FSB Response to Herman Pretorius Fund

If there was any non-compliance by Pretorius, it was well-designed not to be subject to scrutiny - FSB.

In the wake of the shooting by Mr Herman Pretorius (“Pretorius”) in Cape Town, with indications of massive losses to investors that invested in his schemes, the Financial Services Board (“FSB”) would like to offer some perspectives on the regulator’s actions and investigations which it could legally have done and did do with respect to the business activities of the late Pretorius.

There have been varying concerns expressed and questions raised from the media and the industry, all of which the FSB understands to be ultimately focused on the likely losses to be suffered by investors arising from the activities of Pretorius and culminating in his death. To the extent that the questions have been raised and the concerns have been expressed in the interests of investors, the socio-economic effects of the losses to investors and the public interest, the FSB takes to heart all the concerns that have been expressed and the questions that have been raised. Accordingly, the FSB finds it necessary to actively engage on this issue to, among other things, explain how, in certain circumstances, investment relationships exclude the regulator’s power. It is emphasized that the FSB’s engagement and extent of disclosure in this regard is, as set out above, motivated by the need to do so in the public interest as envisaged in the provisions of Section 22 (1)(b) (iv) of the Financial Services Board Act of 1990 (“the FSB Act”).

As a starting point, the manner in which members of the public may invest their savings may or may not, depending on the nature and structure of a particular investment vehicle, be subject to FSB regulation. For instance, the following types of investment vehicles would NOT be subject to FSB regulation:

• A partnership where individuals invest their monies in a partnership and utilise the capital to produce positive returns.

• An investment club where persons with a commonality of interest pool their monies to make an investment.

• A company formed for investment purposes in which investors obtain equity.

• A trust in which beneficiaries’ monies would be pooled, but which would fall outside the ambit of the Collective Investment Schemes Control Act, due to the nature of the underlying investments or because it is a private arrangement between persons involved in a private business arrangement.

Certain investments may also not involve a “financial product” as contemplated by the Financial Advisory and Intermediary Services Act (FAIS Act). Becoming a member of an investment club or a beneficiary of a trust is not an acquisition of a financial product by the investor, even though the monies invested may be used by the investment vehicle to acquire a financial product, for example a share or derivate instrument (the latter being typically the types of products in which hedge funds invest).

Secondly, apart from having to scrutinise the type of investment vehicles which may be utilised to attract investors, it is also necessary to consider the manner in which investors are attracted. The ambit of the FAIS Act is focused on the rendering of financial services which typically involve three parties, namely a product supplier, an intermediary and a client. Unless a financial product is involved, the FAIS Act does not apply. Whilst product suppliers may be required to be authorised under the FAIS Act when giving advice relating to their products, the selling of such products by a product supplier directly to the public may not amount to an intermediary service, such as a company doing a private placement of equity.

It is against the above background that the activities of Mr Pretorius and the capacity of the regulator to intervene as well as the level of intervention from the regulator should be considered.

During May 2011 it was brought to the attention of the FSB that Pretorius was “selling shares in unlisted companies” and “promoting these ventures” by making representations to the community.

As the selling of unlisted shares may constitute a financial service as contemplated by the FAIS Act, the FSB followed up on the information which it subsequently received in order to establish whether or not Pretorius was acting in contravention of the FAIS Act, given also the fact that he was not licensed in terms of the FAIS Act.

Based on the information supplied in response at the time the FSB was satisfied that:

• The private equity or venture capital projects embarked upon or supported by Mr Pretorius did not constitute an activity which was subject to FSB regulation.

• Pretorius’s activities did not require a FAIS licence at the time.

• The manner in which Pretorius indicated that capital would be raised from investors and the investment vehicle used for the raising of such capital also did not point towards any activity which was subject to FSB regulation or otherwise unlawful, because:

• Pretorius was acting as the principal (product supplier) and not as an intermediary when interacting with potential investors.

• The investment vehicle as envisaged at the time, was a company. The FSB does not regulate the offering of shares in a company to the public. When such shares are offered, the company acts as a product supplier and must comply with the Companies Act.

• The explanations provided to the FSB concerning the nature of the trusts as investment vehicles were such that it could not be established with certainty that their activities were subject to FSB regulation. Some of the ventures were designed for individuals who could properly be considered to be involved in a private domestic affair.

Following further complaints received by the FSB in May/June 2012 against Mr Pretorius it was decided that a formal inspection should be conducted on his affairs of Pretorius and the various investment vehicles utilised in order to establish whether or not the activities of the investment vehicles were subject to FSB regulation. The inspection was underway at the time when Pretorius allegedly committed suicide.

Questions have been raised about the speed at which the FSB reacted to these allegations and complaints, with some suggesting that the regulator should have acted sooner. There are media reports indicating that concerns were raised with the FSB more than 8 years ago regarding Pretorius’ involvement in hedge funds. In this regard, the FSB wishes to clarify that at that time that these concerns were raised the regulator could not establish any evidence of Pretorius’ activities in hedge funds or any irregularities with regard to the issues that were raised at the time. Further, the FSB wishes to categorically state that, as detailed above, appropriate action was taken from the time that the allegations first surfaced, and that the investigation into this matter is on-going.

Concerns have also been raised about how the FSB “allowed what amounts to a gigantic Ponzi scheme to continue under its nose.” Once again, it must be remembered that schemes that are operated outside of and actively in secret from the regulator cannot be said to be operating under the regulator’s nose. Accordingly, to the extent that there was a Ponzi scheme in Pretorius’ activities, such a scheme would have been operated in strict secrecy from the FSB.

The FSB is of the view that if there was any non-compliance by Pretorius, it was well-designed not to be subject to regulatory scrutiny. To the extent that investors were lured into any of his projects, such investors carried the risk and obligation to enquire into the merits before parting with their money, especially where above-average returns were being offered. The loss of so much money to so many investors is a sad state of affairs but one for which the regulator is not accountable.

It has in the meantime come to the FSB’s attention that the RVAF Trust was placed under provisional sequestration on 2 August 2012 by the Western Cape High Court. The Regulator supports this action and encourages investors to take the necessary legal action to attempt to recover their monies, especially to the extent that the investments were made via schemes falling outside of the regulatory net. As the investigation into this matter unfolds the FSB will, in so far as matters fall under its jurisdiction and mandate, urgently take appropriate action.

Timeline
2001	Julian Williams launches Penryth (Proprietary) Limited, a specialist securities lending business.
2002	Penryth placed into liquidation, liquidation halted after Cadiz buys it out.
	Williams and Herman Pretorius establish the Abante Group of companies, comprising: Abante Capital (Proprietary) Limited, specialising in statistical arbitrage trading strategies; Abante Virtus (Proprietary) Limited, a private-equity company focusing on black economic empowerment transactions in South Africa; Asset Liability Management (Proprietary) Limited, a specialist securities lending and third party treasury management company; and Abante Management (Proprietary) Limited, an administrative and fiduciary service company.
2003	Williams co-founds Wesizwe Platinum Limited, a platinum explorer and mine developer with James Ngculu. Owns 41% of Abante.
2004	Pretorius sets up Relative Value Arbitrage Fund (RVAF).
2005	SA Superalloys is registered, a special purpose vehicle designed to raise funding from venture capitalist investors.
2005	Wesizwe lists in December. It is advised by Abante Virtus.
2006	A consortium comprising the Abante Group and a management team engineered by Williams buys the Avalloy plant from African Rainbow Minerals and oversees Rolls Royce taking a 15% stake in the company.
	Williams becomes chairman of Avalloy, South Africa's only superalloy producer.
	Pretorius and brokers affiliated to him sell SA Superalloys pref shares to investors promising consistent returns of about 20% a year.
2007	In May Rolls Royce buys a 15% shareholding in Avalloy.
2008	In March Williams splits from Pretorius to start Basileus, which specialises in private-equity transactions and corporate advisory work with Ngculu.
	Basileus acquires SA Superalloys from the Abante Group as part of the split up.
	Basileus Capital takes over Abante's stake in Avalloy, now holds 55%, through two separate investment vehicles, SA Superalloys and Basileus Investment Ventures 1 (Pty) Ltd.
2012	Dividends run dry in Superalloys, which sparks some unhappiness among investors.
	It emerges that Pretorius put R40m of his own money to keep Superalloys paying dividends.
	14 June Moneyweb reports that questions were raised by financial advisers about the returns generated by Pretorius’s RVAF. These returns have been in the region of 20% a year.
	5 July Moneyweb reports that a war of words erupts between Williams and Pretorius over the failure of unlisted public company SA Superalloys to pay dividends on its preference shares. Williams is a director of Superalloys.
	25 July Williams’s e-mails Moneyweb’s Julius Cobbett saying that he is stunned at the abuse directed at him by clients of his former business partner Pretorius.
	26 July Pretorius allegedly shoots his former business partner Williams dead in his Cape Town offices, then turns the gun on himself.
	30 July Pretorius’s investors in RVAF receive a letter from liquidator Lambertus Von Wielligh Bester from the firm Progressive Administration, stating that an application will be made on 31 July to place the RVAF Trust in to sequestration
	30 July sequestration court papers claim investors placed R1.8bn with Pretorius's RVAF.
	30 July Von Wielligh Bester RVAF has 3 000 investors.
	1 August Cape Town High Court grants an order to sequestrate Herman Pretorius’s scheme.
	3 August The Master of the High Court provisionally appoints three curators to take joint control of the assets and the funds in the estate of the late Herman Pretorius.