Property syndication director ‘jointly liable for investor losses’

The masterminds of property syndication schemes – including the directors of schemes that have been liquidated – cannot be absolved of their liability for losses suffered by investors. This, in essence, is the crux of a ruling handed down by the Appeal Board of the Financial Services Board (FSB) this week.

The appeal board has dismissed a financial adviser’s appeal that he should not be held liable for his client’s losses resulting from an investment in a Blue Zone property syndication. And it has gone a step further – by agreeing with the adviser that the directors of the scheme should be held liable, but disagreeing that they should be solely liable. It decided to hold both the adviser and a former director of a failed property syndication scheme jointly and severally liable to repay an pensioner who lost R100 000.

The appeal board is set to hear appeals in another two cases in which the financial advice ombud has held the masterminds of property syndications liable for the losses suffered by investors.

The former directors of Sharemax are appealing the rulings that hold them liable for investors’ losses. Noluntu Bam, the Ombud for Financial Services Providers, or Financial Advisory and Intermediary Services (FAIS) Ombud, is awaiting the outcome of these cases before signing off on property syndication determinations. The ombud’s office has received about 3 000 complaints relating to Sharemax alone.

The appeal that was dismissed this week was brought by Cape Town financial adviser John Alexander Moore and Johnsure Investments CC.

In March 2011, the ombud handed down a determination against Moore for giving bad advice to Cape Town pensioner Gerald Black. The ombud said Moore had failed to take into account that his client was a “conservatively moderate investor”, whereas the investment was “high risk”; had failed to make an independent and objective assessment of the Blue Zone Spitskop property development, relying instead on glossy brochures; and had made himself out to be an expert on a product that he was neither qualified nor licensed to sell.

In both appeals against the ombud’s ruling to the FSB’s Appeal Board, Moore contended that Blue Zone, the company promoting the property syndication scheme, should be held liable for Black’s losses because Moore was acting under supervision of Blue Zone.

Moore admitted he had failed to comply with provisions of the FAIS Act in that he had not furnished Black with a disclosure document. But the fact that he “may have been negligent” was not the cause of Black’s loss, he claimed. The loss was caused by the “fraudulent and irresponsible conduct” of the directors of Blue Zone.

Moore’s legal counsel argued that he could not have reasonably foreseen the fraud in the Blue Zone scheme.

His counsel also referred the appeal board to two determinations issued by the FAIS Ombud, holding the directors and key individuals of financial services providers accountable for the losses suffered by investors.

The determinations are: Paul Rauch (the complainant) v Jacob Johannes van Zyl and Hendrik Christoffel Lamprecht (the directors of Blue Zone); and Gerbrecht Siegrist v Cornelius Botha and others, including the directors of Sharemax Zambezi Retail Park Investments.

In its decision, the appeal board said it agreed with Moore that Blue Zone should have been held responsible for Black’s loss and “should have been party to this matter at the outset of the complaint and investigation by the office of the FAIS Ombud, in that: Blue Zone was the financial service provider (FSP) and the individuals who masterminded the scheme were directors and key individuals of the FSP; Moore was their mandated representative; Van Zyl was … the supervisor for services rendered on behalf of Blue Zone; and Van Zyl performed all management and activities on behalf of Blue Zone”.

Moore’s first appeal was referred back to the FAIS Ombud for determination of the liability of Blue Zone, but the ombud said Blue Zone had been liquidated in 2011 – and because it no longer existed, the ombud’s office couldn’t pursue the company and its directors.

But the appeal board decided “there is no reason why Blue Zone directors, Lamprecht and Van Zyl, should not be held personally accountable for the failed investment scheme”.

“The fact that they were not cited as parties in these proceedings and the fact that the FAIS Ombud had not approached them since the complaint was lodged, cannot absolve them of their liability,” the decision says.

By virtue of a supervisory mandate, both supervisor and supervisee must comply with the FAIS Act and code of conduct. There was non-compliance by both Van Zyl and Moore, the board found.

While Moore could not have foreseen the fraudulent activities that led to the collapse of the scheme, he could have foreseen that the investment, which had no guarantees, was risky, the appeal board says. The loss suffered by Black “was as a result of Moore’s negligence”. Had the risks been explained to Black, in all probability he would not have invested in the product.

As for Van Zyl, the board said he cannot hide behind the facade of an entity which has long been liquidated. “As one of the directors of Blue Zone and supervisor to Moore, he had an obligation to the complainant as well as ensuring Moore was supervised at all times.”

The board ordered Moore and Van Zyl, in his personal capacity, to jointly and severally pay Black R100 000.