Monday, 16 April 2007

The biggest Ponzi ever


This weekend’s Oz contained an article by Bina Brown on MIS schemes in which she disclosed that Great Southern (GTP) in 2005 used some of their own funds to purchase all of the timber from their investors in their 1994 Project. The investors ended up with 3 times the amount they would have received had the contractual arrangements been strictly applied. A face saving exercise perhaps?

This cost GTP $3 million after tax, a small price to pay considering the amount of funds flowing into GTP coffers at the time, all subsidised by the stoic Aussie taxpayers.

But Bina failed to indicate that the problem continued in subsequent years. The GTP 2006 Annual report indicated that a further handout was provided to investors in their 1995 Project. This cost GTP $3.3 million after tax and gave the investors twice the amount they would have otherwise received.

The 2006 Annual Report further indicated that investors in the 1996 project would also be propped up to the tune of $9.6 million (or $6.7 million after tax). This will occur in the 2007 year.

The recent Westpoint and Fincorp episodes have hopefully served as a wake up call to investors. ASIC via their FIDO website keeps punters alert to the various scams and schemes currently on offer.

Punters are told to be wary of Ponzi schemes. These are schemes which are characterised by the use of funds from ‘new’ investors to artificially boost the returns to ‘old’ investors so that the positive feedback leads to more contributions from ‘new’ investors.

Could GTP be running a Ponzi scheme? A quick look at the 2007 Product Disclosure Document (PDS) for the GTP 2007 Project reveals that punters from the 1994, 1995 and1996 Projects (already the recipient of largesse from GTP) will get a 10% discount if they invest in the 2007 project. A classic Ponzi strategy! Make sure you look after the ‘old’ investors so that the feedback is always positive.

A Ponzi scheme can last forever provided there is a continuous supply of ‘new’ money. But as ASIC says “the scheme inevitably collapses once people stop joining”. All the heavy political lobbying designed to maintain the current advantages enjoyed by MIS companies seems now to make sense. If the funds dry up then the Ponzi is finito.

When Charlie Ponzi weaved his magic in Boston in 1920, he allegedly diverted $200 million (in today’s $AUD) for his own benefit. The spoils from today’s MIS schemes are much more.

Could we be witnessing the biggest Ponzi ever?


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