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Essentially acted in a position of conflict of interest

A retired KwaZulu-Natal man who invested in the discredited Garek scheme has told how after smelling a rat, he confronted his financial advisor who refused to divulge his commission on the basis that "big powerful groups were trying to undermine and take business away" from him.

Theol Newey Wood of Umzumbe told Noluntu Bam (Pictured right), the Ombud for Financial Services Providers, that he had been advised by Andrew van der Merwe to invest in Global Environmental Technologies (GET) and in GAREK.

Van der Merwe had informed them that GET was about to list on the London AIM exchange at the time whilst GAREK had already listed in South Africa in June 2005.

Following such advice, the complainant and his wife Mary jointly invested R430 000 in October 2005.

The complainant later discovered that GAREK had never been listed and GET did not list in the London AIM exchange as indicated by respondent.

New listing dates given for the London listing passed with no listing taking place. The Woods' belief was that GET would in all likelihood never list. They demanded repayment of the entire investment. It was not paid.

After exchanging correspondence with the respondent, Mr Wood decided to lodge a complaint with the FAIS Ombud on the basis that had the respondent made full and frank disclosures about the investment, he would have been in a position to make an informed decision. In this case, he was deprived of that opportunity. 

The Office of the FAIS Ombud has previously found in favour of other investors who had lodged similar complaints against Van der Merwe.

The Ombud has noted there were many people who had invested in the Garek scheme and had lost millions of rand in the process. The Office of the FAIS Ombud has received numerous complaints relating to financial services rendered in the course of recommending investments in the GAREK scheme.

According to the complainant, after the investment had been done, he had occasion to ask Van der Merwe what his commission was in respect of the transaction. The respondent apparently said it was five percent. Months later, the complainant had heard that the respondent was publicly telling people that his commission was in fact 20 percent.

Mr Woods said he and his wife requested a meeting with respondent. In attendance at this meeting was Alan Curtin who was introduced as the marketing manager.  Ten minutes into the meeting, when respondent and Curtin were confronted with questions, Curtin walked out and refused to answer questions. Respondent stayed behind but refused to answer questions pertaining to amongst others his commission. 

"His excuse was that they did not want to divulge too much information about the mechanics of the business owing to fear that big powerful groups were trying to undermine and take business away from them," said Mr Wood.

The FAIS Ombud referred the complaint to the respondent who replied that he would do his best to resolve the complaint with the complainant.

He later sent a letter to the Office of the FAIS Ombud indicating that they had reached an agreement whereby the respondent would find a buyer for the shares held by the Woods. The Woods would continue to hold shares to the value of R30 000.

In October 2007, the Woods confirmed receipt of R110 000 from the respondent. However, from that date onwards, several promises were made by the respondent to pay the balance. Nothing materialised from those promises.

The Woods requested the FAIS Ombud to compel the respondent to pay them the balance of their capital, being the sum of R320 000.

In her determination, Ms Bam said it was evident that the respondent, as a result of his failure to carry out the most basic of due diligences, either lacked a proper understanding of the product or more seriously may have been complicit in a fraud perpetrated against innocent investors.

She said in reality, and as exposed by a Department of Trade and Industry report on the Garek scheme, the shares purchased by the Woods were worthless and investors' funds had been expended on company expenses, directors' remuneration and commissions.

Ms Bam said the Woods had not been advised of possible risks associated with the investment. No attempt was made by the respondent to gather available information regarding the client's financial situation, financial product experience and objectives.

In the circumstances there was no way in which the respondent could have determined whether such a product was appropriate to the complainant's needs or not.

Even if one were to assume that in the event that an investment in unlisted shares was appropriate to complainant's needs, one would expect that an appropriate due diligence would have been conducted into the company by the provider prior to marketing such shares, the Ombud said.

Ms Bam also found that the respondent had not made full disclosure of his commission.

"The respondent evidently did not concern himself with the fact that essentially he acted in a position of conflict of interest; given that he placed more value on his relationship with GAREK and the commission it paid as opposed to acting in his client's interests, a clear violation of the Code.

"Not only did the respondent invest complainant in worthless shares, but the complainant has lost whatever growth he would have received, had he been appropriately invested."

Ms Bam ordered Van der Merwe to compensate the Woods the sum of R320 000 plus interest of 15.5 per cent per annum from 18 October 2005 to date of final payment.