Bam orders advisers to pay investors money lost in property syndications

The financial advice ombud, Noluntu Bam, is still dealing with complaints lodged several years ago against advisers who persuaded their clients to invest in property syndications that subsequently collapsed around 2010 and 2011.

In one of two recent determinations ordering advisers to repay their clients the money they invested in developments marketed by the now defunct Sharemax Investments, Bam says one investment was essentially a pyramid scheme, because the income the investors received was largely funded by the capital of new investors.

In the first case, the executrix of the estate of Ms V lodged a complaint in 2011 against Johannes Christiaan Mostert, a sole proprietor trading under the name of Medsure Brokers, of Pinetown in KwaZulu-Natal.

In 2006 and 2009, Ms V, a pensioner, invested R200 000 and R70 000 in two schemes in the Sharemax fold: Carletonville Centre Holdings and The Villa Retail Park respectively. She had been assured by Mostert that the investments were low risk and would provide a steady income. According to Bam’s determination, Ms V had told the adviser that she could not afford to lose money in the investment.

In 2010, Ms V’s income dried up, and she was not repaid her capital the following year, when the Carletonville investment matured. Similarly, she got no capital back from her investment in The Villa.

Regarding the investment in The Villa, Bam, in her determination, says an important question to be answered by Mostert is how he satisfied himself, when he advised Ms V, that the investment was capable of paying the promised returns.

The issue is one of viability, she says. The prospectus stated that investors would be paid from interest earned on the attorneys’ trust account, where investors’ money was meant to be held securely until the property was transferred. But this account, a bank call account, would typically have paid interest of between four and five percent in August 2009.

Bam says one must also consider that Sharemax paid the advisers an upfront six-percent commission on the full investment amount, and also used funds from the attorneys’ trust account to cover office expenses, travelling and other costs. “Yet, they paid the investors interest ranging between 11.5 and 12 percent ... This was simply impossible,” she says.

Bam details a business agreement between The Villa and the developer, Capicol, whereby Capicol paid interest of 14 percent on a R1.2-billion loan from investors’ funds, from which Sharemax took two percent with the remaining 12 percent being paid to investors.

She says: “There is no evidence that the developer had independent funds from which it was paying interest ... The conclusion is inescapable that the interest paid to investors was from their own capital ... A cursory reading of the [business agreement] reveals a pyramid scheme.”

The second case also involves an investment in The Villa.

In about April 2010, Ms E was advised by Hermanus Lombard, key representative of Dovetail Trading, Bloemfontein, to invest the R500 000 she had inherited from her late mother in the ill-fated development.

According to the complaint, Ms E specifically asked Lombard what would happen if the development ran into financial trouble. He is reported to have replied that this would never happen, since a portion of The Villa already had prospective clients. Ms E further claimed that Lombard had pressed her into making a decision by telling her that there was a special interest rate of 12.5 percent, but for a very limited period only.

Ms E received income payments for only two months, and later concluded that she had lost her money.

As in other property syndication cases, Bam ruled that the advisers had breached the code of conduct under the Financial Advisory and Intermediary Services Act by, among other things, not fully assessing the risks by conducting a due diligence on the investments or conveying the risks to their clients.

In the first case, she ordered Mostert to pay Ms V the R270 000 she had invested and, in the second, Lombard to pay Ms E her R500 000.