The shock waves from the shooting and suicide involving two dodgy asset managers in Cape Town last week are reverberating widely, with indications that investors in a “hedge fund” could face losses of almost R2 billion.
The high drama surrounding the Relative Value Arbitrage Fund (RVAF) started when the person who ran the fund, Herman Pretorius, was visited by inspectors from the Financial Services Board (FSB), whereupon he went to see his business associate, Julian Williams. During an altercation, Pretorius apparently shot Williams twice before turning the gun on himself.
The full extent of the losses to about 3 000 investors in RVAF, most of whom are from the Western Cape, are not known at this stage. Once again, pensioners who now face destitution have been misled into putting their money into a high-return, extremely high-risk, unregulated “investment”.
In the wake of the collapse of yet another in a long trail of dubious investment schemes, questions are now being asked about:
* How the FSB allowed what amounts to a gigantic Ponzi scheme to continue operating under its nose; and
* Why financial advisers channelled their clients’ money into a Ponzi scheme that posed as a hedge fund despite their having to meet the requirements of the code of conduct under the Financial Advisory and Intermediary Services Act. The code requires advisers to give advice and sell products that are appropriate to their clients’ risk profile.
A Ponzi scheme is a structure where the returns are paid out of the capital of investors, dooming it to self-destruct eventually. RVAF was paying returns of between 20 percent and 30 percent a year.
Personal Finance asked the FSB to investigate Pretorius in May 2011.
This week, Gerry Anderson, FSB deputy executive in charge of market conduct, said that following Personal Finance’s request for an investigation, “the FSB engaged with Mr Pretorius, a former policeman, and was satisfied with the answers he provided at the time”.
It has now been revealed that Pretorius was taking in millions of rands in so-called investments but was not registered with the FSB as a financial services provider (FSP). By law, hedge fund managers must be licensed by the FSB.
Pretorius was paying financial advisers commissions of between 7.5 percent and 12 percent to get people to invest in his phoney fund.
Investors indicated this week that they may try to sue both the advisers who placed them in an investment that failed to meet even the minimal investor protection required of hedge funds and the FSB for failing to take action earlier.
And the financial services industry body, the Association for Savings & Investment SA (Asisa), this week called for “ruthless and speedy” action by the FSB against those transgressing legislation.
Leon Campher, chief executive of Asisa, at an information meeting for financial advisers, said market conduct legislation means nothing without ruthless enforcement – it simply adds another layer of costs with no discernible benefit.
Campher says that:
* Far stricter rules should be applied when FSPs seek to register with the FSB, such as applicants and reference providers submitting information by way of an affidavit so that people can be criminally charged if they provide false information; and
* The FSB should appoint someone, at the cost to the applicant, to conduct a forensic and due diligence investigation into an FSP before granting it a licence.
Peter Stephan, senior policy adviser, says that although one can never regulate fully against dishonesty and fraudulent activity, if the FSB, as the regulator of market conduct, is not seen to take swifter and firmer action against suspect operators, “investment” schemes and adverts offering unrealistic returns, there is an argument that a portion of the levies the FSB receives from the financial services industry should rather be used for a statutory investor compensation fund.
Apart from Personal Finance’s bringing Pretorius to the attention of the FSB last year, concerns were raised about Pretorius as far back as eight years ago, when he launched his Abante hedge fund and asked fund administrator IDS to do the administration.
Ian Hamilton, IDS chief executive, says that after a due diligence investigation he was not prepared to take on Abante as a client and reported his concerns to the FSB.
There is a long history of Personal Finance’s raising concerns about investment schemes with the FSB on which it takes little or no action until the schemes have actually imploded. Two major examples are Fedsure, where the mis-management of its main life assurance fund led to its downfall; and Fidentia, which Personal Finance raised with the FSB about 18 months before it collapsed, leaving thousands of widows and orphans facing destitution.
Financial advisers, some of whom apparently channelled more than R100 million in client money into RVAF, are likely to face significant claims. Once again, many of the investors are elderly pensioners who will face destitution.
The Ombud for Financial Services Providers can order that compensation of up to R800 000 be paid where investors lose money due to bad investment advice.
Anderson, in an email exchange with Personal Finance this week, said “it is also trite to point out that the FSB (and Personal Finance and other media) has continuously stated that investors should not ‘invest’ in unregulated entities”.