Another investment scam unravels
Hot on the heels of Fidentia, another company which offered a mix of property 'investment' solutions and subscription financial advice products has been placed in liquidation.
The company's bank accounts were frozen on 28 February this year and, as of 7 April, investors are still waiting to see how much of their money will be recovered.
The liquidation order followed an investigation by the Registrar of Banks which found that the complex financial transactions underpinning the company amounted to little more than a pyramid scheme. In addition, the company was conducting the business of a bank without the required banking license.
Deputy registrar of banks, Michael Blackbeard confirmed that: "Money Skills was issuing debentures to the public in direct contravention of Section 83 of the Banks Act. We have appointed two managers to take control of the monies in the bank account and alert investors to the latest developments."
The registrar has subsequently rejected various proposals by the Money Skills management team to 'trade' out of their financial difficulties and repay investors. The proposed solutions were unworkable and could not be financed from the companys available resources.
More than 400 clients involved
Shares (actually debentures) in Money Skills were sold for R100, 000 each. In return, investors received a share in a public unlisted company and a five year debenture. The debenture would pay 2% per month (or 24% per annum) over a five year period. In other words, investors would receive their R100, 000 plus interest after five years.
South African website MoneyWeb estimates that as many as 400 clients invested in these Money Skills debentures. These clients will now be waiting for a refund from the companys frozen accounts.
The worst aspect of this scheme was that investors were encouraged to take additional funds from their own mortgages to raise the capital for the investment. Unless you are a skilled investor using derivative products for financial leverage, the golden rule of investing is never to use borrowed money. Your main residence is a safety net for your retirement and you should never jeopardise this asset.
The company also operated a property investment branch which offered an opportunity to individuals to earn rental income on second properties. These transactions were heavily weighted in Money Skills' favour.
Investors were urged to obtain finance for the property and sign 100% surety for the loan. Thereafter the property would be registered in a trust with Money Skills owning 60% and the investor 40%. It takes a very brazen investor to simply sign away 60% of their investment...
Only a few 'winners' in a pyramid scheme
Many so-called investment companies choose to operate with a pyramid-scheme structure. The general idea is that existing 'investors' are compensated out of funds brought in by new 'investors'. The emphasis at companies operating a pyramid scheme is always on recruiting as many new participants as possible.
As soon as new membership dries up the company is unable to fund its operations, and is also unable to make good on the handsome financial rewards that it promised the investors in the first place. A few lucky individuals (and definitely the owners or initiators of the scheme) walk away compensated or at break even. The rest will inevitably lose a portion of their hard earned savings.
It is unlikely that investors in the Money Skills concept were fully informed of the risks associated with the transactions they were entering into. We will have to wait and see if the threatened criminal actions are brought against the directors and management of the scheme.
Editor's thoughts:
Money Skills lured investors with promises of quick and easy returns from property investments. If investors had paid attention to the outrageous claims made in some of the company's marketing material they might have saved themselves a great deal of financial hardship. "Make money on auto-pilot" and "zero risk on a second rental property" are not the type of claims you expect from a reputable investment firm. Are you aware of any similar schemes or practices in operation today? Send your comments to [email protected].
