Secondary

FAIS Ombud Indicts Product Provider

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:

  1. Cornelius Johannes Botha – the intermediary who placed the investment
  2. Sharemax Investments Pty (Ltd) – product provider and promoter of investments involved
  3. FSP Network trading as Unlisted Securities South Africa (USSA)
  4. Gerhardus Rossouw Goosen – Sharemax director and compliance officer, and both director and key individual of USSA
  5. Johannes Willem Botha – director of Sharemax
  6. Dominique Haese – Director, key individual and representative of Sharemax
  7. 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.

 

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