Business Practices Committee Report 79

On 9 June 1999 money revolving schemes, which include multiplication schemes, chain letters and pyramids promotional schemes, were declared harmful business practices by the Minister in terms of the former Harmful Business Practices Act, 71 of 1988 (the former Act). The order of the Minister followed from a section 8(1)(b) investigation into money revolving schemes.

The promoters of multiplication schemes invariably claim that money invested by "investors" with them could be "multiplied" a certain number of times within a specific time, such as "... multiply your money by 5 in 24 hours" or "... multiply your money by 3 in 14 days". The Metro share offer to the public is a multiplication scheme, because it stated implicitly that a shareholders investment could be multiplied by 1.525 times in a years time. The advertisement copied in section 5 stated that R40 000 will grow to R61 000 after 12 months and R40 000 times 1.525 is R61 000.

The order of the Minster states that it is a harmful business practice, in terms of the former Act, to offer or promise or guarantee an effective annual interest rate of 20 per cent and more above the REPO rate, as determined by the South African Reserve Bank, to any investor, whether or not the investor becomes a member of the lending entity. The applicable REPO rate is that which applied at the date of the Investment. The effective annual interest rate is:

where:

r = the effective interest rate,

R = the interest in rand, which is the difference between the amount paid out to the investor and the amount invested,

C a the amount invested by the investor or any amount paid by a person to become a member of a scheme, and

T = the period of the investment in months.

The effective interest rate, applied to the advertised offer by Metro, was 55 per cent. On 9 June 1999 the Repo rate was 15.375 per cent (see Money Market Accommodation, Selected daily indicators, Quarterly Bulletins of the South African Reserve Bank, September 1999, December 1999 and March 2000) and since then there has been a steady and continuous decline in this rate and it is now (15 May 2000) 11.75 per cent. Thus, since 9 June 1999 Metro offered or promised or guaranteed an effective annual interest rate of 20 per cent and more above the Repo rate, as determined by the South African Reserve Bank, and in the process transgressed the order of the Minister. This report will be brought to the attention of the Commercial Crime Unit of the South African Police Services.

It is possible that various sections of the Companies Act, 1973 (Act No 61 of 1973, as amended) have been transgressed by Metro, Holsthauzen and Bezwick. For example, it is stated in section 85 of the Companies Act that: "The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company". Dividends, or rather, interest in the guise of dividends, were paid to investors and at no stage did Holsthauzen and Bezwick have figures, in the form of interim financial statements or management accounts, at their disposal to confirm that Metro had indeed made a profit. There Is a strong possibility that Metro traded while being technically insolvent. This report will also be brought to the attention of the South African Companies Registration Office.

A number of investors claimed that Holsthauzen, and certain other persons closely associated with him, siphoned huge cash amounts from Metro. These investors were advised to lay charges of fraud against the persons concerned at their nearest police station.