The South African Reserve Bank (Sarb) issued directives against Sharemax in 2010 despite a warning by a senior advocate about the disastrous financial consequences “an over hasty approach” could have for investors because urgent high court winding-up applications were pending against the failed property syndication company.
This was confirmed by former Sarb deputy registrar of banks Michael Blackbeard on Monday during the Independent Regulatory Board for Auditors (Irba) disciplinary hearing against the former auditors of Sharemax.
The three audit practitioners are facing a total of 413 improper conduct charges related to Sharemax.
Jacques Andre van der Merwe is facing a total of 340 charges, Danie Dreyer 40 charges and Petrus Johannes Jacobus Bekker 33 charges.
All of them were directors of ACT Audit Solutions Incorporated at the time they allegedly committed the offences while Van der Merwe was also the managing partner of the firm.
They previously all pleaded not guilty to all the charges against them.
Blackbeard said the Reserve Bank launched a desktop investigation into Sharemax in 2007 after it received a query from a large financial institution, which later became a full forensic investigation into the company.
Explaining what underpinned the decision to issue the directive that all monies in Sharemax must be repaid, Blackbeard said this was the only remedy available to the Reserve Bank in terms of the Banks Act once it was satisfied that Sharemax’s funding model was illegal.
Blackbeard said the Reserve Bank was trying to prevent a wholesale collapse of Sharemax and did an impact study to see what the impact would be and whether there could have been a change of the funding model so the schemes could still be operated.
Sharemax fate sealed by Sarb?
Mike Maritz, counsel for the three audit practitioners, asked Blackbeard if it was fair to say that as a result of the directives issued and the negative media publicity following the issuing of the directives that it was inevitable that the Sharemax schemes could not continue.
“We were obviously hoping for a different result but taking all the facts into consideration, it was one of those difficult decisions,” Blackbeard said.
“With these schemes, you are either criticised because you are not acting quick enough or because you are acting too late,” he said.
Blackbeard confirmed that the entire Zambezi and The Villa series of prospectuses were only issued after the Reserve Bank had already earlier received the complaint or query from the financial institution.
Maritz asked why it had taken the Reserve Bank three years to act, suggesting that had steps been taken timeously by the bank, it would not have ended up in a situation where billions of rands were collected from the public for the The Villa, for example, which to this day 10 years later is uncompleted and for practical purposes is of no use to anyone.
“The category of people who invested in the Villa scheme will be [in] an unfortunate situation where money will be lost,” he said.
Reserve Bank ‘did not drag its feet’
Blackbeard said putting it that way seems to suggest the Reserve Bank was dragging its feet but stressed the bank did not and it is unfortunate money will be lost.
He said actions were taken, there were processes to go through, and the Reserve Bank did not know Sharemax or its companies.
Blackbeard added that the Reserve Bank had to get information through other means before it could make a decision and Eckaard Le Roux of Weavind & Weavind, Sharemax’s attorneys, was very assertive in disputing that Sharemax was contravening the Banks Act.
“We did have some administrative difficulties upfront but those are processes that have to be done properly and considered responsibility,” he said.
“There are a lot of practical, legal [issues] and steps to be taken with responsibility before you tackle a big scheme like this.”
Maritz asked Blackbeard if he took issue with a 2018 judgment in the KwaZulu-Natal division of the high court in Pietermaritzburg in litigation between an investor and his broker, where Judge Johan Ploos van Amstel concluded that the cause of Sharemax’s collapse was the unforeseeable intervention of the Reserve Bank – in the absence of which, the scheme on the evidence would probably have succeeded.
He added that what went wrong and resulted in the collapse of the Sharemax schemes was the unforeseeable intervention by the Reserve Bank and not some inherent defect in the schemes.
Blackbeard said on first reading he thought the judgment was harsh and wrong.
“It was a factual finding that between contracting parties he could not find a nexus for the breach but it was an unforeseen external event, the Reserve Bank.
“He [Judge Van Amstel] does not make the finding that the Reserve Bank’s actions were wrong. The Reserve Bank was not a party to that case either,” he said.
The disciplinary hearing commenced on January 25 2021 and has been mired in frequent technical legal arguments about the admissibility of evidence, particularly evidence that constitutes opinion or interpretation.
The hearing is continuing.