Gullible investors cannot resist inflated returns
What would you say if an investment company guaranteed 2.5% per month on a fixed investment of R100 000? If you’re a South African investor then chances are you’d haul out your cheque book and part with some of your life savings. And true to form, six months to a year down the line, you’d be knocking at the regulators door for them to intervene on your behalf. Despite the thousands of column inches devoted to educating investors on how to spot a questionable investment product, hundreds of investors fall victim every year.
We’re not halfway through 2009 and a number of these so-called investments have faltered. Edwafin – which sold debentures through a number of financial intermediaries – was placed under provisional liquidation in May 2009. The first signs of trouble came in October 2008 when it failed to make interest payments to some of its debenture holders. At the time of liquidation the group assets of around R16.5m were offset by debts in the order of R228.5m. A month previously the Financial Services Board applied (FSB) to the high court for the liquidation of companies in the Corporate Money Managers stable. Their initial investigation into activities at the group “revealed serious liquidity and other problems in the business of the entities.” And that from a company that operated in the money market space.
Once the hammer falls your investment is up in smoke
The moment a dodgy investment company goes into liquidation you can kiss your cash goodbye. Because once the administrators (curators or other court appointees) take their slice, pay the preferred creditors and divide what’s left, you’ll be lucky if you see 5c in the rand. Perhaps the only consolation at this stage is that your investment would have been worth nothing anyway. The liquidation only serves to accelerate events. And – in a bizarre twist – the liquidation could prevent you from ploughing more of your savings into the same opportunity.
There will be many more dodgy investment companies going to the wall this year. One of the reasons for this is many of these companies hope to generate the promised returns from property or equity investments. During the boom times starting 2003 and ending mid-2007 (for equities mid-2008) the financial directors could keep most investors happy by juggling funds or ‘borrowing’ from new investors. But with housing and equities in the doldrums – and new funds drying up as consumers struggle with increasing levels of debt – this simply isn’t possible anymore.
Just yesterday a reader forwarded an article from the Afrikaans daily Rapport. The article discusses an ongoing FSB investigation into A&S/Kings Brokers, both part of a company called King Financial Holdings in Wellington. This company offers investments in residential and commercial property developments, as well as a number of financial services such as healthcare, risk cover, mortgage broking and real estate broking. Reporter Adri van Zyl says the company set about raising R100m in July 2008. Since then investors haven’t received audited statements or their promised investment returns. Yes – you guessed it – an investment with King Property Finance promised 2.5% per month on an investment of R100 000.
Give unlisted venture capital schemes a wide berth
The best advice we can give is that you treat any financial opportunity that ‘guarantees’ excessive returns with utmost suspicion. And remember, while most of these schemes can be dismissed out of hand, some appear quite plausible.
In an article titled “Hell to Pay,” Finweek’s Marc Hasenfuss provides a useful summary of 11 disappointing unlisted venture capital projects. His “projects from hell” summary includes the likes of UG2 Platinum, Agave Distillers, Global Jewel, Wealth 4U, Supertow, Vinguard, SA Organics, Mobile Events Marketing, Lazaron, Garek and APMI. You’ve probably encountered more than one of these firms in recent years. According to Hasenfuss the common thread running through these so-called investment opportunities is that “not one of them can prove a tangible return of any sort to shareholders.” They also tend to go belly-up – leaving investors penniless. Agave Distillers has been liquidated twice in different guises while Garek and Wealth 4U both went to the wall earlier this year.
Don’t get involved in an unlisted venture capital opportunity unless you’ve completed due diligence. Hasenfuss provides five commonsense steps in his article. Before you invest you should ask:
- Does the company have an operating track record?
- Have banks, investment companies or private equity partners already provided funding to the company?
- Are you buying new shares or shares already in issue
- What are the shares really worth
- How much commission is being earned on the sale of these shares
Asking the right questions will save you a fortune
FAnews Online has a suggestion of its own. Remember – these companies are usually set up by shrewd operators – and there’s a good chance the answers to the above questions will be slightly embellished. So make sure you get independent verification of all the facts. Misrepresentation of facts (you and I call it lying) is common practice at questionable investment companies. Another sure warning sign is excessive commission or reward for selling the product/opportunity or recommending it to family and friends.
But don’t take our word for it. Consider instead the 1 850 investors who lost in the region of R350m after investing with Mauritian-based Leaderguard Spot Forex. The FSB was instrumental in putting this company in provisional liquidation in March 2005. Investors were introduced to the opportunity through Leaderguard Securities in South Africa. Brokers who recommended the Leaderguard investment were castigated by FAIS Ombudsman Charles Pillai for their “poor judgement” in recommending the investment – especially in light of the higher-than-normal commissions paid. And brokers in turn bemoaned the FAIS licensing process which allowed representatives of Leaderguard to claim they had regulatory approval.
Editor’s thoughts:
We try to keep our ear to the ground for schemes that offer ridiculous returns; but unfortunately most of them only come to light after investors take a hit. What are the latest ‘fantastic return products you’ve been bombarded with? Add your comments below, or send them to [email protected]
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