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THE FINANCIAL SERVICES TRIBNUAL Case No: FAB116/2020

In the matter between: ERNEST VENTER t/a ERNEST VENTER MAKELAARS Applicant and HENDRIK EVERHARDUS GRUNDLING DU PREEZ Respondent

____________________________________ DECISION

____________________________________

Tribunal: Adv S K Hassim SC (Chairperson)

Mr J Damons, and

Adv N K Nxumalo

Date of hearing: 22 June 2021

Date of decision: 30 September 2021

Appearances:

For the Applicant : Mr P Bielderman (Bielderman Incorporated)

For the Respondents : No appearance

Summary: Application for reconsideration of the decision of the Ombud for Financial

Services Providers; FSP’s liability for loss of investment in a Sharemax

scheme; Causation

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I INTRODUCTION

1 The Applicant is a ‘financial services provider’ (“FSP”) as defined in section 1

of the Financial Advisory and Intermediary Services Act 37 of 2002 (“the FAIS

Act”).

2 The First Respondent is an adult male farmer born on 4 February 1933 (“the

complainant”). The Second Respondent is the Ombud for Financial Services

Providers (“the Ombud”).

3 Following a complaint lodged by the complainant, the Ombud conducted an

investigation and issued a determination in the following terms:

“[35] Complaint is upheld.

1. The [FSP] is ordered to make payment to the complainant as

follows:

1.1 …the amount of R200 000.00;

1.2 Interest on the said amount at the rate of 7% per annum

from a date 14 days from service of the order.

1.3 Upon such payment, the complainants [sic] is to cede his

rights in respect of any further claims to these investments

to the [FSP].

2. Should any party be aggrieved by the [Ombud’s] decision, leave

to appealis granted in terms of section 28(5)(b)(i), [of the FAIS

Act] read with section 230 of the Financial Sector Regulation Act

9 of 2017 (“the FSR Act”).”

4 Aggrieved by the Ombud’s determination, the FSP brought this application for

reconsideration.

5 This matter pertains to an FSP’s the liability for loss to a client whom he had

advised to invest in two property syndications promoted and managed by

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Sharemax Investments (Pty) Ltd (“Sharemax schemes”), the Zambesi Retail

Park Holdings Limited (the Zambesi scheme) and the Villa Retail Park

Holdings Limited (“the Zambesi scheme”), following the collapse of those

Sharemax schemes.

II THE FACTS

6 During November 2008, the FSP visited the complainant at his farm,

Nooitgedacht, Hennenman, in the Free State. At the time, the complainant

was 75 years old.

7 The FSP knew the complainant. He had previously handled the complainant’s

investments as a broker employed by ABSA bank, where the complainant held

investment accounts.

8 There is a dispute of fact regarding the circumstances surrounding the FSP’s

visit to the farm, in particular as to who requested the visit. What is clear

though is that during his visit, the FSP introduced the complainant to the

Sharemax schemes which resulted in the complainant making investments in

the Sharemax schemes.

9 The complainant states that he was not looking for investment opportunities

when the FSP introduced him to the Sharemax schemes. He states further

that he was initially skeptical of the Sharemax schemes but the FSP assured

him that:

9.1 Sharemax schemes were a sound investment;

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9.2 Sharemax schemes generated returns from purchasing properties,

renovating them and renting them out; and

9.3 If he invested R100 000 in Sharemax he would receive interest in the

sum of R1 000 per month.

10 The complainant acted on the FSP’s advice and made two investments in the

Sharemax schemes. The first investment of R100 000 was made in

November 2008 into the Zambesi scheme. The second investment of

R100 000 was made in November 2009 into the Villa scheme.

11 With regard to the Zambesi scheme, the complainant was told he would

monthly receive interest in an amount of R1 000. However, this monthly

payment became less and less as time went on. The last payment he

received was R833,33 on 30 July 2010. With regard to the Villa, the last

payment he received was an amount of R1 041,67 on 30 July 2010.

12 The modus operandi of these Sharemax schemes have been rehearsed in

numerous determinations of the Ombud, decisions of this Tribunal and

judgements by the courts.

13 The crux of the complaint in the present case appears from the following

statement in the complaint:

“16 The basis of my complaint is that Venter never [made] full and frank

disclosures about the investment in Sharemax. He only discussed

Sharemax with me and no other possible investments where [sic]

discussed when I was approached by Venter. I was therefore deprived of

the opportunity to make an informed decision. Venter was also very

adamant that Sharemax was a very good investment. He over

emphasized the benefits I will get from investing in Sharemax but

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neglected to inform me of the possible risks involving in investing into

property syndications. He obviously placed more value on his relationship

with Sharemax.

17 I was never shown a prospectus of Sharemax or the relevant projects. I

doubt whether he ever conducted an independent verification into the

projects or to simply just gather available information with regard to the

projects.

18 I was also never informed what commission Venter received although I

have ascertained from my attorney that it could be anything from 7% -

10% according to articles posted on the internet.”

14 In his response, the FSP admits that he advised the complainant to invest in

the Sharemax schemes and that he recommended them to him as good

investments. He still maintains that they are good invetsments.

15 The FSP denies that the complainant was not given the prospectus of each

scheme before making each investment. His version is that the prospectus

was explained to the complainant and his wife by one Mr Coetsee, a

Sharemax representative, on his laptop computer.

16 The FSP contends that because the “Sharemax Investments Risk

Assessment on Product Information” form signed by both the FSP and the

complainant reflects that the “Yes” box next to the question “Did your adviser

provide you with a registered prospectus?” was checked, the complainant was

provided with a prospectus.

17 The Ombud was not provided with a copy of the prospectus that is said to

have been provided to the complainant, and no copy was included in the

record. When asked during argument about a copy of prospectus that is said

to have been provided to the complainant, Mr Bielderman stated that the

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Ombud has a copy of the prospectus from other similar matters she had

investigated in the past.

18 This was a surprising response because the “Compulsory Cover for New

Investments” prescribed that an application for investment must be

accompanied by inter alia the “Relevant, Fully Completed and Signed

Prospectus”.

19 Seemingly admitting that he did not present any other alternative investment

products to the complainant, the FSP contended that it was not necessary to

present alternative investment products to the complainant because the

complainant had already done his homework and came to the conclusion that

the Sharemax schemes were an answer to his problem, being that ABSA

investments only yielded interest at 4% to 6% annual rates. Mr Bielderman

contended during argument that because the “Client Mandate” reflected that

the box against the “Single Need” (Enkele Behoefte) was ticked, it was not

necessary to present alternative investment options.

20 The FSP did not deal directly with the allegation that he did not disclose that

he was getting a commission calculated at 6% of the capital sum invested. He

simply stated that the 6% commission was paid by Sharemax and not the

complainant.

21 It is significant that in his response to the complaint, the FSP did not deal

pertinently with the accusation that the FSP neglected to inform the

complainant about the possible risks associated with the Sharemex scheme.

In the grounds of appeal, it was contended that “the Sharemax prospectus

forewarns the investor of the risks associated with the investment”. In the

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grounds of appeal the FSP stated that he, together with the Sharemax

representative, discussed the prospectus with the complainant. The FSP said

that he was satisfied that the complainant understood the nature, scope and

the associated risks as set out in the prospectus.

22 As correctly oberved in the grounds of appeal, filed on behalf of the FSP:

“Over the last few years there have been a number of ‘judicial pronouncements’

in matters of this nature being decisions of the Supreme Court of Appeal, the

High Court of South Africa and the Financial Services Tribunal, which it is

submitted are binding on the office of the Ombud and should be followed.”

23 The modus operandi of the relevant Sharemax schemes is conveniently

described in the following judgments and need not be repeated here:

23.1 Oosthuizen v Castro and Another 2018 (2) SA 529 (FB) at paragraphs

[54] to [57].

23.2 Symons NO and Another v Rob Roy Investments CC t/a Assetsure

2019 (4) SA 112 (KZP) at paragraphs [16] to [21], see also paragraph

[22] to [38].

23.3 Centriq Insurance Company Ltd v Oosthuizen and Another 2019 (3)

SA 387 (SCA) at paragraphs [13] to [15].

III APPLICABLE LEGAL PRINCIPLES

24 Acting in terms of section 28(1)(b)(i) of the FAIS Act, the Ombud made the

determination upholding the complaint and awarded compensation for the

loss suffered by the complainant. The FSP was ordered to pay R200 000 to

the complainant .

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25 In his grounds of appeal, the FSP placed the following issues in dispute:

25.1 Whether the elements for liability have been established. The

following requirements are placed in dispute:

25.1.1 Negligence;

25.1.2 Wrongfulness;

25.1.3 Loss; and

25.1.4 Causation.

25.2 The FSP took a number of other points similar to those raised in a

similar matter before this Tribunal namely Ernest Lehaine t/a Ernest

Venter Maakelaars v J F Kruger and Another.1 In that case, the

Tribunal noted the following procedural issues raised by the FSP:

“[12] The applicant contends that the Ombud, in investigating an [sic]

issuing her determination did not act independently, impartially

and objectively, thus resulting in issuing a determination that is

unfair, unlawful and [in] breach of applicant's rights. The Ombud

erred by allowing her desire for disposing of the matter in an

“economical and expeditious manner” as required by s. 23 and 24

of the FAIS Act to [trump] the applicant's s.34 constitutional right.

[13] It is argued that the Ombud had proceeded to issue a

determination against the applicant without the necessary factual

or experts’ evidence to hold the applicant liable for the loss of the

first defendant or to establish in law, the elements of liability.

1 Ernest Lehaine t/a Ernest Venter Maakelaars v J F Kruger and Another Case No FAB130/2020 dated

21 June 2021.

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[14] It is argued that the Ombud should not have determined the

matter where there are material factual disputes between the

parties and should have used the well-established principle to

make a determination where there are factual disputes or

alternatively should have declined to investigate the dispute as

she was obliged to exercise her discretion in terms of s. 27(3)(c)

and referred the dispute to court.

[15] Applicant submits that the Ombud failed to apply - audi alteram

partem — by not providing the applicant with all the information

or responses the Ombud received from the respondent.”

26 Similar arguments were raised before us. We deal with the procedural issues

first and then consider the substantive issues.

(a) Procedural issues

27 The procedural criticisms raised by the FSP against the Ombud are essentially

the following:

27.1 The Ombud followed an irregular process in investigating and

determining the matter;

27.2 The Ombud did not act fairly and impartially;

27.3 The Ombud accepted the complainant’s version without evidence and

despite it being contradicted by documents.

28 The record shows that upon receipt of the complaint, the Ombud notified the

FSP of the complaint and requested him to submit his response together with

all the supporting documents. The letter specifically requested the FSP to

provide the following information:

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“In your response please provide us with a full statement as to how this

transaction was concluded. In particular we require the followlng:

1. A statement by you the advisor as to how the investment was entered

into with the complainant;

2. An explanation as to why the Sharemax Investment was seen to be in the

best interests of the complainant. Please therefore provide this Office with

the financial planning conducted for the Complainant which supported the

recommendation of the product as being appropriate in terms of his

financial needs and risk profile;

3. Please inform this Office what was the source of the funds, and whether

this transaction represented a replacement; if so please provide a record

of advice with regards to the replacement of products as per Section 8 (1)

(d) of the General Code of Conduct;

4. Please provide this Office with the due diligence completed, that satisfied

you that the Sharemax investments were appropriate Investments to

recommend to the Complainant;

5. A copy of any record of advice in terms of section 9 of the General Code

of Conduct for Authorised Financial Services Providers and

Representatives as well as all other compliance documentation;

6. A copy of the policies;

7. Any other material signed by the complainant which may support your

version of events, including a full statement from the person who dealt

with him in concluding this transaction.”

29 The Ombud’s determination sets out inter alia the following:

29.1 The complainant’s version of the facts per the complaint.

29.2 The FSP’s version of the facts per the response and the supporting

documents.

29.3 The findings of fact.

29.4 Application of the law to the facts.

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30 In the course of setting out the FSP’s version, the Ombud undertakes a

detailed analysis of whether the facts and the supporting documents provided

by the FSP answer the allegations in the complaint, making her findings along

the way. For example, the determination notes that:

30.1 “Complainant stated that he did not receive a prospectus. Respondent

denies this and explains that Mr Coetsee, a representative of

Sharemax, explained the prospectus fully to complainant and his wife,

using his laptop computer.”

30.2 “As part of the application form there appears [sic] two pages of

‘Terms and conditions’. Of interest is paragraph 15. This paragraph

records that after the cooling off period has lapsed, an amount of 10%

of the capital, deposited in the attorney’s trust account, will be

released to the promoter to make payment of commissions. The

promoter also undertakes to ‘eventually pay all commissions’. What is

stated here contradicts respondent’s version that complainant's funds

will not be used to pay his commission. It is not in dispute that

Sharemax Zambezi had no trading history and no independent source

of funds which could be utilised to pay commissions and interest. This

much is stated in the prospectus and I must assume that respondent

was aware of this. Respondents [sic] version is completely

misleading.”

30.3 “The next document worth noting is a standard Sharemax document titled

‘Compulsory coverpage (sic) for new Investments’. The purpose is to record

the documentation tendered in making a new investment in a Sharemax

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product. The document describes respondent as the Financial Adviser and

Hertzog Coetsee as the Consultant. The importance of this document, for

purposes of this determination, is that the document notes that ‘Relevant,

fully completed and signed prospectus’ is attached to the application. This

cannot be true as it is not in dispute that complainant never received a

prospectus. Respondent's version is that Coetsee, the Sharemax

consultant, explained the prospectus from his laptop computer. It is common

cause that complainant never received, read and signed the relevant

prospectus.”

31 It appears from the above that the Ombud followed the statutory procedure in

investigating the matter, considered the versions of both parties and accepted

the complainant’s version where it was not disputed by contrary evidence

presented by the FSP; and rejected the FSP’s version where it was not

consistent with his own supporting documents.

32 On this basis, we find that the procedural issues raised by the FSP are

unfounded.

(b) Substantive issues

33 As stated above, the substantive issues pertain to whether the elements of

liability have been established to justify the Ombud’s award of compensation

to the complainant.

34 The fact that the complainant suffered loss in respect of his capital

investments in the sum of R200 000 when the schemes collapsed and it

became apparent that the invested capital had become irrecoverable cannot

be denied. The only elements that require attention therefore are negligence,

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wrongfulness and causation. Because of the overlap between negligence and

wrongfulness, these elements are considered together.

(i) Negligence and wrongfulness

35 The FAIS Act regulates the rendering of financial advisory and intermediary

services to clients by FSPs. The purpose of the FAIS Act and the duties it

imposes upon the FSP in the course of providing advice have conveniently

been set out by this Tribunal in Ernest Venter Maakekelaars v Kruger as

follows:2

“[23] The fundamental purpose of the FAIS Act, the Rules and the Code is

to regulate the rendering of financial advisory and intermediary

services to consumers and to ensure that a potential investor can

make an informed decision.

[23.1] Section 16 of the FAIS Act read with Items 2,3,7, 8 and 9 of the Code

were designed to ensure that an investor is in fact placed in a position

to make an informed decision and in particular, that this very purpose

is in practice achieved. The prescripts of these provisions enjoin the

FSP to deal with the prescribed issues, which if complied with, should

result in an investor being in a position to make an informed decision.

All the available information and records must in this context be taken

into account.

[23.2] Item 2, part Il of the Code states that a provider must at all times render

financial services honestly, fairly, with due skill, care and diligence, and

in the interest of clients and the integrity of the financial services

industry.

[23.3] There can be no compliance with Item 2, if an FSP does not know the

product that he recommended. An FSP will therefore need to gather

relevant facts about the product and product provider, so that the FSP

is in a better informed position to assess the suitability and

2 Supra.

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appropriateness of the product for the client. Such an assessment will

alert an FSP to the risks inherent to the product.

[23.4] Item 7 (1) of the Code provides that a reasonable and appropriate

general explanation of the nature and material terms of the relevant

contract or transaction be given to a client, and that a FSP must

generally make full and frank disclosure of any information that would

reasonably be expected to enable the client to make an informed

decision. In particular, Item 7 (1)(c)(xiii) provides that any material

investment or other risk associated with the product be disclosed.

[23.5] Item 8 (1) of the Code provides that the recommended products be

appropriate to the client's risk profile and financial needs. The steps

contemplated by this provision of this item of the Code can only be

achieved by obtaining relevant information from the potential investor.

[24] Item 3 (1) (a)(ii) of the Code required representations made and

information provided to the investor to be in plain language and avoid

uncertainty of confusion. Item 7 of the Code (dealing with product

information) requires significant information to be provided to a

potential investor. Item 7 of the Code places an onerous obligation on

providers of a product on a duty to disclose because it contains very

wide requirements such as disclosure of “all material financial product

information” to a potential investor to enable an investor to make an

informed decision. Item 7 (1)(a) requires “full and frank disclosure” of

“any information” that would be reasonably expected to enable an

investor to make an informed decision. Importantly, Item 8 of the Code

deals with the suitability of the advice given, provides inter alia, that an

FSP, must prior to providing a client with advice:

[24.1] take reasonable steps to seek from the client appropriate and available

information regarding the client’s financial situation, financial product,

experience and objectives to enable the FSP to provide the client with

appropriate advice;

[24.2] conduct any analysis, for purposes of the advice, based on the

information obtained; and

[24.3] identify the financial product or products that will be appropriate to the

client’s risks profile and financial needs subject to the limitations

imposed on the FSP under the Act or any contractual arrangement.”

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36 Although the FSP was requested to provide the Ombud with all the supporting

documents, the following documents are glaringly missing from the

information provided:

36.1 The record of the advice given to the complainant. Although the FSP

states that the prospectus of the Sharemax schemes was explained

to the complainant by the Sharemax representative from his laptop,

no written record, audio or video recording or transcript of that

presentation was submitted;

36.2 A copy of the prospectus that was given to the complainant,

completed and signed by the complainant as required by the

“Compulsory Cover Page for New Sharemax Investments”.

36.3 No record of the risk assessments was provided. As was observed

by the Ombud, what is termed “Risk Assessment on Product

Information” has nothing to do with risk assessment. The Ombud had

this to say on the issue:

“Another Sharemax standard document is ‘Sharemax Investments Risk

Assessment On Product information’. This document was signed by

the parties. The document is drafted by Sharemax and supplied to all

its brokers. The document is nothing more than a sham. It purports to

be some form of risk assessment. It comprises of 6 questions which

must be answered by ticking off ‘yes’ or ‘no’. All the questions have

absolutely nothing to do with risk on product information, which

information is contained in the prospectus. One thing is clear,

respondent did not explain the risks in this type of investment to

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complainant. Still less did he explain the risks in this particular product.

There is absolutely no evidence that respondent explained to

complainant that this product represented a risk to capital. Respondent

was under a duty to explain the risks to complainant”; and

36.4 There is no record of the financial needs analysis having been

performed.

37 It is telling that the FSP, despite the complainant’s trust based on their

previous dealings when the FSP was an ABSA broker, had to rely on the

Sharemax representative to explain the prospectus to the complainant. This

coupled with the fact that the FSP advised the complainant that the Sharemax

schemes were “sound investments” can only mean, at best for the FSP, that:

37.1 he did not fully understand the Sharemax schemes;

37.2 he did not take reasonable steps to satisfy himself of the safety of the

investment;

37.3 he did not (nor could he) explain the risks inherent in the Sharemax

schemes such as that the properties that were supposed to generate

the income were not complete and that they were not owned by the

relevant entities.

38 Not only was it negligent of the FSP to recommend the Sharemax schemes (i)

without properly understanding them; and (ii) without properly explaining them

and the risks they posed, it was also wrongful. It was wrongful because the

FSP was under a legal duty to perform these duties in the course of rendering

the advice. The FSP failed to discharge the legal duty resting on him.

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(ii) Causation

39 It was contended by Mr Bielderman, relying on the Symons judgment, that the

FSP cannot be held liable for the complainant’s loss because the collapse of

the relevant Sharemax schemes was caused by the instruction from the Banks

Supervisory Division (“BSD”) of the South African Reserve Bank (“SARB”) to

stop taking deposits. He argued further that because the intervention of the

BSD was not amongst the risks identified in the prospectus, that risk was not

reasonably foreseeable.

40 In the Symons judgment, the High Court held that:

“[59] If it can be said that on a factual level Griffin's failure to explain the risks

adequately was a conditio sine qua non of the plaintiffs' loss (which I do not

consider to be the case) then the question of legal causation arises, as factual

causation on its own is not enough. In Standard Chartered Bank of Canada

Corbett CJ said in order to determine legal causation one has to consider

whether the act was linked sufficiently closely or directly to the loss for legal

liability to ensue, or whether the loss is too remote. He said the test to be

applied is a flexible one in which factors such as reasonable foreseeability,

directness, the absence or presence of a novus actus interveniens, legal policy,

reasonability, fairness and justice all play their part. Also see International

Shipping Co (Pty) Ltd (and in particular the quotation at 701A – C), and

Sandlundu (Pty) Ltd.

[60] The loss suffered by the plaintiffs does not seem to me to be linked

sufficiently closely or directly to any failure on Griffin's part to explain the risks

of the investment to Symons. Those risks had nothing to do with the

intervention by the Reserve Bank, which the plaintiffs do not contend should

have been foreseen by Griffin.

[61] It follows that even if it can be said that Griffin failed in his duty to

understand the scheme better and to explain the potential risks to Symons, any

such breach was not causally connected to the plaintiffs' loss.”

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41 This Tribunal in Ernst Venter Maakelaars v Kruger accepted the FSP’s

contention referred to above based on the Symons judgment and concluded

that:

“Similarly in this matter, the fact that the applicant failed to adhere to

the provisions of the Code, and breached his statutory duty, may not

be a condition sine qua non of the respondent's loss. With the Reserve

bank introducing a novus actus interventions [sic], causing the breach

of the mandate to be remotely connected to the loss. The breach does

not ipso facto prove that the failure to explain the potential risk was

causally connected or closely linked to the first respondent's loss.”

42 It seems to us that both the High Court in Symons and this Tribunal in Ernst

Venter Maakelaars v Kruger did not consider the impact of the findings of the

High Court and the Supreme Court of Appeal in the Oosthuizen v Castro and

the Centrique Insurance cases that the Sharemax schemes had all the

hallmarks of a Ponzi scheme on the element of causation.

43 In Centrique Insurance, the SCA held that:

“[14] The scheme required investors to transfer their money to Sharemax's

chosen company. The company or Sharemax would then pay their

investors interest on this investment without the underlying investment

— the property development — having earned anything — and where

it was unlikely to do so for years, pending the purchase of the land and

the construction of a shopping centre. Only upon the completion of the

construction centre would rental income be realised. Yet the

prospectus previously mentioned held out to investors a projected rate

of return equal to a 10% after tax dividend from the date of full

subscription to the occupation date in September 2011. The

'investment' in fact had all the hallmarks of a Ponzi scheme in which

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money placed by later investors pays artificially high interest or

dividends to the original investors, thereby attracting even larger

investment. When there are no longer new investors, which inevitably

happens, the scheme collapses. Mrs Oosthuizen was one of the later

investors. On any objective analysis the investment was not viable,

certainly not having regard to her needs.

[15] As the learned judge trenchantly observed:

‘It is amazing that [Mr Castro] could think for one moment that

interest could lawfully accrue from the investment from the first

month. I wonder where he thought the magical origin of the

income stream would derive from. . . . (A) simple investigation or

even an inspection of the half-built shopping complex would

have been an eye-opener. He would have realised that

enormous costs would have to be incurred to complete the

project [and that the] half-built shopping complex could not earn

any income for some time … but the investment provided for

income to be paid to investors from the start.’”

44 When Mr Bilederman was asked about this finding he contended that the

Centriq Insurance case was distinguishable because the plaintiff’s evidence

was not challenged and that the issue on appeal was whether the exclusion

clauses in the insurance contract applied.

45 The fact that the plaintiff’s evidence was not challenged does not detract from

the finding of those courts on the nature of the Sharemax schemes. As the

Supreme Court of Appeal, in MacDonald v Young,3 reminds us:

“[6] It is settled that uncontradicted evidence is not necessarily

acceptable or sufficient to discharge the onus.”

3 2012 (3) SA 1 (SCA).

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46 Nevertheless, it is clear from paragraphs [13] and [14] of the judgment that the

Supreme Court of Appeal, in Centrique Insurance, reached the conclusion that

the Sharemax schemes had all the hallmarks of the Ponzi scheme from its

own analysis of the prospectus.

47 The contention that the Centrique Insurance case was distinguishable

because it related to the insurer’s liability under a professional indemnity

insurance overlooks the fact that, before holding the insurer liable to indemnify

the FSP, the Court had to be satisfied that the FSP was liable – which it did.

48 What then is the impact of the finding that the Sharemax Scheme had all the

hallmarks of a Ponzi scheme on the element of causation? The Supreme

Court of Appeal held that “on any objective analysis the investment was not

viable”. It agreed with the court a quo’s finding that:

“(A) simple investigation or even an inspection of the half-built shopping

complex would have been an eye-opener. He would have realised that

enormous costs would have to be incurred to complete the project [and that

the] half-built shopping complex could not earn any income for some time …

but the investment provided for income to be paid to investors from the start.”

49 Similarly, if the FSP in the present case had taken time to acquaint himself

with the Sharemax schemes instead of relying on the Sharemax

representative to study and explain the prospectus to the complainant, he

would have seen the glaring hallmarks of a Ponzi scheme. Ponzi schemes

are illegal and bear an inherent risk that regulatory authorities will clamp down

on them. And having seen that Sharemax schemes had the resemblance of

a Ponzi scheme, the FSP would have been obliged to inform the complainant

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of this as well as the associated risks, instead of recommending the Sharemax

schemes as a good investment. Had the FSP so informed the complainant,

the complainant would have been placed in a position where he could make

an informed decision whether to invest in the Sharemax schemes, or not.

50 The FSP’s failure to discharge its obligation to the complainant resulted in the

complainant being mislead into believing that the extremely high risk Ponzi

scheme was a sound investment.

51 The FSP did not deny the complainant’s allegation that “although I was

skeptical Venter assured me that Sharemax was a sound investment”. If the

FSP had fully discharged his duties and investigated the true nature of the

Sharemax schemes and explained the real risks associated with them to the

complainant, the complainant’s initial skepticism would have been confirmed.

52 It was reasonably foreseeable that the FSP’s failure to investigate and,

acquaint himself, with the investment product being recommended by him

could result in misleading advice with dire consequences for the investor.

Once it had been established that the schemes had the hallmarks of a Ponzi

scheme, the inherent and real risk of regulatory authorities clamping down on

them was reasonably foreseeable..

53 The loss to the complainant was caused because the FSP had failed firstly, to

acquaint himself with the workings of scheme and secondly, to investigate how

the schemes worked in reality and whether the promised returns were

sustainable. Had the FSP done so, being a financial services provider, he

would have recognised the hallmarks of a Ponzi scheme in the Sharemax

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schemes. The aforementioned failures were the cause of the complainant’s

loss.

54 For these reasons we conclude that the element of causation has been

established.

IV CONCLUSION

55 Consequently, we are satisfied that the Ombud’s determination cannot be

faulted. We therefore make the following order:

“The application for reconsideration is dismissed.”

Signed on behalf of the panel at Pretoria on 30 September 2021.

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Adv N K Nxumalo