Was Sharemax illegal, or did the Reserve Bank screw up?

The implosion of the R4.6 billion property syndication scheme Sharemax and the failure of its subsequent ‘rescue scheme’ to repay investors are a massive indictment of South African regulators.

More than a decade after the spectacular implosion, not a single individual has been prosecuted or held accountable.

The only people being punished are the 18 700 investors who stand to lose most, if not all, of their investments – and they still don’t know whether Sharemax was illegal or if the regulators screwed up.

However, the Companies and Intellectual Property Commission (CIPC) recently initiated an inter-regulatory process which may offer some answers.

It will look at the events leading up to Sharemax’s implosion and why the Nova Property Group, the company tasked to repay investors after the collapse within 10 years, failed to do so.

The CIPC has labelled the investigation critical to ensure “regulatory integrity” and the proper protection of investors in the future.

Sarb under scrutiny

Although the investigation will look at the conduct of various regulators, the behaviour of the South African Reserve Bank (Sarb) will come under immediate scrutiny. The bank’s 2010 decision that Sharemax’s funding model contravened the Banks Act triggered Sharemax’s collapse, but has never been tested in a court as being correct or not.

South Africa prides itself on having an advanced financial system and world-class regulators, the Sarb being one of them. Its conduct must be beyond reproach.

If any regulator has made a mistake, it should be rectified – or steps taken to ensure it doesn’t happen again.

Not only Sharemax

The investigation may have much broader implications beyond Sharemax and Nova.

The Sarb not only ruled that Sharemax’s funding model was illegal, it found that numerous other property syndication schemes flouted the Banks Act, leading to their implosions. Some notable examples are Picvest, Kings, Bluezone, Realcor.

These rulings abruptly ended South Africa’s property syndication industry.

A conservative estimation is that over 40 000 people invested more than R10 billion in Sharemax and the other schemes.

The formal rescue schemes, especially in the case of Sharemax and Picvest, also seem to have imploded. Most investors have lost most, if not all, of their money.

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No opinion regarding the legality of the schemes

I must state that I did not investigate the events that led up to Sharemax’s collapse at the time; I only covered the events that followed.

However, I have read thousands of pages of court and other documents related to the matter, as well as articles written at the time by the late investigative financial journalist Deon Basson, former Moneyweb journalist Julius Cobbett, and other journalists.

These articles were critical of Sharemax’s business and funding models and the exorbitant commissions financial advisors earned when they invested their clients’ money.

When the highly respected Sarb issued its directives in 2010 ordering the repayment of investors, these journalists must have felt it justified their suspicions.

Over the past few months, I have also read court and other documents and interviewed numerous people (mainly off the record) who have a bearing on Sharemax and other failed schemes.

There are many divergent views and legal opinions, and I do not have an opinion on whether Sharemax or the Sarb is to blame.

But I think investors deserve an official explanation of what went wrong. If Sharemax contravened the Banks Act and acted illegally, the directors and officials must be held accountable. Likewise, if the Sarb made a mistake, it should be held accountable.

CIPC investigation and regulatory integrity

The CIPC entered the fray last year when it issued two compliance notices to Nova questioning its ability to repay investors by January 2022, as set out in the original Section 311 Schemes of Arrangement (SoA).

The CIPC issued a third notice in July this year after Nova failed to repay investors by the January 2022 deadline.

This notice not only ordered Nova to stop selling fixed assets, but the inspector’s report, written by CIPC inspector Cuma Zwane, went further and announced an inter-regulatory investigation to find out what went wrong.

He wrote that a comprehensive review of the events leading up to Sharemax’s collapse and Nova’s subsequent failure is necessary to maintain South Africa’s “regulatory integrity” and protect investor confidence.

Zwane specifically refers to the need to investigate the legality of the Sarb’s decision and whether any oversight function was built in to ensure Nova executed the Sarb’s directives that investors be repaid.

(The Nova board – led by chair, significant shareholder and author of the SoA Connie Myburgh – denies that it failed to implement the rescue scheme and insists it has the authority to postpone the repayment of investors beyond the 10-year period).

Read:
Nova has sold more than half of its investment properties
Nova may be a bigger failure than Sharemax
Reserve Bank issued directives against Sharemax in 2010

All eyes on the Sarb

Based on the documentation I reviewed, there is merit in an independent review of the Sarb’s decision as several peculiar issues need to be cleared up.

Most notably, the Sarb never drafted a formal report detailing its reasons for believing that Sharemax’s funding model contravened the Banks Act. It is almost gobsmacking that the Sarb would order a R4.6 billion investment scheme to repay investors without a formal report justifying the decision.

What makes this even more peculiar is that the Sarb had two contradictory legal opinions regarding the lawfulness of the funding model when it took the decision.

The one was from Advocate Solly van Nieuwenhuizen SC, sourced by the Sarb, which confirmed that the funding model was illegal. The second was from Advocate Cedric Puckrin SC, sourced by Sharemax, which found the model to be legal.

Then-deputy registrar of the bank Advocate Michael Blackbeard, who seemingly made the final decision, recently said during a disciplinary hearing at the Independent Regulatory Board of Auditors (Irba) into the conduct of Sharemax’s former auditors that he rejected Puckrin’s legal opinion out of hand.

He testified that Sarb officials took the final decision based on the Van Nieuwenhuizen opinion, operational reports, internal memos, and verbal discussions. He confirmed that no comprehensive report was ever produced.

Many people believe Blackbeard should have approached a court for a declaratory order at the time.

Vehement denial of contraventions

It is also strange that the Sarb investigated Sharemax for three years, which seems to be a very long time.

During this period, there were numerous interactions between Sharemax, its legal representatives, and the representatives of the Reserve Bank. It is evident that these interactions were not cordial and that both parties were pretty hostile towards each other.

But, and despite its denials of wrongdoing, Sharemax cooperated with the Sarb’s investigators and even amended its funding model to remove possible concerns.

During the three-year investigatory process and under oversight by Sarb inspectors, Sharemax continued to issue prospectuses to raise more capital.

These prospectuses were registered and approved by the CIPC, and it can thus be assumed that the CIPC found them to be legal.

However, the Sarb issued directives on 16 September 2010 stating that the funding model of all Sharemax syndications was illegal and that investors must be repaid. This news triggered a media frenzy leading to the scheme’s collapse.

This raises another mystery as to why the Sarb’s decision was never taken on review.

Blackbeard stated in an affidavit that Sharemax and other parties had ample opportunity to take the decision on review but failed to do so. In fact, Sharemax did apply for a review, but it was withdrawn before being heard.

Realcor

As I said earlier, this process may have a bearing on other failed property syndication schemes whose funding models the Sarb also found to be in contravention of the Banks Act.

One such scheme was Realcor, which imploded in 2011 after the Sarb also found its funding model to be illegal following a three-year investigation.

Realcor was the brainchild of Deonette de Ridder. Its flagship project was the R650 million Raddison Blu Hotel in Cape Town, which was on the verge of completion when the Sarb found that Realcor’s funding model contravened the Banks Act. When the news hit the media, the scheme imploded.

De Ridder recently submitted a complaint against the Sarb at the CIPC, in which she gives her account of what ensued during the Sarb’s investigation. She does not mince her words and describes the Sarb’s conduct as “unconstitutional, reckless, and grossly negligent”, resulting in investors losing around R1 billion.

The lengthy complaint details the interactions between Realcor and the Sarb, and in many ways mirrors Sharemax’s arguments of administrative unfairness.

One key similarity is that the Sarb also never produced a report detailing Realcor’s transgressions.

De Ridder states that Realcor never took the Sarb’s decision on review as it waited for the Sarb’s report.

“We were confident that the report we were promised would clear suspicion of any alleged contravention, and we only cooperated with the Sarb to withhold them from destroying the business as they threatened to do … Realcor never received the inspection report, and a directive was issued by the Sarb without any warning or opportunity to reply to the allegations in the alleged report,” she states.

She also claims the Sarb’s inspectors threatened Realcor’s board “that any court application by us would result in the publication of the Sarb’s investigation, and even if Realcor survived the negative press, the Sarb has ‘deep’ pockets, and the court case will take ten years, cost millions, and Realcor would anyway be bankrupted”.

As was the case with Sharemax, no Realcor functionary was ever prosecuted.

I haven’t been able to find any documentary response from the Sarb refuting De Ridder’s claims.

No criminal prosecution, and investors lost billions

One of the most curious developments following the implosion of the property syndication schemes is that not a single individual was prosecuted for contravening the Banks Act.

Such a contravention is a criminal offence, and such a finding must be referred to the prosecuting authorities. The Sarb did report such cases to the police and prosecuting authorities, but they never took action. In some cases, the National Prosecuting Authority said it would not proceed with prosecutions.

Interestingly, the Sarb, in its banking Supervision Unusual Report for 2011, states that the finding against Sharemax was an “administrative transgression” and not criminal.

This contradicts numerous other rulings that any such infringement was a criminal act.

Sarb’s decision should be taken on review

It seems inevitable that the Sarb’s decision should be tested in a court of law.

South Africa has some of the best oversight legislation and most respected institutions, most notably the Sarb. But Sharemax’s failure, as well as those of other property syndication schemes, presents an indictment of the regulatory integrity in South Africa.

Conversely, the Sarb needs an opportunity to defend itself against any allegations of wrongdoing.

The Sarb’s integrity needs to be beyond reproach as it is a critical institution in South Africa. However, if a court finds it erred, it must carry the consequences.