Tuesday, November 18, 2014
KEEPING THE DIRECTORS OF AN FINANCIAL SERVICE PROVIDER LIABLE
KEEPING THE DIRECTORS OF AN FSP LIABLE
( FA NEWS )18 November 2014
It is human nature to look for a way to indemnify oneself when something goes wrong. Often, when you are part of a large corporation, you may be tempted to hide behind the company in the hope that it will provide you with ample protection.
However, there is a famous proverb which says that you can fool some people some of the time, but you cannot fool all of the people all of the time. This was the case regarding an appeal brought before the Appeal Board of the Financial Services Board (FSB) against the findings of the Ombud of Financial Services Providers (FSPs) regarding the well documented fraudulent activities of the Blue Zone Investment product.
In 2006, John Moore (the first appellant) rendered financial advice to Gerald Black (the respondent). At the time Moore was the key individual and representative of Johnsure Investments (the second appellant) and at the same time, the first appellant was also a representative of Blue Zone, an authorised financial services provider.
According to the mandate, Moore acted under the supervision of Jacob van Zyl, who was a key individual and Director of Blue Zone.
This was common practice under the Financial Advisory and Intermediary Services Act (FAIS Act) for independent financial advisers, acting under their own license to be added as a representative on another FSP license, such as Blue Zone, USSA (linked to Sharemax) and PIC (PICvest) for purposes of marketing unlisted property investments.
In July 2010 the respondent filed a complaint at the Ombud's Office and on 7 March 2011, after considering the appellant's response, the FAIS Ombud found that Moore and Johnsure Investments were solely liable for the respondent's loss due to non-compliance with the provisions of the FAIS Act.
At the time Blue Zone was not cited as a litigating party to the respondent. The matter was taken on Appeal on the basis that Blue Zone should have been cited as a party to the respondent because Moore disclosed to the respondent that he was a representative acting under the supervision of Blue Zone for purposes of unlisted property investments and he was duly registered as such with the FSB.
An application of leave to appeal was later granted and the Appeal hearing took place on 29 November 2012.
On 15 January 2013 the Appeal Board referred the matter back to the FAIS Ombud for reconsideration, but on 14 February 2014 the Ombud issued a supplementary determination in which it was stated that Blue Zone could no longer be cited as a litigating party, due to its demise in 2011.
The appellant was not satisfied with the Ombud's response and applied for a continuation of the Appeal, which took place on 17 September 2014. The Appeal Board issued its decision on 12 November 2014 and held the following:
1. It was in agreement with the appellant that Blue Zone should have been a litigating party right from the beginning and should have been liable for the respondent's loss.
2. Van Zyl, the key individual of Blue Zone and supervisor of Moore, had specific duties in terms of the FAIS Act.
3. The fact that Blue Zone and Van Zyl have not been cited as litigating parties to the respondent and the fact that the Ombud had not approached them since the complaint was lodged with its office, cannot absolve them of their liability.
4. Van Zyl and the other directors had every intention to defraud investors.
5. Moore could not have foreseen the fraud perpetrated by the directors of Blue Zone, but he could have foreseen that Black could have suffered a loss due to the risks of the scheme.
6. It was a requirement that the complainant had to be advised and furnished with a disclosure document and failure to do so was a vital act of non-compliance on Moore's part.
The Appeal Board referred to it as the "crucial missing link" in this case. The relevant disclosure document highlighting the nature of the product was not presented to the respondent, so he was in essence not given the opportunity to consider the investment in light of this document.
7. Given that the Blue Zone Investment product was a high risk product, the respondent probably would not have invested in the product if he was made aware of the disclosure document.
8. Supervisors and supervisees must work together and have an equal obligation to their clients and it was found that there was non-compliance by both Moore and Van Zyl.
9. The appellant and Van Zyl should be held jointly responsible for the loss.
10. Both parties need to pay the respondent an amount of R100 000.
A full version of the appeal can be read here.
The time factor:
It can take a number of years for matters that serve before the FAIS Ombud to be resolved.
The importance of full disclosure:
It is clear that financial advisers will be held accountable for non-disclosure of relevant and material product information, with specific reference to terms, conditions and risks.
Key individual responsibilities:
Key individuals will be held accountable for the acts of their representatives.
Representatives will also be held individually responsible for non-compliance with the General Code of Conduct.
Supervisors and Supervisees:
Rendering services under supervision is not as simple as it seems. One wonders if the financial services industry fully understands the mutual responsibilities of the relevant parties?
Finding against a person which was never a litigating party to the complaint:
It is interesting to note that, although neither Blue Zone nor Van Zyl was ever approached by the FAIS Ombud for their version, the Appeal Board held Van Zyl accountable.
Piercing the corporate veil:
In this case the Appeal Board supported the principle of lifting the corporate veil and keeping the directors of an FSP liable in certain instances. Could this decision be indicative of what is to come in the Siegrist matter against the Directors of Sharemax?
What are your thoughts regarding this appeal. Please comment online, interact with us on Twitter at @fanews_online or email me your thoughts.
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19 July 2013
Pensioner commits suicide outside Sharemax offices
In my Blog I have posted so many Blog Posts on both Sharemax and Picvest.
I have always looked at it from the point of view of an interested observer with a keen interest in the Property Industry. I was always interested in the legal ramifications of the coniving that has gone on with these two investment schemes.
When taking an analytical view of these type of activities, it is easy to forget that there is a real impact on people's lives.
I was therefore stunned to see the latest news on Moneyweb about Sharemax. One of the investors in The Villa committed suicide right in front of the Sharemax Offices, which also happens to be very close to my house.
The fact that Nova Property Group is now simply trading as Sharemax with another name (and the same directors) while investors (many of whom can't afford it) is in my opinion an absolute travesty of justice.