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Protecting the lifeblood of our economy

They say that in desperate times, people take to desperate measures. Evidently we have been through many periods of desperate times, according to Daryl Ducasse, Merkurius Capital Solutions.

The list of schemes or failed entities in which investors have lost untold billions of Rand is mind-numbing – this includes Masterbond, Supreme, Saambou, Regal Bank, Fidentia, King Financial Services, City Capital, Sharemax, PIC and now, Realcor.

When will this financial ‘bloodshed’ end? We suspect never – mainly due to the fact that greed interferes with the function of logic in the brain.

We maintain this credo – banks are the gatekeepers of capital, and investors are the lifeblood of our economy. But the majority of investors are relatively uninformed when it comes to the technical risks inherent in an investment structure. As a consequence, most end up trusting their financial advisors to manage their investment decisions, and investment managers or directors and management of companies to manage their investments – thank goodness most perform, but for those who fall victim to poor legal structures, over-pricing, mismanagement, and in some instances, till-plundering, the consequences of investment failure can be devastating.

The effect of this devastation is not limited to the investors themselves – by way of illustration, there are three companies we have had dealings with recently whose investors number 1,110+, 3,300+ and 42,000 odd individuals. That is a total of nearly 45,000 people who face financial loss due to various circumstances (close to two-thirds of the capacity of the Green Point Stadium!).

Many of these victims are retired, or elderly people with little chance of starting a commercial life again.

Sadly, the calculation doesn’t stop there – these investors likely have families to support, or friends and family who have to support them as a result of the financial loss.

If one assumes that each investor has at the very least one life partner or wife – that is 90,000 odd people who are affected!
If they support one extra person out of their anticipated investment, that number rises to 135,000 affected individuals.
If one relative or friend supports the affected investor, and his partner, there are close to 200,000 people affected!
This does not include those who are affected in ‘knock-on’ ways such as creditors, employees, banks, landlords and the like.

Please take a moment to consider the implications of this butterfly effect – or could we call it the ‘rabbit in the headlight effect’?

When schemes collapse, investors become increasingly wary of representations of investment products bearing promises of security and income. The effect of this is likely to be a decision not to invest, in which case capital is kept with financial institutions in fixed deposits.

The consequence of this is likely to be reduced gross domestic fixed investment – less investment means less opportunity in various industries spanning real estate, financial services, manufacturing and the like.
No prizes for guessing what that boils down to – lower contributions to GDP, and an increase in problematic employment statistics!

Yes, a very simplistic view that is open to criticism, but a theory which should not be ignored.

Take for example, the similarities between the latest saga of Realcor, and the age-old case of Masterbond:

  • Both schemes represented the development of underlying leisure assets – in the case of Masterbond, Club Mykonos in Langebaan, and Fancourt in George. In the case of Realcor, The (incomplete) Radisson Blu Hotel development in Blaauwberg;
  • Masterbond raised R600m in investor funds. Realcor raised R640m by way of a combination of shares and debentures;
  • Masterbond directors were found guilty of fraud amounting to some R170m. In the Realcor scenario, it is alleged that somewhat more than R140m of investors’ funds have been diverted from their original intended purpose to personal loans to directors, taking profit upfront (from a yet to be completed development?) and the acquisition and development of other properties which the investors know nothing about nor have any shares in;
  • Most of the investors in Masterbond were elderly people (most of the funds raised through Masterbond were pension funds) – most of the investors in Realcor are elderly or retired people;
  • Approximately 2,000 individuals lost their money in the Masterbond scheme – there are approximately 3,400 investors in the Realcor case;
  • Apparently 16 people committed suicide in the aftermath of the Masterbond debacle, but we are reaching out to the affected investors in Realcor in an effort to avoid a repeat of this unnecessary waste of life!

It is imperative that transactional ethics and the principles of investor protection be swiftly elevated to the top of the priority pile in our environment – on the regulatory front, in the operational manifesto’s of practitioners, and in the hands of educators.

Each event in which an investor loses money is a darkening of South Africa’s commercial integrity.

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