Investor’s Remorse: Can you take action against your investment broker for a failed investment?

In the Symons case, the plaintiff invested R5 million into a property syndication with Sharemax Investments (Pty) Ltd (Sharemax) based on the advice of the defendant - the plaintiffs’ former investment broker and financial advisor. The defendant, a registered financial service provider, had previously advised the plaintiffs on various investment opportunities and had also personally invested R600,000 into the Sharemax property syndication. The investment initially yielded returns, however, the South African Reserve Bank stepped in and instructed Sharemax to change its funding model as it was deemed to be unlawfully taking deposits from the public. Sharemax was unable to do so and the property syndication scheme subsequently collapsed, with the plaintiff losing his entire investment. The plaintiff sought damages against the defendant for the failed investment.

The plaintiff argued that:

• he was ill advised by the defendant and was under the impression that the investment was low risk;
• the defendant breached its contractual duties as the plaintiff believed he was guaranteed a return on his investment as well as the capital amount invested; and
• the defendant had not properly applied his mind to the investment and the associated risks.

The defendant, however, argued that:

• the plaintiff was well informed of the risks involved as the plaintiff was provided with various materials relating to the investment;
• the defendant was well versed with Sharemax and its investment opportunities as the defendant had attended numerous Sharemax presentations;
• Sharemax had a respectable track record, which the defendant supported through expert evidence; and
• the contracts signed by the plaintiff indicated on numerous occasions that the investment was not guaranteed and that there was a risk that the plaintiff could lose his entire investment.

The plaintiff was an experienced businessman in dealing with property syndications and therefore was deemed by the court to be adequately versed in the risks involved.

The court found that the plaintiff went into the investment with open eyes due to his experience as a businessman, his interactions with similar schemes and the fact that the defendant had given the plaintiff adequate documentation on the investment. The court also took cognisance of the fact that the plaintiff took two weeks to make a final decision on whether to invest and that this was, according to the court, a sign that the plaintiff gave due consideration to the investment. The court highlighted that the defendant took advice on the investment structure from an accountant as well as a compliance officer and could not have reasonably foreseen the reason for the collapse of the investment. Ultimately, the court handed judgment down against the plaintiff and dismissed the action with costs.

The Symons decision does not mean that your investment broker is completely safeguarded from any and all wrongdoing as was shown in the case of Oosthuizen v Castro 2018 (2) SA 529 (FS) where the court held the financial advisor liable for the failed investments of the plaintiff due to the fact that the financial advisor led the plaintiff to invest under the impression that the investment was a low risk investment, when in actual fact if the risk was properly explained to the plaintiff she would never have invested in the first place.

The courts are yet to develop a hard and fast test for such matters and rather deal with such on a case by case basis having regard to, among other factors, the investor’s emotional state, the actual risk of the investment compared to the risk the investment was sold to be as well as the reason for the investment’s failure.