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Durr v Absa Bank Ltd and Another (424/96) [1997] ZASCA 44; [1997] 3 All SA 1 (A) (20 May 1997)

80 Reportability
Contract Law
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Brief Summary

Negligence — Investment advice — Claim for damages arising from poor investment recommendations — Appellant sought investment advice from bank's advisor, who assured her of the safety of investments in a company later found to be insolvent — Legal issue centered on the standard of care expected from the advisor — Court held that the advisor failed to exercise the requisite skill and care, leading to the appellant's financial loss.

Comprehensive Summary

Summary of Judgment


1. Introduction


The proceedings were a delictual damages claim arising from allegedly negligent investment advice given by a bank’s investment advisor to a client and her family, which advice led to substantial losses when the recommended investments failed. Although the plaintiff’s particulars of claim relied on contract alternatively delict, the matter was presented and determined as one of negligence in delict, and nothing turned on the choice between contractual and delictual characterisation.


The appellant was Valerie Elsie Cornwell Purr (referred to in the judgment narrative as Mrs Durr), the only plaintiff at trial. She sued Absa Bank Ltd (first respondent; the successor to entities within which the advisory services had been provided) and Myles Stuart (second respondent; the investment advisor employed in the bank’s broking division). Mrs Durr had taken cession of the claims of other family members who also invested on Stuart’s advice, and sued for the aggregated loss.


The appellant had been unsuccessful in the Cape Provincial Division before van Zyl J, and appealed to the Supreme Court of Appeal. The appeal concerned whether the respondents had been negligent, and in particular what standard of skill and care was required of an investment advisor employed by a bank that held itself out as providing expert investment advice.


The dispute arose from investments made in what were described as “secured debentures” and “preference shares” issued by companies in the “Supreme” stable. Those investments ultimately became worthless (or largely so) when the issuing companies were provisionally liquidated in November 1992. There was no allegation of dishonesty against the respondents; the case turned on whether they failed to exercise the requisite level of skill and care in recommending and maintaining the recommendations.


2. Material Facts


Mrs Durr, aged 65 in 1985, decided that managing her investments herself had become burdensome. She approached Myles Stuart (then regional manager of the broking division of the United Building Society, later United Bank and thereafter absorbed into Absa Bank Ltd) for assistance. Mrs Durr made clear that she was not seeking the highest return but wanted secure investments. For some years Stuart advised her on conventional investments (including fixed deposits and an annuity).


From 1989 onward Stuart recommended investments associated with “Supreme”. On his recommendation, Mrs Durr first invested R30 000 in November 1989 in “secured debentures” and later made further investments and reinvestments. In 1990 Stuart proposed “preference shares” in Supreme (redeemable within three years), and Mrs Durr invested R100 000 while Mr Durr (her husband) invested R300 000. In 1991 Mrs Stanley (Mrs Durr’s daughter) invested R20 000 in preference shares after Stuart recommended she move money from another institution. In 1992 Miss Ashburner (Mrs Durr’s granddaughter) invested R10 000 in “secured debentures”. Mrs Durr’s last investment was on 5 November 1992, when she invested R80 000 in “secured debentures”, shortly before the relevant Supreme companies were provisionally liquidated.


The family’s evidence, accepted as context for reliance, was that they were looking for safety and that Stuart repeatedly assured them that the Supreme investments were safe, solid, secure, and sound. They also understood that because Stuart was connected to a bank or building society, the advice was backed by the competence and resources of a large financial institution. The court recorded that the investors did not understand the technical nature of preference shares and debentures, and relied on Stuart’s assurances and recommendations.


The court treated as not in dispute (for purposes of determining negligence) that Stuart recommended Supreme, that the advice was accepted and acted upon, that it was bad advice, and that it caused loss. It was also common cause that the Supreme investments failed when the relevant issuing companies were liquidated.


The judgment detailed the reality that the two companies that mattered for the investments were Supreme Holdings Ltd and Supreme Investment Holdings (Pty) Ltd, both insolvent (Holdings by 1990 and Investment from inception), and later provisionally liquidated in November 1992. It was significant to the court’s analysis that what were marketed as “secured debentures” were in fact not secured, and that the preference shares were irregularly allotted, leaving subscribers as concurrent creditors. The two companies also failed to provide the legally required transparency mechanisms (including prospectuses and audited financial statements) that would ordinarily allow assessment of their position.


As to Stuart’s conduct, the court relied on his own evidence that his “investigation” consisted primarily of contacting and meeting a Supreme representative (Mannheim), receiving and reading marketing material (including brochures and press cuttings), and speaking to other brokers. He did not ask for a prospectus or audited financial statements, did not ascertain the precise nature or adequacy of the purported security, and did not seek advice from Absa’s internal professional resources (legal, accounting, or banking expertise), despite acknowledging such resources existed.


The record contained certain disputes of fact on what Stuart told the family, including whether he said his own money was invested in Supreme, and whether he told Mr Stanley that “our people” at Absa had thoroughly investigated Supreme. The court noted that the trial court made no findings on these disputes. The Supreme Court of Appeal considered at least one such dispute (whether Stuart referred to his own funds or his mother’s) not decisive to the outcome, because the core issue remained the nature of the assurances and the inadequacy of the investigation underlying them.


3. Legal Issues


The primary legal question was the standard of skill and care required of the respondents when giving investment advice in the circumstances. This required the court to determine whether Stuart’s conduct should be evaluated against the standard of a typical or average broker, or against the standard of a regional manager of a bank’s broking division in a bank that professed investment skill and offered expert investment advice.


A connected issue was whether, on the appropriate standard, Stuart’s failure to make further enquiries (including seeking prospectuses and audited financial statements, clarifying the identity of the debtor entities, and establishing the nature of the security) amounted to negligence. This was largely a question of application of legal standards to established facts, informed by expert evidence but ultimately decided by the court as a normative assessment of reasonableness.


A further issue was Absa’s liability basis. Absa was sued on alternative grounds of vicarious liability for Stuart’s negligence and direct negligence in exposing the public to an inadequately supervised or trained advisor. The appeal ultimately proceeded on the footing (conceded in argument) that if Stuart was negligent, vicarious liability followed, making it unnecessary to determine the alternative ground.


4. Court’s Reasoning


The court approached the negligence enquiry by emphasising that hindsight should not be used to attribute foresight unfairly, particularly given that Supreme’s collapse involved a complex and insidious fraud that misled many. Nonetheless, the court held that this caution did not absolve an investment advisor from making reasonable enquiries commensurate with the expertise claimed and the assurances given.


On the general legal standard applicable to skilled professionals, the court relied on the principle articulated in van Wyk v Lewis 1924 AD 438, namely that a professional is not expected to bring the highest possible degree of skill, but is bound to employ reasonable skill and care, assessed with reference to the general level of skill and diligence possessed and exercised at the time by members of the relevant branch of the profession. Expert evidence assists in determining that level, but the ultimate decision of what is reasonable remains for the court.


The central analytical move in the judgment was to reject the trial court’s adoption of the “typical broker” benchmark derived from the respondents’ expert (Wessels). The Supreme Court of Appeal reasoned that the appropriate standard is determined by what the advisor and institution held themselves out to be. The respondents’ own pleadings expressly alleged that they offered expert financial planning and investment advice to the public and that Stuart gave expert advice. Stuart himself accepted that his conduct could be measured against the standard of an expert investment advisor. Against that background, the court held that it would be incorrect to set the standard by reference to a broad and “motley” class of persons described as “brokers” for the purposes of the expert’s evidence, many of whom lacked competence to assess institutional risk. The court considered that approach conceptually flawed because it would allow an unduly wide, self-selected comparison class to dilute the standard, in a manner analogous to judging a specialist by the standard of a general practitioner rather than by the relevant branch of the profession.


Applying the higher standard, the court framed Stuart’s duty by reference to the content of his recommendation and assurances. Stuart used language such as “safe”, “very solid”, “very secure”, and “very sound”, stated he had investigated Supreme, and strongly recommended the investments. In the court’s view, this necessarily entailed that he had reason to believe—based on knowledge of, or reliable information about, the debtor’s affairs—that the investment would be reasonably safe. This reasoning was reinforced by the court’s reference to Nathan and Other v Absa Bank Ltd and Another (unreported D & CLD 30.11.1995), where a similar implication had been drawn from a recommendation of Supreme “secured debentures”; in the present case, the court considered the implication even stronger because the assurances were more explicit.


The court accepted that Stuart had skills in advising on investment “products” in a general planning sense, but emphasised that recommending unlisted debentures and preference shares in an entity like Supreme amounted in substance to advising clients to embark on moneylending, a potentially dangerous activity. On the evidence, Stuart lacked knowledge of critical matters (including the nature of the purported security, the legal function and significance of a prospectus, the relevance of audited financial statements, and the identification of the actual debtor company). The court held that it was not a sufficient answer for Stuart to say he did not know he should ask. A professional, in the court’s view, must know when he is out of his depth and must either warn clients of the limits of his competence or seek appropriate assistance. Given the institutional setting, the court regarded it as significant that Stuart did not draw on readily available expertise within the bank.


In evaluating whether warning signs existed that should have triggered further enquiry, the court considered several factors cumulatively. It treated the combination of high returns and high commissions as a reason for caution, particularly when the explanation offered for the high returns was, in the court’s view, not convincing when weighed against the reality of ongoing marketing efforts. It also considered the relative lack of an established track record for the relevant issuing entities and the inadequacy of Stuart’s understanding that investing in “Supreme” was investing in a “group”, without properly identifying the actual debtor companies. The court did not hold that Stuart should have discovered the full internal illegality or fraud, but held that basic, persistent enquiries—such as calling for a prospectus and audited financial statements, clarifying the debtor’s identity and the nature of security, and seeking internal professional advice—were reasonably required before recommending the investment as “safe”.


On the facts, Stuart’s “investigation” was characterised as relying on the representations and marketing material of the very entity to be assessed, rather than performing independent verification. The court held that Stuart could not properly assure clients of safety without having established by sufficient means that the investments were safe. The failure to make such enquiries, together with the giving of unqualified assurances, constituted a failure to perform the duty owed and therefore negligence.


Once Stuart’s negligence was established, the court held that Absa’s liability followed on the accepted basis of vicarious liability, making it unnecessary to decide whether Absa was also negligent directly by reason of deficient training or supervision.


5. Outcome and Relief


The Supreme Court of Appeal upheld the appeal with costs. It set aside paragraph 1 of the order of the court below and substituted an order holding both defendants liable, jointly and severally, for payment of agreed damages.


The substituted order directed the defendants to pay the plaintiff R 772 845,50, together with interest at 14% per annum from 1 November 1995 to date of payment, and to pay the costs of suit. The court also declared Messrs Goldhawk and Nieuwoudt to be necessary witnesses.


Cases Cited


van Wyk v Lewis 1924 AD 438


Mitchell v Dixon 1914 AD 519


Mahon v Osborne [1939] 1 All ER 535 (CA)


Nathan and Other v Absa Bank Ltd and Another (unreported D & CLD 30.11.1995)


Legislation Cited


Companies Act 61 of 1973 (sections 144, 145, 148, 156 and the definition of “share” in section 1)


Rules of Court Cited


No rules of court were cited in the judgment.


Held


The court held that the appropriate standard of care was not that of a broadly defined “typical broker”, but that of a regional manager in a bank’s broking division where the bank and its advisor held themselves out as providing expert financial planning and investment advice. On that standard, the advisor was required to make reasonable enquiries into the safety of the recommended investments, including the identity and creditworthiness of the debtor entities and the nature of the purported security, and to seek professional assistance where necessary.


The court held that Stuart’s unqualified assurances of safety, combined with his failure to obtain or request basic independent information such as a prospectus or audited financial statements and his failure to clarify the security and debtor identity, constituted a breach of duty and therefore negligence. Absa was held vicariously liable for Stuart’s negligence. The appeal succeeded and judgment was granted for the plaintiff in the agreed amount with interest and costs.


LEGAL PRINCIPLES


The judgment applied the principle that where a person undertakes to perform professional services requiring skill, the law measures the conduct against the standard of reasonable skill and care expected of members of the relevant branch of the profession at the time, as articulated in van Wyk v Lewis 1924 AD 438 (with reference to Mitchell v Dixon 1914 AD 519). While expert evidence is useful in describing prevailing professional standards, the determination of what is reasonable in the circumstances remains a matter for the court.


The judgment further applied the principle that the applicable standard is shaped by the role undertaken and the expertise professed. A person or institution that holds itself out as providing expert advice is not assessed against the baseline of a broad class of practitioners who may lack the competence that the defendant claimed to possess. The standard must be appropriate to the specialised function represented to the client.


The court also applied the principle that an advisor who gives assurances of safety and represents that an investment has been investigated assumes a duty to ensure that such assurances are supported by reasonably adequate enquiry. Where the advisor lacks personal competence to evaluate key aspects (such as the risk of lending to an issuer via debentures or preference shares), reasonable care may require the advisor to seek professional assistance or to warn the client of the limits of the advisor’s competence, rather than giving unqualified assurances.


Finally, the judgment proceeded on the accepted principle that where an employee’s negligent conduct occurs within the course and scope of employment, the employer may be held vicariously liable, and where vicarious liability is established on the facts, it may be unnecessary to decide an alternative case of direct negligence against the employer.

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[1997] ZASCA 44
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Durr v Absa Bank Ltd and Another (424/96) [1997] ZASCA 44; [1997] 3 All SA 1 (A) (20 May 1997)

CASE NO. 424/96
In the matter between:
VALERIE ELSIE CORNWELL PURR
APPELLANT
AND
ABSA BANK LTD
FIRST RESPONDENT
MYLES STUART
SECOND RESPONDENT
BEFORE: SMALBERGER, NIENABER, MARAIS,
SCHUTZ JJA and STREICHER AJA
HEARD: 2 MAY 1997
DELIVERED: 20 MAY 1997
SCHUTZ JA
2
JUDGMENT
SCHUTZ JA:
Hindsight is not vouchsafed the common man as he picks his course through life. This must be kept constantly in mind in a case like
this one, where all is so obvious now. It is a case in which members of a family took investment advice from a bank's investment
advisor. That advice has proved to be lamentably bad. Almost all that was invested was lost. The bank and the person in its employ
who gave the advice have been sued. The broad issue is negligence. There is no question that the bank offered investment advice,
that the advice was accepted and
3
acted upon, that it was bad advice, and that it caused loss. There is no imputation of dishonesty. The particular aspect of negligence
that is in contention is the degree of skill and care to have been expected of the respondents. They accept that they had to act
with skill and care. The question is, with how much skill and care? The claim pleaded relied upon contract, alternatively delict,
but as the case was presented as one in delict, and as nothing turns upon the precise cause of action, I shall treat it as such.
How the Purrs saw things
At 65 Mrs Durr decided that attending to her investments herself was becoming burdensome. A friend suggested she approach Mr Myles
Stuart of the United Building Society for assistance. She did so in 1985,
4
and out of this flowed the various investments by herself and members of her family which gave rise to this case. I shall refer to
the family collectively, if somewhat inaccurately, as the Durrs. They were her husband Mr Durr, her daughter Mrs Stanley and her
granddaughter Miss Ashburner. All of these people gave evidence and all have suffered loss. The only plaintiff is Mrs Durr. She has
taken cession of the other claims. Having lost before van Zyl J in the Cape Provincial Division, she is the appellant.
In 1985 Stuart was the regional manager of the United Building Society's broking division in Cape Town. He was to become the second
defendant, and the second respondent on appeal. In time the building society metamorphosed into United Bank. Later it was absorbed
as a
5
division in the first respondent, Absa Bank Limited, which was the first defendant in the trial.
Pursuant to her approach Stuart visited Mrs Durr at her home and this became the scene for intermittent business during succeeding
years, until 1992. She was in no need of the highest return available and was looking for secure investments. This she told Stuart.
On his advice she invested on fixed deposit at United Building Society and in an annuity with Old Mutual. She found him charming
and polite and he gained her confidence - so much so that at a later stage she appointed him her executor.
In 1989 a company called Supreme was mentioned by Stuart for the first time. This was a very good company, he told her. She asked
6
him if it was safe for investment. He gave the answer, which according
to her was repeated on later occasions, that his own and his mother's
money was invested with Supreme. (In his evidence Stuart stated that
his mother's money was so invested on his recommendation and that he
told the Durrs as much. But he disputed that he had said that any of his
own money was invested in Supreme. Nor was that the fact. The other
members of the family supported Mrs Durr. No finding was made by the
Court below. Hot though the dispute was on this point, I do not think
that it is of much moment, as I would expect that for a son to vaunt a
company by saying that he has persuaded his mother to invest in it is at
least as strong as saying that he had done so himself.) Other expressions
attributed to Stuart are that Supreme was a very solid company and that
7
he strongly recommended investment in it. That such was the tenor of
his commendation is not in dispute. In fact this was what Stuart
believed. The first investment in Supreme, of R30 000, was in the
form of secured debentures. That was in November 1989. These had
been offered by him as an alternative to fixed deposits. In February
1990 another R10 000 followed. The debentures were redeemable after
12 months, but were re-invested on maturity. It is unnecessary to detail
all her investments and re-investments in debentures, all of which were
recommended by Stuart with re-affirmation of his original indorsement.
In 1990 he proposed a new form of investment, preference shares
in Supreme, redeemable within three years. Again Mrs Durr sought
assurance as to risk and was given it. By now Mr Durr had become
8
interested, due to his wife's persuasions. He received the same assurance from Stuart as she had received. After discussion with him,
Stuart worked out how an available one and a half million rands should be invested. At the top of the list was R300 000 for Supreme
preference shares. Mr Durr accepted all the recommendations. At the same time, November 1990, Mrs Durr committed R100 000 of hers
to the same shares.
Next, it was Mrs Stanley's turn. In November 1991 she invested R20 000 in preference shares. She had met Stuart at her mother's home.
He made an appointment to visit her. During the visit he told her that she would do better if she withdrew money invested with Syfrets
and placed it in Supreme. He told her also that it would be a very secure
9
investment. She consulted her husband, who was not happy with the proposal. However, he phoned Stuart, and upon receiving assurance
from him, suggested that she proceed if that was her wish. That is what she did.
For her 21st birthday Mr and Mrs Durr gave their granddaughter, Miss Ashburner, R10 000. She also met Stuart at their home. He advised
her what to do with the money. In February 1992 she invested it in Supreme debentures.
Mrs Durr's last investment was on 5 November 1992, thirteen days before the two Supreme companies that were the ones that mattered
(as it later turned out), were provisionally liquidated. This last investment was R80 000 in secured debentures. Of this Rl 000 was
for an elderly
10
gardener. Once again assurance as to risk was sought and given. When the music stopped Mrs Durr was owed R115 000 on secured debentures
and R150 000 on preference shares: Mr Durr was owed R300 000 on preference shares: Mrs Stanley was owed R20 000 on the same: and
Miss Ashburner R10 000 on secured debentures - a total of R595 000.
What were the Durrs' expectations and beliefs? Mrs Durr said that she would never have thought of approaching Stuart had he not been
connected with a bank or building society. The picture that she had in her mind was that in a big company like United or Absa there
would be financial experts who would examine prospective investments - "men who were really in the know." It is clear that
she has no clear idea of what a preference share is other than that it confers some sort of priority.
11
She seems to think that it ranks prior to a debenture (which it does not),
a belief which Stuart also appeared at that time to hold. Mr Durr does
not know what a preference share is. But Stuart assured him that
Supreme preference shares were an entirely safe investment. Nor does
Mr Durr know what a debenture is. Miss Ashburner was not asked, but
there is no reason to suppose that her state of knowledge on these
matters exceeded that of her elders, or that her expectations were any
different. As to Mrs Stanley, she also does not know what preference
shares are and, referring to United, her comment was "a big company
like that you take - those are the people that you take the advice from."
Her husband, it will be recalled, took the trouble to phone Stuart.
According to him Stuart said that "our people" (ie at Absa - I use this
12
name to include United in its two manifestations) had thoroughly investigated the operation, Supreme, and that he was confident that
it was a sound investment. Stanley was emphatic about this. Stuart disputed any reference to "our people". His version
is "That was never contained, conveyed to him, what I recall probably having said to him was that I had investigated Supreme
and that I had satisfied myself that Supreme was in order". The Court below made no finding on this important dispute.
The truth about "Supreme"
Just about everything that Stuart told the Durrs about Supreme was wrong, not that he knew it, but because he had allowed himself
to be misled, as many others also had been, by a series of deceits.
13
In order to sort out the tangle it is necessary to establish some corporate identities. The two companies which had issued "secured
debentures" and "preference shares" were, at the time of liquidation, Supreme Holdings Ltd and Supreme Investment
Holdings (Pty) Ltd. I shall refer to them respectively as "Holdings" and "Investment". Holdings had been formed
in 1986. By 1990 it was insolvent. When registered in 1986 it was named Supremebond Trust (Pty) Ltd. (There was a purpose in this
name, with its inclusion of the word "bond".) In 1988 it was converted to a public company and the name became Supremebond
Trust Ltd. In May 1990 its name was changed to Supreme Holdings Ltd, the appellation under which, being unable to pay its debts,
it was liquidated in November 1992. Investment was formed in 1989.
14
It was insolvent from its inception. Its fortunes never improved. The original name was Supremebond Investment Holdings (Pty) Ltd.
(Notice again the "bond".) Later in the year it was converted to a public company and the name became Supremebond Investment
Holdings Ltd. In 1991 it became Supreme Investment Holdings Ltd, and after some months it reverted to being a private company with
the name Supreme Investment Holdings (Pty) Ltd. It was provisionally liquidated together with Holdings, similarly unable to pay its
debts.
The affairs of Holdings and Investment were inextricably interwoven. Neither was a listed company. The moving spirits behind them
were one Ronbeck, an attorney, and one Hafner, an accountant. In 1985, that is before either of the companies so far mentioned was
15
registered, Supreme Bond (Ply) Ltd had been formed. This was a participation bond company, which survived the collapse in November
1992. It did not form part of the "Supreme Group" at all. The shares in it were held by Ronbeck. I shall refer to it as
"the participation bond company." There were numerous further companies which did form part of the group. Some of them
will be mentioned later.
Between them Holdings and Investment (to which I shall refer collectively as "the two companies") raised large sums of money
from the public. At the time of liquidation they owed debenture holders some R280 million (on what was described in the debenture
certificates as secured debentures, but which were in fact not secured). So-called preference shareholders were owed another R40
million. Two of the
16
means employed in raising money were to pay brokers commission some three times more than the going rate for comparable investments
and to offer a return on debentures some one and a half to two per cent above the fixed deposit rate. The higher rate of return was
not only attractive to investors but would encourage brokers wishing to remain competitive to offer the "product" as one
of the commodities in their stock in trade.
What was held out to the world was that "Supreme" had a sound financial base in a selection of manufacturing and trading
companies, with particular emphasis placed upon three that were listed on the Johannesburg Stock Exchange (which last was one of
the true statements.) The listed companies were Supreme Industrial Holdings,
17
Protea Furnishers and Supreme Manufacturing Holdings. What was
lacking in respect of the two companies (which were the ones that
mattered as they were issuing the debentures and preference shares), was
any clear statement as to their relationship with the other companies;
and any audited financial documents of the kind that the law requires,
which, if they had been available, would have allowed some assessment
of the activities, profitability and soundness of the two companies. No
financial statements were filed with the Registrar of Companies by
Holdings which, as a public company was required to do so. No
financial statements were made available to any broker by either
company. ("Supreme" marketed through brokers.) None were sent to
debenture holders or preference shareholders, as was by law required.
18
Even for internal consumption they were late. For instance, the statements for the year ended 31 December 1990 were not signed by
the auditors until May 1992. There was a reason for that. During the course of the 1990 audit the auditors realised that Investment
was insolvent at the end of 1990. In order to prevent this being reported, an increase of capital of R19 950 000 in December 1990
was fabricated retrospectively. That amount was supposed to have been paid by Holdings to Investment for new shares, but it never
was.
After January 1989 not a single prospectus was issued, although money was being raised from the public wholesale. S 145 of the Companies
Act 61 of 1973 ("the Companies Act") requires an offer to the public for subscription for shares to be accompanied by a
prospectus.
19
A prospectus may be used for only three months after its registration (s 156). It must contain a fair presentation of the state of
affairs of the company (s 148); and many informative details, including an auditor's report, are required to be included. For purposes
of a public subscription debentures are equated to shares (definition of "share" in s 1). The reason advanced for not issuing
prospectuses was supposed to be, relying on s 144, that because shares and debentures were made available to a limited class consisting
of brokers, the offer was not calculated to become available to other persons. This contention was advanced despite the fact that
brokers were issued with wads of application forms!
The "secured debentures" were in fact unsecured, for a variety of reasons that need not be set out. Again deceit was involved,
but mainly
20
of a kind that only a detailed investigation would reveal. What was apparent to the outsider, however, was that the debenture certificates,
although calling themselves secured debentures, said nothing about how and to what extent the security had been effected. Also, for
the enquirer with longer vision, the publicly available documents of the three listed companies in the group, upon which much emphasis
was placed, would have shown that they had not issued debentures or preference shares.
For reasons that need also not be stated the "preference shares" were irregularly allotted and the claims of those who subscribed
for them are those of concurrent creditors.
Rather than documents in a form which past experience has embedded in the statutes as a requirement, brokers were edified with
21
glossy brochures, dossiers containing laudatory but largely irrelevant press cuttings, and they were exhorted to invest at marketing
conferences.
The two companies' names were played down. Rather the "Supreme
Group" was put forward as disposing over the operational companies and their assets, and particularly the three quoted companies.
Completely spuriously, the "Supreme Group" was dated back to 1923, whereas Holdings had been formed in 1986 and Investment
in 1989. The actual facts concerning the two companies themselves were suppressed. What was also suppressed was where the major investments
were being made by the "Supreme Group": not in the operational companies, but in a trio called Insulated Structures (Pty)
Ltd ("Insulated"), Sandton Finance (Pty) Ltd ("Sandton") and Pier Investments (Pty) Ltd ("Pier"). Insulated
was
22
an intermediary financing company which was having problems with the Financial Services Board. Sandton was involved in what the witness
Goldhawk called the "loan-sharking business", lending small amounts to the man in the street at high rates, a business,
according to him "which involves unusual collection tactics whereby letters are not necessarily used but large people knocking
on the door go to collect money very often." Pier bought repossessed properties from the participation bond company, properties
that did not generate income, and put them together in property portfolios.
The broad substance was that the two companies were running an illegal bank, taking deposits from the public, and through their intermediaries,
lending to other members of the public at a rate higher
23
than that paid to the depositors. Of course, they had no license to conduct a bank, so that they could not openly solicit deposits
from the public. Becoming a bank would have entailed rigorous regulation. Openly raising capital by offering shares or debentures
would have required a prospectus with no room to quibble. That would have entailed a scrutiny which they could not bear. So it was
also no good. The expedient that was devised was to use the participation bond company as a stalking horse. It was a registered financial
institution and was entitled to solicit funds. What was done, as explained by Goldhawk, was to advertise participation bonds and
then to add that, by the way, secured debentures and preference shares were also on offer. That no doubt explains the "bond"
in the earlier names of the two companies, and the
24
suggestion contained in a widely distributed brochure, to wit:
"The Supreme Investment.
By law, all investments in Supreme Bond are placed in Participation Mortgage Bonds or Secured Debentures. Supreme Bond grants mortgages
only over income producing immovable property and investors participate in the high returns that result. Each Participation Bond
is secured by the property on which it is granted, making this one of the safest possible investment avenues.
In order to accommodate investors with different periods of investment, Supreme Bond offers you Participation Bonds for 60 months
with a floating rate and a 'floor rate' guaranteed for this period.
In addition, Supreme Bond offers investment opportunities in 'Secured Debentures' for 6, 12, 18, 24 and 36 months respectively with
fixed interest rates of interest guaranteed for these periods."
Had the Durrs heard only a fraction of the preceding recital they would not have invested in Supreme.
I would add that those who are stigmatised in my judgment for
25
dishonesty are not parties to the litigation. The three persons who are parties are content that the facts are broadly as I describe
them, and they dictate what facts are presented to the Court.
What Stuart did
Stuart, of course, did not know nor suspect these things at the time. He first heard of Supreme in 1989 from colleagues and associates
and decided to investigate. He telephoned Mannheim, the director of Supreme's Cape Town branch. Upon enquiry as to how Supreme managed
to offer such high rates Mannheim told him that money was saved by not advertising, marketing being confined to brokers and accountants,
and by minimising administration costs. After this conversation he received marketing material through the post from time
26
to time, including the brochure already mentioned. Stuart read the brochure, and having regard to its contents, what Mannheim had
told him, and discussions with other brokers, he concluded that he could offer Supreme as an investment with confidence. Neither
at this time nor at any other time did he ask for financial statements or a prospectus. At no stage before liquidation did he hear
or see anything negative about "Supreme", whether in newspapers or elsewhere.
He decided that he wished to meet Mannheim personally, so he went to see him, in order to assess the man and his environment. The
man he found credible, plausible and confident, the premises professional but not opulent. He took the opportunity to ask Mannheim
how Supreme invested the money it collected. Participation bonds and secured
27
debentures were mentioned. The latter were said to be secured through
assets in the company, assets such as fixed property. Returns were said
to be obtained from investments in retailing, property and manufacturing
companies. Two of the names mentioned were well known to him,
Protea Furnishers, and Mewa, a manufacturer of steel products.
Mannheim told him that Ronbeck had been a director of Johannesburg
Building Society, later Allied Building Society and he said that Supreme
had been in existence since 1923. Stuart came away with total
confidence in Supreme. There had been no mention of loan sharking.
Stuart had worked for Allied before and considered that if Ronbeck had
been a director he would have the skill and integrity to run a profitable
business.
28
Stuart twice evaded a question whether he had asked Mannheim squarely what the security behind the debentures was. When he was pressed
on this subject in cross-examination he appealed again to the generalities expressed by Mannheim, but was forced to concede that
he did not know what the precise nature of the security was, or whether it was adequate. According to him the fact that the certificate
said "secured" was enough.
Consistently with his version that he had not said to Mr Stanley that "our people" had investigated Supreme, he claimed
that when he spoke to Mrs Durr he told her that he (the emphasis was he personally) had done investigations and that the result was
that the company was sound, with a "risk profile (that) was not excessive."
29
When he took the final R80 000 to Mannheim in November 1992
(days before the collapse) "once again (he) gave me assurances . . . that
all was in order." This message, thus curiously phrased, reconfirmed his
confidence. His evidence proceeded:
"And my understanding from that conversation was, if Supreme had gone into negotiations with United and were going to raise capital
and United was going to lend them capital [this is a reference back to a part of the conversation he had already described] obviously
they [meaning United] would have had their own set of risk assessment criteria before they would even consider lending any organisation
funds."
This is a strange remark. It sounds very much like what Mrs Durr
thought. It also reflects that Stuart drew solace from a second or third
hand account of investigations which his employer might make. Yet his
evidence was that although that same employer had skilled people who
30
could investigate Supreme, and they were available to him on a direct approach, he never once sought any information or advice from
them.
After the crash he went to see Mannheim again. Mannheim assured him that there was nothing much to worry about. There had been an
adverse article in Finansies en Tegniek, there had been a "little bit of a scare" and a "run on funds", but things
would stabilise. This sanguine view seems to have made some impression on Stuart, particularly as he said that it was confirmed by
the managers of some of the subsidiaries. Mr Durr deposed that on hearing of the liquidation he had phoned Stuart, whose response
was "Don't worry, it is not another Masterbond." (So he was alive to the travails of Masterbond.) Miss Ashburner also phoned
him and she also was told not to worry. Mrs
31
Durr, in her turn, was given assurance, but on a different if equally
erroneous basis, that preference shares offer greater security than secured
debentures.
What did the law expect of Stuart and Absa?
Imperitia culpae adnumeratur,says D 50.17.132 - lack of skill is regarded as culpable. That much is accepted by the respondents. But
how much skill, they say. We have shown all the skill that an "ordinary" or "average"broker, or a bank employing
such a one, need show. What more can be asked of us?
Two questions arise in this case. 1. In general, what is the level of skill and knowledge required? 2. Is the standard required in
judging that level that of the ordinary or average broker at large, or is it that of
32
the regional manager of the broking division of a bank professing
investment skills and offering expert investment advice?
The answer to the first question is found in the judgment of Innes
C J in van Wyk v Lewis
1924 A D 438
at 444 with reference, as it
happens, to medical practitioners:
"It was pointed out by this Court, in Mitchell v Dixon (1914 A D at 525) that 'a medical practitioner is not expected to bring
to bear upon the case entrusted to him the highest possible degree of professional skill, but he is bound to employ reasonable skill
and care'. 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" (own emphasis).
"But (at 448) the decision of what is reasonable under the circumstances is for the Court; it will pay high regard to
33
the views of the profession, but it is not bound to adopt them."
For the purposes of this case I do not think that anything need be added to this statement. (Scott L J in Mahon v Osborne
[1939] 1 All E R 535
(CA) at 549 D-E was to say of Innes C J's judgment that it was one "of which I should like humbly to express my admiration".)
However, the second question is less easy - whether the standard is set by the broking community at large or by a much smaller group
of which Stuart is a representative. The Court below opted for the wider and therefore less strict test, accepting a submission that
"[Stuart] was at all relevant times a member of the broking profession and as such his conduct should be evaluated on the basis
of the general level of care, skill and diligence which might reasonably be expected of a typical,
34
ordinary or average broker,"
This conclusion was reached notwithstanding that the respondents had made the following statements in their plea:
"[Absa and Stuart] offered expert financial planning and investment advice to the public."
"[Absa] invited the public to make use of such services."
"The investors made use of the services offered by [Absa] and asked for and received investment advice from [Stuart]."
"[Stuart] gave the investors expert financial planning and investment advice."
"[Absa and Stuart] would exercise the degree of skill and care which is required of a reasonably competent and careful investment
advisor when giving advice to clients."
In his evidence Stuart affirmed that he was content that his conduct
be measured against the standard of an expert financial and investment
advisor.
35
The respondents' case was not, therefore, that they be measured by
the standards of any old broker, but that of an expert of the kind stated.
However, the evidence was rather differently presented, and the Court
below acted on that evidence. The only expert witness that the
respondents called was one Wessels, the executive director of the Life
Offices Association of South Africa ("LOA"), a trade association of all
the major life insurance companies. He was called to give evidence of
the knowledge and skills of the "average or typical broker", of which
there are some 27000 in South Africa, of whom 16000 or 17000 are
linked to insurance companies. The definition of a broker that he used
in establishing the number of 27000 was one that had been proposed for
the purposes of his own evidence by Goldhawk, an expert witness for
36
Mrs Durr, namely "... any person, (whatever his designation or job description might be) who offers information and advice on
financial
planning and/or investments or solicits or procures investments, for
reward by way of commission or otherwise". These 27000 brokers, and
I say it in a non-pejorative sense, must be a motley lot.
Wessels expressed the view that Goldhawk's expectations of them
were too high. Wessels's "typical broker" is a man of modest accomplishment. He would not ask for financial statements,
and if provided with them would not be able to read them; he would not know that a prospectus is required for a public offer, or
how a prospectus differs from glossy marketing material; he would take a "secured debenture" certificate at face value;
he would be misled by misleading
37
brochures and advertisements such as were issued by Supreme; and,
critically for this case, he would not have the skills to analyse or assess
"institutional risk". This expression is used to denote the soundness or
creditworthiness of a prospective debtor. It is used by Wessels in
contrast to "product risk". A "product" is part of a broker's stock in
trade, like an endowment policy or a fixed deposit. That falls within the
"typical broker's" sphere of competence. But institutional risk is quite
beyond him. This means, in plain English, that if he is advising a client
to lend money to a new debtor, he lacks the skill to assess the debtor's
creditworthiness. That provokes the immediate question whether be
should recommend the debtor, without warning his client of his own
incapacity.
38
A reading of Stuart's evidence delineates him as one of Wessels's |
typical brokers. The list of things relevant to this case of which he is
ignorant is a long one. He seems to have an imprecise understanding of
separate corporate personality, of the possible natures of a "group", and
of possible relationships within a group. He does not understand the
character of the security offered by either preference shares or
debentures, of the range of varieties of either, or of the order of ranking
of preference shares and debentures. He does not know what a prospectus
is, what its purpose is, or what may be learned from one. He is
unfamiliar with the Companies Act. He does not know what financial
statements comprise, nor would he know how to interpret them if given
to him. Even less does he know that a public company must file them
39
with the Registrar of Companies, after which they are matter of public
record. Nor does he know that deposits may not be solicited from the
public indiscriminately except by registered banking institutions. (I put
this last matter loosely.) I do not say these things in disparagement of
Stuart. It is not negligent not to be a lawyer. But those who undertake
to advise clients on matters including an important legal component do
so at their peril if they have not informed themselves sufficiently on the
law.
Not only did the Judge below adopt the "typical broker" test, but he held that Mrs Durr tendered no evidence as to the duties
and functions of bankers under circumstances such as exist in this case. That is not entirely correct. Mr Goldhawk had said:
40
"If a person holds himself out as an expert and there is support, such as a financial institution confirming that he's an expert,
then any person dealing with him should be entitled to expert advice. There's the analogy of if you get into a taxi and the taxi
driver is a bad driver, does that remove any negligence claim you may have against him?"
Mr Goldhawk is a chartered accountant and a specialist investigating accountant. He was appointed as such by the liquidators of "Supreme"
and gained a deep insight into the group and its penumbra.
Mr Nieuwoudt was also called as an expert by Mrs Durr. He is a Fellow and current Vice-President of The Institute of Life and Pension
Advisors ("ILPA") and chairman of that body's professional standards institute. Its members are drawn from the cream of
the life and pensions industry. This was made a ground of criticism of his evidence. His standards were impossibly high, it was said.
41
Nieuwoudt joined issue with Wessels on the question of
"institutional risk". The main basis of his opinion that the respondents
had acted negligently was that they were concerned with recommending
forms of investment less well used by financial institutions, namely
unlisted preference shares and unlisted debentures. (Stuart does not seem
to have encountered these phenomena before.) Both amounted to debt
financing and it was imperative to make at least a preliminary
investigation of the solvency of the debtor. Among other things, he
would at least expect that the broker find out who exactly the debtor is
to be, what the security offered is, and seek to obtain financial
information by asking for a prospectus and audited financial statements.
Of course, everything would depend upon the particular circumstances.
42
But, he added, "the important issue is that even if the advisor himself
does not have the personal competence to make the enquiries, I believe
it's incumbent upon him to harness whatever resources are available to i
him, or if necessary to ask for professional, legal or accounting opinion
before committing his client's funds to such an investment."
These opinions of Messrs Goldhawk and Nieuwoudt are of assistance, but the case remains one where the Court will, in the end, have
to form its own opinion, having regard to the reasoning advanced by the experts.
By contrast the respondents called no expert evidence from the banking sector to explain what they contended was meant or was to be
understood by Absa's public professions of skill, or what Stuart would
43
have been told if he had asked for help. It would have been interesting to hear whether indeed they contended that the "average
or typical broker" of Wessels's description met their public claim to expertise. It may be added that when an attempt was made
to cross-examine Wessels as to what he thought was to be expected of Absa, he, not surprisingly, shied away from the subject.
In dealing with the question whose standard is the relevant one, I have dealt with the opinions of the experts and some of the facts
at some length. That is because in real life negligence is not a mere legal abstraction, but must be related to particular facts.
However, as a matter of law set in the present factual context, I am of the opinion that the relevant standard is not that of the
"average or typical broker" as he has
44
been defined. To accept that standard would be to allow a definition chosen by a witness for his own purposes to dictate the result,
making the enquiry as to what is required of a particular kind of broker pointless. What is actually needed is first to determine
what skills the particular kind of broker needs to exhibit, which must depend in large part on what skills he is held out to possess.
If this were not so then the reasoning advanced by the respondents would justify the neurosurgeon being judged by the standards of
the general practitioner. That would be contrary to the reference by Innes CJ in van Wyk v Lewis (above) at 444 to "the branch
of the profession to which the practitioner belongs".
I conclude that the appropriate standard is that of the regional manager of the broking division of a bank professing investment skills
45
and offering expert investment advice.
Before dealing with the issue of negligence it is necessary to underline the manner in which the respondents have chosen to present
their case. Goldhawk directed his attention to a wide group of brokers but focused more specifically upon those who offered information
or advice for investment purposes or who solicited or procured investments. The members of that class of broker would then have to
exhibit the particular skill that they professed. The respondents have simply ignored this vital qualification, chosen to use Goldhawk's
broad group as the source of the relevant benchmark of skill, and proceeded to establish that most of that group do not in fact have
all the skills needed to give comprehensive investment advice. Therefore they cannot be expected
46
to exhibit the necessary expertise, it is sought to be argued. This is a complete perversion of Goldhawk's classification. He did
not select a group without the requisite skills. Once the correct categorisation has been made it is apparent that Wessels's evidence
concerns a type of broker who is irrelevant to the setting of standards in this case. There is no other expert evidence on the respondents'
side. So Stuart enters the arena all on his own.
Were Stuart and Absa negligent?
It remains to enquire whether Stuart and Absa have been negligent. It should be mentioned that Absa has been sought to be held liable
in delict on one or other of two bases: as vicariously liable for Stuart's conduct, or as negligent in its own right for exposing
the public
47
to Stuart without supervising or training him properly. To my mind it is clear that if Stuart was negligent, that negligence is vicariously
attributable to Absa, and it was so conceded in argument. Accordingly, if Stuart was negligent the alternative need not be explored.
In dealing with what standard is to be applied to Stuart I have already given some preliminary indications of what I think was expectecd
of him. I shall now examine this question more closely.
On his own evidence Stuart's real skills lie in advising clients on different kinds of products. Thus he can advise them to plan their
affairs having regard to the incidence of income tax and estate duty, to returns, capital growth, liquidity, duration of investment,
various forms of investment such as endowments, retirement annuities, unit trusts, fixed
48
deposits, life insurances, and a variety of other matters. This is in itself a valuable service and on the evidence Stuart was able
to provide it.
But whether he was qualified to advise investments in preference shares and debentures in "Supreme" is a more questionable
matter. That his advice was bad is now clear. But, as I said at the outset of this judgment, one must be careful not to use hindsight
to impute foresight to him. And it must be remembered that many other brokers, institutions and various regulating authorities were
fooled as well.
It is now clear that a little persistence in just a few enquiries would have led to the Durrs investing their money elsewhere. Were
there warning signs visible to Stuart which should have led him to make at least some of those enquiries? Goldhawk says that there
were. Now I
49
think I should make it clear that Goldhawk, although speaking out of much experience and deep insight into the affairs of "Supreme",
tried to be fair, and not expect of others his own standards and skills. So that there were many things that would have alerted him,
had he been in
Stuart's position, that he thought it unlikely would have alerted a
competent broker in a bank's investment division. There were others that he was doubtful about. Perhaps they should have alerted that
broker, perhaps not. He was not dogmatic about those. But there was a residue which, taken collectively, should have alerted the
broker. That was his opinion.
The first warning signs according to Goldhawk were the high returns and high commissions offered by "Supreme". Whilst placing
less
50
emphasis on these two factors, Nieuwoudt agreed on their relevance. As far as high commission is concerned (about an extra one per
cent for debentures in this case) it imposes an additional burden upon profit margins. If the return is also higher than normal,
that burden is further increased. In order to cover these burdens there is pressure to lend at higher rates than normal, possibly
to persons who cannot obtain lower rates from banks. And so the vicious circle may be created.
High commission also creates temptation. It may influence the broker to promote something that is not, objectively speaking, best
for his client. A broker with any knowledge of the world must know that that is sometimes the very object. And even if he is beyond
temptation he might well ask himself whether the person offering the high
51
commission does not anticipate that some other brokers might be less upright. As far as high returns are concerned, Nieuwoudt put
it succinctly: the basic rule of investment is that there is an inverse relationship between risk and return. This is no hard and
fast rule, of course, but it is a rule nonetheless. Over the centuries people, sometimes almost whole peoples, have ignored it, usually
with the same result. Stuart was mindful of the rule, because he asked Mannheim how the unusually high returns were achieved. The
explanation about saving advertising and other costs should, 1 think, have been taken with a grain of salt, particularly when he
was invited to marketing conferences (which he attended). Marketing conferences cost money. High returns and high commissions should
not be overemphasized, but they were, to my mind,
52
reasons for some caution at the very threshold, particularly when both
were present in a marked degree.
Nieuwoudt's main emphasis was not on these two factors but on
a failure to make preliminary enquiries into the would-be debtor. I have
set out his views above. Goldhawk, also, was of the view that whatever
allowance one makes for a broker in Stuart's position, he should have
obtained better information, more particularly by calling for a prospectus
and/or financial statements. I must say that I find it astonishing that
when the legislature and the administration has gone to trouble to allow
people to protect themselves and their clients, to allow them to have easy
access to audited figures, as in the case of Holdings, that these facilities
should be ignored, in favour of glossy pamphlets and press cuttings
53
selected by the debtor. And if it be complained that the standard I postulate is too high, then I would suggest that banks and similar
institutions refrain from claiming an expertise that they do not have. If a prospectus had been sought it would soon have become
apparent that there was none. And if the reason for its absence was given as being that there was no offer to the public, common
sense should have raised a query, whatever some lawyer was supposed to have said. Similarly, if financial statements had been asked
for, they would not have been given. That alone should have been enough. And had the excuse been offered that they were late, that
should have led to further enquiry. If, on the other hand, they had been provided, even an unskilled person might have asked, but
how is it that in such a well managed company there is a loss?
54
The answer raised to all this is - but Stuart was so unskilled that he did not even know that he ought to ask. One of the first requirements
of a professional is to know when he may be getting out of his depth, so that I do not think that that is a sufficient excuse. I
am not able to say exactly what Stuart should have done. But I would suggest that there was a point at which he should have walked
down the passage or across the street, or lifted the telephone, or activated the fax, and said to a lawyer, or accountant, or banker
(none of which he was) in the employ of Absa, something like this. "Look, I have been introduced to some attractive debentures
(preference shares) in a group called Supreme. Would you please tell me quite what debentures (preference shares) are, and how secure
they are. And also, please tell me how I find out who
55
and what Supreme is and what risk attaches to investing in it."
When questioned about his failure to seek advice Stuart justified himself by saying that a certain responsibility was placed on his
own shoulders as a broker and that it was simply not practical to ask for an investigation of "every single investment opportunity
or insurance opportunity or business opportunity." This despite the fact that he had not marketed debentures or preference shares
before and despite the fact (as he acknowledged in the light of retrospect) that he had not verified a single fact about the two
companies. He sought to explain his conduct by saying that he looked to the Registrar of Financial Institutions to keep a watch on
companies. Wessels also had said that the "average or typical broker" would largely rely on the official regulators rather
than
56
make his own investigations.
Similarly, he drew solace from the fact that "Supreme" was listed. In fact the two companies were not listed. The same question
may be asked. In this case it would have been quite easy to And out, simply by looking at the daily stock exchange lists published
in the press. But that would have required knowledge of the names of the two companies, knowledge that Stuart did not have at once
to hand. Should he not have had? One sees the victim of an insidious and well thought out fraud ready to be ensnared because of his
own ignorance and too ready trust in his fellows. Frauds play upon these qualities. To have a trusting nature is not in itself to
be negligent. But to be naive may be. Stuart, in my opinion, was naive. To have gone to Mannheim in the first
57
instance as an intitial step was reasonable, but to go to him again after news of the collapse and be talked into a sense of some
security, seems to me to lack that edge of suspicion and alertness to possible evil that an investment advisor should have as part
of his weaponry.
I would say something about reliance on the various regulatory bodies and officials. They do perform valuable functions in protecting
the public against fraud. But for an investment advisor to assume that they have shot out all the predators is ingenuous. New ones
always creep in under the wire. Those responsible for lending other people's money must be ever alert to this, and, sometimes helped
by the regulatory powers, make their own investigations to the extent reasonably necessary. These powers are not there, after all,
to give individual and
58
daily attention to particular lenders, and the grindings of their mills are sometimes slow. Individual attention falls to be given
by individual advisors. And then, there are also other aids to the investor and his advisor which the State has made available. To
what extent did Stuart avail himself of them?
When asked why he had not sought audited financial statements Stuart's answer was "Because I didn't believe it was appropriate.
When I started to market Supreme through secured debentures, the document that I read indicated that the investment was secured,
and I believed that to be the case at the time and nothing was ever conveyed to me to challenge that "(own emphasis). He was
cross-examined about the analogy of a bank manager (which the Judge below did not consider to
59
be an analogy at all - "bank managers are terrible people . . . they trust
nobody" - said in jest). It was put to him that if a representative of
company A wishing to borrow money was asked by the hypothetical
bank manager to produce financial statements and he produced those of
company B, he would not be taken seriously. He conceded that B
company's statements would not advance the application. Upon being
asked if the analogy was unfair, he answered "Except that the name
Supreme' was always prevalent and that was what gave the impression
that what you were looking at was the same as what was being offered
to clients." As an example it was pointed out to him that whereas certain
results that were put forward in a published profit announcement related
to Supreme Industrial Holdings Limited, a debenture certificate was
60
issued in the name of Holdings. He was asked whether it was not
apparent that different companies were involved. His answer was "No,
because I see the same - the name 'Supreme' appearing on both
documents . . .. My understanding was that by investing in Supreme
one is investing in a group of companies . . .." This is tantamount to
lending to a nebula. Stuart was asked whether if the hypothetical bank
manager had been told by the supplicant that financial statements
(presumably of the correct company this time) were not needed, and that
a brochure was quite good enough to establish that debentures being
proffered as security were in fact secured, the bank manager was likely
to accept that proposition. He agreed that it was unlikely that he would.
When pressed as to why the Durrs should be expected to receive less
61
protection than the bank, Stuart answered "Because of the research that I had done myself, and the Durrs obviously trusted my
evaluation". It is difficult to know what to make of this answer, when one has regard to the fact that Stuart's researches had
consisted of asking Mannheim a few superficial questions, casting his eye over the marketing hand-outs, and attuning his ear to the
gossip of the market. Later he was asked again "Is there any reason why you think its reasonable to expose pensioners to greater
risks than the bank would be prepared to expose its money to?" and he answered "No."
Stuart fared no better on the question why he did not ask for a prospectus. "Because I didn't believe it was appropriate or necessary,"
was the answer. He had addressed his mind to the question of a
62
prospectus. He had come across prospectuses before. But, he concluded, a prospectus was needed only for a "new placing".
There was no doubt in his mind that a prospectus was not needed. This conclusion was reached without his being informed on the subject,
without reference to the Companies Act and without seeking any help or advice. In hindsight he conceded, he was now much wiser. He
made a similar reluctant concession with regard to taking "secured debentures" at face value.
I do not think that Stuart can be blamed for not having realized that the two companies were running an illegal bank. Goldhawk said
that as an outsider he could not be expected to have guessed what was going on inside. Nor should he have realized how the participation
bond company was being misused. Goldhawk furthermore conceded that he
63
did not think a broker would read anything sinister into the advertising
material standing alone, which a more skilled person probably would
have done.
I come towards my conclusion on the subject of negligence. The
basic rule is stated by LAWSA First Reissue Vol 8 para 94, as follows:
"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."
The respondents accept that an investment advisor requires special
skill and that in a case such as the present he would be under a duty to
make enquiries concerning "Supreme". But, argued Mr Joubert for the
respondents, they were not under a duty to investigate "institutional risk",
64
that is the creditworthiness of "Supreme". This cannot be. They held themselves out as expert investment advisors, without
qualification. Even more to the point is what Stuart said to the Durrs, after he had chosen to bring "Supreme" to their
attention. He used expressions concerning it such as "safe", "very solid", "very secure" and "very
sound". He said that he had investigated it and strongly recommended it for investment. 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
65
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.
Was that duty performed? I have set out what Stuart did. What it amounts to is that he went to the subject of the investigation, instead
of performing an independent investigation (save for some conversations with colleagues and reading some of the journals). Mr Joubert
has argued that he was under no duty to go further unless there was something to alert him, and there was nothing. I have difficulty
with this submission too. He had told his clients that he had investigated Supreme, but was driven to concede that he had not established
a single fact about the two companies, the borrowers. To my mind he had no
66
right to make the recommendation until he had satisfied himself by
sufficient means that the investments in those particular companies were
safe.
This is an even stronger case than that decided by Thirion J in
Nathan and Other v Absa Bank Ltd and Another(unreported D & CLD
30.11.1995). There the second defendant, a financial advisor employed
by the first, had recommended investment in secured debentures in
"Supreme". The learned Judge said (at 35):
"[The recommendation] carried the further implication that Allied had reason to believe, based on its knowledge of the business
affairs of Supreme or reliable information about its affairs, that an investment in Supreme secured debentures would be reasonably
safe, . . . and that plaintiffs would in the ordinary course of the business of Supreme and barring unforeseen events be repaid the
amount of their investment
67
What was implied in that case was express in this one.
Returning to Stuart's conduct, there were in my opinion warning signs if not flashing lights. First, there is the matter of the high
commissions and high interest rates, which I have discussed already. Second, there is the fact that "Supreme" did not have
a well established track record when he made his first recommendation to the Durrs in 1990. Holdings had been issuing debentures
since 1986 and Investment was formed only in 1989. The first preference shares were issued in 1990. To my mind it is idle to equate
these forms of investment in this sort of institution with placing a fixed deposit with an established bank. No doubt Stuart was
right in saying that he did not have to seek assistance each time he was to recommend a deposit in such a bank. But
68
in doing so he was really evading the question as to why he did not make more pertinent enquiries about "Supreme". Also,
I think he should have wondered whether Mannheim's explanations as to the rediscovery of the cornucopia were not possibly too good
to be true. All of these things taken collectively did, I think, constitute warning signals.
Given the rule of law concerning the undertaking of activity requiring skill, Stuart was in a constant dilemma. Either he had to forewarn
the Durrs where his skills ended, so as to enable them to appreciate the dangers of accepting his advice without more ado, or he
should not have recommended Supreme. What he was not entitled to do was to venture into a Geld in which he professed skills which
he did not have and to give them assurances about the soundness of the investments
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which he was not properly qualified to give. Before he recommended Supreme he should first have sought help, which was readily available
to him. Given the limits of the enquiries he had made himself he was under a duty to do so. I do not suggest that the professionals
at Absa would at once have brought down the house of cards, but a few pertinent requests for the likes of audited statements and
prospectuses should have led to more questions or simply a loss of interest in "Supreme".
Accordingly 1 am of the view that on the facts of this case Stuart did not perform his duty and was consequently negligent. Absa's
negligence follows, as it is accepted that it is vicariously liable for his actions.
I have constantly kept in mind my own warning about the dangers
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of hindsight, but in the end I am persuaded that there should have been more foresight. I have also borne in mind that an investment
advisor is not as such the guarantor of what he recommends and nothing that I have said should be read as indicating the contrary.
The parties have reached agreement on amounts and interest rates
should the appeal succeed.
In the result the appeal is upheld with costs. Paragraph 1 of the order made below is set aside and replaced with the following:
"1. (a) The defendants are ordered, jointly and severally, to pay the plaintiff:
(i) The sum of R 772 845,50;
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(ii) Interest thereon at the rate of 14 per cent per annum from 1 November 1995 to date of payment;
(iii) The costs of suit
(b) Messrs Goldhawk and Nieuwoudt are declared necessary witnesses."
W P SCHUTZ JUDGE OF APPEAL SMALBERGER JA) NIENABER JA) MARAIS JA) CONCUR STREICHER AJA)

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