The Ombud for Financial Services Providers (Fais Ombud) has ordered a financial advisor to repay an 87-year-old farmer the R200 000 he invested in two property syndication schemes promoted and marketed by Sharemax Investments.
Fais Ombud Nonku Tshombe said financial advisor Ernest Venter, trading as Ernest Venter Makelaars, was unlicensed to sell Sharemax products and there is no evidence on record that he acted as a representative and was supervised to sell these products to Hendrik Everhardus Grundling Du Preez.
Du Preez invested R100 000 in Sharemax Zambezi Retail Park Holdings in November 2008, and a further R100 000 in Sharemax The Villa Retail Park Holdings during November 2009.
Tshombe said Du Preez lost his capital and there is no prospect that he will recover any part of it.
This appears to be the first determination issued this year by the Fais Ombud related to a complaint about an investment in Sharemax.
Tshombe told Moneyweb in April there were 1 114 property syndication matters still open at her office.
Sharemax collapsed in 2010 after the findings of a Registrar of Banks investigation that its funding model contravened the Bank Act became public knowledge.
This led to new investments drying up and Sharemax being unable to make monthly payments to investors.
The Registrar of Banks laid criminal charges against Sharemax for alleged contraventions of the Bank Act in March 2012.
About 18 700 investors invested an estimated R5 billion in Sharemax’s various property syndication schemes.
At the time it imploded in 2010, it was the biggest-ever collapse of a property syndication scheme in South Africa.
Tshombe said the investment by Du Preez into Sharemax had been recommended by Venter.
She said over time interest payments from Zambezi began decreasing and during July 2010 payments from both the Zambezi and Villa investments stopped, with no further payments received since July 2010 for either of the investments.
Cancellation request countered with assurances
Du Preez instructed Venter in August 2010 to cancel the investments and get back his capital.
Venter gave an assurance that “everything was alright and we should be receiving our interest soon” but there were no further interest payments and Du Preez did not receive any response from Venter regarding the capital.
After numerous attempts by Du Preez to liaise with Venter, he approached the Office of the Fais Ombud.
In his response to the complaint, Venter disputed Du Preez’s version regarding the circumstances around the investment and claimed he had visited Du Preez at the farm because Du Preez needed assistance with a Sanlam policy.
Venter said it was on this occasion that he told Du Preez about Sharemax but Du Preez was well informed about investments, had already done his homework and came to the conclusion that Sharemax was the answer to his problem. In addition, Venter claimed Du Preez no longer wanted to invest in Absa because these investments only yielded an interest rate of 4-6%.
Venter, therefore, believed Du Preez was making an informed decision, saying that he had acted in the best interests of his client and carried out his work “absolutely correctly”.
He further claimed that no one could predict that Sharemax would go wrong.
The Fais Ombud listed a number of undisputed facts which were relied on for the resolution of the matter.
These included that Venter:
- Requested a Sharemax consultant to explain the investment to Du Preez.
- Did not provide Du Preez with a prospectus for either of the investments.
- Did not explain the risks in the investment to Du Preez and didn’t deny that he informed Du Preez that Sharemax was a safe investment and that he had invested his own funds into it.
- Informed Du Preez that Sharemax purchased property, rented it out and eventually sold it at a profit for the benefit of investors but failed to point out that the Zambezi and The Villa schemes were different from all the previous syndications marketed by Sharemax.
- Did not carry out a risk analysis or needs analysis, with his record of advice confirming this.
- Did not offer Du Preez any other or alternative financial products.
- Failed to point out to Du Preez that Sharemax, in respect of Zambezi and The Villa, had no trading history and no independent means to pay commissions, and that investor returns and commissions and monthly interest payments in effect were to be made out of investor funds.
- Failed to point out that Sharemax did not own any property.
Tshombe found that Venter failed to act honestly, fairly, with due skill, care and diligence; contravened the general code of conduct for financial services providers; and failed to act in the interests of his client.
In addition, Tshombe said Venter failed to provide full and frank disclosure of all the material information about the Sharemax product to enable Du Preez to make an informed decision; failed to provide appropriate advice; and failed to identify a product that was appropriate to Du Preez’s risk profile and financial needs.
However, Tshombe stressed the fact that Venter was in breach of the Fais Act and code does not on its own mean that he was liable for Du Preez’s loss.
There must also be a breach of contract as well as a claim in delict, she said.
Tshombe said that as a result of the contract that exists between a financial service provider and the client, there was an express or implied term that Venter would comply with the provisions of the Fais Act and code in carrying out his obligations.
She said Venter was in breach of this term, a consequence of which was the loss of Du Preez’s capital, adding that Venter acted wrongfully and negligently.
Tshombe said even if it is accepted that Venter could not reasonably have foreseen that the scheme would be found to have contravened the Banks Act or foreseen any delinquent conduct by the directors of Sharemax, Venter was expected to make an evaluation of the product from the prospectus and give advice based on the client’s requirements and tolerance for risk.
Venter failed to do this and was therefore negligent, in this case possibly even dishonest, and is accordingly liable for damages, she said.