February 27, 2010
By bruce Cameron and Neesa Moodley-Isaacs
The financial services ombud, Charles Pillai, wants all financial products regulated, greater co- ordination between regulators, and the more determined prosecution of people stealing money from investors to stop the ongoing plunder.
And the Association for Savings & Investment SA (Asisa) wants the reach of the Collective Investment Schemes Control Act extended to include all products where investments are pooled in any manner, such as property syndications, to stop consumer exploitation.
Asisa chief executive Leon Campher says that this could put a halt to many of the high-risk and often dishonest schemes.
Pillai, in a determination this week, expresses his frustration at how "retirees who can least afford to gamble with their retirement capital are induced into shady investment schemes peddled by unscrupulous intermediaries".
What he finds alarming is that that these were the very concerns of the Nel Commission of inquiry into the 1990s Masterbond scam and investor protection.
Pillai asks: "Is history doomed to repeat itself and, as such, must we continue to fall prey to the same schemes and scamsters?"
Investors conned in 'worthless' scheme
In the first of what are likely to be many cases against brokers who sold shares worth R74 million to some 2 000 investors in related unlisted companies that later proved to be virtually worthless, Pillai has ordered a KwaZulu-Natal broker to compensate a Pretoria couple for the R40 000 they invested in the scheme.
On Andre van der Merwe's advice, Adolf and Christina Hare invested in unlisted companies Global Africa Resource and Energy Corporation Limited (Garek) and Mwamko Africa Trade Resource Industrial and Commerce Corporation (Matric).
Van der Merwe received R4.5 million in commission for shares he sold to the couple and other investors.
More than R10 million in commission was paid to brokers from Garek and other related companies.
A Department of Trade and Industry (DTI) investigation found the companies had only R299 061 left in their bank accounts and no other assets of discernible value.
Similarity of complaints
Pillai's office has received a further 14 complaints against Van der Merwe, relating to investments he placed in Garek.
Pillai echoed calls made by the DTI for the criminal prosecution of the directors of Garek, as well as of Van der Merwe.
Pillai says there are several similarities in all the complaints received by his office against Van der Merwe. These include:
Complainants were told of an "excellent investment opportunity that would be open only for a limited period";
No financial needs analysis was carried out to ascertain if the investment suited the clients' risk profiles and financial needs;
Clients were told that Van der Merwe had invested in the scheme to assure them that it was safe;
The risks inherent in the scheme were not disclosed;
The high commission earned by Van der Merwe - more than R4.5 million - was not disclosed.
Pillai's ruled that Van der Merwe must reimburse the Hares the money they invested in Garek/Matric.
Pressure to buy
The Hares attended a presentation by Van der Merwe in December 2004 and were told that Matric was due to list in three different countries.
They were offered unlisted shares in the company for R2.50 each, with the assurance that the shares were projected to increase in value to R20 each. The Hares were told that they would receive two shares in Garek for every Matric share they bought, and that the offer would expire at the end of December 2004.
On December 30, 2004, the couple invested a combined R40 000. The promised listing of Garek did not materialise.
The Hares asked Pillai to "engage this broker so that he realises that he has a responsibility towards his clients and not only towards the company whose shares he is marketing and selling".
Pillai says Van der Merwe failed to prove in any way that he complied with the Financial Advisory and Intermediary Services (FAIS) Act when advising the Hares to invest in the scheme.
"In fact, to do justice to the many contraventions of the FAIS Act would be voluminous," he says.
In a letter addressed to Garek/Matric shareholders, dated February 25, 2005, Van der Merwe describes himself as being part of the "marketing team of Garek". Pillai says this statement is perhaps the first real revelation as to the true nature of the relationship between Van der Merwe and the Garek scheme.
Van der Merwe was also not licensed to sell shares in 2004, when he sold shares to the Hares; his licence was amended only in 2007 to allow him to sell shares.
Pillai says Van der Merwe "vacuumed up" clients into the scheme, and in doing so provided a ready source of funding for the perpetuation of the scheme, as well as "very lucrative commissions for himself".
The ombud ordered Van der Merwe to pay Adolf Hare R30 000 and Christina Hare R10 000 plus interest of 15.5 percent calculated from December 30, 2004 to the date on which their money is repaid.
The DTI's probe into Garek
Thousands of people invested millions of rands in Garek and/or its related companies, which include Resourcefin Strategies International (RSI), Mwamko Africa Trade Resource Industrial and Commerce Corporation (Matric), Holistic Resources Limited, and Appropriate Structures in Emerging Markets (ASEM), an investigation by the DTI has found.
The DTI report states that of the R74 million investors put into the company and a further R76 million from inter-company deposits, R24 million was paid to directors, and R62 million was paid to other individuals and companies.
According to the report, Garek had no assets of any substance and failed to produce annual financial statements from 1999 onwards.
Key individuals in the Garek scheme were directors Andrew Cecil and Ronald Creasy, chief executive officer Kevin Watson, company secretary Anthony Illingworth.
Dynamic Wealth battles FSB action
Pretoria-based financial services company Dynamic Wealth and the Financial Services Board (FSB) clashed again in court this week as the FSB continued its quest to place the company under curatorship.
In court papers, the FSB says that many millions of rands of investor money is exposed and may be lost unless the Pretoria High Court grants its application.
Dynamic Wealth, which over the years has left a string of disappointed investors in its wake, has been bitterly contesting the application to place the company and four of its subsidiaries under curatorship.
Dynamic Wealth, which denies all the FSB's allegations, has:
Asked the court for condonation to set right what is wrong; and
A counter-application before the court to stop the FSB from revoking its financial services provider licence and to set aside an instruction to financial services company Metropolitan to withdraw a white-label agreement allowing Dynamic to manage and market unit trust funds under the Dynamic Wealth brand.
In documents before the court, the FSB submitted a litany of alleged offences, including claims that Dynamic Wealth and/or its subsidiaries are or have:
Run illegal collective investment schemes under the guise of being investment clubs.
Converted investment club products into companies, placing investors at even greater risk; failed to properly audit the investment products; directed investments from other portfolios into an investment portfolio (Specialist Income Portfolio) that was closed down because it was "illiquid and insolvent". The portfolios also breached their investment mandates.
Contravened the National Credit Act by using property-related bridging finance;
Entered into an improper bridging finance relationship with Attie du Plooy, a Pretoria businessman who had run an illegal pyramid structure, Jean Multi-Management, which was closed down by the SA Reserve Bank. Money stolen from the illegal Common Cents money market fund under the now defunct Ovation umbrella was directed to Jean Multi-Management.
Contravened JSE rules, including submitting false identity numbers of clients and providing investment services in JSE-authorised investments without the authorisation of the JSE.
Used intermediaries who were not registered in terms of the Financial Advisory and Intermediary Services Act to market Dynamic products.
Ensure your insurer falls under voluntary ombud
When you deal with a life assurance company or a short-term insurer, it is in your best interests if the company is a member of an industry body and participates in the relevant ombud scheme. Although companies that do not subscribe to a voluntary ombud automatically fall under the Financial Schemes Ombud and you do still have some protection, the company's reasons for not belonging to a voluntary ombud scheme can be called into question.
Jonathan Dixon, the deputy executive officer for insurance at the FSB, says although it is not compulsory for short- or long-term insurers to participate in an ombud scheme, questions arise as to why an insurer would not want to be a member and "this choice may reflect on the insurer's integrity".
"The Financial Services Ombud Schemes Act introduced in 2004 provides for a statutory ombud known as the Financial Schemes Ombud (who is the Financial Advisory and Intermediary Services ombud with another hat on) who has the mandate to adjudicate on disputes where the financial services company is not a member of a voluntary ombud scheme," Dixon says.
When short-term insurer Orange Insurance recently failed to pay out claims, clients found that the company was not a member of either the industry body, the South African Insurance Association (SAIA), or the short-term insurance ombud scheme. Insurance companies that belong to the SAIA are automatically members of the short-term insurance ombud scheme.
Brian Martin, the Ombudsman for Short-term Insurance, says that complaints who assumed they were Orange Insurance policyholders, were directed to his office but Orange ignored correspondence from his office regarding the complaints.
Walter Ward, the chief executive of Orange Insurance, denied ignoring any correspondence from the short-term insurance ombudsman's office.
He also disputes claims that the complainants hold valid Orange Insurance policies claiming that they were falsely issued by another financial services company, Fleetsure.
Pillai last month ruled in favour of Sabastian Chetty, an Orange Insurance complainant, and said the ruling was likely to be "the first in a series that may follow against Orange Insurance".
The FSB has since suspended Orange Insurance's licence until the company settles all its clients' outstanding claims.
Martin says he would advise consumers to deal with insurers who are members of the SAIA. "Not only does this give the consumers access to our office, but they have increased protection and recourse under the SAIA's code of conduct," he says.
Judge Brian Galgut, the Ombudsman for Long-term Insurance, says that of the 9 088 complaints received by his office last year, 19 could not be dealt with by the office because they involved companies that did not belong to the ombud scheme.
Galgut says that 97 percent of the country's life assurers subscribe to the ombud scheme and most of the non-participants have expressed an interest in joining the scheme.
See page related article for a list of insurance companies that do not belong to either the short-term or long-term ombud schemes.
  
 
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