A triple victory for GAREK investors

Noluntu Bam, the Ombud for Financial Services Providers, has big shoes to fill. In April 2010 she took over from Charles Pillai, who vacated his post to accept a new challenge as the Pension Funds Adjudicator. A week after taking office Bam fired a broads

The GAREK scheme lured in approximately 2 000 investors who lost millions of rand. In a previous ruling (by Pillai) Van der Merwe had been ordered to compensate Adolf Hare (R30000) and Christina Hare (R10000) after the promised growth in their investments failed to materialise. And complaints are still streaming in. The Office of the FAIS Ombud is entertaining 14 complaints about financial services rendered in recommending investments in the GAREK scheme.

How the scheme worked

Van der Merwe allegedly pressured investors to purchase unlisted shares in a company with the promise of ‘tenfold’ returns when the company listed. The complainants described a typical greed-based sales pitch underlined by empty promises and front companies. What convinced the public to invest in the scheme? Towards the end of 2004 rumours did the rounds of a new company that would soon list on stock exchanges in several countries around the world. Investors were encouraged to purchase GAREK shares at R2.50/share with the promise they would trade at R20/share within months. Jacobus Francois Meyer – complainant A – invested R7 500 in the scheme on 13 December 2004 and a further R7 500 on 31 December of the same year.

Investors were initially offered shares in another vehicle (called MATRIC) with the promise of two GAREK shares for each MATRIC share purchased. The sales pitch had a number of ‘bells and whistles’. “Van der Merwe promoted the company in glowing terms and made much of the fact that he himself had invested in excess of R1m in MATRIC,” observes Bam. He also provided an impressive list of directors and showed the complainants copies of an article in the respected TIME magazine, in which GAREK was lauded as business with R5.4bn in international assets. It subsequently emerged that these articles were promotional ‘advertorials’ placed in the magazine by GAREK itself. The listing never materialised on the intended date; or at any of the dates subsequently advised. Five years later investors are still in the dark.

Renier Stephanus Meyer – complainant B – was introduced to Van der Merwe by his brother (complainant A). He followed Van der Merwe’s advice and invested R25 000 on 12 November 2004, an additional R25 000 on 24 January 2005 and a further R25 000 on 22 April 2005. “He said he had been assured of the soundness of the investment by Van der Merwe, only to discover he was on a ticket to financial disaster,” notes Bam. The third complainant, Catherine Elizabeth de Boer invested R50 000 in May 2005.

What the broker did wrong

Bam reports that the complainants’ versions of events were remarkably similar. “They said they were never in a position to understand either the structure of or the risks involved in the scheme.” Instead the broker put them under pressure to act quickly for fear of missing out on the listing windfall!

Van der Merwe contravened several provisions of the General Code of Conduct for Authorised Financial Services Providers. He failed to conduct an interview with the complainants to ascertain the appropriateness of the investment. He never bothered to complete a financial needs analysis. He failed to mention or draw the complainants’ attention to the risk associated with the investment. And he pressured the complainants to ‘act fast’ or miss out on the investment opportunity altogether. By inducing complainants to invest with GAREK, he knowingly placed them at risk. Bam concluded that Van der Merwe “had caused the three complainants to suffer financial losses because of his poor advice.”

The respondent’s defence was unconvincing. His response consisted of a “lengthy explanation of the origins and interwoven share transactions of GAREK” and a flippant dismissal of the risk attached to the investment. He said: “The complainants were categorically and specifically informed of the high risk coupled to unlisted shares.” Bam was equally flippant in her ruling. She found in each of the complaints that Van der Merwe had failed to carry out the most basic of due diligences, and either lacked a proper understanding of the product, or more seriously may have been complicit in a fraud perpetrated against innocent investors.

Conflict of interest

There were further contraventions of the regulations. Van der Merwe hadn’t provided a disclosure document to enlighten the complainants of his financial interest in GAREK. “He had evidently not concerned himself with the fact that essentially he acted in a position of conflict of interest; his loyalties lying with GAREK and the commission which it paid,” notes Bam. This is a clear contravention of the conflict of interest provision, before and after the amendments outlined in Board Notice 58.

Editor’s thoughts: At a recent presentation by the previous FAIS Ombud, Mr Charles Pillai, we learned that Van der Merwe received in the region of R4.5m in commission for his part in the scheme. Investors were fleeced out of approximately R74m and only R299 000 remained in GAREK bank accounts when the curators swooped. Do you think the FAIS Ombud should refer such cases to the National Prosecuting Authority for possible prosecution? Add your comments below, or send them to [email protected]

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