Advice saves investor from suspected ponzi scheme

05 April 2019 - 17:20

A would-be investor’s small but niggling doubt about a tempting investment offer in an empowerment company lead to the recovery of about R10m collected as part of a suspected ponzi scheme with offices in Pietermaritzburg that was also marketed elsewhere.
An office worker was offered a R240,000 return over two years — or 116% a year — if he invested just R65,000 in an empowerment deal that would provide money for a logistics company. The man was given brochures offering him the investment in Exclusive Empowerment Holdings, which would invest in trucks and trailers for transport company Chenge Logistics.
If he invested as much as R300,000, he could earn a R1.08m return after two years — a 114% return, the brochure said. The man was tempted to resign and cash in his pension to invest, but fortunately he checked with a financial adviser before doing so.
It wasn’t the first time staff at the adviser’s practice had heard about the amazing returns the companies were offering. One knew of a policeman who was also planning to cash in his pension to invest in the scheme. The adviser was immediately suspicious, recognising that the returns were ridiculously high and knowing that transport businesses are experiencing tough times.
Shares in investments listed on the JSE as represented by the all-share index have returned just 5.8% a year over the past five years, and 12.6% over the past 10 years, according to the latest Old Mutual Long Term Perspectives.
Unlisted investments should give a higher return because of the increased risk, but the investment in the empowerment company was offering 116% a year, without a business case to support how it would achieve such spectacular returns.
The adviser alerted the Financial Services Conduct Authority (FSCA), which did some mystery shopping and was also offered the investment range that included a R20,000 a month return for two years on a R130,000 investment; and a R40,000 month for two years on a R260,000 investment.
Brandon Topham, the FSCA’s new divisional executive for investigation and enforcement, says the investments were a financial service but Nzimakwe Cedric Mzamo, the sole director of Chenge, and Eric Kusakusa Phoswa, the director at Exclusive Empowerment, did not have licences from the FSCA to provide financial services, nor to collect deposits from the public.
It wasn’t long before the FSCA had persuaded a judge to give them a search and seizure warrant and within days of hearing about the scheme it raided the premises in Redlands Estate in Pietermaritzburg.
Topham says the initial investigation led it to believe there was a high likelihood that the scheme was a fraudulent one. “They were not investing in what they said they were,” he says.
Caught early
The FSCA convinced the Financial Intelligence Centre (FIC) to freeze the various bank accounts of the entities and the individuals. Topham can’t confirm the amount involved but says he believes they caught the scheme early, just as it was starting to take off, noting the companies were set up in May last year and started taking in investments in October.
The financial adviser believes about R10m was recovered from the accounts linked to Chenge and Exclusive Empowerment because the regulator acted within days of receiving information.
Ponzi schemes typically use the money the collect to pay some returns to investors in the initial stages in an attempt to show the scheme is legitimate, but later as participants in the scheme grow, returns falter and later investors are not able to recover any of their capital.
Topham says the FSCA also recently did a search and seizeure on a scheme running in Stellenbosch, but the scheme had been running for nine years and very little was recovered. The FSCA is now communicating with the Asset Forfeiture Unit to obtain a permanent forfeiture order and is also working with the South African Police Services on criminal prosecution.
Ponzi schemes are outlawed in terms of the Consumer Protection Act, which is regulated by the National Consumer Commission and the National Consumer Tribunal. But schemes have, in the past, often flourished for years and caused losses of millions of rands for thousands of people.
When they involve selling a financial service or giving advice, however, the FSCA can get involved. Topham says the FSCA is a new regulator with a new investigation and enforcement division that can act in its own right rather than wait for the instructions from other divisions. It has hired Topham, an accountant, lawyer and former MP, and doubled the number of staff in the unit under its predecessor, the Financial Services Board...

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