Time to rethink recourse for billions lost in property schemes

Almost a decade since property syndication investors lost billions, it is surely time to reconsider the recourse for those enticed into such investments.

Two recent cases highlight the shortcomings.

In one, the Ombud for Financial Services Providers (Fais ombud), orders a Bloemfontein adviser to repay a woman R1.3m lost in a Sharemax-promoted syndication. In the other, the KwaZulu-Natal High Court rules an adviser is not liable for the loss suffered by a family trust which invested R5m in the same scheme.

The investors were very different, but the outcome is nevertheless hard to fathom.

Rusaan van Staden was 20 years old when she lost her mother and the R1.3m her mother intended to fund her studies.

Soon after Hermanus Lombard of Legacy Invest invested the money in the scheme developing Villa Retail Park, the income dried up, forcing Van Staden to give up her studies. The development remains unfinished.

The Financial Advisory and Intermediary Services (Fais) Act obliges advisers to recommend appropriate investments for your circumstances. The Villa Retail Park was “far too risky” for Van Staden, ombud Naresh Tulsie says.

Van Staden told the ombud Lombard recommended the Villa, while the adviser says the student instructed him to invest in the Villa and “overruled” alternatives.

Without a record of the advice, Tulsie could only find Lombard wanting when it came to what he recommended and whether he had warned Van Staden of the high risk of investing in an undeveloped property with no track record of returns.

Then the ombud considered whether Lombard’s failure to act with due skill, care and diligence caused the loss factually and legally.

Factually, “but for Lombard’s inappropriate advice, there would be no investment in Sharemax and consequently no loss”, he says. To determine legal causation, the test is whether the harm was reasonably foreseeable, the ombud says.

Lombard argued he could not reasonably have been expected to see that Sharemax was a Ponzi scheme as the prospectus concealed this.

But Tulsie says the Villa’s prospectus recorded violations of a Department of Trade and Industry Notice on property syndications, contained conflicting statements and presented a business proposal that amounted to a pyramid scheme. He says the collapse was “not only reasonably forseeable but, in all probability, inevitable”.

In the High Court judgment, Judge Ploos van Amstel refers in passing to the Fais Act and doesn’t find Peter Griffin of Rob Roy Investments to be the cause of Shane and Johanna Symons’ R5m loss.

The judge took the view that Shane Symons, who had sold his business for R14m, would have invested in the scheme even after the risks were pointed out because he was impressed with Sharemax’s investment track record and had experience in investing in property schemes.

Van Amstel believed Griffin had explained the risks to Symons, but even if he had failed to understand the scheme, the breach of his duty needed to be causally connected to the loss, the judge said.

The court heard an expert witness testify the scheme would probably have been successful had the Reserve Bank not stopped it from taking deposits.

Griffin did not foresee the Reserve Bank’s intervention and Symons did not suggest that he should have, the judge says. Symons is reportedly taking the matter on appeal.

Assistant ombud Melanie Winkler says the Fais Ombud’s office would have interrogated the facts in the Symons case quite differently, although it would also have taken into account Shane Symons’ ability to make an informed decision.

We’ll never know how the ombud would have dealt with the Symons case because their R5m claim was beyond the ombud’s R800 000 compensation limit.

This limit has not been increased since the office opened in 2004.

Hopefully this and other shortcomings of the ombud system will be addressed when parliament deals with the Conduct of Financial Institutions Bill.