Category Fraud/Crime

Why a Ponzi scheme can taint us all

11 March 2013 Fiona Zebst
Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

For a variety of legal reasons, calling an investment scheme a Ponzi scheme can get you sued (even if it is, in fact, a Ponzi scheme). But the fallout from dubious schemes like Sharemax and the latest on our radar, Net Income Solutions (Also known as Defe

It is bad enough that investors are losing their life savings, but intermediaries, financial services providers and regulators, including the Financial Services Board (FSB) and National Treasury, get tainted by association. Questions arise: Why was something not said or done earlier? Why hasn’t our exhaustive legislation prevented these schemes from flourishing?

The fact of the matter is, it’s a complicated issue. “In the past, we have said that authorities haven’t acted fast enough, but if you act too early you risk potentially destroying a business,” cautions Gavin Came, chairman of the Financial Intermediaries Association (FIA). “If it’s a legitimate business and you destroy it, there’s a legitimate claim against you. So it is really difficult to get the timing right.”

For this reason, too, it is simply not feasible to have some kind of process whereby financial products are given a ‘stamp of approval’, as has sometimes been mooted. “For one thing, that would stifle free enterprise,” says Came. “For another, it’s potentially defamatory. And in addition, the Financial Services Board (FSB) doesn’t want to stamp products because they’re then saying these products are great to invest in but they may not, in fact, be appropriate for particular clients.”

Came says legitimacy is one thing but appropriateness is quite another and only a trusted financial advisors is in a position to make that call. “Your broker understands the industry better than you do because he operates within it,” says Came. “Unfortunately, the biggest targets of dubious schemes are retirees who are desperate for yield as well as out-of-work youngsters, who may borrow money to make an investment.”

Came says the FIA Watchdog was set up in the 2nd half of last year as a warning system for FIA members, to advise caution when dealing with a particular supplier. He admits the FIA has to be really careful because of potential legal exposure. “You can’t tell intermediaries that a particular supplier appears to be acting illegally – you can only raise a red flag and suggest caution,” he says. He is pleased that FIA members have been proactive about investigating particular advertised products and he says that these matters are often raised with intermediaries.

When it comes to TCF, however, he says because it is an initiative and not a law, it is unlikely to prevent dodgy business dealings. “We want product suppliers to treat customers fairly when they design products, with the clients’ interests uppermost, but we cannot force them to do so. It may change the way current laws are enforced, though. For example, the Reserve Bank has acted quickly, using existing laws, to investigate the alleged Ponzi scheme Defencex. Early and rapid enforcement of the laws we already have works – you don’t need TCF to bring that about,” says Came.

It is not Came’s view, but there is some suggestion that new laws would simply make the gap between legitimate and illegitimate suppliers even greater. Legitimate suppliers are careful to comply with the law, but illegitimate ones will obviously try anything to dodge compliance and legislation.

Editor’s thoughts: Came says it is essential that intermediaries and financial services regulators keep their eyes on questionable financial activities, so consumers are alerted at the first sign that there may be something amiss. The price of not doing so is damage to the reputation of industry stakeholders. Policing the industry is a necessary evil, but one should also bear in mind that there are limits to what stakeholders can reasonably be expected to do. Financial advice doesn’t provide a guarantee against loss. It does, however, keep investment risk as low as possible by adhering to a regulated financial advice process, such as assessing appropriateness. Who should be responsible for policing dubious financial schemes? Let us have your comments below or email


Added by FPI Memeber, 11 Mar 2013
"For a variety of legal reasons, calling an investment scheme a Ponzi scheme can get you sued (even if it is, in fact, a Ponzi scheme). " Question to Gavni Came : Can Adv NM Bam , Ombudswoman get sued for makinga staement in her latest determination as quoted below ? "In her latest determination, Bam is scathing of the Sharemax directors, who she accuses of “violating the law.” Bam's determination was received after close of business on Wednesday and the Sharemax directors were not immediately available for comment. Bam writes: “The facts before this office support the conclusion that the investment, as promoted and executed by Sharemax, was nothing more than a Ponzi scheme. The directors of Sharemax violated the law and on this basis [they too] must be held liable for the investors’ loss.” The complaint in question was laid by pensioner Gerbrecht Siegrist, 73, who is now destitute after investing her capital in two Sharemax-promoted syndications: Zambezi and The Villa."
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Added by Zarrick, 11 Mar 2013
Certain schemes like Sharemax are based on a project plan. This was a building project that was funded by Investors. The viability of this as a project would be key. Commercial banks assess this type of project on a daily basis to assess if the would advance funding therefore. Having a commercial bank assess the project for feasability or employing a couple of ex senior bank credit managers to assess the project and projected cash flow statement they could provide the FSB with a report and a system to monitor the provider, possibly in conjunction with auditors to assist. This expertise is not at the FSB nor do I think they even looked at it. The Financial Planner/ Advisor relies on the FSB. If the FSB approves a license to one of these entities it is a go ahead for advisors to market the investment. It would be impossible for an advisor to conduct a due dilligence on every company that they would want to market as this would cost millions. Comprehensive due diligence investigations and ongoing monitoring by people who know what questions to ask would greatly minimise the problem.
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Added by FPI Memeber, 11 Mar 2013
The fact of the matter is, it’s a complicated issue . “In the past, we have said that authorities haven’t acted fast enough, but if you act too early you risk potentially destroying a business,” cautions Gavin Came, chairman of the Financial Intermediaries Association (FIA). “If it’s a legitimate business and you destroy it, there’s a legitimate claim against you. So it is really difficult to get the timing right. Another Question: Did the SARB / DTI / FSB destroy Sharemax ? Was it running a legitimate business over the past eleven years or not ? ( The Late Journalist Late Deon Basson got sued for +- R20million for being a whistleblower and reporting Sharemax to the SARB of which they did nothing and still has done nothing to prove this in court that Sharemax was running an illegal scheme ) Why has this not been proved beyond reasonable doubt in court by the SARB that Sharemax contravened the bank and various other acts before closing them down ?
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Added by confused, 11 Mar 2013
Vox Populi wrote: Sharemax said that they would keep a percentage of the investors funds in a seperate account and this would pay the monthly return to investors till occupation by tennants of The Villa. This should have been in a trust account. Ask any broker who was involved. The project stopped paying investors monthly returns long before this. If Sharemax used these funds for any other purpose then this would be fraudulent and Directors would face a jail sentence. This would be against the client mandate. Hello FSB..anyone listening!! You can nail Sharemax on this, attach directors assets, -Sell the Villa property, as it is going to ruin in the rain and settle investor claims. Maybe get out 60 to 70 cents in the rand. Even make an ex gracia payment to make up for losses and your slip up by giving Sharemax a license...ok that's pushing it. -Brokers don't have any money so that would be a waste of time chasing them, and dumb as they pay your salaries. Better than nothing though. I am sure Investors will see you as the knight in shining armour. The Reserve bank will wipe the sweat from their brow and we can all carry on with our lives and we will all have learned a lesson. Then make up some more legislation to protect us all. MR X Wrote More alarming than the deceptions perpetuated in the mainstream media is the lack of consequence for the myriad parties involved in the business of Sharemax Investments. “What happens to the FSB who issued Sharemax with a license?” asks Mr X. “The FSB may claim that they don’t regulate unlisted securities but they do have a guide to investing in unlisted securities, which the Sharemax prospectuses complied with very well. Can the FSB really claim that they did not know what business Sharemax was involved in? The product structure was negotiated with them after Sharemax was found to be in breach of the new law on Collective Investment Schemes in 2003 and Sharemax became a Licensed FSP soon thereafter”. The list is endless. “What about CIPRO who approved the prospectuses? What about the DTI under whose auspices these products fell? What about Weavind & Weavind who looked after the company’s legal affairs – or ACT Audit solutions? Surely the SARB has a case to answer for its opinion that the product contravened the Banks Act… Do the former directors and consultants of Sharemax, who carry on with their lives as before, have nothing to answer for? What about the attorneys and accountants who advice on investments daily without any risk? And last but not least: The Clients who claim that they have no free will and were bullied into the investment when they specifically asked for better returns”.
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Added by Ayanda, 11 Mar 2013
Dear Fiona, First, do we all know what a 'Ponzi' scheme really is? It is so often confused with genuine network marketing that on occasion even the authorities seem confused. Second, no amount of legislation can ever stop a man from making a fool of himself. That is why our Roman Dutch Law embodies the ancient legal maxim of caveat emptor - the buyer beware. Trying to undo this maxim by more laws and regulation is entirely futile as the Greeks, Romans, Dutch and English learned to their cost over millenia. There is proportionately no more or less fraud in financial services today than ever there was when we used ordinary commercial and common law to protect citizens. Only it cost the nation a lot less then. Indeed, the plethora of extra new laws and civil servants (Insurance Acts, PPR, FSB, FAIS, NCA, CPA, Ombuds, etc, etc, and of course, etc.) plus the massive costs thereof, have had little or no impact on levels of fraud, either here or abroad - and one should not expect this to be any different in the future. The fraudsters simply become more and more clever in circumventing the law. Either consumers start again taking responsibility for their own lives, as our parents and their parents and grand parents did before them, or we go on expecting the impossible of those poor fellows given posts at the FSB and other government agencies. Ever more sophisticated attempts to prevent men (and women) from making fools of themselves has greater and greater cost implications for the national economy and forces every consumer to bear hidden and undue expenses in the pricing of their products, for little or no real net gain and for the benefit of a tiny minority.
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Added by Wicus, 11 Mar 2013
This again shows that the public need good returns on their investments and because they do not get them from the financial institutions, they are desperate for something else and hence the investments where good returns are promised and which normally are ponzi schemes. If you look at stats - only 1% of people can retire financially free. This shows that investing with financial institutions is not the solution.
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Added by Lawless, 11 Mar 2013
" The Law is an Ass" after reading this story and all the comments. They are confused and toothless when it comes to enforcement ! Why are the promoters of these so called " Ponzi Schemes " not yet behind bars ! Does not look like the regualtors can enforce criminal charges , without being sued !
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