Ex-adviser must repay pensioner who invested in unlisted shares
Beware when investing in unlisted shares, particularly when you are told they will be listed on a stock exchange. Even if the shares are actually listed they can immediately lose value and the company may fail.
Failed investments in shares with links to the controversial Pinnacle Point property group, which is in liquidation and has seen members of the South African Clothing and Textile Workers Union lose about R260 million, are the subject of a determination made by financial advice ombud Noluntu Bam.
In her determination Bam says she expects financial advisers to carefully check out shares and selling structures, using the Financial Advisory and Intermediary (FAIS) Act and its codes of conduct to ensure proper advice.
The failure to do so has resulted in now retired financial adviser Johan Willem van der Walt of Margate, KwaZulu-Natal, being ordered to repay R360 000 plus 15.5 percent interest a year from November 2005 to pensioner Stephanus Malcolm van der Merwe, living in a caravan park in Ballito, KwaZulu-Natal, and R100 000 plus 15.5 percent interest a year from November 2004 to his son Charl van der Merwe, who lives in Australia.
The investments were in two different and changing companies, namely African Health Investors Fund (AHIF) and Jansk International.
AHIF was a company in which Van der Merwe senior was already a shareholder when he was advised in the first half of 2004 by Van der Walt that it was to be incorporated into a larger company known as Imuniti Holdings. Van der Merwe could either have his shares paid out or buy preferential shares in Imuniti with his AHIF funds. The shares were to earn dividends at 15 percent, payable half yearly.
Van der Walt and an attorney, Dr NAJ van Rensburg, told Van der Merwe senior that a trust, namely the AHIF Investment Trust, had been set up to administer investors’ interests, with Van der Walt and Van Rensburg as the trustees. The trust would enable the conversion into Imuniti, which would eventually list on the JSE in 2006.
So convincing was Van der Walt’s “chance of a lifetime, which the man in the street does not normally qualify for” argument that Van der Merwe invested an additional R150 000.
But no trust was ever established, despite Van Rensburg twice telling the Van der Merwes that their investment “is secure, a trust having been set up”.
It was later established that the cash for the investment was deposited in a trust in Van Rensburg’s name and was never used to pay for the Imuniti shares.
Van der Merwe senior had an existing investment in Jansk, a public company incorporated in the British Virgin Islands, which at the time was a 100-percent shareholder of the South African company Gardener-Ross Holdings.
After a Financial Services Board investigation into Jansk, the South African shareholders’ holdings were converted into Gardener-Ross preference shares, with a fixed dividend of 18.75 percent a year from March 2005 until redemption in February 2007.
In October/November 2005, Van der Walt informed Van der Merwe senior that Gardener-Ross was to be incorporated into a new company to be known as Acc-Ross Holdings, which was to list on the JSE, and that Van der Merwe would treble his investment. Van der Merwe was told his investment would buy discounted preference shares in Acc-Ross with an annual dividend of 18.75 percent. He invested R360 000.
But Van der Merwe senior was sold ordinary shares, not preference shares. On the first day of listing the shares went up; thereafter their value declined substantially before recovering to their original value in November 2008 when Acc-Ross merged with Pinnacle Point Holdings, whose shares went into free fall.
Bam says Van der Walt was well aware that Van der Merwe senior, as a pensioner, was in no position to gamble with his retirement savings, having been his adviser from 1993, but he advised investments into high-risk single stock unlisted shares, resulting in Van der Merwe sustaining irrecoverable losses.
Bam says that Van der Walt:
* Failed to provide documentary evidence of any compliance with the FAIS Act and code of conduct in advising on the investments, particularly the appropriateness of the products.
* Misled the Van der Merwes, given the non-disclosure of commission earned, lack of record keeping and non-compliance with the FAIS Act.
* Failed to understand that he should provide appropriate advice. His advice “was both questionable and contrary to every provision of the FAIS Act...”.
* Was not licenced to sell shares.