Pyramid schemes – Easy to fall for, and even early birds lose the worm

A3B“If it sounds too good to be true, it probably is” (wise old adage)

Pyramid schemes are in the news again.

They are easy to fall for, with not only desperate pensioners and low-wage earners but also Captains of Industry and many otherwise-savvy investors regularly tricked into “investing” in them.  The reason of course is that the con artists behind these schemes are adept at hiding their true nature, coming up like clockwork with ever more creative cover stories to lure the unwary.  Very popular are “Ponzi” schemes, where the masterminds behind them promise to do everything for you – all you need do is “invest”, then sit back and reap the profits.

Don’t be a victim!

Workplaces are great hunting grounds for these swindlers, so if you are an employer it is worth warning your staff upfront about how to spot and avoid these schemes.  See Sanlam’s Infographic below for some classic warning signs –

blog image A3Source: Sanlam Employee Benefits. Reproduced with authority from http://thinkvisually.co/portfolio/ponzi-schemes-sanlam/.

Tell everyone – Being an “early bird” doesn’t help

Many pyramid schemes rely on their victims putting aside their suspicions in the perennial hope that, even if the scheme is illegal and doomed to eventual collapse, they will be one of the few (12%) “Early Birds” flying away into the sunset with all the loot whilst the latecomers (88%) are left with all the losses.

The reality is that even the “early birds” are at serious risk of losing not only their “profits” but also their original investments.

The reason is that a liquidator (“trustee” in the case of a person or a trust) can recover any monies paid out by a liquidated scheme during the 6 month period prior to liquidation, unless the recipient can prove that the disposition was made “in the ordinary course of business” and without intention to prefer one creditor above another.  Note that the investor isn’t safe even after 6 months, although the onus of proof then shifts to the liquidator.

A recent Supreme Court of Appeal (SCA) case illustrates –

How an innocent investor lost R224,000

  • A Trust attracted investors to a pyramid scheme by fraudulently promising that the scheme was “viable, lawful, not in contravention of any statutory or regulatory provisions, not a pyramid scheme and that the deposits would be utilised by the Trust to purchase from certain estate agents their rights to commissions which had been earned but not yet paid”
  • When the scheme collapsed the Trust was sequestrated and the original trustees convicted of criminal offences
  • The trustees in the insolvency sued an investor for return of “undue preferences” totalling R224,000 being –
    • A first investment of R100,000 repaid after 3 months with interest of R12,000 (effectively a 42% rate of interest), and
    • A second investment of R100,000 repaid after 2 months with interest of R12,000 (effectively a 74% rate of interest)
  • As the investor had been paid out less than 6 months before sequestration, the onus was on him to prove his defence that the payments were made “in the ordinary course of business”
  • Unsurprisingly however the SCA held that the payments were clearly – on a factual, objective basis – not made in the ordinary course of business.  No matter that the investor acted innocently (it was accepted that he had no knowledge of the true nature and illegality of the scheme), he must repay to the sequestrated Trust both the R24k interest and his original R200k capital, together with interest and legal costs.  Of course he still has a concurrent claim against the sequestrated trust, but statistically that’s likely to be worth little or nothing.

The bottom line – take advice!

Take advice before you invest in anything offering suspiciously high returns.  If you decide to go ahead anyway, make sure that you can afford the risk of losing it all – because you probably will.

And if after you invest you start picking up inklings of anything irregular or illegal, get legal assistance immediately.  Some of the Court’s comments suggest that the investor’s claim would have been a lot stronger had he become aware of the true nature of the scheme and then demanded repayment of his capital, not on the basis that the investments were due for repayment but on the basis that they were illegal and void – an important distinction that might have saved him R200,000.

For more advice and practical solutions you are welcome to contact our Commercial Law or Pension Law departments.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The Panama papers, SARS and the (proposed) new SVDP

A2B“The notion that there are any safe places to hide money is a thing of the past” (U.S. tax attorney Mark Matthews)

The Panama leaks, last year’s HSBC leaks, and OECD’s “Automatic Exchange of Information initiative” all suggest that SA residents with accounts and investments in foreign tax jurisdictions should ensure that they are fully compliant with all their local and international tax and exchange control obligations.

In any doubt, take advice on the proposed new Special Voluntary Disclosure Programme (SVDP) – remember that if you consult a lawyer you will benefit from attorney-client privilege.  The SVDP was announced in the Budget Speech and is anticipated to run from 1 October 2016 to 31 March 2017.  Penalty relief and protection from criminal prosecution will only be available if applications are submitted to SARS’ VDP unit before whatever deadline is finally set – we’ll keep you updated!

For more advice and practical solutions you are welcome to contact our Company Services department.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Property and trusts – be careful!

A1B“This case yet again demonstrates the need to be careful when dealing with a trust” (extract from judgment below)

For most of us, business dealings with trusts are most likely to happen when selling a property to, or buying a property from, a trust.  But no matter why or how it happens, have your lawyer check that whoever signs for the trust is fully authorised to do so.

For want of authority, the case is lost

Otherwise you could be in for a major shock if you come to blows and need to ask a court for assistance.  Witness the case of a bank trying to enforce a trustee’s personal suretyship –

  1. A trust concluded instalment sale agreements with a bank
  2. Owed R1m by the trust, the bank tried to enforce a personal suretyship signed by one of the trustees in which she had bound herself as surety and co-principal debtor with the trust
  3. The High Court however found that the suretyship was invalid because the instalment sale agreements themselves were invalid.  They had only been signed by one trustee, whereas the trust deed required a unanimous decision by two trustees.

What to look for

  • Check the letters of authority: The Master of the High Court must authorise the trustees to act so a vital first step is to have these checked and on record.
  • Check I.D.:  Keep copies of all signing trustees’ I.D.s to avoid any dispute as to identity.
  • Check the trust deed:  The trust will only be bound by what the trustees do if their appointment and actions comply strictly with the trust deed’s requirements, such as –
    • Appointment of trustees: Check that the Board of Trustees has been properly constituted.
    • Capacity to contract:  Whilst many trust deeds authorise trustees to enter into virtually every type of transaction you can think of, some are more restrictive so make sure the trustees have authority for your particular type of contract.
    • Minimum number of trustees: If the deed requires a minimum number of trustees to be in office, they must all be in place for the trust to have any capacity at all.  In this case for example, the trust deed required there to be always between 3 and 5 trustees in place, whereas in fact there were only 2.  The only exception – and this saved the bank’s neck on this particular leg of the fight – other clauses in this particular trust deed provided specifically for the case of there being only 2 trustees, and empowered them to still bind the trust in this way.
    • Number of trustees required to act jointly:  Unless the trust deed provides to the contrary, trustees must always act jointly.  Or, as in this case, a trust deed may specify certain actions that can be carried out by one trustee acting alone, or by two trustees acting jointly, or by all trustees acting unanimously.  In this case, the deed required only 2 trustees acting jointly to enter into this sort of contract.
    • Delegation of authority:  Often, as in this case, trust deeds empower the trustees to authorise one or more of them to sign certain documents.  In the event of a dispute, you will have to prove that such authority was validly given – something the bank in this case failed to do.  Alternatively you may be able to prove ratification or inferred or “ostensible” authority (where trustees create the impression that the trustee had the necessary authority to represent them) but it’s much safer to require written proof of actual authority upfront.
    • All the other little requirements and formalities:  Even “template” trust deeds are usually tweaked in one way or another and the differences can be subtle but critical.  So as always, sign nothing until your lawyer has checked it!

For more advice and practical solutions you are welcome to contact our Conveyancing, Property, Real Estate or Wills, Estates & Trusts departments.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Employees: Are your social media posts private?

A1BOur courts have made it clear that posting derogatory or damaging comments about your employer or colleagues on social media can amount to misconduct and result in disciplinary action, perhaps even dismissal.

A recent High Court decision, although it concerned a members’ dispute rather than a disciplinary action, highlights a particular danger in this regard: Your Social Media posts aren’t necessarily as private and hidden from your employer’s prying eyes as you think they are.

A hunter hunted – illegally

  • A fall out between the two members of a close corporation resulted in the minority member, who was employed by the CC as a professional hunter and safari guide (let’s call him “the employee”), leaving the business for a rival venture.
  • He however remained a member of the CC, presumably to avoid breaching a restraint of trade clause in his employment contract.  This turned out to be a crucial factor in his downfall, because as a member he still had a fiduciary duty to act honestly and in good faith in relation to the CC and to avoid conflicts of interest with it.
  • The other member, in hunting (online in this instance) for confirmation of his suspicions that the employee was trying to steal business from the CC, unlawfully accessed his private Facebook page.  Posts on the page indeed proved that he had set up a hunting business in opposition with the CC, had actively sought to entice the CC’s clients to hunt with him, and had been disparaging of the CC and the other member.
  • The employer applied to court to interdict the employee/member from continuing with this clear breach of his fiduciary duties, and the Court had to decide whether or not to allow into evidence printouts of the illegally-obtained Facebook posts.  Without them, it seems, the employer would have had no case, so unsurprisingly the employee’s legal team fought long and hard to have them struck out.

No place to hide – be careful what you post!

The Court however allowed the Facebook printouts into evidence and granted the interdict against the employee, holding that

  • Accessing the employee’s Facebook account without his permission was indeed both
    • Unlawful, to the extent even of being a criminal offence in terms of the Electronic Communications and Transactions Act (which prohibits any unauthorised access to or interception of “any data” – in this case the CC had illegally accessed the Facebook page via another employee’s knowledge of the password); and
    • A breach of the employee’s fundamental constitutional right not to have his right to privacy, including the privacy of his communications, infringed.
  • Critically however, unlawfully obtained evidence will not necessarily be excluded by a court.  Instead, the court has a discretion whether or not to allow it after considering “all relevant factors” such as
    • The extent of the infringement of the other party’s rights,
    • The nature and content of the evidence concerned,
    • Whether any attempt was made to obtain the information lawfully,
    • “The idea that ‘while the pursuit of truth and the exposure of all that tends to veil it is cardinal in working true justice, the courts cannot countenance and the Constitution does not permit unrestrained reliance on the philosophy that the end justifies the means”.
  • In this case the employee’s duplicity was “compounded by the fact that he had denied that he was acting in this way and had also undertaken not to do so”.  His conduct, said the Court, “ought to be exposed and ….. he ought not to be allowed to hide behind his expectation of privacy: it has only been invoked, it seems to me, because he had something to hide”. 

The bottom line – our fundamental rights to privacy, as much in cyberspace as in the real world, are by no means absolute.  Be careful what you post! 

Employers: What about you? 

This case is by no means carte blanche for hacking into your partners’ or employees’ Social Media pages.  Quite the contrary; online hacking is unlawful with potentially serious consequences in the criminal, civil and labour courts.  All it illustrates is that in certain specific circumstances, workplace wrongdoers will find nowhere to hide in our privacy laws. Have in place an employee Social Media policy and take full advice on your specific circumstances.

For more advice and practical solutions you are welcome to contact our Employment Law (link) or Intellectual Property & Information Technology Law (link) departments.

© DotNews, 2005-2016. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omission. (E&OE)

Beware, nothing lasts forever (not even powers of attorney from your aging parents)

A2BIf your aging parents have asked you for help with making decisions as to their personal welfare, financial affairs, medical treatment and so on, asking them to sign a power of attorney in your favour may be the answer.  Just be aware that it is only a temporary solution.

Let’s firstly distinguish between the two types of power of attorney you are most likely to come across –

Special or General?

  1. A special power of attorney allows you to act as agent for the “principal” (the person granting the power of attorney) in either a specific transaction or in a limited, specified range of matters.  For example if you have ever sold, bought or mortgaged property you will have signed a special power of attorney authorising a conveyancer to act for you and to sign documents for you in the registration process.
  2. You have probably also come across the concept of a “general power of attorney”, in which you are authorised to act generally as the principal’s agent.  This will be very widely worded so as to be all-encompassing and is probably the best option for most “aging parent” and similar scenarios.

The automatic termination danger

As you would expect, a principal can cancel his/her own power of attorney at any time, but what is not so widely known is that it will automatically terminate if and when the principal

  1. Dies; or
  2. Becomes insolvent and his/her estate is sequestrated; or
  3. Becomes mentally incapacitated in the sense of being no longer able to make his/her own decisions (for whatever reason – perhaps a stroke, coma following an accident, mental illness, Alzheimer’s, general age-related diminishing capacity etc).

It’s this last category – the “diminished capacity” scenario – that catches most care-givers unawares.  After all isn’t the whole idea that you should be able to act for your parents when they are no longer able to act themselves?

The problem is that our law says that an agent can only do what a principal can do.  So if a principal loses “contractual capacity” to do something, the power of attorney immediately fails.

As a care-giver you risk personal liability for anything you do, even in the best of good faith, after the principal has lost capacity.

The curatorship and other options

Our law certainly provides a solution – you can ask the High Court to appoint a “curator” to manage the principal’s affairs.  Unfortunately curatorship is costly, full of bureaucratic procedures and delays, paternalistic and, being public, demeaning to the principal.  Not much better is the appointment, in cases of actual mental illness or severe/profound intellectual disability, of an “administrator” in terms of the Mental Health Care Act.

Setting up a family trust to address the purely financial aspects could also be worth considering.  Just be aware of the costs, tax and other implications – particularly in light of government’s ongoing suspicion of trusts.

Finally, the South African Law Reform Commission in 2004 recommended changes to our law to allow for alternatives like –

  1. An “enduring power of attorney” (or “EPA”) which would remain valid despite the subsequent incapacity of the principal; and
  2. A “conditional power of attorney” which would come into operation only on the incapacity of the principal.

Unfortunately nothing has come of that yet, and although some legal commentators suggest that our courts might perhaps uphold a properly-worded EPA, others disagree and clearly there are risks involved.

It boils down to this – take full legal advice on your particular circumstances.

For more advice and practical solutions you are welcome to contact our Wills, Estates and Trusts (link) department.

© DotNews, 2005-2016. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omission. (E&OE)

Rates up after a property revaluation? Object, but do it properly!

A3BYour local municipality is entitled to revalue your property (with reference to recent sales of similar properties in your area) at regular intervals.

Of course any upward valuation means more money out of your pocket every month because the rates you pay are arrived at by multiplying your property’s municipal valuation with the municipality’s current “rates factor” as set by it in its budgeting process.

Municipal valuers must, at least every four years, prepare a general valuation roll with particulars of each property as at the date of valuation, and you must be given notice that you can lodge an objection.

This is of course your chance to convince the municipality that its valuation is wrong; just be sure to lodge your objection within the specified time limit, in the specified format, and with sufficient detail.

A terse exchange; and a botched objection

A recent High Court case shows clearly the danger of neglecting the part about giving enough detail –

  • A property owner Trust’s objection to a revaluation gave as the reason for objection: “Subject property has been vacant for 18 months. Market has declined therefore the market value of my property should also be reduced.”
  • The municipality dismissed the objection and, when asked for reasons, replied in equally terse fashion: “The information submitted by the objector is insufficient to justify a change in valuation.”
  • The trust asked the Court to order the municipality to give “adequate reasons” for dismissing the objection.

Give full reasons or fail 

The Court held against the property owner, commenting that: “This was an objection in the tersest of terms in which no particular challenge was raised to the conduct of the valuation by the municipal valuer as is provided for in terms of the Rates Act……… No substantive information was submitted to challenge or dispute the valuation that had been undertaken”.

The message is clear – just lodging your objection isn’t enough to force the municipality to give detailed reasons for its valuation.  You need to word your objection properly and fully to achieve that.

For more advice and practical solutions you are welcome to contact our Conveyancing, Property and Real Estate (link) department.

© DotNews, 2005-2016. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omission. (E&OE)

Your April website: Is big brother tracking you?

A4BHere’s a potential online privacy concern you should be aware of.

If you use Google Maps, go to www.google.com/maps/timeline (you’ll need to log in) and have a look at your “Timeline”.  Red dots mark the places you’ve been to – double click on them for details, a map of your routes, and linked photos.  Or search by date to see where you were, where you went, and how long you stayed there.

That’s great stuff if you want to browse back down memory lane, or prove your whereabouts on a particular day.  Or perhaps you need reminding of the name of the B&B you stayed at or the great restaurant you ate at.  But it’s also a bit creepy if you’re passionate about your privacy.

Go to Google Help https://support.google.com/ and search for “Location History” to see how to turn it off or to modify/delete particular entries.

For more advice and practical solutions you are welcome to contact our Intellectual Property & Information Technology (link) department.

© DotNews, 2005-2016. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omission. (E&OE)

Copyright infringement: A R10,5m award fires a warning shot

A5BA High Court award to an aggrieved copyright holder has fired a strong warning shot across the bows of potential infringers.

The background is that two municipalities had, without authorisation from the holders of copyright in a computer program, copied it after an initial licence agreement had terminated.  They then illegally changed security keys and expiry dates so that they could continue using the program without paying any fees.

The Court, in addition to interdicting the municipalities from continuing to hold or use the program and authorising the copyright holder to check the municipalities’ computer systems for compliance, also awarded it R10,5m in “reasonable royalty” payments (plus monthly royalty payments from date of summons, interest and legal costs).

It seems that copyright infringers who think that the worst sanction they face if they get caught is an interdict, some legal costs and a nominal damages award, could well be in for a major shock.

For more advice and practical solutions you are welcome to contact our Intellectual Property & Information Technology (link) department.

© DotNews, 2005-2016. This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omission. (E&OE)