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Broker tells FAIS Ombud of Leaderguard Bosses’ extravagance

A broker who placed a client’s investment in the rogue Leaderguard scheme has told of extravagant meetings by Leaderguard’s top brass: a whole resort in Mozambique would be booked for as long as three weeks and directors and managers were flown in by helicopter.

Giving his side of the story following a complaint to the FAIS Ombud, Pieter de Jager of Welkom in the Free State said he was also unhappy about the cost-to-client structure, more so after learning that one broker earned “in excess of R100 000 per month from his Free State book”.

However, despite De Jager’s reservations about the monthly fees, I, in my capacity as the Ombud for Financial Services Providers, ruled against De Jager, finding that he appeared to have been ultimately motivated by the high commissions.

My determination followed a complaint by Kroonstad farmer Petrus Stephanus Wessels after he lost his investment in Leaderguard, the dollar value of which on 1 December 2004 was $ 47 962, 97.

Wessels said he first met De Jager in or about 2000 when De Jager worked in the same office as Wessels’ broker.

During September 2004, De Jager contacted Wessels to discuss his portfolio of investments. It appears that when Wessels’ long-standing broker decided to retire, he referred De Jager to Wessels. After gathering information on Wessels’ investments, De Jager contacted Wessels to set up a meeting.

At the time, Wessels’ funds were invested offshore in Old Mutual Guernsey and the original amount of £49 676, 45 invested in November 1999, had devalued to £26 374, 31.

On 22 October 2004, after several meetings, De Jager advised Wessels to disinvest from the Old Mutual Guernsey investment. De Jager further advised Wessels to invest in forex trading through a company called Leaderguard Spot Forex (LSF).

As in the case of several other complaints to the Ombud, Wessels, too, had been told that he could not lose more than 20% of the capital. The investment commenced on 1 December 2004; Wessels invested $47 962, 97.

Sometime between March and May 2005, Wessels read in a newspaper about problems which a company called Leaderguard Securities (LS) was experiencing. He alleged he did not immediately make the connection between LS and LSF and was under the impression that De Jager would have contacted him if there was a problem.

When he received a letter from an entity called Leaderguard Recovery Unit, he immediately approached De Jager who informed him that the money in LSF had been “stolen”.

On 18 October 2007, Wessels wrote a letter to De Jager demanding his capital with interest. Wessels lodged his complaint with the FAIS Ombud on 9 November 2007. He sought compensation of R570 000 (being the rand value of the investment on 1 December 2004) plus interest of 15,5% a year.

In his defence, De Jager said he was first introduced to Leaderguard in February/March 2001 by representatives of Hamilton Solutions Limited. At the time, he admitted that he thought that the monthly commissions/fees were not sustainable. In August 2004, a fellow broker introduced him to Kiep van der Westhuizen, National Manager and Director of Hamilton Solutions and Gerhard Erasmus, Free State Manager and Director of Hamilton Solutions.

De Jager was shown LSF’s Portfolio and their returns. These were compared with the returns on De Jager’s client portfolios which were invested with Old Mutual International. De Jager said the “Leaderguard returns with the 80% capital security were substantially better than those of the Old Mutual portfolios”.

De Jager alleges that Van der Westhuizen and Erasmus indicated that LSF was audited by KPMG and showed good returns. At the time, LSF was in the process of registering with the Financial Services Board (FSB).

On the strength of Van der Westhuizen and Erasmus’ assurances, De Jager then contacted his existing Old Mutual International clients. De Jager said he “discussed this additional investment opportunity” with his clients and the opportunity to diversify the existing offshore portfolios by investing a portion or percentage of the offshore holdings with LSF.

It was at this time that De Jager met with Wessels. Upon perusal of Wessels’ portfolio information, De Jager saw that Wessels was a medium aggressive investor and likewise that his portfolio at Old Mutual Guernsey was a moderate aggressive investment. De Jager also saw that Wessels’ investment had devalued significantly since inception due to the decline on international stock markets.

With Wessel’s agreement, the full value of the portfolio was, therefore, transferred to Leaderguard with the primary goal of achieving positive returns.

By this time, De Jager had been appointed as area Manager for Hamilton Solutions Ltd in the Northern Fee State.

Included in De Jager’s managers’ remuneration package was an additional 0,2% thus bringing the monthly cost to client to 0,7% per month. De Jager alleged he had a discussion with a Chris Viljoen (Free State representative for LSF) regarding the fees and requested his own fees to be reduced on all his clients to 0,2%. De Jager said he was informed the computer system for calculating fees could not be adjusted per individual client.

De Jager said he became “more and more uneasy“ about the cost-to-client structure, “even more so when after a Hamilton Solutions meeting in Bloemfontein and informal discussions with brokers who had been longer associated with Hamilton Solutions, he learned that Chris Viljoen earned in excess of R100 000 per month from his Free State book”.

De Jager said he was subsequently invited to a lunch appointment in early December 2004 by Leaderguard to discuss any questions he had regarding Leaderguard. At this meeting, he learned about the “extravagant approach by the Leaderguard Directors, where a whole resort in Mozambique is booked at a time for as long as two to three weeks and Directors and Management are flown in by helicopter”.

In mid December 2004, while on holiday, De Jager contacted Tim Hefer of Johannesburg International Commodities Management who he had known since 1998.

Hefer had told him that (quoted as is):

“Two of the directors of Leaderguard were previously (1997-1998) employed by JICM as broker consultants but due to reasons (which M. Hefer did not disclose), their contracts were terminated;

“The two persons then started their own company and according to Mr Hefer, used the JICM platform to manage their client’s portfolios. M. Hefer later cancelled this arrangement due to further discrepancies that come known to Mr. Hefer;

“The performances quoted by Leaderguard for the 1997 and 1998 year were, in fact, the returns of JICM and not Leaderguard; and most importantly,

“In 2002 Leaderguard reported a positive growth of 14,55 % for the calendar year although the industry (FOREX) average was 5-6% negative, including a well known offshore Company with which JICM was affiliated, called Cullinham Asset Mandate headed by a Mr. Richard Cullinham.”

De Jager said that, upon hearing this, he immediately instructed his secretaries to contact all his Leaderguard investors in order to effect the sale of their investment. All his investors in Leaderguard signed sale instructions and all were received by Leaderguard by 8 March 2005.

Unfortunately, not all his clients’ funds were withdrawn by the time of Leaderguard’s demise on 30 March 2005. Wessels was one of these unfortunate clients.

While De Jager was of the view that he was not liable for the complainant’s loss, in an email dated 4 September 2009, he offered to pay Wessels an amount of R2 850 on a monthly basis, but Wessels refused the offer.

The Ombud ruled that De Jager did not have the requisite authority under his own FSP licence to market forex products as required by the FAIS Code of Conduct. The Ombud also found that De Jager had acted negligently by placing Wessels in a higher risk forex trading investment with Leaderguard than he had with the Old Mutual International Guernsey investment portfolio.

The Ombud also ruled that there was no evidence put forward by De Jager that the risks associated with speculative forex trading had been disclosed to Wessels. There was also no evidence that De Jager had disclosed to Wessels that none of his capital was guaranteed.

De Jager was also found to have failed to mention to the Complainant that, while LS was operating under an exemption, LSF itself had not been approved by the FSB at the date when the investment in LSF was made. He also did not disclose that he himself was operating under an exemption pending the processing of Hamilton Solutions’ licence application.

Disclosure of these facts was important. Rejection of either Hamilton Solutions’ or LS’s licence applications would have meant that any monies invested by his clients during the period of exemption would have had to be refunded to them.

Failure to mention this meant that the complainant was not placed in a position to make an informed decision.

I also found further non-compliance with the FAIS Code of Conduct as there was no replacement advice document on record as required. When De Jager initially heard about Leaderguard, he admitted he felt that the commissions were not sustainable. Despite De Jager’s initial view (in 2001) that the commissions were not sustainable, he still moved his clients’ funds into Leaderguard.

In my view, De Jager did not display the necessary care and diligence and appears to have been ultimately motivated by the high commissions in spite of his reservations.

De Jager was ordered to pay Wessels the amount of $ 47 962, 97 plus interest.

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