Trickle of relief for syndication investors
A truck driver's widow in George should have enjoyed the secure pension for which her husband saved. But Jacobus Muller invested a third of his retirement savings - amounting to R1m - in his and his wife's name in unlisted shares in The Heights, a property syndication marketed by Bluezone.
The Bluezone schemes faltered, payments became erratic and finally they stopped in 2009, two years after Jacobus died.
Despite a business rescue scheme swapping the unlisted debentures for listed shares in Bonatla in 2010, Jacomina Muller complained to the office of the ombud for financial services providers in 2011 that she hadn't received a cent since 2009 and had been relying on her children and a state pension.
In July, nine years after the scheme ran into problems, Jacomina finally got some financial relief. Ombud Naresh Tulsie ruled that Andre Jonck of Impectus Brokers and Financial Services, who advised the Mullers, should repay her and her husband's estate the R500000 they each invested.
The Mullers' story is one of hundreds highlighted by the ombud's rulings on property syndication complaints, frequently from pensioners or now-deceased pensioners who invested substantial portions of their life savings in these schemes almost a decade ago.
In the two biggest, about R5bn was invested by about 33,000 investors in schemes promoted by Sharemax, and R4.6bn by about 25,000 investors in the Pickvest-promoted Highveld Syndication schemes.
As investors piled in, concerns arose about the structures. In 2006 the department of trade & industry issued a notice under the Consumer Affairs (Unfair Business Practices) Act setting out what syndicates must disclose and requiring investors' money to be held in trust until the properties were registered in the syndication company's name.
Investigations by the then Financial Services Board and inspectors appointed by the Registrar of Banks found contraventions of this notice as well as Banks Act provisions to do with illegal deposit taking.
Many schemes facing liquidation offered investors business rescue plans in which new entities such as Bonatla, Nova and Orthotouch bought the properties, including some unfinished ones, from syndicates such as Bluezone, Sharemax and Picvest.
But the deals have created more unhappiness among investors and advisers. In the rulings before the ombud, investors complain that they have been unable to redeem their shares, and interest payments have dried up.
Despite the ombud and judges pointing out contraventions of the Consumer Affairs Act (now the Consumer Protection Act) and the Companies Act, and referring lawyers, auditors and valuators to their regulatory bodies, key role-players have yet to be prosecuted and there has been no public accounting for professionals who abetted some syndications' unlawful activities.
A few investors have been paid out by brokers wanting to avoid bad publicity. Fewer investors have succeeded in court. Forensic auditor Andre Prakke said some cases are still being fought.
At the end of 2016, some Highveld Syndication investors won a Supreme Court of Appeal case ordering Bloemfontein property developer Nic Georgiou to repay them their investments because they were a lucky few who were guaranteed their shares would be bought back.
Many who do not have the wherewithal to hire lawyers have relied on the ombud for relief. About 2,500 complaints on property syndicates were lodged.
The ombud's office was supposed to offer a fair, informal, cheap and quick way to resolve complaints about bad advice and to provide compensation up to R800,000.
But legal challenges prevented the ombud's office from delivering that speedy resolution.
In 2013, former ombud Noluntu Bam ruled not only against the advisers who placed pensioners Jacqueline Bekker and Gerbrecht Siegrist in the failed Sharemax-promoted Zambezi Retail Park property syndication, but also Sharemax itself, and its former directors Willem Botha, Dominique Haese and Andre Brand, and Unlisted Securities SA, the entity through which advisers acted to give advice on unlisted property syndication shares, and its former director Gert Goosen.
The former directors appealed the ruling on the grounds that the complaints were not laid against them and the ombud did not have the power to join them as respondents. The ombud felt obliged to stop issuing property syndication rulings. It now has a backlog of 1,300 cases and it has taken on additional staff to help clear it.
The appeal was upheld in 2015 and the ombud's attempt to take the appeal board ruling on review in the high court failed in 2017.
As a result of the Siegrist and Bekker cases, rulings are likely to continue to be made principally against the financial advisers who recommended property syndication schemes rather than the key individuals who operated them, as few investors are able to correctly identify those responsible.
Almost all the ombud's rulings against advisers have found that they contravened the Financial Advisory and Intermediary Services Act by failing to give advice with due care and skill.
The ombud's rulings typically cite failures to identify the risks of investing in unlisted shares, failure to identify problems with property syndications, conflicts of interest and unworkable business plans.
Rulings also typically find that advisers failed to consider investors' ability to take the risk of investing in these schemes and offered the property syndication investments without alternatives and without justifying why these products were suitable.
Some advisers think they have been unfairly held responsible for causing investors' losses, arguing that property investments are secure and they could not have foreseen the syndication collapses.
In one case before the ombud, advisers presented a paper raising issues about how far advisers can be expected to go when conducting due diligence and whether they could be expected to second-guess the lawyers, accountants and valuators involved in these schemes.
Tulsie, the ombud, said he agreed that advisers can't be expected to check every professional's work. All the ombud looks for is the steps a reasonable adviser would have taken and what you, as a consumer, could expect your adviser to do when recommending an investment.
One adviser on a crusade to ensure brokers are not the fall guys, Deon Pienaar, has attempted to challenge the Reserve Bank's decisions that syndicates contravened the Banks Act. But Pienaar's challenge of decisions relating to Realcor, a syndication for an incomplete hotel in Blaauwberg, Cape Town, went all the way to the Constitutional Court without success. He has also lost a high court case against the Bank, challenging its actions against Sharemax. He has now approached the Constitutional Court on this matter.