Sharemax was not a Ponzi or pyramid scheme – attorney

Sharemax was not a Ponzi or pyramid scheme – attorney ‘In the way it was constructed, there was always value.’ By Roy Cokayne 11 Feb 2021  00:01 Weavind & Weavind director Eckaard Le Roux, the attorney for Sharemax, has refuted suggestions that the property syndication company was a Ponzi or pyramid scheme. Giving evidence during an Independent Regulatory Board for Auditors (Irba) disciplinary hearing against the former auditors of Sharemax this week, Le Roux said media reports claimed that what Sharemax was doing was in contravention of the Banks Act. “It was unlawful, it was illegal. Some reports even went as far as saying it was a Ponzi scheme. I don’t think [that] is correct. “I don’t think it is a Ponzi scheme. The way in which it was constructed, there was always value. “It was a proper business operation in the sense that a property was bought as a going concern and it was constructed on the basis that the money paid by the PropCo to the developer were advance payments on the purchase price. “At all times, value was created because that money was used to construct the shopping centre,” he said. Read: Three former Sharemax auditors, 413 improper conduct charges Objection to witness evidence delays former Sharemax auditors’ disciplinary hearing Sharemax was the promoter of various property syndication schemes, including The Villa and Zambezi retail parks. Le Roux said Sharemax promoted 49 successful property syndication schemes prior to The Villa and Zambezi. “The Villa imploded but that was because of the intervention of the Reserve Bank. I personally never received any query from any investor as to the validity of the scheme. I never received any complaints from investors that they had not received the monthly interest that they were entitled to,” he said. Le Roux also rejected suggestions there was any dishonesty by the promoters, auditors or himself in The Villa and other syndications. He said each time a syndication was properly researched, and at all times the promoter tried to comply with whatever legislation was applicable at the time, as well as the advice he had given, and that there was compliance. Le Roux said prior to The Villa and Zambezi, Sharemax only syndicated shopping malls or office parks that were already completed, adding that there was a provision in the Companies Act that money that was accepted from investors should remain in trust until the minimum subscription had been achieved. He said Sharemax’s prospectuses from 2003 were drafted on the basis that the money raised would only be released from the trust account when transfer of the property took place. These prospectuses were used as a template for all the syndications that followed. However, Le Roux said The Villa and Zambezi syndications were different in that they were still in the process of being constructed and transfer would only take place once construction was completed, the tenants took occupation and the net rental could be used to determine the purchase price. Provision ‘inadvertently not changed’ Le Roux said the specific provision in the prospectuses indicating that the money raised from investors would be held in a trust account until transfer of the properties “was inadvertently not changed to make it clear that the money that investors invested would be used to fund the construction of the building. “Without those funds the scheme could not work. You could not fund the construction of the building,” he said. The charge sheet of the three auditors refers to the Consumer Affairs (Unfair Business Practices) Act of 1988 and Government Notice 459, which specifically relate to property syndication schemes and, among other provisions, require that money obtained for syndication schemes be kept in trust until the transfer of the property being syndicated into the syndication vehicle. Le Roux confirmed that he considered this notice, but it was his view that the definition of property syndication schemes in this notice was not applicable to Sharemax. He obtained the opinion of a senior advocate, which confirmed that the notice did not apply. Le Roux said three complaints were laid at the Law Society against him and Weavind & Weavind related to the Sharemax syndication schemes, but two of the complaints were subsequently withdrawn. He said he appeared before the investigation committee of the Law Society and explained the prospectuses and the way it worked, the Banks Act, the Harmful Business Practices Notice and compliance with all this legislation. “Subsequent to that, the Law Society decided that we would not be charged. To my knowledge, there was no criminal proceeding commenced against any of the directors [of Sharemax],” he said. Under cross-examination, Le Roux said he included the definition of public property syndications from the government notice in his correspondence with the registrar of banks at the SA Reserve Bank, despite his conclusion that the notice did not apply to Sharemax, because there was no other definition of a public property syndication. Le Roux said that, on a strict interpretation of that definition, it held that an assembly of investors was to invest in a vehicle whose sole assets were commercial or retail property and where the investors share in the profits and losses in these properties. With an investment in a property syndication scheme promoted by Sharemax, the investors invested in HoldCo, but HoldCo did not own the shopping centre and the sale of business agreement stated that the sole asset was not the commercial property, he said. “It was not a property that was purchased, it was a business that was purchased,” he said. “And in the agreement, it was stated [that] you are buying the property and you buy the right, title and interest in the lease agreements and you buy fixtures and fittings. It is more than that [property],” he said. Le Roux admitted there were many other provisions in the government notice he ensured compliance with within the prospectuses. He said he picked those provisions he thought Sharemax could comply with and included them in the prospectuses. Advocate Kate Hofmeyr, appearing for Irba, referred Le Roux to several examples in The Villa 14 prospectus which conveyed to investors that their funds would not be used before registration of transfer of the property. Hofmeyr said they will argue in due course that the inclusion of a provision in the prospectus about investor funds remaining in a trust account until the transfer of the property was not simply an error that crept in from previous prospectuses. “It is a provision of the prospectus that is consistent with other parts of the prospectus,” she said. “It is consistent with the indication that was given to investors in their income plan attached to each 10 prospectuses that the funds would be retained in your trust account until transfer of the property. “It is consistent with the way in which the cash flow forecast was put together, with no cash flow movements being shown in the first two years. “And it is consistent with the statement in the pro forma financial information that explained that no income statement could be provided because funds would only be advanced to Villa Investments from March 1, 2011. “That degree of commonality in various parts of the prospectus, we will say, means that this was not just an error,” she said. Le Roux disagreed, stressing it was an error by him. He said Hofmeyr was ignoring the other parts of the prospectus where it was stated how the monies would be used. “Anyone that read through the prospectus would have understood that the development could not take place without the monies being used to finance the construction of the building, otherwise it could not work. “The deed of sale that was attached to the prospectus clearly showed how the payments would have been made. So no, I do not agree with you,” he said. The three audit practitioners – Jacques Andre van der Merwe, Danie Dreyer and Petrus Johannes Jacobus Bekker – are collectively facing a total of 413 improper conduct charges related to Sharemax. They were all directors of ACT Audit Solutions Incorporated at the time when they allegedly committed the offences. All three of them previously pleaded not guilty to all the charges against them. The hearing is continuing. ----------------------------------------------------------------------------- Sharemax and directors schemed to defraud public, says Fais ombud By Roy Cokayne - Time of article published May 24, 2013 Roy Cokayne SHAREMAX Investments, its network of financial advisers and four of its directors – Gert Goosen, Willie Botha, Dominique Haese and André Brand – were involved “in a scheme calculated to defraud members of the public”, financial advisory and intermediary services (Fais) ombud Noluntu Bam said yesterday. Bam reached this conclusion in her latest determination on a complaint lodged by a 73-year-old female pensioner from Heidelberg in the Western Cape against financial adviser Edward Carter-Smith after investing R490 000 in the Zambezi Retail Park on Carter-Smith’s advice. Sharemax promoted and marketed the Zambezi Retail Park property syndication. Bam ordered Carter-Smith, Sharemax Investments, FSP Network (a network of brokers set up to market Sharemax schemes), Goosen, Botha, Haese and Brand jointly and severally to repay the complainant. Carter-Smith complained that he had been misled by the directors of Sharemax and called them “liars”. In an earlier determination Bam said Sharemax was “nothing more than a Ponzi scheme” in which investors were paid interest out of their own funds. Business Report confirmed in October last year that the Hawks were investigating allegations that Sharemax committed fraud and operated a pyramid or Ponzi scheme. About 40 000 people invested about R4.5 billion in the various schemes promoted and marketed by Sharemax. It defaulted on monthly payments to investors in August 2010 when a decision by the registrar of banks that Sharemax’s funding model contravened the Banks Act became public knowledge. ACT Audit Solution told the ombud that it had concluded after seeking a legal opinion that the transfer of investor funds from the trust account of Sharemax attorneys Weavind & Weavind to the investment property companies in The Villa and Zambezi schemes, prior to the registration of transfer of the property to investment property companies, “may constitute a reportable irregularity on a proper interpretation of the prospectuses”. However, Sharemax directors claimed no reportable irregularity occurred because a bona fide “copy and paste” mistake had occurred during the drafting of the prospectuses. Bam said this claim by the directors of Sharemax was “disingenuous and against the probabilities”. She said her office was in possession of promotional pamphlets produced and distributed by Sharemax in 2010 that also stated investors’ funds would be paid into the trust account of Weavind & Weavind attorneys until the property was ready for transfer into the investors’ names. Bam said Sharemax, FSP Network and the four Sharemax directors on their own version knew at the time of producing this pamphlet that they were “wilfully and deliberately misleading members of the public” because of the “cut and paste error” and the prospectus was subject to rectification. They failed to explain why this “error” was only discovered after the Reserve Bank intervened in 2010 and after the scheme had already collapsed. They also failed to explain why Weavind & Weavind, which allegedly made the mistake, did not file any papers or correspondence in support of the “cut and paste error” version. Bam said Weavind & Weavind had further failed to explain why it did not inform investors there was an error before it started paying the funds out of its trust account. She said Weavind & Weavind had never supported the notion of an error in the prospectus. The law firm was of the opinion that the government notice on property syndications did not apply to this scheme and it was therefore not illegal to pay the money from the trust. Letters sent to each investor by Sharemax, acknowledging the investment and stating that their investment had been deposited into Weavind & Weavind’s trust account, and kept there until the investment amount was processed and the property was transferred, were “equally untrue and misleading” because on Sharemax’s version this was a mistake. Bam said these letters of confirmation were still being written to investors after the “mistake” was discovered. “The only reasonable conclusion to be drawn… is that the second to seventh respondents [Sharemax, FSP Network and the four Sharemax directors] were involved in a scheme calculated to defraud members of the public,” she said.