Two financial advisers and a company of which they are both directors have been ordered to repay a couple who lost more than R700 000, because they invested most of their savings – including the proceeds from the sale of their home – in an unregistered company that traded in foreign currencies.
Financial advice ombud Noluntu Bam has slammed brothers Wayne and Gary Gray, of Krugersdorp in Gauteng, for failing to act in the interests of their clients when they advised them to invest in their forex business, “due to a clear conflict of interest”.
At the time of dispensing the advice, in 2004, the Grays were both authorised financial services providers (FSPs), as well as authorised representatives and directors of a private company, Quantum Leap Forex 181.
This is the second determination by the office of the financial advice ombud against Quantum Leap and the Grays.
In November 2009, Charles Pillai, the ombud at the time, held them jointly and severally liable to pay Ian Scott R100 174, which he lost because Wayne Gray advised him to invest in forex through Quantum Leap in 2005.
Quantum Leap acted as an “introducing broker” for a South African forex trading company, Kerford, which had applied for an FSP licence and was operating under an exemption pending a decision by the Financial Services Board (FSB). Kerford, in turn, placed Scott’s funds with Reymount, a clearing house with its origins in Jersey and branches worldwide.
In April 2004, the Grays became aware of a statement by the Jersey Financial Services Commission warning the public against investing with Reymount, because it had never been registered. Nor was it registered with the FSB.
The local regulator subsequently warned Quantum Leap to desist from doing business with Reymount and Kerford. However, Quantum Leap went ahead and invested Scott’s money with these entities in January and July 2005, without informing him of the risks.
When the ombud ruled against Wayne Gray and Quantum in 2009, he said Gray’s advice to invest with unknown entities, despite the FSB’s warning, bordered on “reckless”.
According to the determination recently handed down by Bam, Gary Gray was the key individual for Quantum Leap, and its FSP licence lapsed in August 2009.
Wayne Gray is registered as an independent financial adviser as well as being a director of Quantum. He is licensed to sell long- and short-term insurance and health services benefits, but is not allowed to render financial advice in relation to forex.
The complainants in the latest case are Maryke and Petrus Marx, who have been Wayne Gray’s clients since 2000.
In June 2004, he advised Maryke Marx to move her investment in an Old Mutual policy that “was not performing” to “a wonderful forex investment” that would provide a return of three percent a month.
He told her the investment was “legal” and would be done through a “registered” investment company called Reymount Investments.
He assured her that “controls were in place” that would minimise the risk, and that if anything were to go wrong, they (the Grays and Quantum Leap) could not lose more than five percent of the investment.
Maryke Marx invested R66 843 in Quantum. She received statements showing a return of three percent a month, even in some months when the investment made losses.
In February 2005, Petrus Marx was offered work in the Western Cape. It would mean Maryke would have to close her physiotherapy practice and they would have to sell their home and buy a new home.
Wayne Gray strongly recommended that the Marxes invest the proceeds from the sale of their home in Quantum Leap, rather than in a new mortgage bond, because this would give Maryke Marx an income – she could draw two percent of her return and reinvest one percent.
In July 2005, Petrus Marx invested R100 000 in Quantum Leap and in August 2005, Maryke invested R560 000.
Three months after they relocated, Maryke Marx wanted to start drawing from the return on her investment. She received statements indicating that no profits had been made, because no trading took place due to market volatility.
Then came a letter from Quantum Leap stating that the company was in a trade and could only allocate profits or losses once the trade had been closed. Due to market volatility, the company had “moved into bullion”, and it may have to hold this position until January 2006.
In February 2006, they received another letter from Quantum Leap, stating that the company had been forced to lock its gold position to avoid serious losses. This trade could take “quite a number of months to rectify and the nominal value of your investment will therefore only change once we have closed this gold position”.
Maryke Marx flew to Johannesburg to meet the Gray brothers. At this meeting, Gary advised the Marxes to withdraw what was left of their investments before a possible rise in the gold price could make things worse.
In June, Maryke Marx withdrew what was left of her investment – R69 742, incurring a loss of R557 100. And in July, Petrus Marx withdrew R18 630, incurring a loss of R81 370.
The Marxes complained to the ombud’s office that they had been misled about the risk of the investment, because Wayne Gray had advised that the worst they could lose was five percent and had indicated that Reymount was registered with the FSB when it was not.
They also complained that Quantum Leap had kept investors in the dark about its losses. When investors found out about the losses, it was too late.
In response to the complaint, the Grays said the Marxes were required to sign a document that authorised Quantum Leap to manage their funds “according to its own mandate” and instructed Quantum Leap to “carry out the following speculative operations: to buy or sell spot and forward foreign exchange contracts, futures, bullion and option related instruments, through registered international brokers”.
Bam says that, although they signed this document, the Marxes did not have the ability to understand the investment and the risk involved in forex trading.
She says the risks were not spelled out in plain language, and the Marxes could not possibly have understood what was meant by “speculative operations”.
Forex trading is “highly volatile” and investors can lose all their money. There was no evidence that the Marxes were informed of this or that this product was suitable for the couple, who were of “modest means” and not in a position to take risk, the ombud says.
Bam says Wayne and Gary Gray did not explain why it was better for Maryke Marx to invest the proceeds from the sale of her house in forex.
She says the Grays and Quantum Leap failed “in their duty to act in the interests of their client, to manage their conflict of interest; to make necessary disclosures; to act with due skill, care and diligence; to make full and frank disclosure of the risks to their clients; and failed to identify an investment appropriate to the risk profile and financial needs of their clients.”
NO SANCTION FOR GRAY BROTHERS
* FSB: Although he is required to pay back the Marxes, Wayne Gray will be allowed to continue practising as a registered financial services provider (FSP).
Personal Finance asked Caroline da Silva, the deputy chief executive in charge of financial advice at the Financial Services Board (FSB), whether he could face debarment or the threat of the suspension or withdrawal of his FSP licence as a result of the latest determination against him.
Da Silva says the registrar only became empowered to debar persons and to refer cases to the FSB’s enforcement committee after the amendments that came into operation in 2008. Therefore the FSB lacks jurisdiction in respect of financial services rendered prior to the amendments coming into operation, she says.
* FPI: At the time of the Scott determination, which was handed down in November 2009, Gary Hilton Gray was a Certified Financial Planner (CFP) professional, which is regarded as the top qualification for financial planners. The CFP accreditation is given by the Financial Planning Institute (FPI), the professional body for financial planners.
Advocate Jacqui Grovè, the legal and compliance services manager at the FPI, says Gray’s membership of the FPI expired in December 2011 and the FPI has “no record of disciplinary action against Gary Hilton Gray during the course of his membership”.