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Too little, too late to stop Ponzi plots

The e-mail contribution below sent by investor activist and member of Merkurius Capital Solutions Daryl Ducasse has been edited and shortened considerably. All documents referred to are in Fin24’s possession.

I am writing to cover a topic which is of great sensitivity – to the South African Reserve Bank (Sarb), the Financial Services Board (FSB), the Office of the Ombud for Financial Services Providers (Fais Ombud), the investing public, the Destination Marketing, Investment and Trade Promotion Agency for the Western Cape (Wesgro), the DA and local government, the reporting execs, and national government.

I would like to draw your attention to this article on Ponzi schemes. The article and the graphic are informative to a limited degree, but what it, and many other articles like it, miss are the key points relating to the structure of the scheme.

Investors need to know what they are actually investing in and what their rights are upfront; even taking the schemes to attorneys for advice does not necessarily assure or guarantee an investor security of capital!

I would now like to draw your attention to a case example – one in which we were originally appointed as strategic advisors in respect of a reverse listing strategy. When I seconded my partner, Ken Morison (CA) SA to the company as a financial director-designate, I had no idea what was about to unfold. In little or no time at all, he uncovered the first signs of irregular financial transactions.

The crux of my email to you is this: no matter whether the person selling the investment is registered/unregistered, qualified/unqualified, you have a gut feeling, your friends advised you to invest/against investing, the returns are too high etc, the mechanics or structure of the scheme are far more important.

This is not to say that the former issues are not important – just that they are comparatively less important from a prioritisation point of view; check all these structural mechanics, and lastly go to the softer issues. It is never likely a scheme will live past the first few steps, so why bother arguing about a broker’s credentials?

In our case example, we study the Realcor scheme:

• The corporate structure could be deemed to have been on where the main individual, Mrs Deonette de Ridder was operating for personal benefit under a corporate veil – ie the corporeal structures put in place were merely there to satisfy the regulatory environment, when in actual fact, ownership of every single asset led back directly to her family trust!
• The FSB eventually got involved in December 2010 with a public warning – too little, too late;
• The Sarb had put Realcor under a directive as far back as 2008, yet never saw what we saw;
• Many investors told us they had taken the prospectus and brochure to attorneys for an opinion – not one told their client not to invest!

Of the over R650m raised by Realcor by way of public funds and bonds, only R240m-odd was actually accounted for on the development site (the Radisson Blu Hotel development in Blaauwberg);

We know that:
• excessive brokers fees were paid out – twice;
• clients’ interest and dividends were paid out of new capital introduced;
• the promoter took out the profit from the development upfront, even though the development remains incomplete at this date, and the development company in liquidation;
• funds were diverted to the acquisition and development of other properties in which the investors had no interest, and in fact, no knowledge of;
• funds were passed as “loans” to directors in their personal capacities;
• funds were allocated to the opening of at least five businesses within the one retail property;

Notwithstanding the proof in our hands, our red alert was dismissed, and 3 348 investors have now lost their investment – totally!

Our information was given early enough to save the investors;

• Investors invested their funds either by way of debentures (loan instrument) or shares in one or more of three investment companies;
• These three investments companies were controlled by the promoters;
• The actual property on which the development was to take place was owned indirectly by the family trust as aforesaid.

WHY WOULD BROKERS, FINANCIAL ADVISORS, CIPC, ATTORNEYS AND INVESTORS THEMSELVES PERMIT THE INVESTMENT OF FUNDS INTO SOMETHING WHICH HAS NO REAL RIGHT????

• We intervened twice in the liquidation proceedings, both in an effort to grapple the asset out of the hands of the liquidation environment into the hands of the investors – both times we failed.

The first failure was directly due to the intervention of the brokers and advisers; the second was an adverse court ruling.

We took a proposal to the FSB to introduce an investors educational programme – ignored;
We informed the FSB that brokers who had placed client funds into the scheme were attempting to raise further cash from investors to “rescue” the asset in the liquidation process – not ignored, but rebuffed;
National government ignored the call;
The DA ignored the call;
Wesgro ignored the call;
Brokers and financial advisers either ignored the call, or put their heads in the sand. There were a handful that believed us and were willing to do something, but overall – the financial advisers were not worth the time of day. They demonstrated idiocy on a scale unimaginable, and an allegiance to the very people who had caused their clients loss.

The reporters were GREAT – they were non-judgemental, open to the possibility of irregular financial activity, and willing to investigate and report as long as there was a story.

However, I believe their influence can reach far wider than that – I believe that it is incumbent upon them to reach the investing public in ways we and others like us cannot.

The Sharemax debacle, which we had occasion to be involved with for a brief moment in time until we saw the disease in that scheme, is even worse.

Over R2bn of public money was spent on two shopping centres, while neither the investors, nor Sharemax for that matter, had ownership of the properties in question – they were, and to the best of my knowledge still are, owned by the developer! The claims and counter-claims will continue ad infinitum.

Although my tone may be impatient, please understand that we have really had enough of listening to naysayers, conspiracy theorists and idiots.

If positive steps are to be taken to protect the investing public, it cannot be with a limp wrist – it has to be done with some form of authority and meaningful implementation.

Daryl Ducasse

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