Tuesday, January 20, 2015

Auditors should have known about Sharemax irregularity – Ombud

Special investigations

Author: Julius Cobbett|

Irregularity reported too late to protect investors.

JOHANNESBURG – Auditors for Sharemax should have known an irregularity was taking place. This is one of the findings in the latest determination by the Ombud for Financial Services Providers (Fais Ombud) Noluntu Bam against a financial adviser who sold Sharemax products.

The determination orders the adviser, as well as four Sharemax directors, to repay a 73 year-old pensioner the R490 000 she invested in Zambezi Retail Park, Sharemax’s second-largest syndication. This is the second determination that has found Sharemax’s directors liable for an investor’s loss. The directors are: Dominique Haese, Gert Goosen, Willie Botha and Andre Brand.

Bam’s determination, dated May 16, takes particular aim at auditing firm, ACT Audit Solutions. This firm has since changed its name and is now known as Advoca Auditing.

Bam states that the auditors failed to report an irregularity timeously to the regulatory body, the Independent Regulatory Board for Auditors (IRBA).

The irregularity in question was the release of investors’ money out of an attorney’s trust account before they had taken transfer of their property. This happened in Sharemax’s two largest syndications, Zambezi and The Villa, and left them in a very precarious position.

Prospectuses for Zambezi and The Villa stated that investors’ funds would remain in the attorney’s trust account until immovable properties were transferred.

ACT Solutions did alert IRBA to this irregularity. But it did so on November 5, 2010. By then Sharemax’s troubles were well known. The irregularity reported served little purpose in protecting investors.

By the time ACT reported the irregularity, Zambezi and the Villa had already raised R2.3bn from investors. The first Zambezi prospectus had been registered three years earlier, on November 15, 2007.

In her determination, Bam notes that her office sent ACT Audit Solutions a letter which asked a number of important questions. An extract of this letter, together with ACT’s lawyer’s response, can be read in the determination.

Bam says it is of concern to her office that ACT does not state when the irregularity was discovered. Nor does it give detail as to the circumstances that led to the discovery.

“The auditors must have known that the investors’ funds were being used to fund the building of the mall and that interest payments, of 12%, to the investors also came from their own funds,” writes Bam.

She concludes: “The auditors, ACT now known as Advoca, failed to report the irregular transaction to IRBA timeously. They ought to have known that investors’ funds were being paid before transfer had taken place. At all times they had access to that information. Also, they ought to have known that this money was ultimately lent to developers who borrowed the money and used the same funds to pay 14% interest back to Sharemax.”

Asked by Moneyweb to comment, Advoca managing director Jacques van der Merwe says: “In response to the determination made by the FAIS Ombud we are satisfied that we answered their enquiries directed to us sufficiently. We did not receive any further enquiries from them after our detailed response on any issues now raised in the determination. We are therefore not going to deal with the issue in the electronic media.”

This is not the only controversy faced by ACT. Moneyweb has previously reported on how the firm changed its mind on a clean audit it gave Sharemax-promoted Flora Centre. ACT only changed its mind after it was notified by IRBA that a complaint had been laid against it relating to the Flora Centre financial statements. For a detailed analysis of these financial statements, see Inside Sharemax’s “magic”.

Copy and paste mistake

Once ACT reported its irregularity to IRBA, Sharemax was invited to respond. Says ACT: “Sharemax’s response was that no reportable irregularity took place as the prospectuses contained a common mistake (the provision that funds could only be transferred after registration of transfer of the property to the property investment companies) which recurred as a result of a bona fide “copy and paste” mistake during drafting of the prospectuses. Sharemax argued that the prospectuses should be rectified.”

Bam says it appears that Sharemax is claiming that there was a mere ‘copy and paste’ error in the prospectus. “This is disingenuous and against the probabilities,” says Bam. “This is a material term of the contract between Sharemax and the investors. Most investors would not have participated if their funds did not enjoy the protection of an attorney’s trust account. This simply cannot be swept under the carpet as a ‘copy and paste’ error. Equally it is far too late to even consider a rectification of the prospectus, large numbers of investors already parted with their funds.”

Bam continues: “The information received by this office is that [Sharemax] representatives specifically told investors that their money will remain in the attorney’s trust account and will only be paid out upon registration of the transfer of the property. The investors were told to pay their money only to and directly into the attorney’s trust account. There the money will be safe.”

Bam also notes that her office is in possession of promotional pamphlets produced and distributed by Sharemax. The pamphlets state: “Investment funds are paid into the trust account of Weavind & Weavind attorneys (established in 1905), which falls under the protection and insurance of the Law Society of South Africa, until the property is ready for transfer into the investors’ names.”

Says Bam: “This statement is consistent with the representations made in the prospectus and its purpose is to assure investors that their funds enjoyed protection. On [Sharemax and its directors’] own version they knew, at the time of producing this pamphlet, that they were wilfully and deliberately misleading members of the public as they equally knew that this protection offered in the prospectus and in this pamphlet was merely a ‘cut and paste error’ and that the prospectus was subject to rectification. The pamphlet was distributed in 2010.”

Furthermore, Bam says that after every investment was made, each investor received a letter from Sharemax. The letter states: “…your investment is deposited into Weavind & Weavind’s trust account, and is kept there until the investment amount is processed and the property is transferred. After this your shares are issued to you as described in the prospectus.”

Bam says these letters were still being written to investors after the “mistake” was discovered.

“The only reasonable conclusion to be drawn from this conduct is that the second to seventh respondents were involved in a scheme calculated to defraud members of the public.”



  1. SARS is after them as well...even after the SARB sanctioned a failed rescue planFact Sheet: Withdrawal of directives in respect of property syndication companies
    promoted by Sharemax Investments (Pty) Limited.
    1. Following an investigation into the affairs of Sharemax Investments (Pty) Limited and
    various property syndication companies it had promoted, the Registrar’s Office found
    that the funding models were in contravention of the Bank’s Act.
    2. This finding is not a conviction of criminality of the persons involved in the scheme.
    The Office of the Registrar, however, will report the findings to the appropriate
    3. Following this finding, in September 2010 the Registrar’s Office issued directives to
    Sharemax and its property syndication companies to repay the funds obtained from
    members of the public.
    4. The Registrar’s Office subsequently appointed independent inspectors as managers,
    to take control of the assets of Sharemax and its property syndication companies.
    5. The majority of the funds were invested in fixed property and, as a result, it would
    have been impossible to immediately give effect to the directives to repay investors.
    The only option would have been to liquidate the companies and to repay the
    investors. This option would have brought no return for the investors.
    6. In the interim, the property syndication companies appointed new independent
    directors to their board.
    7. The Office of Registrar and the appointment managers did not appoint the new board
    8. The new board of directors requested that the Registrar’s Office grants them an
    opportunity to consider their options before the companies are liquidated.
    9. The board of directors were granted a reasonable period to seek alternative options
    that would ensure that the companies were not in contravention of the Bank’s Act
    and that they complied with the directives to pay investors.
    10. The board of directors opted to resolve the matter by means of schemes of
    arrangement as per section 311 of the Companies Act. 11. The Office of the Registrar had no objection to the proposals as the schemes of
    arrangement require approval by the vast majority of investors as well as the High
    12. The Office of Registrar had no influence on the schemes of arrangement and the
    facts provided in the scheme papers were provided by the property syndication
    13. The board of directors also considered the “business rescue” concept, which was
    introduced when the Companies Act came into effect in May 2011.
    14. The fees of the inspection and management of Sharemax and the property
    syndication companies were paid for by the Office of the Registrar.
    15. The appointed inspectors acted in the interest of the South African Reserve Bank
    and the investors.

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