Did Reserve Bank cause Sharemax implosion?

– Interesting high court judgment

This rather sensational headline greeted readers of the Star newspaper on December 14, 2018. But does this reflect the real findings of the KZN High Court?

A careful reading of this very important judgement is highly recommended to anyone who is still involved with Sharemax disputes as it does not provide any easy remedy.

The plaintiffs in the matter were the trustees of the Symons Family Trust. They wanted the Court to award them damages against the defendant, Mr Peter Griffin of Asset-Sure, their former financial adviser and investment broker. The basis of the claim was that on the advice of Peter Griffin, the trust had invested a total amount of R5 million in Sharemax and, like so many others, had lost the whole of its investment when the scheme collapsed.

At paragraph 54 of the judgement the learned judge emphasised the importance of the cause of the loss. He said: “I think it is important to consider what caused the scheme to collapse and the plaintiffs to lose their money, as there has to be a causal link between a breach by the defendant of its contractual obligations and the plaintiffs’ loss.”

The trustees alleged that Peter Griffin, as the financial advisor, had breached his contractual obligations by:

·	advising them to invest in Sharemax;
·	by advising them that the returns were guaranteed when this was not the case;
·	by failing to properly investigate Sharemax and its business dealings or to properly understand Sharemax’s prospectus and proposed business model;
·	by failing to exercise an independent judgment regarding the propriety of the Sharemax business and the contents of its prospectus; and
·	by failing to exercise the requisite level of skill and diligence that it had represented to the plaintiffs that it possessed.

The facts the Court accepted were that Mr Symons, acting on behalf of the Trust, invested an amount of R2 million in Sharemax on 24 June 2009. He made a further investment of R1 million on 12 November 2009. He received regular interest payments on the two investments, and on 14 July 2010 invested a further amount of R2 million. He received no interest payments in respect of the third investment, and the monthly payments in respect of the first two investments also stopped.

When Peter Griffin made enquiries with Sharemax as to what was going on, he was told that the Reserve Bank had raised a problem but that they were dealing with it. It later transpired that the Reserve Bank had intervened as it regarded the funding model as the unlawful taking of deposits from the public, and directed Sharemax to change its funding model. Sharemax was not able to do so and, as a result, it was unable to raise further money and the scheme collapsed.

After considering the expert testimony of witnesses for both the Symons Family Trust and Peter Griffin, the Court found no basis to support any of the plaintiff’s allegations that Peter Griffin had breached his contractual obligations and was the cause of the loss.

The Court noted that when the scheme collapsed, Mr Symons did not blame Peter Griffin for having recommended a high-risk investment, and by July 2012 he was still using him as his broker. The following quote at paragraph [52] of the judgement is significant:

The plaintiffs appear to me to have instituted the action in the hope that the defendant’s professional indemnity insurer would compensate them without the matter having to go to court.

The Court accepted the view expressed by an expert witness that the cause of the loss was actually the intervention by the Reserve Bank in the affairs of Sharemax. Arguably, this is not entirely correct. The intervention by the Reserve Bank was done as part of its mandate. The cause of the loss was that the entire Sharemax scheme was an unlawful structure – not the undoing of that structure by the Reserve Bank.

The essence of this decision is to emphasise that when a party claims that a loss has been suffered as a result of the actions or non-actions of a financial services provider, there must be a direct causal link between the loss and such actions or non-actions of the advisor. The observation of the Court that the intervention by the Reserve Bank can be considered to be the cause of the loss in this instance must be regarded as obiter dictum; that is, it is a mere expression of an opinion upon points of law which is not necessary for the decision of the case. At most, it is valued as a reasoned statement which may well influence another court in future decisions, but it is not binding on such other courts. (Jajbhay v Cassim 1940 TPD 182 at 185)

Click here to read the actual judgment.