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[2019] ZASCA 27
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Atwealth (Pty) Ltd and Others v Kernick and Others (116/2018) [2019] ZASCA 27; [2019] 2 All SA 629 (SCA); 2019 (4) SA 420 (SCA) (28 March 2019)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
CASE
NO: 116/2018
In
the matter between:
ATWEALTH
(PTY) LTD
First
Appellant
ANDREA
MOOLMAN
Second
Appellant
VAIDRO
172 CC
Second
Appellant
and
ALAN
KERNICK
First
Respondent
FIONA
KERNICK
Second
Respondent
KERNICK
CONSULTING LTD
Third
Respondent
Neutral
citation
:
Atwealth (Pty) Ltd & others v Kernick &
others
(116/2018)
[2019] ZASCA 27
(28 March 2019)
Coram
:
Wallis, Zondi and Dambuza JJA and Davis and Rogers AJJA
Heard:
20 February 2019
Delivered
:
28 March 2019
Summary
:
Financial advisor – liability for loss incurred on recommended
investments – what constitutes financial advice –
whether
evidence sufficient to conclude that financial advisor breached her
legal duties.
ORDER
On
appeal from:
Eastern Cape Division of the High Court, Grahamstown
(Molony AJ sitting as court of first instance):
1. The appeal is upheld with costs.
2. The order of the court
a
quo
is set aside and replaced by: ‘The action is dismissed with
costs.’
JUDGMENT
DAVIS
AJA (Wallis, Zondi and Dambuza JJA and Rogers AJA concurring)
Introduction
[1]
This case concerns the liability of an investment advisor who
rendered financial advice to her clients. The latter suffered
significant financial loss on the investments entered into following
a presentation made by the financial advisor.
[2]
The first and second respondents are husband and wife while the third
respondent is a close corporation owned by them. I will
refer to them
collectively as the Kernicks. Their case can be summarised thus:
during the period 2009 to 2010 second appellant,
Ms Moolman, rendered
financial advice to them in the course and scope of her employment
with first appellant (Atwealth) and thereafter
in 2011 with third
appellant (Vaidro). The Kernicks contended that the advice given by
Ms Moolman was to invest their funds in
certain investment products
offered by the Relative Value Arbitrage Fund (RVAF) and associated
products and MAT Abante UK Relative
Value Arbitrage Fund and MAT
Worldwide Ltd (‘the investment companies’), of which MAT
Securities (Pty) Ltd was the
fund manager. This range of potential
investments was said to fall under an entity referred to as Abante
Capital.
[3]
The Kernicks further contended that they were assured by Ms Moolman
that these investment companies generated higher returns
through
legitimate investment vehicles than was the case with alternative
financial products. It was common cause that this did
not prove to be
the case. Mr and Mrs Kernick made the following investments:
Date
of investment
Amount
Investment
Company
20/01/2010
£100
000
MAT
Worldwide
01/08/2010
£70
000
MAT
Worldwide
01/07/2011
£45
000
MAT
Worldwide
28/10/2011
R700
000
RVAF
01/03/2012
£150
000
MAT
Worldwide
Kernick
Consulting made the following investments:
Date
of investment
Amount
Investment
Company
01/09/2009
£50
000
MAT
Worldwide
01/10/2010
£100
000
MAT
Worldwide
01/02/2012
£50
000
MAT
Worldwide
[4]
The Kernicks sued appellants on the basis that Ms Moolman, who, at
the relevant times, was either in the employ of Atwealth
or Vaidro,
had failed to comply with the legal duties which she owed to them and
had given negligent advice. This failure had caused
them significant
financial loss as the investment companies in which they invested did
not produce positive investment returns
but paid returns out of
investor funds. On the basis that their investments had been entirely
lost, they said that Kernick Consulting
suffered damages in the
amount of £50 000 as a result of the negligence of Atwealth and
Ms Moolman and damages in the amount
of £150 000 as a result of
the negligence of Vaidro and Ms Moolman. Mr and Mrs Kernick
additionally suffered damages to be
paid by Vaidro and Ms Moolman in
the amounts of £365 000 and R 700 000.
[5]
The court
a quo
upheld all of these claims and granted
judgment accordingly together with interest and costs. This appeal is
with its leave.
The
conduct of the Kernicks’ case
[6]
Ordinarily, in a case of this
nature, the claim is pursued on the simple basis that the investment
advisor furnished negligent advice
to the investor and the investor
suffered loss in consequence of following that advice.
[1]
For some inexplicable reason that was not the approach adopted by the
Kernicks’ attorney as is clear from that which follows.
The
central allegations contained in the particulars of claim were:
‘
9. The defendants at all
material times rendered financial advice to the plaintiffs. For the
period 2009 to January 2010 the second
defendant rendered such
financial advice during the course and scope of her employment with
the first defendant and thereafter
during the course and scope of her
employment with the third defendant.
10. The defendants advised the
plaintiffs to invest funds in investment products offered by the
Relative Value Arbitrage Fund (‘RVAF’)
and associated
products and MAT Abante UK Relative Value Arbitrage Fund and MAT
Worldwide Ltd (‘The Investment Companies’).MAT
Security
(Pty) Limited was the fund manager of MAT Worldwide Ltd.
The
defendants assured the plaintiffs that the investment companies
generated high returns and were bona fide legitimate investment
vehicles. However this was indeed not the case and the investment
companies used investor funds to pay returns to other investors.
The
investment companies did not hold licences under FAIS and did not
invest the funds of investors but paid the investment returns
out of
investment capital. The investment companies did not produce any
financial records.’
(Emphasis added.)
[7]
The specific case arising from these allegations was that the
investments into which Ms Moolman advised the Kernicks to put
their
money were not what she represented them to be. They were part of a
scheme under which the investment returns were not genuine,
but, when
paid, were paid out of the capital invested. Such a scheme can only
survive so long as there are sufficient new investments
to pay
returns not reinvested and to allow for withdrawals. In common
parlance, this is known as a Ponzi scheme.
[8]
Liability for the losses occasioned by placing the Kernicks’
investments in such a scheme was said to arise from the fact
that Ms
Moolman had given them ‘financial advice’ and in doing so
breached a lengthy list of duties, set out in paragraph
16 of the
particulars of claim and said to have been owed by her to the
Kernicks. The origin of these duties was that, as a licensed
financial services provider, Ms Moolman owed her obligations to the
Kernicks in terms of the Financial Advisory and Intermediary
Services
Act 37 of 2002 (the FAIS Act) and the various codes of conduct
promulgated under that Act, which she had breached.
[9]
This approach by the Kernicks’ attorney, who appeared in the
high court and in this court, resulted in the trial very
largely
being conducted on the basis that what mattered was whether the
provisions of the FAIS Act applied to the RVAF and the
MAT Worldwide
Fund; whether what Ms Moolman amounted to the giving of financial
advice as defined in the FAIS Act; and whether
she complied with
various duties imposed on her by the codes. This proceeded from a
misconception that, if Ms Moolman’s conduct
could be so
classified, liability to compensate the Kernicks for their losses
followed automatically. That was wrong as a matter
of law. Their
claim was one in delict based upon negligence. On its own a breach of
any obligations owed to the Kernicks by Ms
Moolman under the FAIS Act
or its codes of conduct would not fulfil all the requirements for a
claim based in delict.
[10]
The legal problems in relation to the circumstances in which a breach
of statutory duty gives rise to a claim for damages in
delict were
not explored at any stage, including the argument in this court. No
proper consideration was given to the issue of
negligence. No
endeavour was made to ensure that all of the issues relevant to a
claim based on negligence were addressed either
in evidence or
argument. However, before us it was accepted that, unless a claim
based on negligence on the part of Ms Moolman
was established, the
Kernicks could not succeed. Against that background I turn to the
facts.
The
facts
[11]
On 23 March 2009 Atwealth and
Ms Moolman entered into a memorandum of agreement in terms of which
Ms Moolman was appointed as a
financial advisor by Atwealth ‘in
the area of Financial Planning and Selling of approved financial
products from the commencement
date.’
[2]
[12]
Sometime in 2009, Ms Moolman received a telephone call from Mr
Kernick requesting a meeting, which took place in Port Elizabeth
at
the Kernicks’ residence. At this point she was employed by
Atwealth. The evidence regarding this meeting is unfortunately
devoid
of essential detail. To the extent that the content of this meeting
can be divined from the evidence it is as follows: Although
the
Kernicks were primarily resident in the United Kingdom, they had
settled in Port Elizabeth in 2009, albeit on a temporary basis.
A
sister of a friend, Ms Marina Baard, had told them that she ‘had
done very well’ out of investments recommended by
Ms Moolman.
The Kernicks informed Ms Moolman that they did not want their entire
portfolio reviewed. The advice they sought was
limited, in that they
‘had spare cash available’. They were seeking advice
solely on how best to invest this sum.
[13]
Ms Moolman made a presentation to the Kernicks, including a
description of Abante Capital (Pty) Ltd as ‘a South African
hedge fund management company: Abante’s funds each focus on the
core strategy of quantitative arbitrage’. From the
documents
which she claimed to employ during her presentation, it appears that
she introduced them to two specific products, namely
RVAF and a
product described as Bridgefin.
[14]
According to Mr Kernick, Ms Moolman spoke of RVAF as a:
‘
product that was invested in
the top twenty shares, sorry forty shares in either the UK or South
Africa, depending which fund you
were in. Sorry there was the RVA and
the MAT Worldwide. And then the top forty shares were traded
electronically, which appealed
to us, and they were based on sectors
so there was a technical sector or a financial sector. And based on
fluctuations within a
sector which share would be traded, either
bought or sold. So they didn’t look at it as a day-to-day what
shares are doing
well, they looked at it by sector.’
[15]
Mr Kernick emphasised that it was important to both him and his wife
that the RAV fund ‘was invested in the top equities
in the
country or the top shares, so we felt that was more to our liking.’
He said of the products which Ms Moolman introduced:
‘…
[I]t was in equities,
and a known asset effectively, not in properties or something. It was
known in the top 40 companies on the
stock market. The second thing
we enjoyed about it was that the trading was very much computerised
or we were led to believe computerised
and which took the human
emotion out of it. We wanted something that would trade, you know,
based on fact not on hearsay. And then
the third thing was the
returns indicated to us, was why we invested [in] it.’
Events
following the meeting of August 2009
[16]
Following this meeting, on 1 September 2009, Kernick Consulting made
an investment of £50 000. According to Mr Kernick:
‘
I decided after that meeting,
two weeks later, to invest £50,000,00, whatever that might be
in Rands. Then after further communication
with her and advice and
further meetings on what other products there are to invest in, I
invested more. So it wasn’t just
on one meeting that I invested
R8m. Despite this there was no evidence of any further meetings with
Ms Moolman, or any communications
and advice received from her before
the future investments were made.’
[17]
On 21 October 2009 Ms Moolman resigned from Atwealth and on 22
October 2009 entered into an agreement with Vaidro in terms
of which:
‘
VAIDRO 172 t/a VAIDRO
INVESTMENTS will appoint the representative as a representative of
it, to enable the representative to render
financial services to its
clients. The FSP [VAIDRO] will [e]ffect registration of the entity as
a representative on its licence
with the FSB.’
[18]
On 19 December 2009 Mrs Kernick emailed Ms Moolman to say that they
were back in the United Kingdom after their 18-month sabbatical
in
South Africa. They wanted to invest some money in ‘UK RVAF’
in their personal capacities. She asked what they needed
to do. In a
follow-up email of 11 January 2010 she asked whether Ms Moolman’s
new email address meant that the latter was
no longer working for
Atwealth. On 13 January 2010 Ms Moolman replied, writing inter alia
the following:
‘
As Atwealth did not qualify to
submit business to Abante Capital, it was decided through discussion
with Abante that it would be
preferable that I continue representing
Abante under our Vaidro logo – I have been representing Abante
Capital for a number
of years now and they were not at ease with the
Atwealth team, and rather wanted me to represent them under my own
business capacity.
As Abante Capital has always been our core
investment, we decided to revert to our original manner of
transacting in the interests
of investor relations.’
[19]
In this email Ms Moolman indicated that they could follow the same
procedure as before to make investments in their personal
capacities.
They did so by way of an investment of £100 000 on 20 January
2010 and an additional amount of £70 000
on 1 August 2010. On 1
October 2010 Kernick Consulting invested a further amount of £100
000, all of which investments appear
from the table set out above.
[20]
There was no further communication between Ms Moolman and the
Kernicks until 27 April 2011 when Mr Kernick emailed Ms Moolman
to
say that they were thinking of investing some money in South Africa
as they planned to come and live here on a more permanent
basis. To
date they had only invested in the ‘UK RAVI’.
When
they had first met Ms Moolman, she had mentioned two investments,
namely ‘RAVI’ and Bridgfin. They anticipated
that after
the initial six months of the investment they would need to draw
interest every three months. Mr Kernick asked Ms Moolman
to give them
‘details and options on what you currently have available’.
[21]
On 28 April 2011 Ms Moolman replied, writing the following (corrected
for grammatical errors):
‘
As interest rates are at a
historic low in South Africa, fixed interest investment options are
not doing well as they are linked
to prime interest rate.
Therefore at the moment we are not
utilising Bridgfin as the rates currently are below what we feel can
be achieved.
What we are doing in the interim is
making use of the Ravi South African account, and structuring the
investment to meet the income
requirements of the client.
For the last tax year (2010-2011), the
net return on the Ravi SA Investment was 20% net to the Investor.
Depending on the client’s income
needs, what we like to do is take 10% off for income, which then will
still enable the investment
to grow by ± 10% pa. In this way,
as the investment capitalizes, the next year’s income increases
pro rata with the
capitalization of the return – effectively
exceeding inflation.
However if higher income is required
off capital, all returns can be taken, however one’s investment
is then not going to
increase in capital value.
In practice how this would work is the
following: we withdraw amounts every 3 months (or 6 months according
to client’s preference),
this allows the remaining capital to
capitalize the quarter’s return (in a compounding effect).
Another option for a 15% dividend pa
(paid annually) in April, is the Avalloy Venture capital deal with
Abante/Rolls Royce. However
one must always bear in mind the risk
associated with venture capital.’
[22]
The following day Mr Kernick responded and said ‘I think we
will go ahead with the RAVI option.’ On 4 May 2011
the Kernicks
submitted an application in their personal capacity to invest R550
000. In fact three further investments were then
made by the
Kernicks, being R700 000 on 28 October 2011, £50 000 on 1
February 2012 and £150 000 on 1 March 2012.
The
judgment of the court
a quo
[23]
The court
a quo
did not decide the dispute on the basis of the
August 2009 meeting, but concentrated on the implications of Ms
Moolman’s email
of 27 April 2011. But that approach overlooked
the pleadings, for in the respondents’ particulars of claim it
is clear that
their case was made out thus:
‘
The defendants at all material
times rendered financial advice to the plaintiffs. For the period
2009 to January 2010 the second
defendant rendered such financial
advice during the course and scope of her employment with the first
defendant and thereafter
during the course and scope of her
employment with the third defendant.’
[24]
In the first instance the legal implications of the August 2009
meeting are critical to the disposition of this case; in short,
did
second appellant furnish negligent financial advice to the Kernicks
at that meeting such that it induced the latter to invest?
If she did
not, that is fatal to all the claims up until the later email of 27
April 2011, after which it is necessary to engage
in the same enquiry
in relation to the later investments.
Appellants’
case
[25]
Central to appellants’
case was whether Ms Moolman provided advice to the Kernicks and, if
so, whether this advice, failed
to comply with Ms Moolman’s
legal duties and caused the Kernicks to invest in ill-fated products.
Before the court
a quo
and
again in this Court, counsel for both parties focussed their
arguments on whether Ms Moolman breached the provisions of the
FAIS
Act read together with the General Code of Conduct for Authorised
Financial Service Providers and Representatives (the Code).
[3]
There was some debate before us in regard to the applicability of
these provisions as hedge funds were not regulated by the Financial
Services Board until 1 April 2015, when they were declared to be
collective investment schemes in terms of
s 63
of the
Collective
Investment Schemes Control Act 45 of 2002
. Ultimately, however,
nothing turned on this, as the provisions of the FAIS Act and the
Code referred to hereafter mirror, for
present purposes, the legal
duties of a financial adviser under our law governing liability for
negligent acts.
[26]
The Code provides that an authorised financial service provider ‘must
at all times render financial services honestly,
fairly, with due
skill, care diligence and in the interests of clients and the
integrity of the financial services industry’.
The FAIS Act
defines financial service to mean any services contemplated in
paragraphs
(a)
,
(b)
or
(c)
of the definition of
‘financial services provider’, including any category of
such services.
[27]
Financial services provider (FSP) is defined to mean:
‘
Any person, other than a
representative, who as a regular feature of the business of such
person-
(a)
furnishes advice; or
(b)
furnishes advice and renders any intermediary service; or
(c)
renders an intermediary service’
[28]
‘Advice’ is defined in the FAIS Act as follows:
‘…
[S]ubject to
subsection (3)
(a)
, any recommendation, guidance or proposal of
a financial nature furnished, by any means or medium, to any client
or group of clients–
(a)
in respect of the purchase of any financial product; or
(b)
in respect of the investment in any financial product; or
(c)
on the conclusion of any other transaction, including a
loan or cession, aimed at the incurring of any liability or the
acquisition
of any right or benefit in respect of any financial
product; or
(d)
on the variation of any term or condition applying to a
financial product, on the replacement of any such product, or on the
termination
of any purchase of or investment in any such product,
and irrespective of whether or not
such advice –
(i) is furnished in the course of or
incidental to financial planning in connection with the affairs of
the client; or
(ii) result in any such purchase,
investment, transaction, variation, replacement or termination, as
the case may be, being effected.’
[29]
Subsection 1(3)
(a)
restricts the scope of ‘advice’.
To the extent relevant, it provides thus:
‘
(3) For the purpose of this Act
–
(a)
advice does not include –
(i)
factual advice given merely –
(aa)
on the procedure for
entering into a transaction in respect of any financial product;
(bb)
in relation to the
description of a financial product;
(cc)
in answer to routine
administrative queries;
(dd)
in the form of objective
information about a particular financial product; or
(ee)
by the display or
distribution of promotional material;
(ii)
an analysis or report on a financial product without any
express or implied recommendation, guidance or proposal that any
particular
transaction in respect of the product is appropriate to
the particular investment objectives, financial situation or
particular
needs of a client;’
[30]
Ms Moolman’s counsel
contended that she had merely given the Kernicks objective
information about particular financial products
and, at best for
them, no more than advice on the procedures for concluding an
investment transaction. In counsel’s submission
this did not
constitute ‘advice’ as defined in the FAIS Act.
Furthermore, he contended that the Kernicks had invested
in a hedge
fund, which was structured as an
en
commandite
partnership. He
submitted that a hedge fund or a partnership of this particular kind
did not constitute a ‘financial product’
as defined in
terms of the relevant law as it existed in 2009 and therefore,
whatever Ms Moolman might have told the Kernicks,
it could not have
constituted ‘advice’ for the purposes of the FAIS Act
read together with the Code.
[4]
The difficulty with these contentions was that, even if they had
merit, on a careful parsing of the language of the FAIS Act, the
presentation by Ms Moolman constituted, in ordinary parlance, the
giving of financial advice, at least in the form of product
information, to the Kernicks. It was advice on which they clearly
intended to rely and on which they were entitled to rely, coming
as
it did from a professional financial advisor from whom they had
sought that advice.
[31]
Counsel further submitted that Ms Moolman had done no more than
render an intermediary service. In her testimony when asked
about the
emails exchanged between herself and the Kernicks requesting the
sending of proof of payment or making other requests,
she said of
this relationship ‘I was their secretary, low paid secretary’.
Factually that was incorrect. She had gone
to the meeting with the
purpose of furnishing information about two investments in which the
respondents subsequently invested.
She was asked to go to the meeting
because of her professed knowledge and experience in this area. That
constituted the giving
of advice in any ordinary understanding of the
term.
[32]
That conclusion accords with the evidence given by both Mr and Mrs
Kernick, which was that they were given advice regarding
investment
avenues for their ‘spare cash’, being the RVAF and the
Bridgefin products. In terms of their evidence, the
presentation went
well beyond a description of financial products. The entire
presentation was directed to two products, which
would meet their
investment needs.
[33]
The initial investment took place shortly after the presentation by
Ms Moolman to which reference has already been made. It
is clear from
the documents that formed the basis of the presentation that this
took the form of a proposal and constituted guidance
in respect of
the purchase of specific financial products. The conduct went much
further than a mere description of financial investments
and the
mechanism by which the Kernicks could invest therein. In my view, the
information furnished was designed to induce them
to invest in these
particular products, for which Ms Moolman was to receive a
commission. That inducement continued to operate
in respect of the
subsequent investments in 2010 and was compounded by the email of 28
April 2011, quoted in para 21. This in turn
continued to operate on
the investments made after that date.
Ms
Moolman’s legal duties
[34]
A finding that Ms Moolman gave financial advice gives rise to the
further question as to whether she complied with her legal
duties to
the Kernicks and hence, whether in terms thereof, she acted
wrongfully and negligently. The answer depends in the first
instance
on both the level of skill and knowledge required of an advisor in
the position of Ms Moolman and whether someone with
the requisite
skill and knowledge would have advised the Kernicks differently in
the context of the present dispute.
[35]
Section 3 of the Code provides guidance as to what is required from
the appropriately skilled financial advisor, whether viewed
from the
perspective of a breach of the Code or from the perspective of a
delictual claim. When a financial services provider renders
a
financial service –
‘
(a) representations made and
information provided to a client by the provider;
(i)
must be factually correct;
(ii)
must be provided in plain language, avoid uncertainty or confusion
and not be misleading;
(iii)
must be adequate and appropriate in the circumstances of the
particular financial services taking into account the factually
established or reasonably assumed knowledge of the client;
. . .’
This
provision needs to be read together with the general duty of
providers as set out in section 2 of the code:
‘
General duty of provider
A provider must at all times render
financial services honestly, fairly, with due skill, care and
diligence, and in the interest
of clients and the integrity of the
financial services industry.’
[36]
These provisions are clearly
congruent with the common law duties of a professional investment
advisor. These were analysed in
Durr
v Absa Bank Ltd & another.
[5]
In his judgment,
[6]
Schutz JA cited with approval a passage from Joubert (ed)
The
Law of South Africa
:
‘
The reasonable person has no
special skills and lack of skill or knowledge is not
per se
negligence. It is, however, negligent to engage voluntarily in
any potentially dangerous activity unless one has the skill and
knowledge
usually associated with the proper discharge of the duties
connected with such an activity.’
[37]
Referring to an investment advisor employed by a bank who had given
financial advice, Schutz JA said:
‘
The Durrs accepted his advice
and relied on it. He knew that. It was what he had intended should
happen. This, to my mind, defined
his duty to the Durrs. He had
advised them to embark upon what was in effect moneylending. Lending
money is a potentially dangerous
activity. He had investigated the
debtor and found it sound, he said. Mrs Durr was entitled to see him
as a man skilled to advise
her on such matters and as one backed by a
major bank: not as one devoid of skill in assessing creditworthiness
and unready to
seek help. The duty is established.’
[7]
[38]
Following this decision in
Durr
v Absa Bank Ltd & another, supra
Neethling,
Potgieter and Visser
[8]
illustrate the legal position in the following passage:
‘
Mention should also be made of
the maxim
imperitia culpae adnumeratur
. Taken literally, this
maxim means that ignorance or lack of skill is deemed to be
negligence. This maxim is, however, misleading
because our law does
not accept that mere ignorance constitutes negligence. The principle
embodied in this maxim applies where
a person undertakes an activity
for which expert knowledge is required while he knows or should
reasonably know that he lacks the
requisite expert knowledge and
should therefore not undertake the activity in question. An example
of this is where X, who has
no expertise in piloting an aircraft,
flies an aircraft and causes an accident. X’s blameworthiness
in this example is not
to be found in his incompetence in piloting an
aircraft, but in the fact that, while he knows or should reasonably
know that he
is incompetent, he nevertheless attempts to perform the
expert activity.’
Breach
of duty?
[39]
There were undoubtedly limitations to Ms Moolman’s knowledge in
regard to the nature of the investments to which she
introduced the
Kernicks. This was exposed to some measure in cross-examination, but
the nature of that cross- examination calls
for comment. In the first
instance, it was misdirected, because it proceeded on the basis that
the Kernicks’ case lay in
a breach of Ms Moolman’s duties
in terms of the FAIS Act and the Code, with negligence being, at the
most, incidental.
[40]
Secondly, because of the misconception as to the proper legal basis
for the claim, Mr and Mrs Kernick’s evidence concerning
the
crucial meeting in August 2009 was cursory in the extreme. The only
questions addressed to Mr Kernick in that regard prompted
the answer
quoted above in para 14 and the further proposition that Ms Moolman
did not use the word ‘hedge fund’. The
reliability of
much of Mr Kernick’s evidence regarding the investments was
limited as it was prompted by a series of grossly
leading questions.
One stark example was the following:
‘
MS MARKS: Could Moolman have
foreseen that if the information and advice she gave you was not
correct that you would have lost monies
in that scheme? Do you think
that she could have foreseen it, that if she gives you information
that is not correct and you invest
in this kind of scheme? _ _ _ I’m
sure she could have foreseen it, yes.
Would you think she could have? _ _ _
Yes.’
No
attempt had been made, or was made thereafter, to lay the necessary
factual foundation for a later attack on the factual correctness
of
the advice given by Ms Moolman. Consequently there was very little
material available to the cross- examiner to suggest to Ms
Moolman
that the information she provided was inadequate or misleading, or
that she had made any false representations to the Kernicks.
In the
result no such suggestion was put to her.
[41]
In order to lay a foundation for an attack on Ms Moolman’s
abilities as a financial advisor and on the advice she gave
it was
essential in the first instance to establish as clearly as possible
what she told the Kernicks in regard to these investments.
That was
not done and the topic was not explored with Ms Moolman because of
the cross-examiner’s exclusive reliance on the
FAIS Act and the
Codes. Secondly, it called for evidence on behalf of the Kernicks to
identify what a reasonably skilled financial
service provider would
know about products in the market place; what due diligence they
would have done before making a presentation
to a prospective client
and what sources of information they would have consulted.
[42]
One would have expected there to be evidence that in 2009, and again
in 2011, such a person would have counselled against investing
in the
RVAF, or other products marketed and managed by Abante Capital, or
advised that they were extremely high risk. No such evidence
was
called and the cross-examination proceeded on the basis of the
attorney’s beliefs as to what was required from a financial
service provider. There was no factual foundation for those beliefs.
The notion, to give one example, that financial institutions
such as
Abante would be willing, much less obliged, to disclose to advisers
such as Ms Moolman details of their investment portfolios,
trading
activities and their balance sheets was simply far-fetched.
[43]
A significant passage in the record reflects this problem. It read:
‘
MS MARKS: And how did you
evaluate that this is true? _ _ _ This is data supplied by Abante
Capital.
You didn’t evaluate it? Are you
aware of a duty on yourself in terms of the discretionary code to
only provide true factual
information to persons?
MR DALING: M’Lady I just want to
ascertain whether my learned colleague is going to call anybody to
show that that is not
true?
MS MARKS: No I’m not. I’m
just going to establish whether or not there is a duty on her to
establish factual [information].’
[44]
No evidence was led to show that any information provided by Ms
Moolman to the Kernicks was in any respect untrue or factually
incorrect. The cross- examination about the scope of her obligations
was thereby rendered entirely pointless. Unless what Ms Moolman
said
to the Kernicks was factually incorrect or misleading, whether by
commission or omission, it cannot have had any effect on
their
decision to make these investments. And if she did not mislead the
Kernicks – something that was never put to her in
cross-examination – her limitations as a financial adviser were
irrelevant. Liability in delict arises from wrongful and
negligent
acts or omissions and there was simply no attempt to establish that
there were any on the part of Ms Moolman.
Conclusion
[45]
The consequences of the
deficiencies in the evidence presented, by the Kernicks are best
illustrated by reference to the well-established
test for negligence
as set out by the court in
Mukheiber
v Raath & another
[9]
as follows:
‘
The test for
culpa
can,
in the light of the development of our law since
Kruger v Coetzee
1966 (2) SA 428
(A), be stated as follows (see Boberg
The Law
of Delict
at 390): For the purposes of liability culpa arises if
–
(a)
a reasonable person in the position of the defendant –
(i) would have foreseen harm of the
general kind that actually occurred;
(ii) would have foreseen the general
kind of causal sequence by which that harm occurred;
(iii) would have taken steps to guard
against it, and
(b)
the defendant failed to take those steps.’
[46]
What then is the standard of
the reasonable person in this case? The test for negligence must
inevitably be grounded upon the factual
matrix of the dispute
requiring adjudication.
[10]
Schutz JA in
Durr v Absa
Bank Ltd
cited with
approval the following dictum from
Van
Wyk v Lewis
at 444:
[11]
‘
And in deciding what is
reasonable the Court will have regard to the general level of skill
and diligence possessed and exercised
at the time by the members of
the branch of the profession to which the practitioner belongs. The
evidence of qualified surgeons
or physicians is of the greatest
assistance in estimating that level.’
[47]
Whatever the evidence regarding Ms Moolman lacking the requisite
knowledge to conduct a due diligence of the very product she
sought
to market and sell, her lack of skill and knowledge, was insufficient
to find her negligent, except in the abstract sense
that she was
negligent in embarking on the presentation without properly informing
herself about the products. Whether such negligence
was actionable
depended on the further question whether, had she undertaken the
necessary research, her presentation would have
been materially
different to the one she in fact made and whether the respects in
which it might have differed from the one she
actually made would
have caused the respondents to react differently to the way they did.
To put the matter more plainly, a person
who embarks on a dangerous
activity without having the requisite skill may nevertheless, albeit
fortuitously, ‘get it right’.
[48]
There has been a debate among
legal commentators concerning the absolute or abstract theory of
negligence as opposed to the relative
theory.
[12]
As this Court held in
Sea
Harvest Corporation v Duncan Dock Cold Storage (Pty) Ltd
2000
(1) SA 827
(SCA) at 837, in the final analysis the true criterion for
determining negligence is whether in the particular circumstances the
conduct complained of falls short of the standard of the reasonable
person.
[49]
In the present case, as has been emphasized no evidence was led by
the Kernicks regarding what a reasonable financial advisor,
possessed
of the requisite skills, would have advised them. No evidence was led
which engaged with the vital question: what advice
would a reasonable
financial advisor have given the Kernicks about RVAF and related
products in 2009? It was conceded by appellants,
in answer to a
question as to whether fraud was committed by people in control of
Abante, that ‘in hindsight’ Mr Herman
Pretorius, the
chairman of Abante Capital, and others, had acted fraudulently, which
fraud was the cause of the loss. The collapse
of Abante Capital and
associated companies, and hence the loss caused to the Kernicks
occurred, in 2012. This Court is left in
the dark as to what advice a
reasonable financial advisor would have given in 2009 about these
particular investments. The Court
is left without any evidence on the
record about the nature of the fraud supposedly perpetrated and what
the true state of affairs
was concerning Abante and the relevant
hedge funds in 2009 on the one hand and 2012 on the other.
[50]
No evidence was tendered to explain why the RVAF and MAT Worldwide
went insolvent. The court is left without evidence as to
whether they
were indeed part of a Ponzi scheme as alleged, or when and in what
circumstances such scheme had commenced and operated.
[51]
Assuming some of the information that Ms Moolman had in her
possession, in the documents identified as forming part of her
presentation to the Kernicks, was incorrect, that did not mean that
she was in any way negligent, unless it could be shown that
she
communicated this information to the Kernicks in circumstances where
she should have been aware of the deficiencies. That would
require
evidence of what would constitute a proper exercise of due diligence,
but such evidence was not led. Overall, any doubts
about Ms Moolman’s
skills and knowledge of financial matters are overwhelmed by the
absence of any evidence concerning what
occurred at the critical
meeting in August 2009, what the situation of Abante Capital and the
funds was in 2009 and what led to
the collapse in 2012.
[52]
It was also common cause that in 2008 Abante Statistical Advantage
had won a hedge fund award and that during this period both
Old
Mutual and Momentum had invested in Abante products. Ms Moolman had
visited Abante’s head office and observed the trading
operation. There is no evidence that in 2009 Abante was not in fact
following the trading strategies which impressed the Kernicks.
There
is no evidence that it was not in fact making the returns which Ms
Moolman represented. There is no evidence that the entire
operation
was vitiated by fraud as early as 2009. Such slender indications as
there are in the record suggest that Abante’s
hedge fund
products had been in existence for a number of years by 2009. There
is no evidence which even suggests that different
advice would have
been given in 2009 by a reasonable financial advisor concerning these
particular investments or that it would
have been sufficiently
different to deter the Kernicks from making their investments.
[53]
In summary, the limited evidence concerning the contents of the
critical meeting of August 2009, which induced the Kernicks
to
invest, cannot be employed to assess what a reasonable advisor would
have counselled during the relevant period, from August
2009 to 2010.
The failure to produce any expert evidence concerning what advice
would reasonably have been given in 2009 concerning
RVAF means that
it is not possible to find in favour of the Kernicks. It is they who
bore the onus to show that a reasonable financial
advisor, dispensing
financial advice to respondents in 2009 concerning RVAF and related
investments, would have sounded warnings
of a kind that would have
caused them to refrain from investing in hedge funds operated by
Abante Capital .
[54]
In this respect, the difference between the present case and
Durr
is striking. In
Durr
the plaintiff had called two experts
while the defendants had called another expert. One of the
plaintiff’s experts provided
the court with a detailed analysis
of the true state of affairs within the Supreme Group at the time the
plaintiff made her investment
and subsequently, and all three experts
gave evidence as to what a reasonably competent financial advisor
would have concluded
concerning the Supreme Group at the time the
plaintiff was advised to make her investment. Such evidence is
altogether lacking
in the present matter.
[55]
It follows that the Kernicks have not discharged the requisite onus
of proving that any negligence Ms Moolman may have displayed,
by
making a presentation without adequate knowledge of the proposed
investments, resulted in advice materially different from that
which
a reasonably competent advisor would have given.
[56]
The appeal is upheld with costs. The order of the court
a quo
is
set aside and replaced by:
‘
The action is dismissed with
costs.’
_________________
D
Davis
Acting
Judge of Appeal
APPEARANCES:
For
the Appellant: M Daling
Instructed
by: Laas & Scholtz Attorneys, Durbanville Webbers, Bloemfontein
For
the Respondent: JS Marks of:
June
Stacey Marks Attorneys, Sandown Claude Reid Incorporated,
Bloemfontein
[1]
Durr v Absa Bank Ltd and Another
1997 (3) SA 448
(SCA); Centriq
Insurance Company Limited v Oosthuizen and Another
[2019] ZASCA 11.
[2]
Clause 1 of the Memorandum of Agreement between Atwealth (Pty) Ltd &
Andrea Moolman.
[3]
Board Notice 80 2003 issued in terms of the
Financial Advisory and
Intermediary Services Act.
[4
]
In this reference was made to Government Notice 141 of 2015 in which
hedge funds were declared as of 1 April 2015 to be collective
investment schemes in terms of the Collective Investments Schemes
Control Act of 2002. This legislation did not apply retrospectively.
[5]
Durr v Absa Bank Ltd & another
1997 (3) SA 448
(SCA) relying on
Van Wyk v Lewis
1924 AD 438
at 444.
[6]
Id at 468E-G.
[7]
At 468H-I. See also Page v First National Bank
2009 (4) SA 484
(E)
paras 13-15.
[8]
Neethling, Potgieter and Visser The Law of Delict 7 ed (2015) at
147.
[9]
Mukheiber v Raath & another
1999 (3) SA 1065
(SCA) at 1077E-F.
[10]
Durr fn 6 at 463G-H.
[11]
Id at 460H-J.
[12]
M Loubser and R Midgley The Law of Delict in South Africa 2 ed
(2012) at 120-121.