FAIS Ombud: Orders that penisoner be paid R100 000 she invested in Leaderguard

The ghost of the failed Leaderguard forex scam continues to haunt the corridors of the Office of the FAIS Ombud.

This week Charles Pillai, the Ombud for Financial Services Providers, ordered a Welkom, Free State broker to repay R100 000 to 68-year old pensioner Mrs Hester Bronkhorst.

Mrs Bronkhorst claimed that in March 2005, on the advice of Pieter Nicolaas van der Merwe (Second Respondent) of Pieter Van Der Merwe Makelaars en Finansiele Adviseurs CC (First respondent), she invested R 100000 in Leaderguard Spot Forex (LSF), an entity which was incorporated and registered in Mauritius.

She was informed that 20% of the investment will be high risk and 80% safe. The funds were deposited into the account of Investec Global Investments. She later discovered that her funds were lost.

When she enquired, she was informed by the respondent that her funds were still in the country and that she should not worry. The Complainant alleged that she did not receive any proof that her funds were paid into LSF.

Mrs Bronkhorst sought a refund of 80 per cent of her investment which equals R80000.

On 29 September 2004 Leaderguard Securities SA (Pty) Limited (LS), the marketing arm of LSF, applied for a licence in terms of Section 8 of the FAIS Act. Between this date and 18 April 2005 (when the licence was ultimately refused), LS operated under the Registrar’s exemption in terms of Board Notice Number 94. LS was placed in liquidation on 24 March 2005;

In a response to the FAIS Ombud, the First Respondent denied liability for the complainant’s claim which it felt was premature in light of the fact that the liquidator of LSF was in the process of recovering funds which had been lost.

According to the First Respondent it was, therefore, not possible to determine the loss suffered by the complainant.

The First Respondent denied that the complainant had at this stage suffered any damages or financial prejudice as envisaged in section 28(1) of the FAIS Act.

First Respondent submitted that since a court would not be in a position to make such a determination, the Office of the FAIS Ombud was not in a position to make it either.

The First Respondent admitted that the complainant was advised that the investment would have a stop loss of 20 per cent and that 80 per cent would be secure, but states that this advice was in accordance with the marketing material supplied by LSF.

The First Respondent stated that the risks of investing with a foreign entity were set out in the Foreign Exchange Risk Disclosure Notice, which was signed by the complainant as part of her application to invest with LSF.

The Respondents had previously invested funds with LSF on behalf of the complainant’s brother. The First Respondent alleged that based on the performance of that investment, Mrs Bronkhorst approached Van der Merwe and requested that an amount of R 100000 be invested with LSF on her behalf.

On or about 7 February 2005, Second Respondent and the complainant completed a document titled “Ad Hoc – beleggings beplanning.” Simultaneously a risk analysis was completed. During this analysis, Second Respondent established that the complainant was a conservative investor. The First Respondent alleges that “as a result, it was decided to invest her funds in the “Moderate growth option”.

The First Respondent also submitted documentary proof of limited analysis and limited advice given to Mrs Bronkhorst and that she understood that Leaderguard presented a risk and that she was prepared to take the risk.

The First Respondent was of the view that it was not liable to the Complainant for the R 80000 which she sought.

In his determination, the FAIS Ombud ruled that the First Respondent did not have the requisite authority to provide advice or to render intermediary services relating to forex products.

The Ombud said there was no evidence that the First Respondent had informed the complainant that LSF had not been approved by the FSB at the date when the investment was done and what the consequences of a rejection of the licence would mean.

The Ombud was also critical of the financial advice given to Mrs Bronkhorst.

“The Complainant was 63 years old at the time the investment in LSF was made. The First Respondent admits to being aware that the complainant presented a conservative risk profile, having established this itself through the Second Respondent.

“However, instead of advising Complainant to invest in a conservative product, Second Respondent advised her to invest in LSF, which was an inherently high risk investment.

“The First Respondent defends this advice by stating that as a result of the Complainant’s conservative risk profile, it was decided to invest her funds in the ‘Moderate growth option’.

“The First Respondent’s recommendation does not follow the facts,” said the Ombud.

He added that it has already been held in previous Leaderguard determinations made by him that the Leaderguard investment ultimately constituted a speculative investment in an aggressive portfolio, i.e. at the opposite end of the spectrum to that of a conservative one.

“Unlike a younger person who is still employed and can recoup his losses, the complainant could not, in her situation, take the risk she was exposed to.

“This lack of appropriate advice/understanding of the product ties in with the absence of authority to market such products.

“The First Respondent states that the complainant understood the risk and was prepared to take it.

“The Second Respondent, however, himself did not understand the risk associated with forex investment let alone the LSF product.

“The First Respondent acted negligently by placing the funds of a conservative investor in the moderate option of a high risk product.

“In addition to a lack of understanding of the product he sold, the Second Respondent demonstrated a lack of understanding of his role as a financial services provider (on behalf of the First Respondent).

“First respondent unabashedly states that the complainant signed a document which states that she confirms that she had to decide whether the advice was suitable, given her objectives, financial situation and needs.

“This, however, is a duty which falls squarely on the shoulders of the provider concerned,” the Ombud ruled.

Although the Complainant claimed only R 80000 based on the fact that her decision was based on a guarantee of only 80 per cent of her capital, the Ombud stated she in all probability would not have invested in LSF if First Respondent’s advice had been above reproach.

“I am, therefore, of the view that Respondents should be jointly and severally held liable for 100 per cent of complainant’s loss,” the Ombud ruled.