Boiler room operators reel under R4 million penalty
On 6 November 2012 the Enforcement Committee of the Financial Services Board (FSB) imposed a R3 million penalty on Advocate George Catsicadellis and a R1 million penalty on Monica Greyvenstein (nee Botha) for contravening various provisions of the Financi
Catsicadellis was an authorised Financial Services Provider (FSP) and conducted business under the name of Investcare, based in Cape Town. The Registrar of Financial Services Providers withdrew his licence on 8June 2011. Greyvenstein was a representative of Catsicadellis during the period relevant to the contraventions in the case. During 2008 to 2010 Catsicadellis and his representatives (including Greyvenstein), cold-called randomly selected members of the public and advised them to invest in Platfields Limited shares. They employed high-pressure selling tactics to convince their ‘marks’ to invest in the unlisted mining exploration company… Most of the shares marketed were owned by Catsicadellis.
A clever strategy to fleece unwitting investors
The Committee reveals that Catsicadellis purchased large number of shares in then unlisted gold and platinum mining company Platfields for around 80c per share. Catsicadellis, with the active assistance of Greyvenstein, operated a boiler room to on-sell these shares to unwitting investors. The term boiler room, according to website Wikipedia.org, refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny shares, private placements or committing outright stock fraud. Catsicadellis made various misrepresentations regarding fictitious listing dates, listing prices and exorbitant growth projections of Platfields shares to lure investors in.
Through Investcare some R7 million worth of Platfields shares were sold to 736 investors. The shares, sold at around R3/share, eventually listed on the JSE Limited at just 7c/share. According to the Committee: “The fact that within days after the listing of Platfields shares, shares in the company were [changing hands] at 7c/share, goes far to show how misguided the 736 persons were and that an investment in Platfields was highly speculative”.
It found that the use of cold-calling was singularly inappropriate for this type of investment and condemned the conduct of strongly urging persons sought to be made clients to invest in what was plainly a highly speculative investment, at inflated prices, in shares owned by the seller. The Committee concluded that Catsicadellis’ conduct amounted to a flagrant disregard of the statutory directives of what is to be expected of an FSP.
The charges
We turn to the ‘charge sheet’ to find out where the respondents erred. Although six chargers are listed the bulk of the determination deals with the first, namely that the respondents “set about flogging Platfields shares in a deceitful manner for amounts well in excess of their intrinsic value [and also] touted for clients in an improper manner”. The Committee said that there had been improper conduct in attaining contact and communication with potential buyers of the shares and misrepresentations to potential clients regarding the merits of investing in the shares.
Its allegations were underpinned by 15 independent testimonies that confirmed a similar modus operandi in marketing the ‘opportunity’. Each of these ‘witnesses’ swore that they were approached telephonically by someone at Investcare. They added that the contact was unsolicited and that they had no prior businesses dealings with the company. In each case the investor was offered an opportunity to purchase Platfields shares with the promise of massive returns at listing – which date was falsely stated as mid-2009 – and substantial gains within two years after listing. (Platfields only applied for a listing in Q3 2010, which request the JSE granted on 3 December of the same year).
Smashing a disingenuous defence
Among his many ‘defences’ the respondent argued that none of the share purchasers were in fact clients when the cold-calling took place. In this regard, the Committee noted: “We consider that the purchasers of Platfields shares via Investcare became ‘persons who may be clients’ the moment they were earmarked by Investcare with the intention of urging them to purchase Platfields shares”. The Committee also dismissed the claim that calling on several persons to buy Platfields shares amounted to the rendering of advice to the general public… It determined that the conduct of both respondents fell squarely within Section 2 and 3 of the Code – namely General and Specific Duties of Providers – which duty they both contravened.
As for the remaining five charges, the Committee determined that Catsicadellis contravened Sections 14(1)(a) and b(i), (ii) and (iii) of the Code; Section 13(2)(b) of the FAIS Act; Section 15(2)(a) of the Code and Section 21(1) of the FIC Act. [Readers can view the full determination here]. It concluded that Catsicadellis did not obey the dictate that he should act in the interest of his clients; but acted solely in the promotion of his own interests. The use of misrepresentations in order to secure sales at relatively high prices for Platfields shares amounted to a complete absence of honesty and fairness.
Editor’s thoughts: South African investors have fallen victim to a number of “boiler room” scams in recent years. Although the Enforcement Committee action should be applauded it is too little too late for the affected investors. And one cannot help but wonder whether the punishment fits the crime. Do you think that the Enforcement Committee action should be followed up by criminal prosecutions? Please add your comment or send it to [email protected]
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