Brokers still paying for Leaderguard collapse
Leaderguard Securities (LS) and Leaderguard Spot Forex (LSP) went to the wall in April 2005, wiping out millions of rand of private savings and investment. Since the collapse the FAIS Ombud, Mr Charles Pillai, has entertained a number of complaints related to the schemes. His latest determination is in the matter of Petrus Wessels, a 51-year old farmer from Kroonstad and his broker, Pieter de Jager, of Pieter de Jager Makelaars.
De Jager (the respondent) contacted Wessels (the complainant) in September 2004 after the complainant’s regular broker retired. The previous broker had invested Wessels’ funds in Old Mutual Guernsey. This offshore portfolio performed poorly, reducing in value from £49 676 (in November 1999) to just £26 374 (by Q3 2004). On or about 22 October 2004 De Jager advised the complainant to terminate the Old Mutual Guernsey investment and move the funds to Leaderguard Spot Forex (LSF). The investment commenced on 1 December 2004 with an initial balance of $47 962.
The complainant missed the first possible signs of trouble. He read an article early in 2005 discussing problems at LS, but did not make any connection with his Hamilton Solutions and LSF investment until he received a letter from the an entity called Leaderguard Recovery Unit. The respondent repeatedly assured Wessels that his investment would be returned. It was only when he read the Leaderguard Liquidator’s report (dated 19 September 2007) that he realised his investment would never be recovered. At his point Wessels demanded compensation from the respondent – who refused – before lodging a complaint with the FAIS Ombud in November 2007.
The wheels of justice turn slowly
What follows illustrates the arduous ‘back and forth’ taking place at Ombudsman schemes across the financial services industry. The complaint was forwarded to De Jager on 10 March 2008. His initial response was filed a month later, on 14 April 2008. The FAIS Ombud – after due consideration – issued a notice in terms of Section 27(4) that was issued on 5 September 2008. The respondent’s complete papers were filed in the same month, on 26 September 2008. The determination mentions that further supporting documentation was filed as late as 4 September 2009. Bear in mind the complainant hasn’t had access to his funds since he invested them in December 2004!
Massive commissions were worrying, but...
The respondent says he first heard about LSF form representatives of Hamilton Solutions Limited in 2001. He met with two directors of Hamilton Solutions in August 2004. At this meeting they compared the returns earned on De Jager’s offshore client portfolios – typically at Old Mutual International – with those earned through LSF. Not surprisingly LSF performed considerably better and De Jager began talking with some of his clients about moving portions of their offshore holdings to LSF.
The transaction fees were a problem from day one. De Jager was receiving 0.2% monthly commission and the total charge to his clients in this investment ran to 0.7%, or 8.4% per annum! The respondent dropped some telling ‘gossip’ around Leaderguard’s operations. He mentioned that one broker was earning in excess of R100 000/month from his Free State book – suggesting around R50 million in assets under management. He also heard that Leaderguard had hired an entire resort in Mozambique, flying directors and management in by helicopter. De Jager says he instructed his clients to exit the Leaderguard investment in March 2005 when he realised their investments were unsafe. Unfortunately not all of his investors received the balances remaining on their accounts when Leaderguard went under on 30 March 2005.
After covering the respondent’s submission at length, Pillai said it was his job to decide whether “De Jager had the requisite authority to market forex products, whether De Jager acted in a manner which was not in compliance with the FAIS Act and/or negligently and if so, whether his conduct caused the complainant to suffer damage or financial prejudice.” If this were the case the amount of such damage or financial prejudice would also have to be decided.
Wading through the findings
The respondent ‘cleared’ the first hurdle. “De Jager was in fact authorised to market forex products and did so under Hamilton Solutions FSP licence – albeit in terms of an exemption granted to Hamilton Solutions,” said Pillai. Correspondence from the Financial Service Board (FSB) revealed that the respondent was one of 210 intermediaries investigated by them for assisting clients to place investments with LS, either directly or through Hamilton Solutions.
But Pillai wasn’t as forgiving when he addressed the advice issues. He concluded the advice provided by the respondent was not appropriate considering the complainant’s stated needs. In addition the respondent failed to properly disclose relevant and material information to enable the complainant to make an informed decision! Omissions included the risk associated with the investment and the difference in risk between speculative foreign exchange trading and an offshore fund. A common mistake made by brokers in the LS debacle was to fail to disclose that LS and Hamilton Solutions were operating under an FSB license exemption. Further to this the respondent failed to abide by the replacement policy protocol and to render financial services in accordance with the requisite honesty, care and diligence and in the interests of his client.
Pillai upheld the complaint and ordered the respondent to pay the complainant an amount of $23 981 within fourteen days plus interest at 15.5 per cent per annum calculated from 14 days after the date of this order to date of payment.
Editor’s thoughts: Promises of excessive return to clients and payment of high commissions to brokers are typical of investments that flout financial services regulation. In some cases money is invested with unacceptable levels of risk, in others it’s misappropriated. What is the highest commission on an investment product you are aware of? Add your comments below, or send them to [email protected]
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