Edwafin Chickens Come Home to Roost

Two FAIS Ombud rulings were published on Friday, both concerning investments made via an FSP in Edwafin, a venture capital company in KZN which offered 18% guarantees on debentures.

Edwafin started advertising aggressively in 2005, when a reader sent me a copy of their advertisement. They were not licensed by the FSB, and enquiries to the Registrar were forwarded to the Banking Registrar.

A licence application by Edwabond was received by the FSB on 24 July 2007, and they were duly registered under licence 31990. This licence was withdrawn on 5 March 2010.

According to the Ombud determination, “Edwafin issued debentures in terms of the Companies Act and marketed them through Edwabond (a subsidiary of Edwafin). Edwabond was thus subject to and bound by the provisions of the Financial Advisory and Intermediary Services Act.”

The advisor involved invested R600 000 for his critically ill father-in-law in this scheme in February 2008. The latter passed away on 13 May of the same year. His family each received debentures to the value of R100 000, and was informed that the capital would be repaid in five years. In the interim, they would receive interest on a monthly basis. This did not materialise. Interest was only received in respect of September 2008. When no payment was received in October, enquiries led to two cheques being issued for the October and November payments, both of which were dishonoured. The debenture holders were subsequently informed that Edwafin was experiencing cash flow problems, and they were unable to recover their money from the company.

The Ombud held the advisor liable for the loss, and he was ordered to repay the amounts invested to his in-laws.

The findings can be summarised as follows:

• The advisor was not licensed to sell debentures, and thus in breach of the regulations of the FAIS Act.
• He did not possess the “… skill, training nor expertise to sell” unsecured debentures.
• The “unusually high returns the product promised…” should have been a warning to the FSP to carefully check the viability of the product.
• Failure to conduct a proper due diligence of the product and the company was seen by the Ombud as “failure to act with the due care and skill required.”
• Failure to disclose to the investor that the advisor was not licensed or equipped to sell a product unsupervised.

This case highlights an interesting train of events.

• Edwafin started advertising aggressively in 2005.
• In 2007, Edwabond applied for an FSB licence.
• This investment was made in February 2008.
• The Ombud received the complaint on 27 October 2009, and referred it to the advisor to try and resolve the matter.
• The parties failed to resolve the matter, and the FSB then accepted the complaint “…for formal investigation”. This date is unfortunately not specified, but given that the normal time allowed for this is six weeks, one can assume that the Ombud’s office started looking at the complaint in December or early January 2010.
• Edwabond’s licence was withdrawn on 5 March 2010.
• The Ombud’s determination was published on 20 August 2013.

Mention is made of the fact that, when the complaint was sent to the advisor, he was informed that “there were other similar complaints by a number of his clients”.

No doubt, Edwafin would not have been able to pay returns of 18% from 2005 to September 2008 without a steady stream of funds flowing in. According to a blog written by one dismayed investor, the total invested in Edwafin came to R228 million.

Although a smaller amount than some of the other imploded schemes, for investors the loss remains 100%.

It is imperative that the time frame in which such schemes are allowed to operate be reduced. Surely 5 years is far too long?

It is also not clear from the determination why it took more than three and a half years for the complaint to be resolved in a “… procedurally fair, informal, economical and expeditious manner.”