Ombud calls adviser’s conduct ‘morally reprehensible’

Ombud calls adviser’s conduct ‘morally reprehensible’

How does one justify placing an 80-year-old Alzheimer sufferer’s funds in a syndication scheme that is being investigated by the South African Reserve Bank?

A recent determination by the FAIS Ombud revealed details of yet another syndication investment that resulted in tragedy.

The investor was 80 years old when the broker advised her to invest R700 000 in Realcor, a property syndication scheme. Three months after making the investment, Realcor was placed under liquidation. Her funds were lost, and no part of her capital was paid back to her.

When the investment was made, on 16 April 2010, her health had deteriorated to the point where she could no longer recognise her daughters’ voices on the telephone, nor was she capable of holding a normal conversation with them.

She was examined by her family doctor on 1 July 2010 and was diagnosed as cognitively and functionally compromised. Subsequent examinations confirmed that her condition had become progressively worse. She was incapable of making decisions about her finances, and it was recommended that a curator be appointed for her.

On 7 September 2010, a specialist neurologist filed an affidavit in support of an application to appoint a curator for her. His diagnosis was that she was suffering from Alzheimer Dementia.

She was therefore not capable of understanding basic financial transactions, which belies the respondent’s claim that the client requested the investment and understood the prospectus, said the Ombud.

Previous investments

The respondent had, in the past, advised her to invest in a number of other property syndication investments. The curator of her estate requested information from the respondent about these, but he indicated that he was not required to keep documents for more than five years.

The FAIS Ombud states that he did not offer her alternative products, nor did he concern himself with advising her to hold a diversified portfolio of investments to reduce her exposure to risk. It was also not disputed that the respondent advised his client to divest of some of her existing investments and put the funds into property syndications instead.

On 19 March 2013, the client was placed under curatorship by the Master of the High Court, and one of her daughters was appointed curator. When she later passed away, another daughter was appointed by the Master as executor of her late mother’s estate.

The curator, after finding out about this investment, was unable to resolve the matter with the respondent and filed a complaint with the Ombud on behalf of her mother.

She knew that her mother was unable to make any decisions regarding her financial affairs and believes that the respondent was aware of this. She states that there was a relationship between her stepfather, the client’s second husband, and the respondent. She believes that he tipped off the respondent that her mother had sold her property, which led to the Realcor investment. According to the Ombud’s report, she also believes that the respondent paid her stepfather a commission, something the respondent refused to confirm or deny.

On 14/15 April 2010, Absa Bank called and informed her that R700 000 was transferred out of the family trust account in which her mother’s funds were held. All the trustees had to sign before any funds could be transferred, but it appears that this did not happen.

As proof of her allegations of the husband’s involvement, the curator provides a copy of the cheque drawn on Absa Bank to pay “Purple Rain Properties 15 (Pty) Ltd” an amount of R700 000. The cheque is dated 16 April 2010. The cheque was signed by her mother but was written out by her husband in his own handwriting.

Realcor timeline

In April 2008, in response to allegations that Realcor was raising money unlawfully from the public, the South African Reserve Bank ordered an inspection, which was conducted by PricewaterhouseCoopers (PwC).

The Reserve Bank found that Realcor was conducting the business of a bank without being registered as one. It prohibited Realcor from raising further deposits and took steps to have investors’ money repaid, appointing PwC as the managers to supervise Realcor for the Reserve Bank.

Of relevance to this determination is the fact that it was widely publicised in the media and Realcor’ s brokers were informed about this.

At the beginning of 2010, the collapse of property syndications, including Sharemax and PIC (Highveld Syndications), were regularly making the news. Despite all the negative publicity and the intervention of PwC, the respondent deemed the Realcor investment to be a suitable investment for an 80-year-old Alzheimer’s sufferer.

Less than three months after the investment, Realcor collapsed. The client and her husband were left with no income and became dependent on the investor’s daughters. In a bizarre twist, the husband committed suicide in December 2010.

Prescription claim

The respondent claimed that the complaint had prescribed, as it was only lodged on 12 January 2016, nearly six years after the event.

The Ombud ruled that, on the respondent’s own version, he does not dispute that the curator only became aware of the problem on 19 March 2013. The complaint was filed on 12 January 2016; within the three-year period.

In addition, at the time the investment was made, the client was already suffering from Alzheimer’s disease. Prescription cannot run against the investor, as she did not have the mental capacity to administer her own affairs.

Unconscionable conduct

The Ombud describes the respondent’s conduct as “morally reprehensible”.

“At a time when he knew that the Sharemax and PIC investments were in trouble, he decided to advise her to invest in yet another property syndication scheme. To make matters worse, he also knew that Realcor was under investigation by the SARB.”

The Ombud states that he was not acting in the interests of his client; he was squarely focused on the lucrative commission on offer from Realcor.

This determination was published on 13 October 2020. The Ombud categorically states that:

  1. The respondent had brought the financial services industry into disrepute; and
  2. He is not fit to be a licensed FSP.

She determined that the respondent was liable to pay back the money to his client’s estate.

In addition, she ruled that the matter be referred to the FSCA for regulatory action against the broker.

A search on the FSCA website reveals that the respondent is still registered as an FSP. Although his business is listed as a CC, and not as sole proprietor, it has no key individual. Under normal circumstances, his licence should have been suspended until the matter had been rectified.

Successful appeal

It has subsequently come to our notice that a successful request for reconsideration was launched by the respondent to the Financial Services Tribunal. No details were given as to why the matter was referred back to the Ombud. The only plausible reason could be the grounds for prescription.

If, and when, one day, the Office of the FAIS Ombud gets around to reviewing this decision, I fear that we may see that justice is not always fair.

May I please be proved wrong in this case.

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2 Responses to Ombud calls adviser’s conduct ‘morally reprehensible’

  1. Karen du Plessis 27 January 2022 at 10:35 pm #

    And for how much commission was this horrendous thing done? How much is commission on R700,000 “investment”?

    • Paul Kruger 28 January 2022 at 10:47 am #

      Karen, the Ombud says 6%, which equates to R42 000. She also says that, despite the documentation saying otherwise, the money was not paid from Realcor’s funds, but from the client’s investment. The building was still under construction, so there was no income from it.

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