October 14, 2006
By Laura du Preez
In another precedent setting ruling, Charles Pillai, the Ombud for Financial Service Providers, has ordered a third broker to repay a couple who invested in Leaderguard Spot Forex.
Dismissing the broker's argument that he could not have been expected to foresee the collapse of Leaderguard Spot Forex, Pillai says he did not expect financial service providers to be prophets, but they must adhere to the requirements of the Financial Advisory and Inter-mediary Services (FAIS) Act and its regulations.
Ordering Durant van Zyl, of Trade First, a financial consultancy, to repay Henry and Anneke Stephan an amount of R800 000 as compensation for the £59 919 (more than R870 000) that they invested in Leaderguard Spot Forex, the ombud said Van Zyl had contravened the FAIS Act and its regulations in a number of ways.
Pillai has made similar rulings against two other brokers this year. In May, Pillai ordered Marius Naude of Kameeldrift West to repay Wonderboom pensioner Michael Mackrory the R60 000 he invested in Leaderguard Spot Forex.
And in August, he ordered Wilma Willemse of Centurion to repay Pretoria East pensioners Charl and Brechtje du Plessis the more than R600 000 that they lost in Leaderguard Spot Forex.
Background
Leaderguard Spot Forex was a Mauritian-based foreign currency trader which was placed under provisional liquidation last year.
About 1 850 South African investors had invested R350 million in Leaderguard Spot Forex
After news of Leaderguard Spot Forex's demise, the Stephans, who farm in Klawer in the Western Cape, lodged a complaint with the ombud.
They told Pillai that Van Zyl had sold them the investment in Leaderguard Spot Forex on the premise that it was a solid investment which came with a guarantee for 80 percent of their capital.
The investment apparently had a 20 percent stop-loss order - that is investors would be informed when there had been a 20 percent loss in trading, and they could then decide whether to stay invested.
Before they invested, the couple were allegedly shown performance data for the investment dating back to 1997, although Leaderguard Spot Forex was only established in February 2003.
The Stephans said Van Zyl had compared the performance of their investment which was in an HSBC call account with the performance of an investment in Leaderguard.
The document showing the comparison stated that the return on an investment in Leaderguard Spot Forex would be far superior to that in the call account, and it would be more tax efficient.
In July 2004, the Stephans invested US$28 052 (now about R217 964) in Leaderguard. The ombud's office, however, only has jurisdiction over financial transactions that have taken place after October 2004, and has therefore not been able to assist the Stephans with this investment.
Later in 2004, they agreed to invest a further amount in Leaderguard and this investment of £59 919 was made in January 2005.
Through his lawyers, Sim Attorneys, Van Zyl said that he did not convince the Stephans to invest in Leaderguard as they were already knowledgeable about the investment. He said that he had met the Stephans at the request of another person, Bernard Taljaard, and that Taljaard was acting for the couple.
He further alleged that a portion of the commission he earned was paid to Taljaard.
Van Zyl told Pillai that he had made inquiries into the affairs of Leaderguard Spot Forex through an entity known as 4i Securities and the feedback was that the foreign currency trader was "above board".
He told Pillai that he did not recall giving the comparison between the call account and the investment in Leaderguard Spot Forex to the Stephans.
Van Zyl's lawyers said no broker could have expected Leaderguard Spot Forex to suffer the alleged losses as out of 91 months of trading, there had only been 18 months of "negative trading".
The broker further said that the Stephans' claim was premature as issues surrounding Leaderguard Securities and Leaderguard Spot Forex are still being investigated.
He said that it was not possible to quantify the Stephans' losses and accordingly denied that they had suffered any loss.
A court could not make an order, and neither can the ombud, Van Zyl's lawyers argued.
Depth of knowledge
In his ruling, Pillai says Van Zyl did not say how he came to the conclusion that the Stephans were knowledgeable about Leaderguard Spot Forex and did not reveal the questions he had asked to establish the depth of their knowledge.
Van Zyl had failed to give details of what advice Taljaard had given the Stephans and even if Taljaard had advised them, it could only have been as Van Zyl's agent, because he paid Taljaard commission out of his own funds, Pillai says.
Regarding his inquiries into Leaderguard Spot Forex's affairs, Pillai says Van Zyl was "economical with details relating to these inquiries" and did not say on what basis he found the foreign currency trade to be "above board", despite being invited to do so.
With regard to Van Zyl's assertion that no broker could have foreseen the collapse of Leaderguard Spot Forex, Pillai says he does not expect financial service providers to be prophets, but they must comply with the provisions of the FAIS Act.
Financial services should be rendered in terms of the Act and even if Taljaard was involved, Trade First was the authorised financial service provider and, as a result, had certain obligations in terms of the FAIS Act, Pillai says.
Ombud's findings
Pillai found Van Zyl and Trade First had contravened the provisions of the FAIS Act and its code of conduct for financial services providers in a number of ways:
Neither Van Zyl nor Trade First were licensed in terms of the FAIS Act to provide advice or render intermediary services in foreign exchange (forex) at the time, and even if they were, they should have abided by the code of conduct for forex providers under the Act.
There was no indication that the Van Zyl or Trade First did so.
Van Zyl was obliged in terms of the code of conduct for financial services providers under the FAIS Act to tell the Stephans what skills he had to recommend the investment and he failed to do this, Pillai says.
He was also obliged to tell the Stephans that Leaderguard Spot Forex had not been approved as a foreign forex service provider in South Africa, but did not do so.
"The question of license and approval of entities should be the most basic step a provider should establish before recommending an entity to consumers," Pillai said.
Van Zyl did not provide a file containing a record of the advice given to the Stephans. Pillai concluded that the file did not exist.
Van Zyl did prove that he had identified the Stephans' need for the product. Pillai said he can only conclude that the Stephans had no need for the investment in Leaderguard Spot Forex.
"The recommendation [to invest in Leaderguard] is nothing more than a senseless one aimed at addressing nothing but commission to the provider," he says.
Pillai found that the foreign exchange risk disclosure notice in the Leaderguard Spot Forex contract states that under certain trading conditions it may be difficult or impossible to liquidate a position and the stop-loss order may not necessarily limit investors' losses to certain amounts.
The general terms and conditions of the contract also state that "no capital guarantee is offered by Leaderguard Spot Forex and the investor warrants that he/she shall not hold Leaderguard Spot forex liable for any capital losses suffered by the investors".
Financial service providers are obliged under the FAIS Act to explain the risk of a financial product to clients.
Pillai says the Stephans were given incorrect advice on the risk of the product.
The code of conduct under the FAIS Act prevents financial service providers from comparing products without outlining the differing characteristics. Pillai says it is "most disturbing" that the comparison between the Leaderguard investment and the call account in which the Stephans were invested did not include the characteristics of the two products.
"One cannot compare performance on a call account with an investment in forex, which, by its very nature is volatile," Pillai says.
Uninformed decision
Pillai found that although the document comparing the investments was undated and had no addressee, it was in all probability given to the Stephans by Van Zyl in order to induce them to invest in Leaderguard Spot Forex.
Pillai concluded that Van Zyl deprived the Stephans of the opportunity to make an informed decision about the investment and he did not accept Van Zyl's argument that it was not his advice which persuaded the Stephans to make their investment in Leaderguard.
He says Van Zyl "by his calculated misleading statements induced [the Stephans] to invest in Leaderguard Spot Forex".
Pillai dismissed as "vacuous statements" the arguments that the claim was premature and that the Stephans had not suffered a loss. He says Leaderguard Securities and Leaderguard Spot Forex have been finally liquidated and no investors have been paid income or capital since 2005.
It is a known fact that Leaderguard Spot Forex had lost vast sums of money, he says, and there are no prospects that favour the investors recovering any amount from the liquidated estates of these entities.
Van Zyl had recklessly and willfully advised the Stephans to invest in Leaderguard Spot Forex and he had been equally reckless in his responses to the ombud's office, Pillai says.
He ordered Van Zyl to repay them their investment of £59 919.
However, the ombud only has jurisdiction over claims up to R800 000. At the time that the Stephans complained to Pillai, their claim was within the R800 000 limit.
However, when Pillai made his determination the rand had weakened to R14.58 to the British pound, resulting in the Stephans' claim exceeding R800 000.
Pillai said the Stephans had therefore agreed to abandon the part of their claim that exceeds R800 000.
The Ombud for Financial Services Providers, Charles Pillai, can be contacted on telephone: 0860 324 766; fax: (012) 348 3447; or you can email: info@faisombud.co.za
  
 
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