FAIS Ombud comes down hard on property syndication fraud
In a judgment likely to cause waves in the multibillion rand property syndication business the FAIS Ombud has ordered an investment company Lifesure Financial Services cc represented by Nigel Segers to repay Bernard Dudley, a 70-year old retired Western Cape man, R495 000 with interest.
The judgment places stiff obligation on those selling this type of product to ensure that they conduct a full and proper due diligence into the financial viability of a scheme prior to marketing it to their clients.
Hopefully this will go some way to placing a lid on exaggerated valuations, coupled with excessive costs and of course plain and simple fraud that bedevils this industry.
Noluntu Bam, the Ombud for Financial Services Providers, states in her ruling: “Much has been written about risks associated with property syndication and the history we have in this regard in South Africa.
“Notwithstanding the giant steps taken in legislative measures, this area continues to be plagued by stories of investors having been robbed of their investment in the most crude and opportunistic fashion.”
“Any financial services provider who intends to recommend an investment in a property syndication to a client must first obtain all the available information about the promoters as well as the financial viability of the underlying investment before the product can be presented to a client.”
Put simply the FSP is expected to first satisfy itself that the investment is sound. The investor upon being presented with such a product is entitled to accept that the FSP has satisfied himself that the product and its promoters are sound.
This does not simply mean utilising the information contained in the prospectus, given that this in itself may be misleading.
Ms Bam found that from the information brought to the attention of Dudley by Segers, the latter “had no idea what information to look for in a prospectus”.
“Worse, he carried out no independent verification of what was presented in the prospectus. It was open to him to seek this information. A glance at the prospectus indicates that the promoters deliberately intended to be economical with information relating to the financial details of the company.
“The information provided in the prospectus in relation to financial standing of the company is so inadequate that no reasonable provider acting in the interests of his or her client could have recommended the investment,” said Ms Bam.
Advisers are now required to conduct an independent verification of what is contained in the prospectus.
In the present instance, the Ombud slammed Lifesure Financial Services cc for not considering it necessary to see an independent valuation of the properties to be purchased or indeed that the properties would be purchased in the name of the property syndication.
She goes further in castigating Lifesure for not verifying any of the claims about the existence of the leases and the fact that Lifesure “never thought of doing any due diligence on either the properties or the leases”.
“It recommended to complainant that he invests in the syndication even though he had no clue about the physical state of the immovable property to be purchased, the areas where the properties are situated, whether or not there were tenants in the properties and what term was left to run on any of the leases.
“He had no idea whether the immovable properties were indeed worth what was going to be paid by the investors.”
At the heart of any investment is the attendant costs and charges and here again the Ombud did not pull any punches in criticising the respondent for not questioning a charge referred to as “commission goodwill” of 8%, and why it should cost investors 8% of their capital.
The Ombud further looked at the management charges and makes the rather pertinent statement that taking into account this expenditure together with any other foreseeable expenditure, the FSP must ascertain whether the projected returns are realistic.
It is only with advice from a provider acting with due skill and diligence that a client would appreciate whether the attractive projected returns were not too good to be true.
A syndicate gives a group of investors a stake in a commercial property, such as a shopping mall or an office block. A legal structure usually comprising a private company and a public company is created. Investors or shareholders buy shares in the public company, which owns the private company, which, in turn, owns the properties.
The Masterbond scam was one of South Africa’s most spectacular property syndication failures. Thousands of investors lost hundreds of millions of rands.
In lodging his complaint to Ms Bam, Dudley said the investment was positioned as, to use the words of Segers, “a property income plan which offered an attractive yield (10.5%) with the potential for growth of the capital”.
“I was not familiar with the company and questioned Mr Segers about their status. He vouched that the company was completely sound, all essentials had been checked and he was confident of the investment,” said Dudley.
Acting on the advice of Lifesure, Dudley invested R495 000 in November 2005 with Network 2 The Company Ltd, trading as Propdotcom 3. Dudley hoped to be paid a proportion of the net rental income from purchased properties as outlined in the prospectus.
Monthly income payments from the investment commenced in December 2005. In some months income payments were late. In August 2007, however, all payments from Propdotcom ceased. Thereafter Dudley was not paid anything and he believed he had lost his entire capital.
Upon investigating, the Office of the FAIS Ombud found that the decision as to the type of investment to recommend rested with both respondents and with no specification from the complainant. Also, respondents were at all times aware of the complainant’s status as a retiree including his financial standing.
Before recommending the investment, Segers attended a presentation where Blue Pointer presented its product to financial advisors. At that meeting, a prospectus concerning Propdotcom 3, was made available. In terms of the prospectus, Propdotcom 3 would acquire 100% of shares of a private company known as Nordic Saga Investments, 239 Pty Ltd.
The latter company was to have been the entity that would acquire the immovable properties, namely, Letaba Boulevard Centre in Tzaneen and Unit 1Willow Street in Bellville.
Due to the fact that Lifesure Financial Services CC was not licensed to render financial services in relation to shares, they applied to be appointed as agents of Blue Pointer Marketing (Pty) Ltd in November 2005. The agency arrangement, however, never came to fruition because, Blue Pointer Marketing (Pty) Ltd was in itself unlicensed.
After attending the presentation, Segers discussed the investment with the complainant. He said in studying the prospectus he noted several factors that ultimately persuaded him to conclude that the investment was suitable to address the complainant’s needs. Some of these factors were that:
· The Prospectus was registered by the Registrar of companies on the 11th November 2005,
· The bankers were ABSA bank
· The auditors were KPMG
· The transferring attorneys were Du Toit Binedell
· The marketer of the syndication - Blue Pointer – was a licensed FSP in accordance with the FAIS Act
· The investment was secured by the unbounded property.
In April 2006, complainant’s attention was drawn to an article in the Mail & Guardian about a public alert issued by the Financial Services Board warning the public to exercise caution when dealing with one Louis Baartman of Blue Pointer.
When Dudley asked Segers about the article, he was told that the article was about an outstanding civil case against Baartman and not connected with Blue Pointer.
Ms Bam found that Segers’ response was negligent, given that the wording of the
article was specific. It had nothing to do with outstanding civil cases against Baartman but his ability to render financial services to the public.
In August 2007 when all payments from Propdotcom ceased, Dudley instructed Segers to withdraw his investment from Propdotcom. It was at this point that Segers found out that Blue Pointer had closed its doors.
When Segers contacted Blue Pointer about Dudley’s unpaid income and sought to sell his client’s investment, he was advised that Blue Pointer could sell the investment but could not find any buyers.
In December 2007, Segers and Dudley were informed at a meeting that the reason Dudley’s income had stopped was that there were no properties and, therefore, no income to pay.
On asking how this had happened, they were advised that the transferring attorneys had paid the capital directly to Blue Pointer and that a building was purchased and sold without the necessary approval.
At this point Segers decided to see his attorneys and asked for an investigation into the matter. The investigation found that:
· Blue Pointer was denied a licence as an FSP. Baartman was found unfit to hold a license in terms of the FAIS Act;
· The prospectus was never registered;
· KPMG were never appointed as auditors;
· The transferring attorneys were negligent in paying the funds to Blue Pointer and not the sellers;
Ms Bam found that the respondents’ conduct violated the provision of the FAIS Act, specifically with regard to the duty placed on providers of financial services to act with due skill, care and diligence and in the interests of clients and the integrity of the financial services industry when rendering financial services to clients.
No records had been furnished stating what advice had been furnished to
Dudley, the basis for the advice, what other financial products were considered
and why an investment in property syndication was considered the most suitable
to address complainant’s needs. The General Code of Conduct for financial
services providers requires that such records be maintained.
“Any financial services provider who intends to recommend an investment in a property syndication to a client must first obtain all the available information about the promoters before the financial product can be presented to a client. The FSP is expected to first satisfy himself that the investment is sound,” said Ms Bam.
Segers had no knowledge of Blue Pointer’s history, no idea of who was behind the entity and no information as to the track record of the persons behind the company matter.
Ms Bam said the duty placed on providers to act with due skill, care and diligence
forces providers to take responsibility for the advice they provide to investors.
“The fact that a client may have extra funds to invest based on his financial means, does not give licence to any provider to act recklessly.
“In addition, embarking on an exercise of advising a client to invest in a product which the provider has not the slightest idea of how it works and no appreciation of the risks borders on criminal conduct.”
Ms Bam concluded that both respondents had caused Dudley’s loss and ordered Lifesure Financial Services CC to compensate Dudley in the amount of R495000 plus interest of 15.5 % p.a. from 30 November 2008.
