FAIS Ombud orders Leaderguard broker to repay pensioners

The spectre of Leaderguard, the failed investment scheme that defrauded more than1850 South African investors - mostly pensioners - of at least R385m, continues to haunt the corridors of the Office of the FAIS Ombud who has already pronounced on several errant brokers.

This week Charles Pillai, the Ombud for Financial Services Providers, upheld yet another complaint against a broker who enticed an aged couple to invest in Leaderguard, only to later discover they were never going to see their precious money again.

The first complainant Willem Johannes de Lange, an 81 year old pensioner of Heiderand near Mossel Bay, and the second complainant, his 74-year old wife Mrs Elma Cornelia de Lange, also a pensioner, sought compensation from the respondent, Johan Stander T/A Johan Stander Makelaars, for almost R600000 they had invested in Leaderguard.

The complainants said they had a large amount of their cash investments in money market funds. Stander, who was their broker, had for some time given them advice about several alternative investments, which they had rejected.

They said they had told him that they would only consider alternative investments if they could provide more income than the money market funds and provided they were as safe as the latter.

In November 2004 Stander informed the couple that Leaderguard Spot Forex (LSF) was such an investment. Stander, and Christine Immelman of Leaderguard Securities (Pty) Ltd (LS) - the South African marketing arm of LSF - had recommended investment in LSF so strongly that the complainants withdrew their investments from the money market and invested in LSF.

LSF was an entity incorporated and registered in Mauritius. LSF and LS have since both been liquidated.

First complainant said that about a month after investing in LSF, in December 2004, he read in the press that Leaderguard was “bankrupt” and he could not get his money back, from Stander even though he was promised it.

At the time of lodging the complaint with the FAIS Ombud (in 2006), Willem de Lange said he was 78 years old and was very concerned about their money. He had invested R308327.21 in LSF and his wife had invested R270804.43.

When asked to respond, Stander said he was authorised in terms of his FSP licence to

market forex. He added he had complied with all relevant provisions of the General Code of Conduct for Authorised Financial Services Providers when advising the complainants. He did not believe he had been negligent in advising the complainants to invest in LSF.

He said at the time he recommended the investment to the complainants in November 2004 he had no reason to be suspicious of or concerned about LSF.

In his determination, the Ombud said Stander had applied to be registered as a Financial Services Provider and for authorisation to give advice on forex on 2 August 2004.

“Stander had mentioned in a supporting document to his licence application that the foreign entity he would be dealing with was LSF.

“He was - like many others - given a blanket exemption to continue giving advice whilst his licence application and forex authorisation was being processed.

“Stander has not been forthright in this respect. In his response to the complaint he said he was licensed to give advice on forex investments.

“But the rendering of the service to the complainants took place during the period of the exemption, i.e. prior to 21 December 2004. The licence and authorisation were granted only on 21 December 2004 which was long after he had advised complainants during the exemption period. “

The Ombud said Stander had failed to mention to complainants that LSF had not been approved by the FSB at the date when the investment in LSF was made.

He also did not disclose that he himself was operating under an exemption pending the processing of his licence application. Disclosure of these facts was important.

Rejection of either Stander or LS’s licence applications would have meant that any monies invested by his clients during the period of exemption would have had to be refunded to them. Failure to mention this meant that the complainants were not placed in a position to make an informed decision.

In deciding whether Stander had acted with due skill and diligence, in accordance with the General Code of Conduct, when he advised complainants to invest in LSF given the complainants’ particular circumstances, the Ombud considered the forex investment posed high risk.

“They were 78 and 72 years old respectively and Stander, by his own admission knew they had a conservative risk profile. “

The Ombud said the Code provides that before giving a client advice, the FSP must “identify the financial product or products that will be appropriate to the client’s risk profile and financial needs”.

The complainants had also submitted that Stander had failed to properly disclose all costs in violation of the provisions of the FAIS Act.

The Ombud ruled that Stander’s advice to complainants to invest in LSF was negligent and in breach of his duties as provider in terms of the Code. Stander’s inappropriate advice had caused complainants their loss.

“Switching money market investments into currency speculation is in my view, negligent and not acceptable if the client had no knowledge of the factual risks involved or if he had a low risk profile, but that depends on the personal circumstances of the person, such as age, value of total assets, and so on.

“As an experienced provider of many years, Stander surely knew or ought to have known that forex trading is volatile, subject to the vagaries of almost daily fluctuations in value and is inherently a high risk investment.

“So why did he recommend the LSF investment? I can find no other reason other than his own misunderstanding of the nature of the product and self interest or commission to be earned that caused him to recommend it,” the Ombud said.

Stander was ordered to repay all monies invested in LSP by the complainants with interest.