FAIS Ombudsman punishes FSP for fraud and poor advice

When Cornelius Johannes Ferreira (the complainant) invested R50 000 in a managed Foreign Exchange product he did so with the understanding that Tyraz Investments CC (the respondent) would seek his permission to trade away more than 70% of the capital amount. This ‘guarantee’ proved meaningless and Ferreira was left with only R6 033 when he finally extricated himself from the resulting mess. He approached the Ombudsman for Financial Services Providers in an attempt to recover R28 967, being the difference between what he believed was the guaranteed amount (70% of R50 000) and the actual sum recovered.

Forget guarantees in the fast-paced world of foreign exchange trading

We’ve heard plenty of nightmare investment stories with roots in the foreign exchange trading universe. The most well known is the Leaderguard Spot Forex debacle which cost investors millions of rand. Management at Leaderguard used the window afforded by the initial Financial Services Board (FSB) licensing period to credibility to their operation. Is this case similar? We can think of three compelling reasons to answer in the affirmative.

The first is that foreign exchange trading is at the heart of the loss. The second is that misrepresentations were made about the financial service provider’s registration. And the third is that a substantial amount of investor capital went up in flames. According to Ferreira he approached Tyraz Investments after reading an advertisement in a local newspaper. His first call to Tyraz Investments was handled by its representative (and member) Jan Hendrik Van Zyl. Van Zyl explained how the product worked and also assured the complainant that he was in the process of registering with the FSB. The FAIS Ombudsman says “a copy of a document headed ‘FSP Application Progress’ was given to the complainant at a meeting on 14th October 2004 to convince him that there was an application in progress.” With this assurance and the 70% ‘guarantee’ Ferreira decided to go ahead with the investment.

A contract was concluded between complainant and respondent in which Tyraz was appointed as a facilitator to trade the complainant’s funds on a foreign exchange platform known as FX Active SA “or other similar recognised platforms as chosen by the facilitator.” This contract set out the investment as “trading in foreign currencies through FX Active SA” and included an investment restriction condition, being that “70% capital guaranteed under normal trading conditions.” The agreement stipulated that the complainant had to be contacted before trading on the account beyond this 70% capital guarantee.

A very attractive offer

A quick look at the initial advertisement which lured Ferreira is typical of similar high risk investment products. Who can resist “monthly income of 3%” or the opportunity to “compound profits to 42% per annum from investing in the world’s largest capital markets?” This claim soon proved unfounded. Ferreira was able to view his managed account through the FX Active trading platform, discovering five months after making the investment (on or about 22 March 2005) that his balance stood at only R6 033. Despite repeated requests to Van Zyl to have the guaranteed portion of his funds returned he had to satisfy himself with the R6 033 refunded to him by FX Active at his request.

The respondent failed to reply to the complaint. He discussed the matter by telephone in September 2007 and told the Ombudsman that the investment occurred prior to the jurisdiction of the FAIS Act. He said that he’d referred the matter to his attorney. The FAIS Ombudsman set about determining whether the respondent had “rendered a financial service within the jurisdiction of the FAIS Act; whether in rendering a financial service the respondent contravened any provisions of the FAIS Act or General Code; and whether the contraventions of the Act resulted in a loss, and if so the extent of such loss.”

Quite easily done

In each of these cases the FAIS Ombudsman found the respondent to be lacking. The FAIS Ombudsman’s jurisdiction “came into effect on 30th September 2004” and although the complainant may have held initial discussions with the respondent before that date “the crucial advice and investment” occurred when the contract was signed, on 14 October. “In simple terms even if discussions took place prior to the jurisdiction of this Office, there can be no doubt that the critical discussions, and hence advice, took place well within the jurisdiction of the Office,” said Ombudsman, Charles Pillai.

The advice given to Ferreira was also questioned. Although he was told that up to 30% of his capital could be ‘lost’ in the foreign exchange product there was no attempt to assess the appropriateness of using ‘retirement’ capital in such a high risk investment. “There can be no doubt that not only was the complainant not advised but even more alarmingly fraudulently led to believe that he was dealing with a duly licensed FSP in order to convince complainant to part with his money,” the Ombudsman ruled.

“The extent to which complainant was misled into believing that respondent was in the process of being registered, coupled with the lack of necessary documentation and promises of unrealistic return, is so material that I have no hesitation in concluding that 100% of the loss was directly attributable to respondent,” said Pillai. He ordered the respondent to compensate the complainant for the full amount of the capital sum lost – R50 000 less R6 033 – with interest.

Editor’s thoughts:
The FAIS Ombudsman takes a tough stance on institutions that misrepresent their compliance status to lure investors. Do you still encounter service providers that fraudulently claim to be registered financial services providers? Add your comments below, or send them to [email protected]

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