Sharemax's directors told their auditors they made a "copy and paste" error in the prospectus of the Zambezi property syndication that misled investors about the security of their investments.
This is revealed in the latest determination by Noluntu Bam, the Ombud for Financial Services Providers, in which she orders an adviser, who is an accredited Certified Financial Planner, as well as Sharemax and four of its directors, to make good the loss suffered by an elderly woman who invested in the scheme.
The Zambezi property is now an empty shopping centre, and millions of rands need to be spent to rectify problems with the roads around the centre, the ruling reports.
Investors stopped receiving payments in 2010.
In her latest ruling, Bam relates replies from Advoca Auditors, then known as Act Audit Solutions, to her questions about whether the auditors reported the transfer of investors' funds out of the trust account of Sharemax's attorney, Weavind & Weavind, to the developer of Zambezi as an irregularity to the Independent Regulatory Board for Auditors (Irba).
The transfer was irregular because the Zambezi prospectus stated that investment funds would remain in the trust account of Weavind & Weavind until the property was transferred into investors' names.
Property syndicates are also required to keep investors' funds in an attorney's trust account until the property is transferred to the syndicate. This is in terms of a general notice issued under the Consumer Affairs (Unfair Business Practices) Act by the Department of Trade and Industry (DTI) in 2006.
The promise that funds would be held in a trust gave some peace of mind to investors such as 73-year-old Mrs B, who invested R490 000 in Zambezi on the advice of her financial adviser, Edward Carter-Smith.
Bam says most investors would not have participated in the syndicate had they been informed their funds would not enjoy the protection of an attorney's trust account.
But despite the DTI's notice saying it applied to all property syndications, Advoca told Bam it obtained legal advice that the general notice did not apply to the Zambezi syndication or Sharemax's other troubled scheme, The Villa.
Advoca also told Bam that the Sharemax directors said the transfer of the money from their attorney's trust account was no reportable auditing irregulatory because the reference to the money being held in trust should not have been in the prospectus and was a "bona fide 'copy and paste' mistake" made during the drafting of the prospectuses.
Bam says it is "startling" that the directors are claiming there was a mere mistake in the prospectus, as it was a material clause and the prospectus had been issued repeatedly between 2007 and 2010.
The ombud says the claim is disingenuous and against the probabilities.
She says the auditors do not give any details about when the error was discovered and what action, if any, was taken to inform investors.
Bam says the auditors did not accept the directors' explanation and reported the matter to Irba anyway. However, they did not report the matter timeously, she says, and they ought to have known that investors' money was being lent to the developers of Zambezi, who used the same funds to pay 14 percent interest back to Sharemax.
In an earlier determination, on a complaint by Mrs S, a widow who invested R649 000 in Zambezi, Bam also asked Sharemax's directors to explain the irregularity, and reported Weavind & Weavind to the Law Society.
In her latest ruling she says she found their explanation "unacceptable".
The only reasonable conclusion that can be drawn from the directors' conduct is that they were "involved in a scheme calculated to defraud members of the public", the ombud says.
Bam says Sharemax was a Ponzi scheme and its directors broke the law.
For this reason, as in the earlier matter, Bam found Sharemax and its four directors, Gerhardus Goosen, Johannes Botha, Dominique Haese and Andre Brand, liable together with the adviser who recommended the scheme to the pensioners.
A company trading as Unlisted Securities South Africa, which allowed advisers and brokers who were not qualified to use its licence to sell Sharemax to investors, was also held liable.
Sharemax has appealed the earlier matter.
Bam says Mrs B complained that she and her 71-year-old husband were in poor health and had told Carter-Smith she was a conservative investor and did not want "all her eggs in one basket".
Carter-Smith told Bam that Mrs B had invested in the PIC (Picvest) property syndicate previously and she found the Sharemax syndicate better suited to her needs.
Carter-Smith told Mrs B she could earn a 50-percent return on Zambezi in the first year, and the risks were as remote as that of the banks collapsing
Bam says that, as an adviser with 25 years' experience, CarterSmith should have realised that a return of 50 percent "is ridiculously extravagant" and questioned how it was possible.
She says Carter-Smith failed to comply with the code of conduct under the Financial Advisory and Intermediary Services Act by failing to give advice "honestly, fairly, with due skill, care and diligence".
She says Carter-Smith failed to apply his mind to the fact that Mrs B was a pensioner, unable to tolerate risk, and she had asked for her capital to be guaranteed with some growth and an income. Carter-Smith asked Mrs B to sign a disclosure document that made it clear that Sharemax represented a risk to capital and that income was not guaranteed.
He also failed to offer Mrs B alternative products, Bam says.