JOHANNESBURG - Financial adviser Andre van der Merwe has finally fallen foul of the Fais Ombud Charles Pillai, more than four years after his dubious share-peddling activities were exposed on Moneyweb.
Van der Merwe is the most prominent broker for a company called Garek. He has raised many millions of rand from investors by selling them shares in Garek and its related entities.
Van der Merwe's success is based on a simple formula used by many unlisted-share peddlers in South Africa. He informed his clients that Garek shares were available for a limited period because a listing was imminent. At which point investors could look forward to their shares increasing by a multiple of the original purchase price.
A Department of Trade and Industry report into Garek identifies Van der Merwe as the single largest broker-beneficiary of the scheme. He received commission totalling R4.5m.
On Wednesday Pillai released the first of several Garek-related determinations. He said his office had 14 other similar complaints.
The DTI report found that R74m had been invested in Garek. This came from more than 2 000 shareholders, several of whom are foreigners.
Pillai said he has "no doubt" that Garek's billions of issued shares are now "worthless". He called for "consideration of possible criminal prosecution of directors and officers of the Garek scheme as well as financial services providers who assisted to market the product."
Pillai recommended that the ruling be forwarded to the SA Police Commercial Crimes Unit. He also asked Finance Minister Pravin Gordhan to "consider appropriate legislation to put an end to the kind of abuse that is evident in this case.
"To do otherwise would be to simply leave vulnerable consumers to the mercy of market forces motivated by nothing more than greed and irresponsibility."
Wednesday's determination relates to Van der Merwe's sale of shares to Pretoria engineer Adolf Hare and his wife Christina.
The Hares said they met Van der Merwe in December 2004. He had been Mrs Hare's mother's financial adviser.
Van der Merwe introduced them to Garek predecessor Matric. They were advised that an imminent listing in three countries was on the cards. Upon listing, shares purchased for R2.50 were projected to reach R20.
"This return was compounded by the fact that the structure of the investment was such that they automatically received two shares in Garek for every Matric share purchased," noted Pillai in his determination.
The Hares said that Van der Merwe promoted the company in glowing terms and made much of the fact that he himself had invested in excess of R1m in Matric shares.
Van der Merwe asserted that the assets of the company were substantial, amounting to some R5.4bn. The Hares were shown an "article" in Time magazine, which painted the company in a very positive light, and highlighted the involvement of Sir Ketumile Masire, the former president of Botswana.
"In reality this article was merely promotional material placed on a limited number of copies of Time magazine," said Pillai. "In short it was an advertorial taken out by Garek itself."
However, the involvement of Masire as Garek's chairman is genuine. When this journalist alerted Masire to Garek's shenanigans, he responded with a vehement letter addressed to Moneyweb CEO Alec Hogg threatening legal action.
Masire wrote: "For the record, Garek is committed to and proud of being a part of the African Renaissance and will further its business affairs and aims as the law requires, in a manner and at a pace it resolves to follow, without being influenced by prejudiced journalism and publications of the nature of those controlled and/or prompted by you, publications which clearly survive on sensationalist journalism, thriving on incorrect, negative, distorted and quite often, fabricated, so called factual situations.
"I believe Garek has a uniquely important role to fulfil in the development of our continent and any attempts by your organisation to impede its vital programmes will be vigorously opposed in all appropriate forums."
Masire, who has been hailed internationally as an "icon of good governance", has failed to respond to further requests to comment on his involvement with Garek.
Perhaps swayed by Masire's involvement in the company, as well as the various claims made by Van der Merwe, the Hares invested R40 000 in Matric.
Needless to say the promised listing dates never materialised. In 2007 the Hares complained to the Fais Ombud.
Pillai invited Van der Merwe to respond to the complaint. He asked Van der Merwe if he had conducted an appropriate due diligence into Garek.
Van der Merwe responded with a lengthy explanation of the origins and interwoven share transactions of Garek. He blamed delays in listing dates on "changes in legislation, political conditions in West Africa and the Department of Trade & Industry's investigation into Garek and other companies."
Van der Merwe claimed that the Hares were "categorically and specifically informed of the high risk coupled to unlisted shares".
In his determination, the Ombud said he had no evidence that proper documentation, including a record of the advice given and disclosures made to complainants, had been maintained.
Pillai found that the respondent had not complied with the FAIS Act by failing to consider whether the investment actually suited the complainant's needs. He found that Van der Merwe had failed to disclose the risks associated with the investment.
"Regrettably the complainants did not have the luxury of any due diligence reports or appropriate advice before they entered into these transactions.
"Instead it was a rushed process that had a so-called limited offer period of less than a month. They were encouraged to act quickly given the promised imminent listing.
The Ombud found that while Van der Merwe was an authorised financial services provider, he was, however, restricted to certain financial products. He was not licensed to sell shares in 2004. His licence was only amended in 2007 so as to enable him to sell shares.
Pillai ordered Van der Merwe to repay the Hares their investment of R40 000 plus interest.
Late last year, the Financial Services Board eventually withdrew Van der Merwe's licence. However, this did not prevent him from selling shares in the latest Garek entity to several Vryheid investors.
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