

Barry Tannenbaum, a South African businessman living in Australia, was said to have lured investors with the promise of 200 percent annual returns linked to pharmaceutical imports, and forged AIDS drug orders to reassure its funders when money started to dry up.

The scheme is still unraveling, but lawyers and investigators believe hundreds of investors, including top businessmen from South Africa, the United States, Germany and Australia, were involved.

The case looks set to rank as South Africa's biggest corporate fraud and has shocked the country's business community, known for its conservative approach to risk and investment.

Peter Winer, a lawyer representing several investors, said details were still unclear, but likened the fraud to the Ponzi scheme used by New York money manager Bernard Madoff to cheat thousands of investors of $65 billion over more than 20 years.

"It could have started as a legitimate company, but by the end there was nothing there," Winer, head of insolvency and corporate recovery at Werksmans Attorneys, told Reuters.

"There are billions of rands involved and we don't know for sure where the money is," he said.

A Ponzi scheme pays early investors returns out of money collected from later clients. Winer said it appeared as though Tannenbaum's scheme collapsed when investors demanded to be repaid and new funds could not be found.

The South African Reserve Bank said in an email that it had become aware of the issue this week after complaints from investors who were no longer receiving "their exorbitant returns," and would check if exchange control and banking rules had been broken.

FAKE AIDS DRUG ORDERS

Investigator Specialised Services Group, a private law enforcement agency hired by investors to look into Tannenbaum, said he told investors they were funding a pharmaceutical ingredient import business.

Tannenbaum sent Reuters an email saying he would reply to questions about the allegations on Friday. Dean Rees, a lawyer and Tannenbaum associate whom SSG said was also involved, also did not return calls.

Tannenbaum operated through his Frankel International and Frankel Chemical Corp companies, and says in brochures that his father was a founder of South Africa's No. 2 pharmaceuticals firm, Adcock Ingram (AIPJ.J). Adcock said it was his grandfather.

Documents posted on the Internet by SSG include what they say are forged purchase orders from Africa's biggest generic drugmaker, Aspen (APNJ.J), which Tannenbaum allegedly used to show investors that funds were coming soon.

Both Adcock and Aspen confirmed they had bought small amounts of supplies from Frankel, but said the purchase documents, including some involving life-prolonging anti-retroviral AIDS drugs, were fake.

"This was absolutely elaborate and was going on for about four years," SSG spokesman Warren Goldblatt said. "It's like in the case of Madoff: The wheels have just come off."

In April, the money suddenly stopped flowing in, and investors tried to recover their cash. Winer said Tannenbaum's South African estate had been sequestered and authorities were probing the matter.

Among the documents the SSG investigators made public was a March 5 email from Tannenbaum, in which he describes efforts last year to secure an investment from U.S. hedge fund manager Och-Ziff Capital Management Group (OZM.N).

Tannenbaum explains that his firm ramped up business under the expectation that a deal would be struck.

"We did take the business to higher turnover compared to previous years in anticipation of the Och-Ziff deal being concluded by end October last year," Tannenbaum wrote to an associate named James Patterson.

"Early July when we met with Och-Ziff, we all decided it was a fait au complete (sic) and that we must start getting the order and entering new markets in anticipation for Och-Ziff," he wrote. "Possibly we were all too eager and excited."

An Och-Ziff spokesman, in an email statement to Reuters, said the firm never did a transaction with Tannenbaum.

South Africa's Financial Mail said some of South Africa's top businessmen, including former Pick 'n Pay (PIKJ.J) chief Sean Summers, had been duped.

South Africa's Department of Trade and Industry, which is responsible for pyramid schemes, had no immediate comment, but said it would look into the matter. The police could not immediately comment. (Additional reporting by Joe Giannone in New York; Tiisetso Motsoeneng and Gordon Bell; Editing by Rupert Winchester, David Cowell and Lisa Von Ahn)

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