February 13, 2010
By Neesa Moodley-isaacs
In two more rulings related to the Leaderguard foreign currency scam, Charles Pillai, the Ombud for Financial Services Providers, recently ordered two Welkom brokers to reimburse their clients. This brings to nine the total number of ombud rulings against brokers who promoted the forex scam.
In September 2004, Leaderguard Securities SA, the marketing arm of Leaderguard Spot Forex (LSF), applied to the Financial Services Board (FSB) for a licence in terms of the Financial Advisory and Intermediary Services (FAIS) Act. Between September 2004 and April 2005, when the licence was ultimately refused, Leaderguard Securities operated under an exemption from the Act's licensing requirements.
The Mauritius-based LSF and its South-African marketing arm were placed in liquidation in 2005, leaving 1 600 investors with losses of about R300 million.
This week, 68-year-old pensioner Hester Bronkhorst and Petrus Wessels both won the complaints they took to the ombud, and two different Welkom brokers - Pieter van der Merwe of Pieter van der Merwe Makelaars en Finansiele Adviseurs and Pieter de Jager - were ordered to reimburse them.
Similarities
The two rulings were similar in that in both cases, Pillai found, the Welkom financial advisers:
Did not have licences in terms of the FAIS Act to provide advice or render intermediary services related to foreign exchange products;
Failed to inform their clients of the full risks of the investments and told their clients that they could lose a maximum of 20 percent of their investment while 80 percent of it would be "safe";
Did not disclose that Leaderguard Securities was operating under an exemption from the FAIS Act's licensing requirements; and
Did not disclose that LSF had not been approved by the FSB at the time of the investments.
In both cases, the investors discovered their losses only after reading about Leaderguard's problems later.
Ruling 1:
In the first case, Bronkhorst invested R100 000 in Leaderguard Spot Forex (LSF) in March 2005, through Pieter van der Merwe of Pieter van der Merwe Makelaars en Finansiele Adviseurs in Welkom.
After she discovered her losses, Bronkhorst applied to the ombud for a refund of R80 000, or the 80 percent of her investment that Van der Merwe told her was "safe".
In his response to the ombud, Van der Merwe denied liability for Bronkhorst's claim on the basis that the liquidator of LSF was still in the process of recovering investors' funds and the claim was therefore premature.
Van der Merwe also said the risks of investing with a foreign entity had been set out in the Foreign Exchange Risk Disclosure Notice, which Bronkhorst had signed when she applied to invest in LSF.
But Pillai dismissed the arguments, saying: "Bronkhorst was 63 years old at the time. Instead of advising her to invest in a conservative product, Van der Merwe advised her to invest in an inherently high-risk investment."
He says the Leaderguard scheme ultimately constituted a speculative investment in an aggressive portfolio - the opposite end of the spectrum to a conservative portfolio.
"Unlike a younger person, who is still employed and can recoup his or her losses, Bronkhorst could not in her situation take the risk she was exposed to. This lack of appropriate advice or understanding of the product ties in with the absence of authority to market such products," Pillai says.
"Van der Merwe states that Bronkhorst signed a document that confirmed that she had to decide whether the advice was suitable, given her objectives, financial situation and needs. This, however, is a duty that falls squarely on the shoulders of the provider concerned."
Pillai says it is the duty of a financial services provider to make sure that the advice is suitable, given a client's objectives, financial situation and needs.
Not above reproach
Although Bronkhorst claimed a refund of R80 000 because she had been guaranteed only 80 percent of her capital, Pillai said that in all probability Bronkhorst would not have invested in LSF if Van der Merwe's advice had been above reproach.
He ruled that Van der Merwe and his company were jointly and severally liable for 100 percent of Bronkhorst's loss. They were ordered to repay Bronkhorst R100 000 plus interest of 15.5 percent calculated from two weeks after the date of the ruling to the date of payment.
Pillai says it is extremely doubtful that Bronkhorst would recoup any of her capital from either Leaderguard Securities or LSF, but that if she did, she would have to reimburse Van der Merwe and his company for any amount that would constitute a double payment of her capital and interest.
Ruling 2:
In the second case, Wessels was referred to Welkom broker Pieter de Jager when Wessels's broker retired in September 2004.
Wessels had funds invested offshore in Old Mutual Guernsey, and the value of the £49 676 he had invested in November 1999 had dropped to £26 374.
According to the determination, De Jager advised Wessels to disinvest from Old Mutual Guernsey and to invest in the forex market through Leaderguard Spot Forex (LSF).
Wessels invested R570 000 in LSF on December 1, 2004.
Wessels says it was only when he received a letter from the Leaderguard Recovery Unit and contacted De Jager that he was told that the money in LSF had been "stolen".
On October 18, 2007, Wessels asked De Jager to refund his capital with interest.
Wessels lodged a complaint with the financial services ombud the following month.
'Not sustainable'
In responding to the complaint, De Jager told the ombud that when he was introduced to Leaderguard in March 2001 by representatives of financial services company Hamilton Solutions, he thought the commissions and fees were not sustainable.
De Jager told Pillai that in August 2004 he was shown LSF's portfolio and returns, which compared favourably with Wessels's portfolio invested with Old Mutual International. Because of this, De Jager said he advised several of his clients, including Wessels, to switch their investments to LSF.
By this time, De Jager had been appointed area manager for Hamilton Solutions in the northern Free State. As a result, a fee of 0.2 percent was added to De Jager's remuneration package, increasing the monthly costs of his clients' investments to 0.7 percent.
De Jager told Pillai that he asked Hamilton Solutions if the fees for all his clients could be reduced to 0.2 percent, but was told that this was not possible.
He told the ombud he later became "uneasy" about the LSF scheme and, by March 8, 2005, had contacted all his Leaderguard investors to withdraw their investments. However, not all his clients, including Wessels, had done so by the time Leaderguard crashed on March 30, 2005.
The ombud also found there was no evidence that De Jager had disclosed to Wessels that he was operating under an exemption pending the processing of Hamilton Solutions's licence application.
Pillai ordered De Jager to repay Wessels his R570 000 plus interest of 15.5 percent a year calculated from two weeks after the date of the ruling to the date of payment.
Contact
If you have a complaint relating to financial advice, contact the Ombud for Financial Services Providers, Charles Pillai.
Telephone: 012 470 9080
Post: PO Box 74571, Lynnwoodridge, 0040
Fax: 012 348 3447
Email: info@faisombud.co.za
Website: www.faisombud.co.za
  
 
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