Unclaimed shares pose a number of irregularities
The Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud) recently released a determination, in which an issue arose out of an investment.
We summarised the determination for you but you can download the original determination here.
Notification of unclaimed shares
During 2011, the complainant Dr Robert Alexander Georges De Meulenaere, a 53-year-old radiation oncologist at the time, was contacted by Sophia Elizabeth Coetzer, trading under the name and style of Downstream Trading who had notified him that he had a number of unclaimed shares with Netcare, Sanlam and Old Mutual.
De Meulenaere disputes Coetzer’s claims that the shares in these entities were either unclaimed or unknown to him. Nevertheless, a meeting was arranged for 12 December 2011 and based on Coetzer’s recommendation, De Meulenaere agreed to sell the shares held in Netcare, with the proceeds being used to purchase shares in Unimin African Resources. Coetzer had advised that the investment in Unimin would yield a greater return than that of Netcare.
During the same meeting, De Meulenaere had signed a letter of appointment in favour of Coetzer as his representative, and after the sale of all the shares in Netcare, which yielded an amount R1 679 404, an investment of R1 300 000 was made into Unimin on 13 April 2012.
De Meulenaere had been under the impression that he was purchasing preference shares and that the shares were listed on the Frankfurt Stock Exchange. He had also been advised that those very preference shares could be exchanged for shares in Global Precious Commodities (GPC) after a period of 12 months.
A number of irregularities
During July 2014, De Meulenaere requested the return of his funds and it was then that he became aware that Unimin did not even have mining rights and that it only held prospecting rights. Furthermore, during August 2014, De Meulenaere was informed in correspondence from Unimin that there had been irregularities detected with regards to Unimin’s capital structure, and that certain preference shares issued, which included those of De Meulenaere were invalid. The result was that the preference shares, which had all along been ordinary shares, remained as ordinary shares.
The letter also confirmed that GPC was, contrary to undertakings made by Coetzer, not only an untradeable security but that is was no longer a going concern. It was also noted that Unimin could as a result of a number of irregularities, the share capital being one of them, not be listed.
De Meulenaere has to date been unable to access his funds and they have for all intents and purposes been lost. He is of the view that Coetzer should be held liable for the losses incurred as a result of her recommendation to invest in a high-risk product without having even conducted a risk analysis. He states that had it been conducted, it would have recorded that he was a risk averse investor who required a guarantee on his capital. De Meulenaere seeks payment of his capital in the amount of R1 300 000. He agreed to abandon the amount in excess of R800 000 to bring the claim within the jurisdictional limits of the Office.
The respondent’s version
Coetzer claims that she conducts the business of a tracing agent in respect of unclaimed securities and dividends under the name and style of Trace Solutions. She claims that she works from leads provided by a database where after having traced the respective individual she would assist with the replacement of share certificates etc. All of this is done in return for an agreed upon percentage of the value of the unclaimed shares.
It is Coetzer’s assertion that should the client wish to dispose of the shares she ostensibly refers them to PSG Konsult Financial Planning and her involvement would then cease. She therefore denies, despite being licensed to provide both advice and intermediary service with regards to shares, to in fact having rendered a financial service as contemplated by the FAIS Act.
She does however admit that in a meeting during March 2012 the topic of Unimin had arisen. Despite her claims that she had advised De Meulenaere that she was unable to advise on such an investment and that he would have to do his own research in this regard, she had directed De Meulenaere to Unimin's website and told him that she would assist in setting up a meeting with the company’s CEO.
She therefore remains firmly of the view that De Meulenaere had conducted his own research into Unimin and that he had as a result fully understood the risks associated with such an investment. Coetzer ended the response by claiming that De Meulenaere failed to demonstrate that he had suffered any financial prejudice as a result of the Unimin transaction.
The Ombud’s stance
According to the Ombud, in recommending the investment to De Meulenaere, Coetzer breached a number of provisions of the Code. The risks in the investment were not disclosed. She has provided no documents to demonstrate that, despite having had access to all the relevant and available information pertaining to De Meulenaere, that the recommendations made were appropriate to De Meulenaere’s needs and circumstances. No documentation exists to indicate that De Meulenaere had been informed as to the implications and consequences of replacing the Netcare shares with shares in Unimin. The Ombud states the failure by Coetzer to fully disclose all the material aspects canvassed in this determination would mean that De Meulenaere had not been placed in a position to make an informed decision.
The Ombud believes that there is no doubt that had De Meulenaere been made aware of the risks involved in these investments, he would not have invested in Unimin. Coetzer is also deemed to have contravened section 2 of the Code in having failed to conduct the required due diligence prior to recommending an investment in Unimin.
Coetzer, the Ombud states, appears to have kept information regarding Unimin to herself to the exclusion of her client. It is thus fair to say she had no idea who she was dealing with in recommending an investment in Unimin and could therefore not have acted in the De Meulenaere’s interests when she recommended this investment to him. As a consequence of the numerous breaches of the Code, Coetzer committed a breach of her agreement with De Meulenaere in that she failed to provide suitable advice.
The complaint is upheld. Coetzer is ordered to pay De Meulenaere the amount of R800 000.
Editor’s thoughts:
There is often a need to identify and understand the implications of the potential effects of these actions. When we learn the undesirable consequences of other people’s actions this helps us determine the steps we need to take to avoid, mitigate, change, or eliminate these consequences from happening to us. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
