The Financial Services Tribunal (FST) has dismissed the reconsideration application by a former key individual (KI) of Stringfellow Financial Services, finding that he failed to comply with his obligations under the General Code of Conduct.
In December 2022, the FSCA debarred Satish Bhala for eight years and imposed an administrative penalty of R100 000.
It also imposed a R20m fine on Stringfellow Financial Services, trading as Stringfellow Investment Specialists, and a R15m penalty on the Stringfellow Group. The Authority debarred Thomas Stringfellow, the director of Stringfellow Investments, for 20 years and provisionally withdrew Stringfellow Investments’ licence.
In March this year, the FSCA said it had permanently withdrawn Stringfellow Investments’ licence with effect from 13 December 2022.
The enforcement action followed an investigation by the FSCA which found that Thomas Stringfellow and Stringfellow Investments had contravened the FAIS Act, the General Code of Conduct, and the Banks Act.
According to the FSCA, investors lost more than R200m after they were induced to invest in loan agreements to fund franchises of Lorna Jane, an Australia-based retailer of fitness apparel for women.
Bhala was appointed as the KI of Stringfellow Investments in February 2016. He claimed to have resigned with effect from 30 April 2018. The FST said the FSCA’s investigation showed that Bhala received a salary until October 2018, and he was registered as Stringfellow Investments’ KI until 30 June 2019. However, the FSCA accepted that he could be liable only for the period from February 2016 to April 2018.
The Tribunal said it was apparent from the record that Bhala was not involved in Lorna Jane or any of the other entities, and the FSCA did not make this allegation when it sought to debar and fine him. The Authority’s underlying complaint against Bhala was essentially culpable remissness.
Attempt to fund the expansion of Lorna Jane
The FST provided an overview of the background to the FSCA’s enforcement action.
In 2010, Thomas Stringfellow acquired the rights to roll out Lorna Jane across Africa. Stringfellow, who was a successful and well-known financial adviser in Johannesburg, needed capital to fund the expansion of Lorna Jane.
Two attempts to raise the required capital via external entities failed.
Stringfellow then leveraged his relationships with the clients of Stringfellow Investments to invest in Lorna Jane. Clients were told that because of market volatility, an imminent economic crisis and market crash, “and other tales told by Stringfellow”, Lorna Jane was a better and safer investment.
Many of these clients were advised to disinvest from funds managed by the likes of Allan Gray, Prudential, and Sanlam and to invest in Lorna Jane. “Accordingly, Stringfellow successfully induced the gullible and the injudicious to invest large amounts of money in a business which, when properly analysed, never had a reasonable prospect of succeeding,” the FST said.
Clients advanced money to Lorna Jane in the form of an unsecured loan in return for interest rate payments of 14% a year for an agreed period. At maturity, or at the end of the agreed period, the lender or investor would be entitled to recall the loan amount.
The Tribunal’s decision said there was some debate between the parties as to the nature of the loans and whether they were debentures. In its view, the loans were debentures.
The FSCA initiated its investigation into Stringfellow, Stringfellow Investments, and related entities in 2019 after receiving complaints from investors about the non-payment of interest and their inability to recall the loans.
Bhala’s predecessor as KI and compliance officer also reported Stringfellow Investments to the Authority because he believed it was conducting unlicensed activities and a scheme akin to a Ponzi scheme.
The FSCA’s investigation covered the period between May 2013 and November 2018.
Grounds for reconsideration
Bhala’s principal grounds for reconsideration of the FSCA’s sanctions were procedural irregularities during the investigation and enforcement action.
But the Tribunal said it could not find anything irregular in the way in which the FSCA conducted its investigation, including the procedure in relation to the debarment and the imposition of the administrative penalty.
“With respect, the approach adopted by the applicant concerning purported procedural irregularities is akin to ‘throw everything against the wall and see what sticks’. Unfortunately for the applicant, nothing sticks […],” it said.
Bhala also contended that:
- He was licensed for Category II activities and was therefore not responsible to oversee Stringfellow’s Category I activities.
- No deposits were paid into Stringfellow Investments’ bank account and therefore it was impossible for him to have been alerted to Stringfellow’s conduct.
- He should not be held responsible for the R200m loss to clients because a large portion of the loss ensued before his appointment as KI.
KI was responsible for overseeing Stringfellow’s ‘investments’
The Tribunal dismissed as “irrelevant” Bhala’s contention that Stringfellow’s advice concerned Category I activities for which he was not licensed.
“A KI is not only responsible to oversee the categories of financial services for which he is licensed, but he bears an oversight role in relation to the FSP generally,” it said.
The FST said Stringfellow Investments was licensed to provide advice on debentures from 22 February 2016. The FSCA’s investigation showed that “Stringfellow and his wife had full access to Lorna Jane’s account, which they managed at their sole discretion, and they are alleged to have misappropriated a large sum for personal use. The conduct is discretionary in nature.”
Bhala contended that investors deposited funds into Lorna Jane’s account, not Stringfellow Investments’ account. Therefore, the discretionary services in relation to the debentures concerned Lorna Jane, not Stringfellow Investments.
“There is, however, a causal nexus. Stringfellow leveraged the reputation of Stringfellow Investments, an award-winning company, and his relationships with the clients of Stringfellow Investments, cultivated over many years, to induce those clients to disinvest from reputable fund managers and invest in Lorna Jane. This the applicant’s counsel concedes. Many of those clients were over the age of 60 and invested their pensions; they were vulnerable. Stringfellow wore two hats, and one cannot divorce Stringfellow Investments from the scheme simply because the deposits were paid into an account held by Lorna Jane,” the Tribunal said.
It agreed with the FSCA’s finding that when clients were advised to disinvest from legitimate investments, Stringfellow, a representative of Stringfellow Investments who was under Bhala’s supervision, advised and rendered financial services.
Bhala, as a KI, was responsible to oversee (approve, sign-off, and monitor) the “investments” made by Stringfellow and/or through Stringfellow Investments. He failed to do this, thereby materially contravening a financial sector law, the FST said.
Addressing Bhala’s argument that a large portion of the client losses occurred before his appointment as KI, the Tribunal said the FSCA’s investigation showed that in December 2016, the same year as Bhala’s appointment as KI, Stringfellow Investments had about R400m in assets under management (AUM). By July 2018, AUM had almost halved to about R210m because the funds were disinvested so they could be invested in Lorna Jane. The FSCA was mindful of the fact that during Bhala’s tenure, the reduction in AUM was about R140m.
Compliance failures
The Tribunal said there was “no indication” that Bhala fully appreciated his responsibilities and duties as a KI or the seriousness of his remissness and the consequences thereof.
If Bhala had fulfilled his management and oversight role as a KI, he would have had insight into the business of Stringfellow Investments and would have been made aware that clients were withdrawing their funds and disinvesting from sound investments on the advice of Stringfellow, the FST said.
“He would have, acting in the interest of the FSP, sought to establish why those clients were withdrawing their funds. Nothing prevented the applicant from making enquiries, and had he done so, he could have prevented the losses suffered by those clients.”
It said Bhala had not implemented any risk management procedures, nor did he develop systems and procedures to ensure that the FSP complied with the financial sector laws. He failed to employ resources and procedures that can reasonably be expected to eliminate the risk of financial loss that clients may suffer through professional misconduct or culpable omissions.
Instead, the Tribunal said the FSCA’s investigation revealed that Bhala was not involved at all with the activities of Stringfellow Investments. “He hardly ever went to the office and knew nothing about the dealings of Stringfellow who he was required to supervise. When asked to produce the record of his supervision of Stringfellow, the applicant could not produce a single document.”
The Tribunal said Bhala had been aware that the previous KI left because of the “Lorna Jane issue”, but he did not bother to interrogate it. The only inference to be drawn is that Bhala was “simply not interested and considered the appointment ‘an easy gig’, as he put it”.
Bhala failed to comply with his significant responsibilities and duties as KI thereby, causing the breaches alleged, the FST said.
The FSCA’s decision to impose the fine and debar Bhala could not be faulted.
