Scrutinise before you buy
April 15 2012 at 12:15pm
By Bruce Cameron
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PF
Illustration: Colin Daniel
Here is a little quiz for you. What do the following have in common?
* The barren bushveld in a blue zone;
* A bridge over troubled waters;
* An exotic foreign island;
* A stolen moment in a pyramid;
* A dynamic moneyless fund; and
* A medical wonder cure for the rich.
For an explanation of the clues, see “The cryptic clues explained”, below.
The common factors to all six cryptic clues are:
* All were extremely high-risk or fraudulent “investment” schemes where investors lost a lot of money.
* No proper due diligence into the schemes was conducted by financial advisers or investors. Instead, advisers and investors relied on glossy pamphlets and often ignored words of warning.
In most cases, if even the simplest checks had been carried out, investors and their advisers would have identified the flaws.
The Financial Advisory and Intermediary Services (FAIS) Act places a “general duty” on financial planners and advisers to “at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry”.
Financial advisers are required to show, if necessary, that:
* They have undertaken a proper due diligence on a product.
* The due diligence is demonstrable. In other words, that they have not just read the glossy brochures and spoken to the product provider.
* They thoroughly understand the advantages and disadvantages of a product.
* They explained the details of a product in such a way that you appreciated its advantages and disadvantages.
Too many financial advisers have ignored these requirements. Instead, they have relied on confusion and complexity, vague promises, incomplete documentation, verbal assurances and glossy brochures misrepresenting the dicey products to make the sale, and in the process have sometimes knowingly passed on misleading information.
The Financial Services Ombud has, in numerous determinations, expressed that the reason errant financial advisers do not undertake proper due diligence tests on products is that they are blinded by excessive commissions and other inducements that normally come with questionable and high-risk products.
Any good adviser knows that the first alarm bell on a bad product is a “good” commission structure.
It is also not acceptable for a financial adviser to assume that because a product is regulated, due diligence does not have to be undertaken. Regulation does not eliminate risk.
Good financial advisers should have a written due diligence procedure that should include a formal product approval checklist and process, the identification of comparable products, an assessment of modifications of an existing product, and what they require from product providers, including an assessment of training they will require as part of a formal product approval process.
The checklist should include things such as:
* Due diligence procedures, which should include checking the product company (for example, ensuring it is properly licensed/registered), the company management (for example, what incentives they receive), and the product (if it is an unregulated product, the checks should be more onerous). It is important that your financial adviser can show that all claims made by the product provider have been independently and expertly verified.
* The existence of gatekeepers (auditors, lawyers, credit rating agencies) and their tasks.
* Reading a prospectus/fact sheet/ broker pack to establish what is reality and what is fiction. Often, promotional material contains sins of omission rather than commission.
An immediate red flag for an adviser should be the refusal of any company to submit to due diligence, particularly using nebulous excuses such as competitive confidentiality.
An immediate red flag for you is when someone comes knocking on your door and they cannot tell you about their due diligence assessments. You should insist on a written copy of the due diligence on the product. You should study the document and do some checks yourself to protect yourself.
QUESTIONS YOU MUST PUT TO YOUR FINANCIAL ADVISER
Due diligence is not only the responsibility of your adviser. There are some basic due diligence questions you should ask your adviser about any financial product you are advised to use:
* What is the company name?
* What is the name of the product?
* What is it?
* How does it work?
* What is the regulatory environment of the company and the product?
* Why should I use it?
* What due diligence has been done?
* What guarantees are provided and what supports the guarantees?
* What is the risk level?
* What is the minimum investment amount?
* What is the minimum investment term?
* What are the costs, including layered, initial and annual?
* What are the rewards for your adviser, including initial and annual commissions and any other incentives, such as a share bonus scheme, sign-on employment bonuses, and links your adviser may have to any company receiving payments for any service undertaken for the service provider?
THE CRYPTIC CLUES EXPLAINED
* Barren bushveld in a blue zone
This is the now defunct Spitskop BlueZone property syndication. This was a 190-hectare agricultural property in Mpumalanga with a municipal valuation of R1 million. It was bought in 2003 in the name of a company called Blue Dot, whose directors and shareholders were Hendrik Lamprecht and Johann van Zyl, who also happened to be directors of the BlueZone property syndication company. The property was sold by Blue Dot to the Spitskop property syndication company for R118.3 million, which was then valued for syndication purposes at R425 million.
In other words, the value jumped virtually overnight from R5 000 a hectare to R2.2 million a hectare without a sod of earth being turned.
An army of financial advisers started selling debentures and securitised debt in the BlueZone property syndication while the company was operating without a licence to deal in debentures and securitised debt.
A number of the advisers were not licenced to sell debentures in their own names. BlueZone “legalised” them by illegally registering them as representatives under its financial services provider licence.
In one of her determinations on the failed scheme, financial advice ombud Noluntu Bam found one of the advisers who flogged investments in Spitskop, John Moore of Johnsure Investments, had falsely made himself out to be an expert on the product, was not qualified or licensed to advise on or sell unlisted shares and debentures, had failed to make an independent and objective assessment of the property syndication, relying instead on glossy BlueZone brochures. He had also failed to take into account that a risk analysis revealed that the pensioner who lodged the complaint was a “conservatively moderate investor”, whereas the investment was “high-risk”.
So, in a nutshell, there were unskilled financial advisers selling what was a scam, without doing any due diligence. Instead, they relied on the word of the perpetrators of the scam and their glossy brochures.
And the problem is that this cavalier approach to the high risks pertaining to property syndications, be they fraudulent or not, is seen in many other determinations from Bam.
And yet thousands of advisers sold – and many still continue to sell – property syndication products as low-risk, in particular targeting pensioners, who can ill afford the losses.
And this appalling situation has now been compounded by the Santam-owned insurance agency, Stalker Hutchinson Admiral, which is doing its best to avoid the liability of making good on professional indemnity insurance that is supposed to be in place to provide assistance in compensating investors when there has been negligence on behalf of an adviser.
* Bridge over troubled waters
This is the story of a bridging finance company. In recent years there has been a flurry of fraudulent bridging finance investments. Essentially, the companies claim to provide bridging finance, mainly to property developers, to allow them to continue with projects while awaiting more formal financing from banks.
The bridging finance companies raise the finance from investors, promising them often extraordinary returns based on the higher interest rates they are able to charge on the bridging loans.
Even in companies that are operated on a non-fraudulent basis, the risks can be extraordinarily high, particularly if the developer cannot get bank financing and the scheme falls apart.
In 2007, bridging finance company Malokiba, owned by Susan Kretzmann, was placed under provisional liquidation. In a determination dealing with the issue, then financial advice ombud Charles Pillai found that Malokiba was insolvent while taking in investments. However, financial advisers were taking in investments on the say-so of the company directors that there was an ironclad guaranteed safety of capital, indemnity assurance, trust account protection and bank guarantees. Returns of 30 percent a year on investments were offered.
Yet there was not even a prospectus issued as required in terms of the Companies Act, and the various claims of the directors were simply untrue. It was also alleged by the liquidators that Malokiba was acting illegally as a bank by taking in money and lending it.
The promises of 30-percent returns should have been the warning signal to those flogging the dud product, and even a cursory due diligence would have revealed the faultiness of the scheme.
* Exotic island foreign deal
This is the now well-known foreign currency speculation story of Leaderguard Spot Forex based in Mauritius, which was both high-risk and a scam, yet about 250 financial advisers were out there encouraging people to invest. By the time Leaderguard was declared bankrupt in March 2005, about 1 700 investors had lost about R350 million. Again, many of the investors were pensioners.
Leaderguard provided a “guarantee” on 80 percent of capital. Leaderguard never applied for a FSP licence – it had only a temporary exemption, but claimed it was licensed. Again, a cursory due diligence would have revealed the problems.
* Stolen moment in a pyramid
Sometimes the thieves are not cheap crooks dealing in products on the edges of the financial services industry. They can be mainline product providers. This little saga shows that due diligence checks need to be done even when companies are subject to strict regulation.
The case involves the now defunct linked-investment services company, Ovation, which had in its suite of investment offerings an unregistered money market fund called Common Cents.
The Financial Services Board (FSB) got on to the fact that the owner of Ovation, Angus Cruikshank, had taken in R200 million via financial advisers. Not one of the advisers selling investments in Common Cents had checked with the FSB to find out whether the money market fund was registered in terms of the Collective Investment Schemes Act.
By that time, Cruikshank had stolen the money and paid it over to another dicey operator, Attie du Plooy, who had one of his companies, Jean Multi Management, closed down by the Reserve Bank for contravening the Banks Act.
When the FSB caught Cruikshank with his hands in the till he promptly committed suicide.
Du Plooy operated property bridging finance operations, including one connected with our next example.
* Dynamic moneyless fund
Financial services group Dynamic Wealth was effectively closed down by the FSB last year after a long, tough legal battle that went all the way to the Appeal Court.
Among other things, Dynamic Wealth operated “investor clubs”, which it later converted to unlisted companies. At one time, Dynamic Wealth also had a joint bridging finance venture with Attie du Plooy.
One of these portfolios was the Specialist Income Fund, which invested about R230 million of its money in another imploded entity, Corporate Money Managers (CMM) Fund, which masqueraded as a collective investment scheme and which, in turn, had invested in failed property developments.
* Medical wonder cure for the rich
Barry Tannenbaum offered the rich returns of 20 percent every 12 weeks. That is more than 80 percent a year.
Tannenbaum, part of the Adcock Ingram pharmaceutical family, managed to convince Sean Summers, a former Pick n Pay chief executive, to invest R50 million and Mervyn Serebro, the chief executive of OK Bazaars, to invest R25 million in his pharmaceutical company, which turned out to be a Ponzi scheme. The total fraud is expected to be close to R2 billion.
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Ombud side-steps bid to halt syndication rulings
April 15 2012 at 12:10pm
By Bruce Cameron
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PF
Illustration: Colin Daniel
Ombud for Financial Services Providers Noluntu Bam is pressing ahead with determinations arising from complaints about financial advisers who placed their clients – many of whom were pensioners who could ill-afford the losses – in property syndications, despite an attempt by Santam to stop Bam in her tracks.
Bam is facing a court application – financed by, and with legal backing from, Santam – to prevent her from issuing determinations on complaints made against a Gauteng-based financial adviser, Deeb Risk, who advised at least seven clients, mainly pensioners, to put their money into imploding Sharemax property syndications.
Bam has issued a further two determinations, ordering financial advisers to compensate their clients for the losses they suffered.
A date has not yet been set down for the High Court to hear the urgent application by Risk.
Santam-owned insurance agency Stalker, Hutchison and Admiral (SHA), which provided Risk and his company with professional indemnity insurance, is paying for Risk’s attempt to stop Bam in her tracks and from protecting consumers.
Risk, with the support of Santam, lodged an application last year to stop Bam from issuing determinations against him, arguing that the matters should be referred to the High Court.
At the time, Bam said that if the Santam/Risk challenge is successful, it will nullify the advantages of her office for consumers, who will generally be unable to afford to take on insurance companies, which have extensive cash and legal resources, in the High Court.
She said many of the complainants were pensioners who had lost a large portion of their assets.
The urgent application was made when Bam continued to issue determinations against Risk, despite a non-urgent application to stop her in her tracks and, in effect, nullify the office of the ombud.
The ombud’s office was established in terms of the Financial Advisory and Intermediary Services Act to provide consumers with cheap and easy access to seek compensation when they are ill-advised on their investments.
By the time the urgent application was launched, Bam had issued two determinations against Risk and his company, D Risk Insurance Consultants, ordering them to repay R1.2 million plus interest to a 72-year-old widowed pensioner, Elise Barnes.
Bam then issued a third determination against Risk and his company, ordering them to repay R780 000 to an 82-year-old pensioner, Margery Salmond, whom Risk advised to place her savings in a Sharemax property syndication.
ADVISER ‘THREW WIDOW’S SAVINGS INTO A DARK HOLE’
Pretoria-based financial adviser Cornelia Snyman and her company, Multi-Professional Services (trading as ACS Financial Management), have been ordered by financial advice ombud Noluntu Bam to pay widowed pensioner Paulina Susanna Coetzee R530 000 plus interest of 15.5 percent a year calculated from November 2009 to the date on which payment is made.
In ordering the compensation, Bam found that Snyman failed to:
* Conduct a due diligence investigation into BlueZone Investments, the property syndication company in which Snyman advised Coetzee to invest the money she had saved in a Sanlam interest-earning product;
* Determine Coetzee’s risk profile in order to ascertain her risk tolerance and, in the light of this, the suitability of BlueZone as an investment;
* Keep proper records of advice as required by the Financial Advisory and Intermediary Services (FAIS) Act and its code of conduct;
* Comply with various provisions of the code of conduct when she rendered advice to Coetzee; and
* Establish whether BlueZone complied with regulations pertaining to property syndications issued by the Department of Trade and Industry.
As a result of Snyman’s failures, a few months after she had invested in BlueZone, Coetzee stopped receiving the income she was told her investment would earn.
Snyman had told Coetzee that she would receive an income of R4 257 on the seventh day of every month, with projected increases indicated up to the 10th year. After late and intermittent payments from 2005, Coetzee received her last, reduced payment in November 2009.
Coetzee first heard that BlueZone Investments was experiencing financial difficulties in 2009, when Snyman told her that the company was under judicial management.
But Snyman assured Coetzee that she should not be concerned, because a new investment group, Bonatla, would be purchasing BlueZone. However, Coetzee did not receive any further payments.
Snyman failed to comply with Bam’s demand to provide: a record of advice; proof that she had conducted a risk analysis; and any other documentation that showed that she had complied with the FAIS Act.
Instead, Snyman told the ombud: “The signed documentation you are referring to was, in Mrs Coetzee’s instance, somewhat not utilised. It is therefore not possible to furnish you with the signed versions to points one to three as requested. As a result, we therefore sustain with the response given and documentation provided.”
In response to a question from the ombud about what due diligence investigation she had conducted into BlueZone, Snyman admitted that BlueZone did not issue a prospectus when selling its investments, “because these were private offerings with a minimum investment amount of R100 000, and, for that reason, the products were not registered with the registrar of companies”.
Bam says Snyman’s “response is untenable. At the time that Snyman made the decision to invest, BlueZone was an unknown entity with no trading track record. To compound matters further, BlueZone had not issued any prospectus. It is therefore difficult to understand on what basis Snyman decided on BlueZone as the appropriate financial product. When advice was rendered, Snyman could not have had any objective criteria by which to judge the financial viability of BlueZone.”
There is nothing to indicate that Snyman explained to Coetzee the risks of property syndications.
Snyman in effect threw Coetzee’s savings “into a dark hole”, because Snyman herself did not understand the risks, Bam says. Snyman sold what was “simply her favourite of the month”, Bam says.
SHAREMAX ‘GUARANTEED’ INCOME DRIES UP: PENSIONER MUST BE REFUNDED
Financial advice ombud Noluntu Bam has ordered George-based financial adviser Martin Cornelius Holtzhausen and his company to repay R190 000 to a retiree who was receiving a “meagre” military pension of R1 099 a month.
In February 2010, Holtzhausen advised Maria Elizabeth Kapp to invest her only asset, which was in an RMB money market account, in a Sharemax property syndication, telling Kapp the income stream was “guaranteed”.
The “guaranteed” income stream dried up six months later, and Kapp was unable to access her capital in the wake of the implosion of the Sharemax syndications. Holtzhausen went to ground and did not respond to Kapp’s inquiries. Kapp complained to Bam.
The money Kapp invested was the proceeds of a life policy paid on the death of her son in 2007. According to Kapp, this was the only money she had to live on, apart from her pension.
She told Bam in her complaint that if Holtzhausen had disclosed the risk inherent in the Sharemax investment, she would have never invested in it.
Holtzhausen claimed to Bam that he had performed a proper risk analysis and a product comparison. But when the ombud checked his claims, she found they were incorrect.
Holtzhausen was also unable to substantiate his claim that the “income was guaranteed, but there was a risk to capital”.
Holtzhausen claimed he provided Kapp with a proposal that compared seven different investments and their respective income and risk levels. Kapp disputed this claim. Holtzhausen claimed he provided details of the income flows of two property syndication companies and five life assurance products. The information on the life assurance products was, Holtzhausen claimed, from the website of a company called Moonstone.
However, when Bam checked, she found that Holtzhausen had gathered the information at the time of Kapp’s complaint, and it did not reflect the information provided by Moonstone when Holtzhausen had advised Kapp.
Sanlam told Bam that Holtzhausen had inquired into its rates on January 28, 2011, almost a year after the advice and just before Holtzhausen responded to Kapp’s complaint.
The Sanlam quote was for a gross income of R938.46 and an effective rate of return of 6.01 percent, which was the amount Holtzhausen filled in on the comparison table he supposedly drew up on February 16, 2010. Moonstone provided Bam with a table of Sanlam rates for the week of February 15 to 19, 2010 – the week in which the Sharemax investment was made. These rates would have generated an income of R1 158.70, and not the R938.46 as reflected on the comparison table.
“This, on its own, was sufficient to establish that the document supposedly used to compare income and risk was a fabrication,” Bam says.
Similar inconsistencies applied to the other life assurance products.
The ombud also found that Holtzhausen did not, as required by the Financial Advisory and Intermediary Services Act:
* Explain the extent of the investment risk to Kapp.
* Take into account Kapp’s lack of understanding of property investments and the complicated structure of the Sharemax investment, which involved shares and a linked loan account with an “unsecured floating rate claim”.
Bam says: “Even to an experienced investor, this would likely take some time to digest, never mind someone like the complainant.”
* Properly assess Kapp’s investment risk. Bam says Kapp needed maximum income and capital, “but this must be placed in the context of her precarious position and requirement that the capital be preserved”.
Holtzhausen, who admitted that he knew there was a risk to the capital, should have been aware that the Sharemax investment “might not be appropriate”, Bam says.
* Warn Kapp that she should rather consider safer investments with Sanlam or Liberty Life.
* Complete a product replacement assessment, which requires full disclosure to the investor of “the actual and potential financial implications, costs and consequences”.
* Consider any other products that would have addressed Kapp’s needs more appropriately.
Bam says Holtzhausen failed to act with integrity when dealing with Kapp’s complaint, compounding his initial failure to render financial services with due skill, care and diligence, and in Kapp’s interests.
