Tag Archives: MOONSTONE

RVAF Update

22 Apr

Author: Paul Kruger

Publications: Moonstone

Date Published: 21 April 2015

Die Burger reported on Thursday, 16 April 2015, that investors who placed funds with the Relative Value Arbitrage Fund (RVAF) can expect to get some of their money back.

This information was contained in the latest progress report from the joint trustees of Herman Pretorius’s estate.

According to the article, receipts show that the RVAF group accumulated approximately R2.5 billion between 2004 and 2012 from investors and other sources. A summary of the group’s income and expenses by forensic auditors, appointed by the trustees, states that Pretorius used R753 million of the funds for payments unrelated to payments to investors.

Other unspecified payments amounted to R164 million.

At the time of Pretorius’s death, there was only about R2.1 million left in the RVAF bank account.

It is not clear just how much will become available for distribution to investors. The trustees indicated that they will be applying for the setting aside of judgements obtained to freeze certain of Pretorius’s assets to prevent it from being used. They have also successfully applied for the sequestration of Pretorius’s family trusts.

Broker Commissions

The article also states that R124.6 million was paid to financial advisers who convinced investors to place their funds in the RVAF. The trustees aim to approach these advisers on an individual basis to reclaim the fees paid to them by Pretorius. One such claim was already allowed by the courts, but there is currently an appeal against this finding.

The same broker also appealed against various determinations by the FAIS Ombud that he should repay investors the money they placed in the RVAF on his advice.

In total, 23 FAIS Ombud determinations were made in favour of complainants against a handful of advisers.

Investor Claims

A third article reminds investors who wish to lay complaints against advisers that they would have to do so soon, as they only have three years from the time they became aware of, or should reasonably have become aware of, the occurrence of the act or omission which gave rise to the complaint. Pretorius died in July 2012.

A Double Whammy

There are two sources of hope for investors. The final restitution after the trustees managed to wind up Pretorius’s estate, and/or the Ombud finding in their favour.

In view of a recent Appeal Board decision it appears unlikely that investors will be allowed to have the best of both worlds. They cannot reclaim their investment from the broker, and get a partial payment from the estate. It appears that, until such time as a final payment is made from the estate, the quantum of the loss cannot be ascertained with certainty.

The attempt to get advisers to pay back the “commission” they received is far more complex than what it seems.

In 2012, after the death of Pretorius, the FSB issued a media release on the RVAF in which it said:

” The ambit of the FAIS Act is focused on the rendering of financial services which typically involve three parties, namely a product supplier, an intermediary and a client. Unless a financial product is involved, the FAIS Act does not apply.”

And further on: “To the extent that investors were lured into any of his projects, such investors carried the risk and obligation to enquire into the merits before parting with their money, especially where above-average returns were being offered. The loss of so much money to so many investors is a sad state of affairs but one for which the regulator is not accountable.”

The outcome of the appeal case, referred to above, should provide clarity on this matter.

Justice for All?

Another consideration noted before in this forum, but as yet unresolved by the authorities, concerns the broker’s ability to reimburse clients.

With multiple claims resulting from both the trustees and the Ombud’s determinations, the chances are very good that the brokers involved may be forced to choose the insolvency option.

This could mean that clients will receive justice, but no compensation, while those who benefitted most will walk away scot free.

Such an outcome defeats the object of the exercise, and deserves serious attention.

Due Diligence and the Financial Adviser

13 Apr

Author: Paul Kruger

Publications: Moonstone

Date Published: 9 April 2015

Section 2 of the General Code of Conduct requires that ‘a provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of the clients and the integrity of the financial services industry.’

To the best of my knowledge, this does not require that a FSP must conduct a due diligence to the same extent required when mergers and takeovers are concerned. This is a formal process involving lawyers and accountants, and goes far beyond what can or should be expected from a financial adviser.

In a recent determination, the FAIS Ombud again referred to this thorny issue involving an investment in the Relative Value Arbitrage Fund (RVAF) run by the late Herman Pretorius.

In the formulation of the complaint, the determination reads:

Complainant contends that he was not informed by respondent that what he was investing in what was actually a pyramid scheme as opposed to a legitimate investment. Had he so known, he would never have invested and accordingly holds respondent accountable for his losses.

From the information supplied by the respondent, it appears that she was equally unaware that the scheme was, in its last years, run as a Ponzi scheme. In fact, this only materialised after the death of Pretorius.

In the determination under discussion, the following information is supplied by the respondent:

[12] Specifically questioned as to the due diligence she conducted, respondent advised that having been introduced to Abante Capital she visited the premises where Herman Pretorius explained the strategies and how the risk was managed. Having been introduced to the trading team, respondent then proceeded to ascertain whether Abante Capital was registered with the FSB. In addition thereto respondent confirmed with Momentum and Old Mutual and spoke to their fund managers about Abante Capital and their use of the fund in their portfolios.

[13] Respondent goes on to state that, having a reasonable knowledge of Hedge Funds, respondent concluded that the strategy is sound and when mostly top 40 JSE companies are invested into, this should be a sound fund. According to respondent, Mr Pretorius explained that the way that this fund operated the risks are relatively low.

[14] Respondent contends that she was satisfied that persons investing in the fund were fully appreciative and aware of the risks involved, both in that they attended presentations by Herman Pretorius but also in that respondent further explained the process and operation of the fund as she understood it. In this regard a written explanation of Board Notice 5711 was provided and explained to each client.

[15] As to the basis upon which respondent deemed RVAF to be a suitable basis for her clients, respondent advised as follows:

15.1. Many clients need a higher return on their investment to ensure that they reached their investment goals, and as an adviser it was her duty to ensure that all products and all investment avenues are explored on behalf of clients;

15.2. Given the various market crises, hedge funds could both act as a defensive strategy and outperform traditional investments in a downturn;

15.3. Researching the different hedge funds available in the country, respondent’s research showed that Abante Capital was one of three hedge funds in South Africa;

15.4 In 2008 Abante Capital won a hedge fund award. With regards thereto respondent provided a Symmetry multi manager document showing the market neutral category winner as ‘Abante Statistical Arbitrage.’

[16] The portfolio was explained to clients as a hedge fund which invested in shares on the JSE. It was explained that as in any investment involving shares the risk is of a high nature, however historically the loss in downside markets is lessened when hedge trading strategies are used.

[17] In this regard respondent states that hedge funds may actually be a lower risk than traditional investments as the target is to protect capital, increase defensive strategies, and obtain absolute returns under all market conditions as explained by Herman Pretorius.

Concerning the client’s knowledge of investments, the determination states:

With regards to the investment in RVAF, complainant was given to understand that the underlying investment was comprised of shares on the Johannesburg Stock Exchange. To this end and having personally dabbled a bit in shares he understood that there were risks involved in the investment, chief amongst which was that the share market could go up or down;

The respondent’s version of the client’s profile states:

‘Mr VD Walt has a degree, a residential and commercial property portfolio, runs his own consulting practice and trades a share portfolio. He is investment savvy and understands how shares can be traded long and short for a profit in a bear market’.

Was the advisor negligent?

A recent Appeal Board ruling on this case contains the following interesting view:

What then constitutes negligence? The lack of skill or knowledge is not per se negligent. It is however, negligent to engage voluntarily in any potentially dangerous activity unless one has the skill and knowledge usually associated with the proper discharge of the duties connected with such an activity. Hence, in interpreting the meaning of “care and skill”, our authorities have held that a mandatory should always employ reasonable care and skill in exercising his or her mandate.

What is reasonable in the circumstances is measured against the “general level of skill and diligence possessed and exercised at the same time by members of the branch of profession to which the mandatary belongs. If a mandatary negligently falls to execute his mandate or he is negligent in exercising his mandate, he failed to act with “care and skill”. To act negligently means to act in a way that falls short of the standard of the reasonable person”. Hence the defendant is negligent if the reasonable person would have acted differently if the unlawful causing of damage was reasonably foreseeable and preventable.

It is difficult to see how the actions by the respondent, as outlined above, can be deemed to have been lacking in “… due skill, care and diligence…”, or negligent.

FSP Due Diligence Responsibilities

7 Jul

Author: Paul Kruger

Publications: Moonstone

Date Published: 3 Jul 2014

On Monday, we briefly outlined the background to the first complaint against an advisor who invested client funds in Herman Pretorius’s Relative Value Arbitrage Fund.
In his response to the complaint, the advisor stated, amongst other arguments that he, after reading about possible problems, “…contacted Mr. Pretorius to further investigate the matter. Mr. Pretorius advised me in a meeting at his office that the FSB had visited him and found nothing untoward.”
“If the FSB with all the investigative means at its disposal was not able to detect improper “hedge fund” activities by Pretorius, it surely cannot expect me to have done so.”
He also attached a copy of an e-mail from Tefo Moatshe of the FSB to another adviser dated the 11 May 2009 which states:
“Hedge funds are currently not regulated in South Africa – we only regulate a person who manages a hedge fund portfolio. This means that a person who renders financial services to a client to invest in hedge funds is not a financial services provider and not required to be licensed.”
The Ombud responded to this as follows:
“It is neither considered necessary nor appropriate of this Office to comment on the allegation that the FSB failed to pick up contraventions despite, according to the respondent, the FSB having investigated the business activities of Pretorius on more than one occasion.”
“Whatever the alleged failure on the part of the Financial Services Board, (no opinion is expressed by this Office on this allegation), the respondent’sfailure to conduct even the most basic due diligence is inexcusable. Even more so, given that not only was the respondent directly and regularly interacting with Pretorius and the RVAF, but as discussed hereunder, the respondent was more than amply qualified to pick up on any irregularities.”
The Ombud then expands on the respondent’s membership of a professional body, his obligations under its code of conduct and his professional qualifications.
I find it difficult to reconcile this conclusion with the information published in the media release by the FSB in August 2012 in response to media reports:
“During May 2011 it was brought to the attention of the FSB that Pretorius was “selling shares in unlisted companies” and “promoting these ventures” by making representations to the community.
As the selling of unlisted shares may constitute a financial service as contemplated by the FAIS Act, the FSB followed up on the information which it subsequently received in order to establish whether or not Pretorius was acting in contravention of the FAIS Act, given also the fact that he was not licensed in terms of the FAIS Act.
Some of the findings given were:
“Based on the information supplied in response at the time the FSB was satisfied that:
The private equity or venture capital projects embarked upon or supported by Mr Pretorius did not constitute an activity which was subject to FSB regulation.
Pretorius’s activities did not require a FAIS licence at the time.
The manner in which Pretorius indicated that capital would be raised from investors and the investment vehicle used for the raising of such capital also did not point towards any activity which was subject to FSB regulation or otherwise unlawful…”
The explanations provided to the FSB concerning the nature of the trusts as investment vehicles were such that it could not be established with certainty that their activities were subject to FSB regulation. Some of the ventures were designed for individuals who could properly be considered to be involved in a private domestic affair.”
“Following further complaints received by the FSB in May/June 2012 against Mr. Pretorius it was decided that a formal inspection should be conducted on the affairs of Pretorius and the various investment vehicles utilised in order to establish whether or not the activities of the investment vehicles were subject to FSB regulation. The inspection was under way at the time when Pretorius allegedly committed suicide.”
“There are media reports indicating that concerns were raised with the FSB more than 8 years ago regarding Pretorius’ involvement in hedge funds. In this regard, the FSB wishes to clarify that at that time that these concerns were raised the regulator could not establish any evidence of Pretorius’ activities in hedge funds or any irregularities with regard to the issues that were raised at the time. Further, the FSB wishes to categorically state that, as detailed above, appropriate action was taken from the time that the allegations first surfaced, and that the investigation into this matter is on-going.”
“Concerns have also been raised about how the FSB “allowed what amounts to a gigantic Ponzi scheme to continue under its nose.” Once again, it must be remembered that schemes that are operated outside of and actively in secret from the regulator cannot be said to be operating under the regulator’s nose. Accordingly, to the extent that there was a Ponzi scheme in Pretorius’ activities, such a scheme would have been operated in strict secrecy from the FSB.”
“The FSB is of the view that if there was any non-compliance by Pretorius, it was well-designed not to be subject to regulatory scrutiny. To the extent that investors were lured into any of his projects, such investors carried the risk and obligation to enquire into the merits before parting with their money, especially where above-average returns were being offered. The loss of so much money to so many investors is a sad state of affairs but one for which the regulator is not accountable.”
– See more at: http://www.moonstone.co.za

FAIS Ombud Rules on RVAF Investment

1 Jul

Author: Paul Kruger

Publications: Moonstone

Date Published: 1 Jul 2014

The reasons for the sad ending to the Relative Value Arbitrage Fund, for both investors and advisors, are evident from this, the first determination by the Ombud on the Herman Pretorius saga.

A client, who invested R500 000 in 2010, complained to the Ombud after losing all his savings when the mastermind behind the fund reportedly committed suicide.

The Ombud quotes the following “important points” from the complaint:

‘I had trust in the respondent as he was correctly registered as a certified financial planner. He was a member of the FPI. His company was FSB licensed. I would never have invested my money in any investment platform by not doing it through a registered financial services provider/certified financial planner. The fact that he is a registered financial services provider makes it certain in my mind that whatever investment platform he would be investing my money in would be:

  • legal
  • correctly registered
  • have all the necessary due diligence performed by himself
  • the fund manager (of RVAF) would be FSB licensed
  • there would be third-party verification of returns
  • there would be valid financial statements
  • the fund would be correctly audited

This, I understand, is not the case at all. I am dismayed that none of the above 7 points were fulfilled and I declare that the respondents acted unethically by investing my money in this “hedge fund”. I would never have invested a cent of my money into this fund had I known this information’ (own emphasis).

The Ombud then proceeds to dissect the evidence in terms of the legal obligations of the advisor, including the following:

  • The duty to identify the client’s needs
  • Disclosures in terms of section 4 and 5 of the Code
  • Information on the product supplier
  • The Code of Conduct for Discretionary Financial Services Providers
  • Risk and hedge fund strategies disclosure as required by the discretionary code and
  • Authorisation to conduct business as a financial services provider

Having dealt at great length with all of the above, the Ombud concludes:

“There are so many areas where the respondent was clearly remiss and in direct contravention of the FAIS Act that it is difficult to recap without repeating all that has already been discussed. At its simplest, had the respondent just requested a set of properly audited financials, the scam would have been revealed. This would have been part of basic due diligence. Yet not only was this (sic) most elementary of steps clearly omitted, but similarly, deficiencies are evident in the complete lack of any form of proper due diligence into the investment vehicle, underlying investments or their structure.”

She quotes from the ground-breaking Durr vs ABSA Bank Ltd and Another 1997 (3) SA 448 (SCA), case which states:

“The important issue is that even if the adviser himself does not have the personal competence to make the enquiries, I believe it is incumbent upon him to harness whatever resources are available to him or if necessary to ask for professional, legal or accounting opinion before committing his client’s funds to such an investment”.

Concerning the respondent’s obligations as a member of a professional body, she states:

“The Code of Ethics requires that the 2nd respondent undertake to act in a manner that displays exemplary professional conduct and maintain the abilities, skills and knowledge necessary to provide professional services competently. In short, the 2nd respondent was certified to a standard above and beyond that of the average financial adviser and must be held to this standard.”

A thorough reading of this determination is highly recommended to all investment advisors. In particular, the views of the Ombud on due diligence will clarify an aspect which is still very murky for many of us.

In Thursday’s Moonstone Monitor we will discuss the Ombud’s view on why the FSB failed to identify problems with the RAVF during on-site visits, which is also discussed in this determination.

Please click here to download the full determination.


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Fraud knows no Boundaries

15 Apr

Author Paul Kruger

Publications: InsuranceGateways

Date Published: 15 April 2014

Consumers at the lower end of the market are often more vulnerable when it comes to being defrauded.

The latest Ombud determination provides details of how the Reformed Christians for Truth Church became the victims of an “advisor” (himself a pastor) who was neither registered with the FSB, nor appointed as an agent of the licensed financial service provider he claimed to represent.

The agreement was that he would provide funeral cover for congregants of the church, and that claims would be paid out within 48 hours. The first claim arose in December 2012. When it was not paid by January 2013, the church conducted an investigation and established that “…no funeral cover was in place.”

They referred the matter to the FAIS Ombud. In response to an enquiry from the Ombud, the respondent undertook to settle the outstanding amount before 30 April 2013, but this never happened, and the respondent seems to have disappeared.

The Ombud concluded:

The second respondent’s conduct is not only illegal in terms of the FAIS Act. His conduct is also unlawful in terms of the common law and amounts to fraud. On that basis alone, the second respondent must be held personally liable for the entire amount claimed.

The respondent was ordered to repay the church’s R18 000 within 7 days from date of the determination, and interest hereafter to the date of final payment.

As in the two cases discussed last week, the perpetrator was aware that he needed to be licensed, and that he had to work through a licensed product provider. It appears that he blatantly lied about this. He even used the FSP number of a registered provider despite not being registered as a rep with them.

It is not clear how the church became aware of the office of the Ombud, but at least it managed to get a determination in its favour. What has happened since is anybody’s guess. By January 2014, the outstanding amount had still not yet been paid and the respondent, who undertook to repay the money by the end of April, is missing in action.

There is, of course, no way that the Regulator would have been able to establish or prevent this.

One can only speculate on how many other incidents of this nature occur without the victims having recourse to remedy through ignorance. It is likely that such occurrences are prevalent in this sector of the market. The only long-term remedy appears to be consumer education regarding the safeguards in place to protect them from such scams.

One of the recent amendments to the FAIS Act concerns fit and proper requirements. The following is an extract from a summary written by Alan Holton, a compliance officer and associate of Moonstone:

A new S 6A (Fit and Proper Requirements) has been added to this statute. In terms of S 6A, the registrar must classify financial services providers into different categories and determine fit and proper requirements for each category of providers.

The registrar must then, in each category of providers, determine fit and proper requirements for the key individuals of providers, representatives of providers, key individuals of representatives of providers and compliance officers.

The challenge, of course, does not lie in regulating those in the flock, in a manner of speaking – it is those who opt to operate outside the legal parameters that are most likely to cause harm.

There are currently a number of investment schemes offering above average returns. They do not operate under the radar, advertise brazenly and must be making millions if one looks at their advertising campaigns. Some may well be doing what they promise, but so did major property syndications before market conditions changed.

It seems that the starting point for many of these operators is to set up structures which fall outside the jurisdiction of the regulatory authorities. This appeared to be the case with the Relative Value Arbitrage Fund which camouflaged its business operations in such a way that the FSB was unable to detect anything untoward during an inspection in May 2011. During a further investigation a year later, Herman Pretorius shot his business partner and himself.

There are no easy solutions to the problem of rogue operators. Hopefully, the implementation of Twin Peaks will cast the net wider, and contribute to a safer financial services environment.

FAIS Supervision Annual Report

5 Dec

Author: Unknown

Publications: InsuranceGateways

Date Published: 05 December 2013

The FAIS Supervision Department of the FSB supervises financial services providers (FSPs) in terms of a risk-based approach. In response to the changing face of the regulatory landscape, international trends and outcomes of previous years’ on-site visits, the department introduced a new Medium to High risk category to define the risk of non-compliance more accurately.
A total of 10 297 FSPs were categorised. Interestingly, the number “only” decreased by 493, but a closer look at the table below shows a marked decline in the number of small FSPs from 6 839 to 3 362 – a loss of 3477, or nearly 51%. The table below reflects the categorisation of FSPs in terms of the new risk-based supervision approach as at 31 March 2013. The categorisation was changed with the introduction of a Medium-High Impact (MHI) category. During the period under review, the emphasis was placed on off-site monitoring of High Impact and MHI FSPs.



High Impact



Medium-High Impact (MHI)



Medium Impact

3 411

2 331

Small-Medium Impact (SMI)

2 268

1 358

Small FSPs

3 362

6 839


10 297

10 790

Risk Assessment Visits to FSPs
A total of 643 FSPs received visits. Of these, 490, or 76.2% occurred at the medium to high impact categories.
The report states that the overall compliance of FSPs was satisfactory, and a definite improvement was noticeable during the period under review. The overall understanding of key individuals and representatives with regard to compliance was far better, which can mainly be attributed to the knowledge gained in their preparation for the regulatory examinations. The following issues of concern were noted:


Percentage occurrence %

Sections 4 and 5 of the General Code of Conduct (GCOC): Disclosure of documentation is non-compliant


License conditions: Business information is not updated within 15 days of change taking place


Good business practices are not followed


None-compliance with part VIII of the Determination of Fit and Proper Requirements: FSPs not having a business continuity plan in place


Sections 11 and 12 of the GCOC: FSPs of which the Risk Management Plan is inadequate


No register/records kept of training undergone by key individuals and representatives


Section 7 of the GCOC: Disclosure made to client in terms of the product and services are inadequate


Non-compliance with part IX of the Determination of Fit and Proper Requirements: FSPs not complying with the financial soundness requirements


Section 3A of the GCOC: FSPs that have not adopted, maintained and implemented a conflict of interest management policy


Corporate governance measures are inadequate


Compliance Practice Visits
During the period under review, the Supervision Department reviewed 33 independent compliance practices. The majority of the compliance practices provided acceptable compliance services to clients.
However, there were some areas that needed improvement, which were identified and addressed with the respective practices. During the review of the risk-based framework, a process of recording of information on compliance practices was developed and is being introduced. It is envisaged that this will enable supervisors to focus proactively on specific concerns relating to external compliance officers.
Specific On-site Visits The Registrar of FSPs ordered an inspection into the affairs of Mr Herman Pretorius, RVAF and Polus Capital (Pty) Ltd. During the inspection, the RVAF scheme collapsed and it was established that 16 authorised FSPs were involved in soliciting clients on behalf of the late Mr Pretorius. On-site visits to probe their participation in assisting clients to place investments in the RVAF and other schemes offered by the late Mr Pretorius were conducted. At the end of the period under review, these investigations were still continuing.
Communication with FSPs
The FAIS Supervision Department implemented a comprehensive communication strategy during the period under review, including newsletters, information circulars, workshops, conferences and telematics broadcasts. Guest speakers at the conference and workshops included speakers from other FSB departments, as well as industry experts.
A joint exercise between FAIS Supervision and FAIS Registration was focused on the funeral industry. A large number of workshops were held to assist this part of the industry to understand the registration (licensing) requirements, as well as the ongoing requirements for maintaining a license. During these workshops, FSPs were specifically assisted to complete compliance reports and financial statements.
Specialisation Areas As part of the Department’s risk-based approach, supervisory staff members are involved in specialisation areas. Seven focus groups, including ones for unconventional FSPs (foreign FSPs, forex investment providers, retailers, motor dealers, estate agents and auditors), banking, medical schemes and compliance officers were tasked with providing guidance in these specific specialisation areas. Research into industry practices and thematic work, as well as focused on-site visits, was conducted. Issues that came to the fore led to the compilation of information circulars on bulk client transfers and the re-signing of client mandates, cash management system accounts, fee disclosure and material irregularity reporting by compliance officers.

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Telematic Broadcasts Keeping you Updated

21 Aug

Author: Paul Kruger

Publications: Moonstone

Date Published: 20 August 2013

In the aftermath of the Herman Pretorius matter, and the latest warning from the FSB concerning an institution who offers a 25% return per month, it sounds like a good presentation to attend, and to ask some questions. ………

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Jurisdiction of the FSB

22 Nov


Publications:  MOONSTONE

Date Publiched: 22 November 2012

Was it coincidence?

I was working on this article on Tuesday, and on Wednesday saw an article in Sake24 entitled: Finansiële waghond ‘aan die slaap’. According to this report, the members of parliament felt that there was a lack of oversight on the part of the FSB as far as pyramid and Ponzi schemes are concerned.

Very often, the hands of the Regulator are tied, because the products that cause the problem do not fall under its jurisdiction. The most notable recent example was the Herman Pretorius saga.

In a media release on 10 August, in response to other, similar allegations in the media, the FSB reacted as follows:

During May 2011 it was brought ……………

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Dwindling Sole Prop Numbers and Rent a KI

16 Nov


Publications:  MOONSTONE

Date Publiched: 16 November 2012

Last week, we commented on the fact that there are only 2 492 sole proprietors in the industry, based on the latest FSB statistics.

One reader, speaking from personal experience, wrote as follows:

It is very possible that there has been a reduction in sole props, AND THERE WILL BE MORE. They have not disappeared, but are simply operating through, or off, the back of other intermediaries. This alleviates a lot of the admin and getting the required guarantees, etc. There are many that have merged their books but still manage their own portfolios.

Unless he requests a comprehensive compliance audit of the new business, he has no real idea of what transpired in the past. Even then, there are dangers, such as business transactions not declared in the audit, as we saw in the recent Herman Pretorius saga ……………

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