The financial advice ombud has handed down five scathing rulings against financial adviser Andrea Moolman of Vaidro Investments in Wilro Park, Roodepoort, for advising her clients to invest in the Relative Value Arbitrage Fund (RVAF), which is in liquidation following the suicide of Herman Pretorius, the architect of the scheme.
Although it was promoted as a hedge fund, the RVAF was a Ponzi scheme, according to the ombud. The fund reportedly owes more than R2 billion to about 3 000 investors, and the trustees of the fund have said that most, if not all, investors’ funds have been lost.
In the first of five rulings handed down last month against Moolman, the Ombud for Financial Services Providers, Noluntu Bam, said her office had received a number of complaints from the adviser’s clients who were invested in the RVAF.
The key issues in all complaints were identical, and the essence of Moolman’s response was to renounce liability for any breaches of the Financial Advisory and Intermediary Services (FAIS) Act, the ruling states. Additionally, Moolman claimed she had carried out a due diligence on the RVAF and that her actions were in the best interests of her clients.
All the investors who have lodged complaints against Moolman say she advised them that, not only had the RVAF won a top award in 2008, but it was part of a financial services provider (FSP) known as Abante Capital, which had been in existence for years.
“In reality, Abante Capital was a separate legal entity and was licensed as an FSP by the Financial Services Board (FSB), while RVAF was not,” Bam says.
There was no mention of Abante or its licence number in the contractual documents between clients and the RVAF, and client funds were transferred directly into the fund without the protection of a nominee account, the ombud says. “Furthermore, there were no financials or even so much as a fund [fact] sheet.”
Without these, Moolman could not have understood the economic activity that generated the returns, she says.
When, in November 2011, the first complainant heard a warning about RVAF and its lack of transparency, he took this up with Moolman. She reassured him that the fund had weathered the recession and sent him a survey of South African hedge funds.
Bam says the survey is pertinent because it was sent to substantiate her advice, yet the RVAF was “conspicuously absent” from the survey. Moolman’s action placated her client but “provides evidence that the RVAF did not exist as a hedge fund”, Bam says. When asked to explain the glaring absence of the fund among the funds listed, Moolman’s response showed that she relied on the supposition that Abante was the fund manager.
Bam’s rulings against Moolman refer to her determination Inch vs Calitz, which unpacks all the issues on the rendering of advice to invest in the RVAF. These relate to the adviser’s failure to understand the RVAF and the risks to which clients were exposed.
The Inch ruling was the first of 16 rulings by Bam against financial adviser Michal Calitz, who has the Certified Financial Planner accreditation and who is a member of the Financial Planning Institute. Calitz received R8.4 million in share profits from the RVAF.
In terms of the FAIS Act, a financial adviser must recommend products that suit your needs and your investment objectives, and the risk inherent in the product must suit your risk profile. Your adviser is also obliged to ensure that the investment that he or she recommends is legitimate, and that the person offering the investment, or acting as an FSP, is licensed. Pretorius wasn’t licensed as an FSP.
In the five rulings, Bam has ordered Moolman to pay back more than R1.6 million to the complainants.
Under new regulations passed last month, hedge funds will be regulated by the FSB. They must, by March next year, be regulated as collective investment schemes, offering you, the consumer, a great deal more protection.
Although they were not regulated at the time of Moolman’s advice, any advice rendered in respect of a hedge fund was subject to the FAIS code of conduct and a notice issued by the FSB.
In terms of this code, a hedge fund service provider must obtain a signed mandate from a client before rendering any intermediary service to the client, and the mandate must be approved by the regulator. An additional signed mandate, confirming the contents of the first, is also required.
Bam’s ruling states: “The legislature has made every effort to require not only that a client be appropriately appraised as to the risks inherent in, and the processes and strategies followed by, a hedge fund, but that the client confirms such disclosure having taken place.”
Bam says Moolman was out of her depth in advising on the RVAF and failed in her duties to her clients.
“Quite simply, no adviser would have recommended this product as a suitable component of any investment portfolio had they exercised the required due skill, care and diligence,” she says.