Fais Ombud orders Sharemax broker to repay R800 000

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Fais Ombud orders Sharemax broker to repay R800 000
The Ombud’s finding will worry brokers who sold shares in Zambezi and The Villa.

Financial advice ombudsman Noluntu Bam delivered her first negative finding against a Sharemax broker last week. Her determination may spark fear among those who sold shares in the property syndication company’s two biggest projects, Zambezi and The Villa. It may also encourage other investors to lay complaints against their brokers.

Sharemax is one of the country’s two largest sellers of property syndication schemes. Investors, many of them elderly, have placed about R4.5bn in its numerous schemes. The Villa and Zambezi together account for R2.5bn of investors’ funds. They are also two of the most troubled schemes.

On Wednesday Bam ordered financial adviser Deeb Risk to repay his client, 72-year-old retiree Elise Barnes, R800 000 she had invested in Zambezi. Barnes actually invested R1.4m in the scheme, but the Ombud’s office is only empowered to adjudicate on losses up to R800 000.

A copy of Bam’s order can be downloaded here.

Risk declined to comment on Bam’s finding. He would only say that he will appeal it.

Some commentators have claimed that a complaint against Sharemax brokers would be premature because it is yet to be determined how much investors stand to lose. Moneyweb has previously argued that this should not prevent investors from laying complaints against their financial advisers, and the Ombud’s ruling confirms this view.

Says Bam in her ruling: “The issue is not whether some monies will be recovered by [Barnes] at some future unknown date. The test is whether the advice, given [Barnes’s] circumstances was appropriate. The advice provided was patently flawed.”

Bam had some harsh words for Risk, who she says meant to sell the Zambezi product to Barnes “whether it made sense or not, whether it was inconsistent with [her] circumstances or not”.

But it is Bam’s comments about the Zambezi scheme in general that should be of more concern to Sharemax brokers.

“Had [Risk] read and understood the prospectus he ought to have appreciated the deficiencies,” says Bam.

She describes how the public company into which investors’ money was placed, had only one asset: a shareholding in a private company, Zambezi Retail. “Herein lies the danger,” Bam explains. “Private companies do not have their affairs being subject to public scrutiny.” Bam also notes that Sharemax ensured that at least three of its own directors will be at Zambezi Retail for five years from the date of registration of the prospectus.

“A provider acting with due skill and in the interest of his client would have asked himself, if the two major players, namely the two private companies, are controlled by the same persons, how is accountability, transparency going to be enforced and how is investor protection going to be ensured?”

Bam found that Risk had, among other things:
  • Failed to disclose that Sharemax Zambezi was a long-term, illiquid investment. His own documents revealed that Barnes would need her capital in one-three years;
  • Failed to disclose the risk inherent in the Zambezi scheme;
  • Failed to disclose the investment’s costs;
  • Did not recommend a product commensurate with his client’s risk tolerance;
  • Failed to act with due skill, care and diligence in the interest of his client and the integrity of the financial services industry.

Gareth Shepperson

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Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!