Two women who induced a switchboard operator to invest R420 000 in an unlisted company at an inflated price on the pretext that the company would list and bring the investor great rewards, were this week ordered to make good for their actions.
Despite the fact that the women were operating as an investment company that did not have the required licence to operate as a financial services provider (FSP), Noluntu Bam, the Ombud for Financial Services Providers, found that their actions amounted to providing advice in contravention of the law and as such they were liable for their client’s losses.
Bam ordered the former director and the employee of Melkbos-based Blue Platinum Investments, Deolene Catsicadellis and Verna Badenhorst, to pay back to Esme Nel of Ladysmith the R420 000 that she had invested at their behest in the unlisted company.
The company, Ubambo, is still trading but its shares are worth much less than the inflated amount that Nel paid for them, according to the ombud’s ruling.
Nel told the ombud that on Badenhorst’s advice she invested in Ubambo in 2005. She paid R3 a share.
Nel was hoping to buy a house and told the ombud that Badenhorst advised her that Ubambo would list on the stock exchange in March or April 2006 and that the shares would quadruple from R3 to R12.
The listing date came and went, and Badenhorst told Nel that there was a problem with Ubambo’s black economic empowerment status, the ruling says.
When further inquiries yielded unsatisfactory answers, Nel contacted Ubambo, the ruling says.
A representative of the company informed her that the shares she bought were worth about 35 cents each when she invested. Nel then lodged a complaint with the ombud.
Bam found that Nel had invested through Blue Platinum and a close corporation called Equity Options, which were both under the control of Catsicadellis. Both of these entities have subsequently been deregistered, the ruling says.
Bam says that neither Badenhorst nor Catsicadellis denied advising Nel to invest in Ubambo, and the advice they provided was a direct infringement of the Financial Advisory and Intermediary Services (FAIS) Act, because neither Equity Options nor Blue Platinum was licensed as an FSP.
Equity Options had never applied for a licence, while Blue Platinum had been denied a licence due to the fact that Catsicadellis did not comply with requirements of the FAIS Act in respect of personal character, honesty, integrity, competence and operational ability, the ombud’s ruling says.
Badenhorst, who is no longer employed by Blue Platinum, told Bam the recommendations she gave Nel emanated from Blue Platinum’s management and that she had not guaranteed the listing of Ubambo.
She told the ombud that it was Nel’s responsibility to conduct a due diligence on Ubambo.
Bam questioned why Nel would have invested through Blue Platinum unless Badenhorst had provided her with information that induced her to make the investment.
The ruling says the FAIS Act has very clear requirements for the rendering of advice, including the need to keep an advice record, to conduct an analysis of a client’s needs and to make certain disclosures to a client.
Badenhorst claimed that all the documentation that related to the transaction was with Blue Platinum, but Catsicadellis had failed to produce it when the ombud’s office requested her to do so.
“There is not a shred of evidence that any of these [FAIS Act] requirements were met,” Bam says in her ruling, and the “inescapable conclusion is that [Badenhorst’s] version is improbable”.
The ombud says that Nel was induced to invest in the unlisted shares, and no cognisance was taken of her circumstances or how these shares would suit her needs – “a blatant disregard of the FAIS Act”.
In the course of her investigations into the matter, Bam found a statement on Ubambo’s website to the effect that it was highly unlikely to list on the stock exchange.
The website, she says, reports that various financial advisers and brokers had made representations purporting to come from Ubambo about its listing prospects. Ubambo’s website, the ruling says, states that this led to the company’s shares trading at over R3 a share, whereas in 2007 the net asset value of the company showed its value closer to 70 cents a share.
The ombud’s ruling says that Nel was sold shares in Ubambo at a premium way above their real valuation, either at the point of sale or currently.
“I have no doubt the complainant was misled into making this investment by [Badenhorst],” Bam says, and that Badenhorst was acting under Catsicadellis’s direct control.
Bam’s ruling notes that Catsicadellis’s modus operandi is not new to the ombud’s office. Over the years, a number of complaints have been lodged against her and her entities, but these have been resolved after intervention by the ombud’s office.
In her response to Nel’s complaint to the ombud, Catsicadellis told Bam that Blue Platinum was merely a telesales call centre mandated by another entity that was a licensed FSP. This entity, she said, was Buyers Equity Guide (BEG) and was owned by Michael Berk.
The ombud says that Catsicadellis did not submit any documentation to support this assertion, and claimed all the documentation was in BEG’s possession.
The ombud’s office contacted BEG. Its attorney responded that Blue Platinum was wrong to allege that it was a telesales call centre, and in fact the company had been purchasing shares from BEG and selling them on to the public.
Bam says that if Blue Platinum was acting as a representative of BEG, it should have disclosed as much to Nel, which it did not.
Documents sent to Nel, she says, refer only to Equity Options and Blue Platinum.
Bam also found that Blue Platinum had been inspected by the Financial Services Board (FSB), and the FSB’s inspection report deals with the issue of whether Blue Platinum was a representative of BEG.
The regulator concluded that it was not possible for Catsicadellis (then known by her maiden name, McMaster) to be appointed as a representative of BEG, because she did not comply with the FAIS Act’s fit and proper requirements.
The FSB found an email and an undated letter that referred to Blue Platinum’s role as a representative of BEG.
However, according to the ruling, the FSB’s report concludes that Catsicadellis’s attempts to claim that she acted as a representative of BEG was a “deliberate attempt … to mislead the registrar [of financial services providers at the FSB] in order to evade compliance with the FAIS Act”.
The ruling also notes that R300 000 of Nel’s R420 000 investment was deposited directly into Catsicadellis’s bank account, and that the FSB report notes that Catsicadellis had misrepresented to the registrar that she had a separate bank account in which to receive clients’ funds. The FSB viewed this as “fraud, alternatively a contravention of … the FAIS Act”.
The ombud found both Catsicadellis and Badenhorst liable for Nel’s loss.
The ombud ordered the pair to repay Nel her R420 000 plus interest from the dates in 2005 on which she made her four different investments.
However, taking into account the fact that the Ubambo shares have some value, although considerably less than what Nel was led to believe, Bam says that once she has been paid, Nel should return the shares to Catsicadellis and Badenhorst.
Moneyweb reported in 2005 that Catsicadellis was one of a number of brokers who sold shares in Garek.