The large financial services company Momentum has been held liable, not only for the conduct of one of its brokers, who advised a client to invest in property syndication scheme Sharemax, but also for a share of the client’s R730 000 loss.
Noluntu Bam, the Ombud for Financial Services Providers, is holding Momentum and its adviser, Ian Marais, along with independent adviser Emile Storm of CS Makelaars in Pretoria, jointly and severally liable to pay back R730 000, which is what James Bruce Wallace and his mother lost in the high-risk investment. This is in terms of a determination handed down by Bam late last month.
The determination states that, in 2009, Wallace consulted Marais for advice about investing R1 million on behalf of his 70-year-old mother, who required capital growth and a monthly income.
According to Wallace, Marais recommended an investment through Sharemax, a company he had not heard of until then. Marais advised Wallace that he was not authorised to sell this product and offered to introduce him to Storm.
Marais accompanied Wallace to meet Storm. At the meeting, Wallace explained to Storm, as he had to his broker, that the money belonged to his mother and had to be invested according to her risk profile.
Storm, in the presence of Marais, said the investment in Sharemax was:
* In commercial property with a company with a good track record and good business partners;
* Widely used by elderly and retired investors;
* Consistent with Wallace’s mother’s risk profile and not considered high-risk, but moderately conservative; and
* Allocated entirely to the investment (the buyer did not pay any commission).
He also told Wallace that the investment provided capital growth and a good fixed monthly return.
After some deliberation and consultation with his mother, Wallace placed R600 000 of his mother’s money and R130 000 of his own in the Zambezi and Villa property syndications by Sharemax.
About a year after making the investment, Sharemax stopped paying the promised returns.
Considering the entire amount he had invested to be lost, Wallace complained to Bam’s office that:
* He was given inappropriate advice;
* The recommended investment was not consistent with his mother’s and his own tolerance for risk;
* The investment was not compatible with their need to grow and preserve capital; and
* The assurance and advice that the investment was low risk was wrong and resulted in the loss of all the capital invested.
The determination states that both advisers and Momentum made comprehensive written submissions as to why they could not be held responsible for Wallace’s loss.
Both Marais and Storm denied that they introduced or recommended Sharemax to Wallace. They claimed that he asked about Sharemax. On this basis alone, they said the complaint ought to be dismissed.
They also denied advising Wallace that the investment was low risk. On the contrary, they claimed to have made him aware of the risks associated with property syndications. Storm submitted to the ombud’s office that he told Wallace it was a “risky” investment.
But Bam found that the record of advice, filled out by Storm, states “this is a low- to medium-risk investment”.
Before the investment was made, both advisers performed a risk analysis for Wallace. Notwithstanding the results – Marais’s analysis showed that Wallace was a “cautious” investor and Storm’s found he was a “moderate” investor – Storm was of the view that the Sharemax investment fitted Wallace’s and his mother’s needs and risk profiles. Marais also carried out a risk analysis for Wallace’s mother, based on information provided by Wallace.
In his submissions to Bam’s office, Marais initially denied receiving any commission, but later changed his version to state that he received payment as a “thank-you gesture” from Storm. The determination states this payment was not disclosed to Wallace or to Momentum.
Marais was also adamant that, although he was present at the meetings between Wallace and Storm, this was not to give legitimacy to the Sharemax investment, but to ensure that no more of Momentum’s business was lost to other products.
He advised Wallace to invest the balance of his mother’s funds – R400 000 – in a conservative Momentum-approved product.
Momentum denied any liability for the consequences of Marais’s conduct in the transaction, because Marais was prohibited from selling products that were not approved by Momentum.
The financial services provider said the duty to disclose risk and keep a record of advice rested with Storm and not with Marais or Momentum. Finally, it submitted that Marais did not act outside the ambit of the Financial Advisory and Intermediary Services (FAIS) Act and its code of conduct.
Among the issues that Bam had to determine was what liability, if any, could be attributed to Momentum for the conduct of its employee.
Although she accepted that Marais’s advice to invest in Sharemax was not authorised by Momentum, and amounted to a deviation from his contract of employment, this did not absolve Momentum from liability, because Marais’s conduct was “reasonably incidental” to his work with Momentum.
She quoted from the case Feldman v Mall(1945), in which the then Appellate Division held: “Provided the servant is doing his master’s work or pursuing his master’s ends, he is acting within the scope of his employment even if he disobeys his master’s instructions as to the manner of doing the work, or as to the means by which the end is to be attained.”
Bam found there could be no doubt that there was a collaboration between Marais and Storm, as shown by Storm’s description of their meetings with Wallace as a “joint call”.
Since Marais was prevented by his terms of employment from selling Sharemax, he went on a “joint call” with Storm.
She also rejected Marais’s claim that Wallace asked for Sharemax.
“[Marais] knew at all times, as a licensed financial service provider, that property syndications are risky investments not suitable for cautious investors. He also knew that this investment was not authorised by his employer. Accordingly, at the very mention of Sharemax by Wallace, Marais should have immediately cautioned Wallace and then and there washed his hands of the whole thing.” On Marais’s own version, he did no such thing. Instead, he called his friend Storm and asked for a joint call. If Marais was acting in good faith and in the interests of his client, he would have advised Wallace to keep the entire investment with Momentum, the ruling says.
It concludes that Marais was motivated by a cut of the commission. Bam says both advisers were unwilling to make full disclosure to her office about the commission. Storm admitted he earned commission from Sharemax, but failed to disclose how much.
“The difficulty I have with Momentum’s submissions is that they failed to see that Marais obviously collaborated with Storm to share in the lucrative commission paid by Sharemax,” the ruling states.
“Without the collaboration of Marais, Wallace would not have been persuaded to invest in Sharemax. Marais was aware of the fact that his presence was necessary to persuade Wallace that the investment was legitimate and suitable for his needs.
“Marais, at all material times and, in particular, in advising Wallace, acted within the course and scope of his employment with Momentum.
“If the respondents did their work according to the [FAIS] Act and code, no investment in Sharemax would have been made, bearing in mind Wallace’s tolerance for risk and the high risk involved in the product. The cause of loss was the inappropriate advice to invest in a high-risk product.”