Sharemax attorneys deny ombud’s claims of irregular conduct

Sharemax attorneys deny ombud’s claims of irregular conduct

February 4 2013 at 08:00am 
By Roy Cokayne

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Legal issues sorrounding Bonatla's proposed acquisition of Sharemax.photo by Simphiwe Mbokazi 099

Roy Cokayne

Sharemax Investments’ attorneys, Weavind & Weavind, have labelled allegations by the financial advisory and intermediary services (Fais) ombud that the firm contravened the Attorneys Act and a government prohibition as “gratuitous and unfounded”.

Raiford Johnson, Weavind & Weavind’s managing director, said on Friday that the firm rejected the contention it had contravened a government notice issued in 2006 prohibiting the release of investor funds held in trust for investment in property syndications before the properties being syndicated had been transferred into the syndication vehicle.

In a determination released last week, Fais ombud Noluntu Bam concluded that Zambezi Retail Park, which was promoted and marketed by Sharemax, was “nothing more than a Ponzi scheme” in which investors were paid interest out of their own funds.

The determination followed a complaint by Gerbrecht Siegrist, a 67-year-old pensioner from Tigerpoort in Pretoria, who invested R580 000 in Zambezi but is now destitute.

Bam ordered Siegrist’s financial advisor Cornelius Johannes Botha, trading as CJ Botha Finansiele Dienste, Sharemax Investments, FSP Network, Sharemax and USSA director Gert Goosen and Sharemax directors Willem Botha, Dominique Haese and Andre Brand to jointly and severally pay Siegrist R580 000.

Johnson stressed that the complaint related to the role of all the respondents to the complaint, which did not include Weavind & Weavind.

The issues of the determination did not concern his firm “in any way, shape or form”.

Johnson said it was unclear why Bam had found it necessary to accuse Weavind & Weavind of irregular or inappropriate conduct because these were “completely irrelevant to the issues she was required to determine”.

Bam recommended the Law Society investigate the trust account of Weavind & Weavind to establish how and under what circumstances investors’ funds were paid out of the firm’s trust account.

“It is clear the attorneys did not comply with the Attorneys Act and the Law Society guidelines. Nor did the attorneys comply with the investor protection provisions of the Government Gazette,” she said.

Bam said that in the prospectus and the marketing of the Sharemax product, two significant representations were made to the investing public: that their funds would be deposited into the trust account of the attorneys where they would enjoy protection; and that the attorneys, acting independently, had “satisfied themselves that the whole scheme was compliant with the prevailing laws”.

She said the attorneys claimed that the government notice was not applicable to the Sharemax schemes but the firm did not provide any legal or factual basis indicating why the government notice did not apply to the firm.

Bam said Weavind & Weavind’s view on this was also contrary to what was stated in the prospectus and there was a duty on Sharemax and the firm to disclose in the prospectus that the government notice did not apply to this transaction.

Johnson said the government prohibition was only applicable to “public property syndication schemes”, which referred to schemes in which investors were invited to participate by investing in entities “whose sole assets are commercial, retail, industrial or residential properties”.

“The investors who participated in the Villa and Zambezi Retail property syndication were not invited to invest, nor did they actually invest, in the property investment companies themselves. Their investments were in the investment companies’ holding companies, which did not own commercial, retail, industrial or residential properties at all, but only a share in and a claim against the subsidiaries who did own properties of that nature.”

Johnson said the properties were also not the subsidiaries’ sole assets, which also included rental businesses and other property, “such as furniture, equipment and so forth”.

The Law Society had already investigated several complaints against Weavind & Weavind and all allegations made against the firm had been rejected as “being without merit”, Johnson added.

By Paul
Kruger on 4 Feb 2013
in Compliance
and Legislation

It has become a hackneyed phrase to term an event “ground breaking”.
In this instance, I think it applies.

We have for a very long time voiced our concern over the fact that
determinations were only made against the intermediaries involved, especially
where investments were made in what the media dubbed “toxic
investments”.

In her latest determination, the FAIS Ombud included the directors and
associates of Sharemax in resolving a complaint from a client.

The respondents in the case were:

Cornelius Johannes Botha – the intermediary who placed the investment

Sharemax Investments Pty (Ltd) – product provider and promoter of
investments involved

FSP Network trading as Unlisted Securities South Africa (USSA)

Gerhardus Rossouw Goosen – Sharemax director and compliance officer, and
both director and key individual of USSA

Johannes Willem Botha – director of Sharemax

Dominique Haese – Director, key individual and representative of Sharemax

Andre Daniël Brand – director of Sharemax

I extracted the three
pages containing the issues investigated, and the Ombud’s findings. I strongly
recommend that readers take the time to read it. Please click
here to download it.

The first issue investigated by the Ombud concerns whether non-compliance
with the FAIS Act by the advisor led to the alleged loss by the complainant.

For the first time, it also set out to determine “…the role and consequences
of the second to seventh respondents conduct in this investment, in their
capacities as licensed FSPs, product providers and principals in terms of
Section 13 of the Act.”

In addition, it wanted to determine the consequences of any breach of the law
by the last six respondents.

The findings of the Ombud would be termed “guilty on all charges” in normal
legal language. The list of findings contain the following:

The intermediary contravened the Act by recommending an inappropriate
product.

FSP Network is responsible for the consequences of its representatives.

Sharemax failed to make a full disclosure of the scheme in the prospectus
and investors were misled.

“The directors of Sharemax and FSP Network were aware of the fact that the
scheme was both illegal and not commercially viable and yet they recklessly
took investors’ funds.”

The final conclusion reads: “The directors of Sharemax and FSP Network must
be held personally liable for the complainant’s loss.”

The determination had to be divided in two sections in view of the size of
the document.

In section one, an explanation of what led to the eventual determination is
particularly scathing in so far as the role of FSP Network is concerned. In
particular, its failure to train representatives under supervision is
highlighted.

The Ombud is also convinced that there was no real “arms length” distinction
between Sharemax and FSP Network. Rather than act as a genuine broker network,
FSP Network was intent on selling only Sharemax products.

This determination is bound to raise substantial interest from both legal and
industry circles. One immediate focus is on the possible implications for
intermediaries who recommended property syndications as an investment medium for
clients.

In this instance, the intermediary was not absolved from blame. The question
that arises is whether other advisors, such as Deeb Risk, who were previously
instructed to refund clients, can now request joint responsibility from the
directors and promoters of Sharemax. The same applies to those yet to face the
wrath of the Ombud.

In a determination concerning an investment in the ill-fated Leaderguard
Securities, the late Charles Pillai stated that the directors of Leaderguard
wove such an intricate web of lies and deception that neither investors nor
advisors were able to discern between fact and fiction, or words to that effect.
This did not, however, prevent him from finding against those who invested funds
in Leaderguard.

We will be spending a lot of time dissecting this determination. It provides
a whole new perspective on culpability when investments go sour. Of particular
interest is the Ombud’s determination on which party is responsible for payment
to the complainant.

Perhaps, it is the start of a new era where the consumer will at last enjoy
the protection envisaged in the FAIS Act.

On Thursday, we discuss the view of the Ombud regarding the role of the
product providers and directors, and what the term “…jointly and severally, the
one paying the other to be absolved…” entails.