Naive brokers perpetrated fraud on massive scale - Pillai
In what could be the first of many more determinations, Charles Pillai, the Ombud for Financial Services Providers, has ruled against a broker who sold investments in Leaderguard to a pensioner.
Altogether, 1 850 investors lost 95 percent of their investments when Mauritius-based Leaderguard Spot Forex collapsed last year, resulting in South Africa's largest foreign-currency trading scandal. Investor losses totalled R350 million.
The Financial Services Board has asked Ernst & Young's forensics division to investigate all financial advisers who sold Leaderguard products in terms of the Financial Advisory and Intermediary Services (FAIS) Act. This could result in financial advisers losing their licences.
Pillai says the picture that emerges is that of fraud on a massive scale perpetrated by brokers who naively believed all was well.
In his ruling, the ombud says that fraudulent acts of the Leaderguard company and the higher-than-normal commission paid to intermediaries should have aroused the suspicions of brokers.
"It is clear that losses suffered by the complainant are as a direct result of the broker's poor judgment of the entities involved in the investment," Pillai says.
Michael Denman Mackrory, a pensioner from Wonderboom in Pretoria, complained to the ombud that Marius Naude from Kameeldrift West, his broker of eight years, had acted without due care, skill and diligence by recommending a company without explaining the risk posed by investing with an institution that was not financially sound.
Mackrory made two investments: one of R231 000 in August 2004 and a further R60 000 in February 2005. These were invested with Leaderguard Spot Forex, which had been highly recommended by Naude.
Mackrory told the ombud that Naude had advised him that the investments had an income option that would expose only 20 percent of his capital to risk, whilst 80 percent would be protected. Naude had also told him that income would be payable immediately and there was no minimum investment period.
In August 2004, Naude set up a meeting in Pretoria with Mackrory and Heine Venter, who was introduced as a Leaderguard consultant. It was at this meeting that Mackrory made the first investment.
In February 2005, Naude set up another meeting between Mackrory with Venter but he himself did not attend this second meeting.
During this meeting with Venter, Mackrory completed and signed the necessary documents to invest a further R60 000. Mackrory noted some discrepancies regarding the 80 percent guarantees.
He subsequently asked Naude about the limits to risk but Naude said he should have discussed the matter with Venter. It became clear to him that Naude knew little about the Leaderguard investment.
Mackrory told the ombud that he did not receive any income from the second investment he had made in February 2005, although had received income from the first investment.
He also did not receive contract documents, but did receive letters which kept him up to date on the performance of the investments.
On April 4, 2005, Mackrory learnt of the financial problems facing Leaderguard Securities in a newspaper report. Leaderguard Securities marketed the foreign-exchange investment products of Leaderguard Spot Forex where he had invested.
The newspaper article indicated that problems at Leaderguard Spot Forex began in December 2004.
When Mackrory questioned his broker about the matter, he was told that Leaderguard Securities knew nothing about Leaderguard Spot Forex. In response to Mackrory's complaint, Naude told the ombud that he did not have any documents which related to the investment Mackrory had made in Leaderguard.
The ombud's office cannot rule on matters where the financial service took place before September 30, 2004. Therefore, the ombud could not rule on the loss of Mackrory's first investment of R231 000 which he had made in August 2004.
In his determination on the second investment of R60 000, made in February 2005, Pillai says Naude did not deny that he provided financial advice to Mackrory for about eight years prior to the Leaderguard transactions. It is not in dispute that Naude brought the Leaderguard product to the attention of the complainant.
He pointed out the positive aspects of the product without explaining the risks involved to the complainant, Pillai says in the determination.
"Naude had mentioned that Leaderguard had been generating good returns and that the complainant's capital would be secure.
"He explained and recommended the income option to the complainant. As a result, the complainant chose the plan," says Pillai.
Pillai concluded that Naude had advised Mackrory to invest in Leaderguard Spot Forex and such advice was the cause of the complainant's loss.
Pillai says Naude was not licensed to sell the Leaderguard product.
"He ought not to have advised on this product at all. In essence, the broker had no skill to provide advice on a forex investment product."
In upholding the complaint that the broker did not comply with the FAIS Act and had acted without the necessary skill, care and diligence, Pillai ordered that Mackrory be compensated for R60 000 plus 15.5 percent interest from February 24, 2005 to date of payment.
Pillai says his office has been inundated with complaints relating to advice concerning investments in Leaderguard and he would be issuing further determinations on the matter.
Hundreds of South Africans - many of them pensioners - invested into Leaderguard Spot Forex, an investment company based in Mauritius that speculated in the foreign-exchange markets.
The local arm of the company, Leaderguard Securities, which marketed and recruited investors on behalf of Leaderguard Spot Forex. was placed in provisional liquidation by the Pretoria High Court on March 24, 2005, after Maria Fryer, the financial director, brought an urgent application for its winding up.
This was when investors became aware of Leaderguard Spot Forex's financial difficulties.
However, Pillai says, Leaderguard Securities knew that Leaderguard Spot Forex had solvency problems as early as February 2004.
Nonetheless, it continued to collect funds from investors, Pillai says.
Leaderguard Securities was placed in final liquidation in July 2005.
Pillai says the public was fed performance claims for which there was no basis. Performance data dated back to 1997 but Leaderguard Securities had only been in operation since 2001 and Leaderguard Spot Forex since 2003.
Pillai says it is unfortunate that this was not picked up by the intermediaries involved in marketing the investment products. The risk of the product was, to a large extent, underplayed, whereas the fineprint in the forms painted a totally different picture. Investors were told of a so-called 20 percent exposure to risk and an 80 percent guarantee of their capital. This is how many brokers explained the risk to their clients. In fact, the product carried no guarantees whatsoever, the ombud says.
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