As much as you would like to trust an adviser, verbal promises count for little if you decide to make a claim after losing a bundle, and you will only add legal fees to your tally of losses.
If you want to hold someone accountable for misleading you into a sham deal, you must show that you were fed fake information, such as when an investment was sold as genuine when it was actually fraudulent.
But it is hard to accuse someone of wrongdoing if the person is making an overly optimistic assessment based on something that has yet to happen, such as claiming that the investment will keep doing well in the future.
The High Court has ruled that to succeed in a claim involving misrepresentation, claimants must show that they have relied on statements based on existing facts.
This means that you will not get your money back if you choose to make decisions based on statements unsupported by facts, such as claims on “future intention, predictions, statements of opinion or belief, sales puffs, and exaggerations”.
This important reminder was highlighted in a recent dispute in the High Court involving two Singaporeans who invested $700,000 in a foreign company, thinking that it would be listed on the stock exchange and continue to pay a 9 per cent dividend annually.
When the company went bust, they sued the deal promoters but lost because they could not prove that they were misled into the deal.
Here are three lessons from the case that you should know.
Dividends never guaranteed
All investors should know that no company will put itself in a bind by declaring a guaranteed dividend policy.
In this case, the investors claimed they were misled because they were told that the shares they bought had an annual dividend yield of 9 per cent. But the dividend eventually declared was only 7 per cent, and based on the original share price that was far lower than the price they had paid.
The investors acknowledged during the trial that they knew there was no such thing as an “iron-clad dividend policy”. They also admitted that they did not seek a guarantee and that the fund manager who sold the deal merely represented that the company was “likely to maintain 9 per cent or even better”.
The court found that such a statement was not a falsehood, but a prediction of future events which may not happen.
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Proof of reliance
It is easier to show that a layperson has been misled into a deal if the terms are so complex that only finance professionals can make sense of them.
It is hard for savvy investors who are finance professionals themselves to claim that they have been misled, given that they would have the expertise to understand what they are buying into.
The main investor here was skilled in conventional and alternative investments, and was even capable of structuring the deal to include a “referral fee” for himself.
The court found that such a sophisticated investor would have known that sound investments would be grounded in diligent research rather than partial, overly optimistic projections of future performance delivered as part of a marketing pitch.
Indeed, the investor also conceded that the fund manager’s task was “to pitch the investment in as glowing terms as possible” because it had an incentive to be optimistic about its business.
Future events
You should never make any investment based on future promises because such statements are mere empty words.
In this case, the court found that the 9 per cent dividend representation was a promise related to “future conduct”.
Similarly, the representation that the company would be “going to IPO next year” was a remark on a possible future event, an initial public offering.
While many investors like to base their decisions on such forecasts, they should know that if things go south, they would only have themselves to blame for not making careful checks.
So the lesson here is simply this – don’t be taken in by promises of good returns unless such terms are written into your investment contracts as guaranteed payments.
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Tan Ooi Boon writes for and oversees the Invest section of The Straits Times.
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