Thursday, September 18, 2014

Property syndication complaints pile up

Property syndication complaints pile up

September 13 2014 at 06:30pm

By Angelique Arde

The jurisdiction of the ombud for financial advice to make rulings against the masterminds of property syndications that have turned sour for their investors, will be determined in January, when the Appeal Board of the Financial Services Board (FSB) hears two key appeals.

The date was revealed in parliament this week when Noluntu Bam, the Ombud for Financial Services Providers, explained the delay in her office’s handling of complaints about Sharemax, one of the largest property syndication schemes.

Answering a question from a member of parliament’s finance committee, Bam said the delay was due to a legal battle over her authority to hold the masterminds of these schemes liable for losses suffered by investors, many of them pensioners.

She highlighted the importance of the appeals, saying that if the appeal board ruled against her, it would halt her office’s involvement in complaints about property syndications. Her office provides a free complaints-resolution service, and the alternative for complainants to recover their losses is costly legal action.

Some 34 000 investors bought into Sharemax, which ran into difficulty about four years ago when it was unable to meet payments to investors and builders of some of the properties it was developing.

The Reserve Bank stepped in, saying Sharemax was contravening the Banks Act, and appointed two managers to manage the repayment process. In early 2012, the High Court sanctioned a restructuring of the Sharemax group in what was called a “scheme of arrangement”.

A number of investors approached the ombud’s office seeking compensation for investing in the scheme, often on the advice of financial advisers.

Bam says her office has received about 3 000 complaints relating to Sharemax, but is in a “difficult position” pending the outcome of the hearing by the FSB’s appeal board.

“The matter is set down for January 19 to 23 next year, and until the appeal board makes a decision, we can’t do anything,” Bam says.

Last year, Bam handed down two determinations – the Siegrist and Bekker matters – holding not only financial advisers but also the directors of Sharemax jointly and severally liable for the losses suffered by the investors, both pensioners.

In the first case, they were ordered to pay back R580 000, and in the second case, R490 000. The Sharemax directors applied for leave to appeal both rulings. Bam refused, but the FSB’s appeal board granted them leave to appeal.

Bam told parliament’s finance committee that her office’s mandate states that if a consumer has suffered financial loss as a result of financial advice from a particular person, her office must take that person to task – be it a broker or an agent who is tied to a particular company.

But Bam says her office also con-sidered the “masterminds” – those who designed the property syndication schemes and employed those that sold their products – and believes they, too, should be held accountable.

“We held the directors of these companies personally liable, together with the brokers. But they took us on appeal, and it has been a battle from that day on,” she says. “They are saying that, while investors may have bought financial products from them, the company that sold the products is gone. They’re saying: ‘Sharemax no longer exists. There was a scheme of arrangement that was sanctioned by the High Court. Sharemax is defunct and therefore the ombud had no business looking into these complaints. Investors are now being paid by a new company, which didn’t sell financial products’.”

The former managing and financial director of Sharemax, Dominique Haese, is now the head of the two companies that have taken over the Sharemax property portfolio. Haese has claimed there is no link between Sharemax and the new companies, and that Sharemax no longer exists in terms of the scheme of arrangement.

“We do not agree: it all started with a financial services provider,” Bam says.

“The main issue before the appeal board is the personal liability of the directors and architects of these schemes. If the appeal board disagrees with us and agrees with them, that will be the end of our office’s involvement in dealing with property syndications – meaning all those pensioners will need to go to court. Chances are many may not outlive the court process. That’s the reason they came to us in the first place.”

The ombud is also fighting a legal battle with financial adviser Deeb Risk. She has ruled against him in seven cases where he advised investors before the restructuring of Sharemax.

Risk took the cases on review to the High Court, which instructed him that his appeal should go to the FSB’s appeal board.

Risk then tried to have new evidence heard in the appeal ruling, but the appeal board denied this request and Risk has now taken the matter back to court.

Late last year, he reached settlements with five of the seven complainants.

Bam says the architects of property syndications and some brokers have been misinforming investors, saying they can’t lodge a complaint with her office and that their claims have prescribed.

“We continue to accept and investigate complaints relating to property syndication investments, but cannot make a determination after such investigation, until the ruling in the two matters has been delivered,” Bam says.

“Each case will be dealt with on its own facts. In other words, there may be instances where a claim has prescribed.”

Bam says all property syndication complainants were sent a standard letter, explaining to them the predicament.

She encouraged property syndication investors to lodge complaints with her office. “We will tell you whether or not it’s a valid complaint,” she says.

The appeal board granted the former directors of Sharemax leave to appeal in October last year. It has taken more than a year to set a date for the appeal because the numerous legal representatives of the directors of the companies concerned had to be accommodated, Bam says.

“These directors have money, and each of them is represented by two or three lawyers. The board needs to accommodate them all,” she says.

But the elderly pensioner investors who have lost money can’t afford legal representation, so the appeal board has asked the ombud to assist it with some procedural aspects, Bam says.

“And it’s not just Sharemax. There are other property syndications, such as Blue Zone, and they all seem to do the same thing: first put the company under business rescue, frustrate the pensioners, starve them of income, then go back and say, vote for this proposed compromise. The pensioners think the compromise will release the money, but it doesn’t,” Bam says.

The ombud is limited to addressing complaints where the consumer’s claim exceeds R800 000. However, if you agree to limit to R800 000 the loss suffered in a complaint involving a higher amount, the ombud will still consider your case.

The limit has not changed since the Financial Advisory and Intermediary Services (FAIS) Act was passed in 2002.

Yunus Carrim, the chairman of the finance committee, proposed that when the FAIS Act is reviewed, provision should be made for the finance minister to increase this limit.

Caroline da Silva, the deputy chief executive in charge of financial advice at the FSB, says the R800 000 limit could be dealt with as an amendment to the FAIS Act, but it is more likely to be addressed in the second phase of the market conduct legislation, namely the Financial Sector Regulation Bill.

The first draft of the Bill is due out in April next year, she says.

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