Caveat Emptor

I have zero sympathy for “victims” of Ponzi schemes.

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Ponzi “Master Mind” David Ross / via Stuff

In 2013, David Ross was jailed for more than 10 years for running a multimillion-dollar ponzi scheme.

Just before Christmas the Inland Revenue Department told investors in the failed scheme to expect only a partial tax refund.

Commerce Minister Paul Goldsmith said the Government was unlikely to change the law allowing investors to claw back money from those who benefited from the scheme.

A spokesperson for the investors Bruce Tichbon said the IRD was arguing some of Ross’ work was legitimate and therefore those aspects were taxable.

Mr Tichbon said for many investors a tax refund was probably all they would get back, and that their treatment was unfair.

Wouldn’t it be great if we could write off all our bad decisions against our tax bill?  I’m sure all those speeding tickets could be expensed for starters.

“We estimate broadly there’s probably $20 million due to come back, and we think we’re probably recovering a third or less than that.

“So it’s really a small proportion that’s coming back, the Government is getting two thirds back in tax on the money that was stolen.”

Ross was sentenced to 10 years and 10 months, with a minimum non-parole period of half that time.

The ponzi scheme he had been running had collapsed, owing investors $115 million, and he had pleaded guilty to charges laid by the SFO and the Financial Markets Authority.

The people who took their “winnings” out of the scheme before it collapsed aren’t being asked to hand their money back, so I don’t see why those who lost in the deal should get a tax break on poor diligence.

To do so would sent a precedent that the NZ tax payer will provide “bad investment insurance”.

No.  No.  And No again.

Why do they call gamblers “investors” when they participated in a  greed induced ponzi scheme?

 

– RNZ

 


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  • RightofSingapore

    Depends whether they know its a Ponzi scheme going into it or whether they’ve been duped into thinking its a proper investment.

    • The Whinging Pom

      I imagine the promised returns should have been enough to suggest to most people that something dodgy was going on.

      As the maxim goes – ‘if it sounds too good to be true it probably is’.

    • Platinum Fox

      I haven’t been following this case, but Mr Tichbon appears to be stating that the amount invested was about $20m while RNZ is reporting that the inflated account ‘balances’ were shown as $115m. If the entire $20m had been invested on day one, to achieve $115m after 10 years would require an annual rate of return of 19% (every year). I’m not aware of any legitimate investment category that can regularly achieve returns at that level.

      • Sais

        There is one investment that has managed it. BRK.A (Berkshire Hathaway – run by Warren Buffett) has averaged 19% annual return to investors for many years. It’s made a billionaire of Mr Buffett. It is the most expensive stock traded on the NYSE but no-one else has come close.

        • peterwn

          Warren is so idiosyncratic that he refuses to split BRK.A shares. One BRK.A share currently costs $US 223,600, so this rules out most investors from buying BRK.A shares.

  • Excitedly awaiting Whodunnit

    If you cant afford to lose it, dont gamble with it.

    • ozbob68

      I would disagree, spread the risk by diversifying. One branch of my relatives all put their inheritance into one brothers business, which also turned out to be a Ponzi scheme (he’s doing time for it as we speak). My parents only committed half of their inheritance, so didn’t get spanked when it all crashed. The others all lost their houses and are working past 65. Be smart, but don’t expect to be psychic.

      • andrew carrot

        In 2008, I recovered 85c/$ for a client who held a large sum of unsecured investments in a well-known franchise-based investment company. The fight was ugly and the franchisor threatened all sorts of harm if he was forced to pay up. A settlement was eventually negotiated and the client was disgusted at the outcome. Two months later the company went bottom up and the vast number of investors lost everything. My client still felt she was entitled to more and got a new lawyer. His advice to her was, not surprisingly, to go home and dwell on the fact that she had lost very little of her retirement savings despite the effort she’d made to achieve otherwise. She considered his advice and promptly got a new lawyer. What did I (and my colleague) learn? Many people of a certain generation are all-knowing and therefore have no regard for the simplest of investment principles. And I’m not referring to Gens X and Y.

  • Pete

    I have “invested” thousands of dollars over the years on lotto, the horses, the casino and the TAB, but the outcome wasn’t what I expected, So I had better commission Mr Tichbon to represent me, and fully expect the IRD to give me a huge refund.

    Technically there is no difference to the case outlined!

    • Wheninrome

      Did you keep your receipts? !!

    • rangitoto

      I too have been sold many dud lotto tickets. Can I complain to the Commerce Commssion?

      • Rick H

        I virtually never buy a lotto ticket.
        I refuse to be one of the 4 million losers every weekend.

        • Damon Mudgway

          You gotta be in to win though.

          I’ve bought 2 Lotto tickets in my life. Received a few as gifts though. May as well have given me a roll of toilet paper.

        • Aucky

          I used to be a regular loser too Rick then the thought crossed my mind that if there was only one winner out of two million tickets (could be four mill by now) my chances of winning were the same as a person sitting in one of forty full stadiums the size of Eden Park and having a laser light shone on me and me alone from a hypothetical satellite.

          Biggest con in history and the lefties call Sky City crooks.

      • caochladh

        You would have more luck with the HRC as you can argue that your expectations were not fulfilled and therefore your rights have been abused…;-)

    • T Mardell

      I understand that professional financial advisors were recommending Ross as a legitimate investment vehicle, and most of the people who lost out were your average investor, relying on professional advice for where to go for the best return. I do not agree with the opinion that the investors were gamblers – naive perhaps, but not reckless.

      What irks me is that word around is that the people who withdrew their money in the dying days were of an inner circle who had been given an indication (nudge nudge wink wink) that time was up.

      The Madoff case in the USA was handled in a completely different way. Firstly, there is no criticism of the investors (victims). Secondly the costs of liquidating the firm were born by an industry backed fund. Thirdly 60% of the investments have been recovered, via claw back, meaning that all investors will recover equally the majority of their funds invested.

      http://www.bloomberg.com/news/2014-11-20/madoff-bankruptcy-costs-top-1-billion-six-years-later.html

      With Ross, the costs of liquidating the firm has been born by the investors, and there has been no claw back, so the funds have been inequally distributed, apparently depending upon “who knew and when”.

      • Gekko

        That’s a long bow to draw – one accountancy practice was named as a referral partner – they are not financial advisers as defined by legislation

      • Steve

        When you were confronted with the “too good to be true” returns then, yes, the investors were gambles and naive mostly. The ones that were more savy got their money out on time

  • Wheninrome

    A lot of the investors were word of mouth investors. “You had to know someone” I have friends and I remember when she told me that they had invested, what the returns were, and how they used it like a bank, just asked for money as they needed it. When I questioned the high rate of return and risk – she didn’t see a problem, because of course “You were invited into the scheme” as she put it, “not every Tom Dick and Harry would be eligible so it must be alright”. I kept clear, shook my head, I might have had my opinion but who at that stage was to say that I would be proved right.

  • Richard

    I’ll keep my savings in my government bonded bank, comparatively low interest rates, but slow and steady wins the race.

    • Cracker1963

      No such Bank in NZ- Even Term Deposits in Kiwi Bank is NOT Government Guaranteed.

      • peterwn

        I think that Kiwibank is ‘politically’ guaranteed for all except the largest private investors – formal guarantee or not.

        • Platinum Fox

          I think not. It will be subject to the OBR regs like all the other deposit taking banks, so a government guarantee only kicks in after it has failed and depositors have taken a haircut and only applies to the remainder of deposits after the haircut.
          Having said that, the likelihood of a bank failure in NZ is very small due to the prudential regulations imposed by RBNZ.

        • Gekko

          Your comment sounds like those investors I heard sounding off about Bridgecorps non existent Lloyds insurance

      • Richard

        Who said anything bout NZ?

  • DrQuack32

    To a degree yes. When you gamble, you know that one outcome is likely a loss so you weigh up the pros and cons. When you invest in something you weigh up the pros and cons of a return and whether you commit to that and if you lose, I think people accept that as part of the risk. Committing into a scheme where you are not expecting to be ripped off is completely different and I do sympathise with those folk. Had it been lost by poor choices in the investment and the returns were not there, then your point is valid.

    • I_See_Crazy_People

      That’s a point – can I claim back my TAB or lotto expenses??

      • DrQuack32

        Did the TAB or Lotto commit a crime and rip you off? If so then yes. If not then no. If you can’t see the difference

  • Damon Mudgway

    Husband and wife bank manager friends believe a simple equation one should ask when considering investing money into something. If the return promised is over 7% the risk steps into the ‘high’ category, unless it’s property that has your name on the right of ownership documents.

    • Cracker1963

      Agree- you have to question Harmoneys statement that you can expect 12% return https://www.harmoney.com/investors this would be only by taking extremely high risk.

  • Dave_1924

    If the returns are spectacular and it’s word of mouth…. its liable to be dodgy. It’s word of mouth to stay below the regulatory line of sight. Having said that the regulations governing investing need to be regularly looked at the stop things like the regular boom bust Finance company stuff that happens every economic cycle. How a Bridge Corp ever was allowed to operate is beyond me when you look at who the principal was.

    Edit spelling

    • In Vino Veritas

      Dave, finance companies of this world will always be around. And they are regulated enough already. They are set up as third (at best a tenuous 2nd) tier lender. So effectively, they are lending to people who cannot raise funds from banks (and become second or third ranking security holders). The people that invest money in these types of investment are being paid for their risk via higher interest rates. And in that, there is nothing different to a Ponzi. However, there is a reason the borrower cannot source from banks, or tier one financiers. They are too risky. If people are mug enough to invest in finance companies at greater risk, then they have to be prepared to lose their shirts. Governments cannot protect people from doing stupid things. That’s what the likes of Clark and Labour tried to do.

      • Dave_1924

        I see your point but my point is these types of companies should be forced to more fully disclose the level of risk in their prospectuses, people like Petrovic shouldn’t be able to run a company and finally finance companies were not rewarding investors for the inherent risk of 2nd, 3rd mortgages and bridging finance. The rates they paid compared to what they lent out at demonstrate that.

        But agreed if your fool enough to stick all you money in then don’t complain when it all goes wrong

        • In Vino Veritas

          They are forced to fully disclose Dave. The risk is there for all to see. And they do and were rewarding investors for the inherent risk. Maybe not enough, but that’s for the investor to decide. If the finance company cannot get investors, then their interest rates increase and their margins decrease. Investors piled in, so margins increased. Supply and demand.
          The big problem was always the “financial advisors”. They were the players that the investors trusted to put their money in places that matched risk profile. And often they didn’t. Because they were getting trail commissions, one off jollies and other stuff. For instance, Hanover used to send big groups to say, the Wellington Sevens and Bledisloe Cup matches in Sydney amongst other things. And these were considered marketing expenses.

          • Dave_1924

            Again I see your point but i don’t believe the average prospectus discloses risk at all well, to your average punter. And it should.

            Part of it should be a clear disclosure of the risk margin charged in the on lending of the raised funds by Finance companies, as well as loss rates with a sensitivity analysis of loss rates against economic scenarios i.e as now, down turn, severe downturn.

            To a savvy investor its probably not required, but it should be there so your average punter understands that Fiance companies are in a tough and risky business.

  • Bazza63

    I think that the tax refund that some investors want relates to the tax that they paid to IRD on what is now been determined to be fictional earnings. If this is correct I believe that they should get that tax back.

    • Russell Bell

      Yes they should get a tax refund because they were taxed on un-realised gains, income which eventually proved to be illusory. Sure they took a punt on a very risky investment and should have looked at that gift horse’s teeth a lot closer but that’s not the point.

      It’s like if you’re a business and you do a job for someone on credit so you expect to be paid later. The income is taxable naturally and you pay the tax even though you haven’t received the money for the job. If the customer lets you down and never pays you’ll eventually write-off the debt and you can and should claim a tax credit. The credit is for the same reason as in this case, you paid tax on income that turned out to be illusory.

  • Teletubby

    I have no sympathy for fools who failed to follow the two most important rules of investment. Spread your risk and if it looks too good to be true it most probably is not true. However, the story is not clear about the grounds for the refund, if they are looking for a refund because they have paid income tax based upon statements of return that were actually falsified then they should have a case as those returns were not actually earned. But if they are looking for a tax credit on the loss of their capital then they can go jump.

  • Tom

    I admire the guy. I wish I had enough skill sets to get 115 million out of people.

  • peterwn

    Bridgecorp investors were generally unable to claim their losses for tax purposes.

    • caochladh

      Interestingly, I had advice from our financial colleague some 18 months before Rod’s empire collapsed. Apparently it was common knowledge within the financial world that what was going on inside Bridgecorp with the Book was fatal. Whilst we did not have money tied up with Bridgecorp (simply because I didn’t like the man) we knew several acquaintances that had substantial sums with BC. They wouldn’t believe it and ultimately took a bath.

      • peterwn

        Fortunately I only had a shallow shub of Bridgecorp. I managed half of our savings personally, and half via a financial adviser this appearing to be more prudent than managing the whole lot. Following that and another fund implosion (which the adviser previously recommended), with the agreement of the family, I took great delight in giving the adviser the boot and in due course liquidated all his recommended investments.

        Apparently Mr Bridgecorp threatened MSM with injunctions and defamation suits if they dared write anything adverse about Bridgecorp and the editors were too spineless to step out of line.

        • I_See_Crazy_People

          I had nothing in Bridgecorp. I’d listened to the salesmen and read the prospectus – and knew it was a fraud. Only the greedy fell for this, serves them right.

  • Second time around

    Unless Mr Ross hid all the money in his mattress, he will have had earnings that were taxable to the investors, the money they now feel IRD should return. However they chose to let Ross retain those earnings, a choice that was not imposed on them by the IRD. There is probably legal recourse against those who got paid out early, at least from when RAM became insolvent, but that’s got nothing to do with the government.

  • I_See_Crazy_People

    I’m all in favour of stupidity tax.

  • BrutusIscariot

    Simple greed and incompetence. RAM investors chased the good returns being advertised and didn’t do their homework or spread their risk. The moral of the story is don’t invest in high risk strategies what you can’t afford to lose. Tichbon is a whiner and seems to want to turn NZ contract and securities law on its head to his benefit – consequences be damned!

  • Warren Murray

    This is too harsh. Who is worse, the liar or the fool who believed the lie? And where does such judgement leave the individuals who put their trust in advisors who fell for the lies of the fraudsters?

    The fraudsters have the advantage of knowing the extent of their fraud and the inevitability of being caught. They can arrange things so their assets are protected, putting assets in trust and with members of their family. The investors (victims) have no such protection.

  • Warren Murray

    Bear in mind, Kiwi saver schemes aren’t government guaranteed. Just one example where ordinary people trust an expert that their future will be provided for.

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