Illustration: Colin Daniel

Here is a little quiz for you. What do the following have in common?

* The barren bushveld in a blue zone;

* A bridge over troubled waters;

* An exotic foreign island;

* A stolen moment in a pyramid;

* A dynamic moneyless fund; and

* A medical wonder cure for the rich.

For an explanation of the clues, see “The cryptic clues explained”, below.

The common factors to all six cryptic clues are:

* All were extremely high-risk or fraudulent “investment” schemes where investors lost a lot of money.

* No proper due diligence into the schemes was conducted by financial advisers or investors. Instead, advisers and investors relied on glossy pamphlets and often ignored words of warning.

In most cases, if even the simplest checks had been carried out, investors and their advisers would have identified the flaws.

The Financial Advisory and Intermediary Services (FAIS) Act places a “general duty” on financial planners and advisers to “at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry”.

Financial advisers are required to show, if necessary, that:

* They have undertaken a proper due diligence on a product.

* The due diligence is demonstrable. In other words, that they have not just read the glossy brochures and spoken to the product provider.

* They thoroughly understand the advantages and disadvantages of a product.

* They explained the details of a product in such a way that you appreciated its advantages and disadvantages.

Too many financial advisers have ignored these requirements. Instead, they have relied on confusion and complexity, vague promises, incomplete documentation, verbal assurances and glossy brochures misrepresenting the dicey products to make the sale, and in the process have sometimes knowingly passed on misleading information.

The Financial Services Ombud has, in numerous determinations, expressed that the reason errant financial advisers do not undertake proper due diligence tests on products is that they are blinded by excessive commissions and other inducements that normally come with questionable and high-risk products.

Any good adviser knows that the first alarm bell on a bad product is a “good” commission structure.

It is also not acceptable for a financial adviser to assume that because a product is regulated, due diligence does not have to be undertaken. Regulation does not eliminate risk.

Good financial advisers should have a written due diligence procedure that should include a formal product approval checklist and process, the identification of comparable products, an assessment of modifications of an existing product, and what they require from product providers, including an assessment of training they will require as part of a formal product approval process.

The checklist should include things such as:

* Due diligence procedures, which should include checking the product company (for example, ensuring it is properly licensed/registered), the company management (for example, what incentives they receive), and the product (if it is an unregulated product, the checks should be more onerous). It is important that your financial adviser can show that all claims made by the product provider have been independently and expertly verified.

* The existence of gatekeepers (auditors, lawyers, credit rating agencies) and their tasks.

* Reading a prospectus/fact sheet/ broker pack to establish what is reality and what is fiction. Often, promotional material contains sins of omission rather than commission.

An immediate red flag for an adviser should be the refusal of any company to submit to due diligence, particularly using nebulous excuses such as competitive confidentiality.

An immediate red flag for you is when someone comes knocking on your door and they cannot tell you about their due diligence assessments. You should insist on a written copy of the due diligence on the product. You should study the document and do some checks yourself to protect yourself.



Due diligence is not only the responsibility of your adviser. There are some basic due diligence questions you should ask your adviser about any financial product you are advised to use:

* What is the company name?

* What is the name of the product?

* What is it?

* How does it work?

* What is the regulatory environment of the company and the product?

* Why should I use it?

* What due diligence has been done?

* What guarantees are provided and what supports the guarantees?

* What is the risk level?

* What is the minimum investment amount?

* What is the minimum investment term?

* What are the costs, including layered, initial and annual?

* What are the rewards for your adviser, including initial and annual commissions and any other incentives, such as a share bonus scheme, sign-on employment bonuses, and links your adviser may have to any company receiving payments for any service undertaken for the service provider?



* Barren bushveld in a blue zone

This is the now defunct Spitskop BlueZone property syndication. This was a 190-hectare agricultural property in Mpumalanga with a municipal valuation of R1 million. It was bought in 2003 in the name of a company called Blue Dot, whose directors and shareholders were Hendrik Lamprecht and Johann van Zyl, who also happened to be directors of the BlueZone property syndication company. The property was sold by Blue Dot to the Spitskop property syndication company for R118.3 million, which was then valued for syndication purposes at R425 million.

In other words, the value jumped virtually overnight from R5 000 a hectare to R2.2 million a hectare without a sod of earth being turned.

An army of financial advisers started selling debentures and securitised debt in the BlueZone property syndication while the company was operating without a licence to deal in debentures and securitised debt.

A number of the advisers were not licenced to sell debentures in their own names. BlueZone “legalised” them by illegally registering them as representatives under its financial services provider licence.

In one of her determinations on the failed scheme, financial advice ombud Noluntu Bam found one of the advisers who flogged investments in Spitskop, John Moore of Johnsure Investments, had falsely made himself out to be an expert on the product, was not qualified or licensed to advise on or sell unlisted shares and debentures, had failed to make an independent and objective assessment of the property syndication, relying instead on glossy BlueZone brochures. He had also failed to take into account that a risk analysis revealed that the pensioner who lodged the complaint was a “conservatively moderate investor”, whereas the investment was “high-risk”.

So, in a nutshell, there were unskilled financial advisers selling what was a scam, without doing any due diligence. Instead, they relied on the word of the perpetrators of the scam and their glossy brochures.

And the problem is that this cavalier approach to the high risks pertaining to property syndications, be they fraudulent or not, is seen in many other determinations from Bam.

And yet thousands of advisers sold – and many still continue to sell – property syndication products as low-risk, in particular targeting pensioners, who can ill afford the losses.

And this appalling situation has now been compounded by the Santam-owned insurance agency, Stalker Hutchinson Admiral, which is doing its best to avoid the liability of making good on professional indemnity insurance that is supposed to be in place to provide assistance in compensating investors when there has been negligence on behalf of an adviser.


* Bridge over troubled waters

This is the story of a bridging finance company. In recent years there has been a flurry of fraudulent bridging finance investments. Essentially, the companies claim to provide bridging finance, mainly to property developers, to allow them to continue with projects while awaiting more formal financing from banks.

The bridging finance companies raise the finance from investors, promising them often extraordinary returns based on the higher interest rates they are able to charge on the bridging loans.

Even in companies that are operated on a non-fraudulent basis, the risks can be extraordinarily high, particularly if the developer cannot get bank financing and the scheme falls apart.

In 2007, bridging finance company Malokiba, owned by Susan Kretzmann, was placed under provisional liquidation. In a determination dealing with the issue, then financial advice ombud Charles Pillai found that Malokiba was insolvent while taking in investments. However, financial advisers were taking in investments on the say-so of the company directors that there was an ironclad guaranteed safety of capital, indemnity assurance, trust account protection and bank guarantees. Returns of 30 percent a year on investments were offered.

Yet there was not even a prospectus issued as required in terms of the Companies Act, and the various claims of the directors were simply untrue. It was also alleged by the liquidators that Malokiba was acting illegally as a bank by taking in money and lending it.

The promises of 30-percent returns should have been the warning signal to those flogging the dud product, and even a cursory due diligence would have revealed the faultiness of the scheme.


* Exotic island foreign deal

This is the now well-known foreign currency speculation story of Leaderguard Spot Forex based in Mauritius, which was both high-risk and a scam, yet about 250 financial advisers were out there encouraging people to invest. By the time Leaderguard was declared bankrupt in March 2005, about 1 700 investors had lost about R350 million. Again, many of the investors were pensioners.

Leaderguard provided a “guarantee” on 80 percent of capital. Leaderguard never applied for a FSP licence – it had only a temporary exemption, but claimed it was licensed. Again, a cursory due diligence would have revealed the problems.


* Stolen moment in a pyramid

Sometimes the thieves are not cheap crooks dealing in products on the edges of the financial services industry. They can be mainline product providers. This little saga shows that due diligence checks need to be done even when companies are subject to strict regulation.

The case involves the now defunct linked-investment services company, Ovation, which had in its suite of investment offerings an unregistered money market fund called Common Cents.

The Financial Services Board (FSB) got on to the fact that the owner of Ovation, Angus Cruikshank, had taken in R200 million via financial advisers. Not one of the advisers selling investments in Common Cents had checked with the FSB to find out whether the money market fund was registered in terms of the Collective Investment Schemes Act.

By that time, Cruikshank had stolen the money and paid it over to another dicey operator, Attie du Plooy, who had one of his companies, Jean Multi Management, closed down by the Reserve Bank for contravening the Banks Act.

When the FSB caught Cruikshank with his hands in the till he promptly committed suicide.

Du Plooy operated property bridging finance operations, including one connected with our next example.


* Dynamic moneyless fund

Financial services group Dynamic Wealth was effectively closed down by the FSB last year after a long, tough legal battle that went all the way to the Appeal Court.

Among other things, Dynamic Wealth operated “investor clubs”, which it later converted to unlisted companies. At one time, Dynamic Wealth also had a joint bridging finance venture with Attie du Plooy.

One of these portfolios was the Specialist Income Fund, which invested about R230 million of its money in another imploded entity, Corporate Money Managers (CMM) Fund, which masqueraded as a collective investment scheme and which, in turn, had invested in failed property developments.


* Medical wonder cure for the rich

Barry Tannenbaum offered the rich returns of 20 percent every 12 weeks. That is more than 80 percent a year.

Tannenbaum, part of the Adcock Ingram pharmaceutical family, managed to convince Sean Summers, a former Pick n Pay chief executive, to invest R50 million and Mervyn Serebro, the chief executive of OK Bazaars, to invest R25 million in his pharmaceutical company, which turned out to be a Ponzi scheme. The total fraud is expected to be close to R2 billion.