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Your financial adviser leads you into a disastrous investment. Can you sue?

Although, in principle. the law gives you a right to claim compensation for the financial loss you have suffered as a result of being given negligent advice by an expert investment adviser, you are likely to find that your lawsuit is far from plain sailing. A recent judgment of the Supreme Court of Appeal is a stark illustration of the difficulties you may face in such a claim.

You have lost a small fortune on the stock market. Can you sue your investment adviser for damages?

Assume that, in 2007, you had a substantial amount of money that you wished to invest, and that you consulted a financial adviser for expert advice as to how you should invest it.

Assume that this expert advised you to invest your money in the share market, that you followed his advice, and that you now sit with shares that are worth less than half of what you paid for them two years ago.

Can you sue that expert for the financial loss you have suffered? The answer is - certainly you can sue. But, on these facts, you would almost certainly lose the case.

The reason is to be found in the somewhat similar case that recently came before the Supreme Court of Appeal in mCubed International (Pty) Ltd v Singer NO, where judgement was given on 11 March 2009, which reversed a judgement of the Cape High Court.

In this case, an affluent businessman, Singer, owned assets worth some R76 million. In August 2001 the rand was declining sharply against other currencies, including the US dollar, and Singer's accountant suggested to him that he should remit some of his investments off-shore and hold them in a foreign currency, so that the funds would be insulated against a further decline in the value of the rand.

At this time, the rand had depreciated in value against the US dollar by some 17% in the previous five years, and experts in the field were predicting that it would continue to devalue at the same rate for the next five years.

Singer then consulted an expert from a company called mCubed, who suggested a fairly complicated investment structure that would enable him to convert his rands into US dollar-denominated investments. In March 2002, Singer invested R10 million in accordance with the suggested plan, and the investment was then worth US$865 000.

It was then discovered that the investment structure implemented by mCubed had been a contravention of South Africa's exchange control regulations.

Singer therefore cancelled the investment contract, and the investment was repaid to him. At this point in time, the investment had increased slightly in value in terms of US dollars, being now worth US$910 252.

But, in the meantime, and against all expectations, the rand had increased in value, and when the investment was cancelled and repaid in rands, Singer received only a little over R6 million - he had lost R3 884 958!

Singer sued Mcubed for R3 884 958 in damages.

In its judgement, the Supreme Court of Appeal said that - even assuming that mCubed's advice had been negligent, Singer had still not proved that mCubed was legally liable to pay him damages.

Why? Because, Singer had already decided to invest R10 million in a US dollar-denominated investment and, if he had not used mCubed's unlawful investment plan, he would have taken out another investment in US dollars and would have lost the money anyway.

So, the court gave judgement against Singer and in favour of mCubed, and ordered Singer to pay mCubed's legal costs in the Supreme Court of Appeal and in the Cape High Court - which probably cost him another million rand.

So, to return to the hypothetical question at the beginning of this note, if you had invested money in the stock market, on the advice of an expert in 2007, you would not succeed in getting a judgement against him for damages if it was clear that you were going to invest money in the stock market anyway, because your investment would have halved in value no matter where you invested it, because stock markets all around the world have plunged.

In other words, the investment advice that you received did not, in a legal sense, "cause" you to suffer financial loss, because you would have suffered the loss anyway.

This, is of course, a simplified example, but it illustrates a key point. Just because you followed expert financial advice and ended up losing a lot of money, does not automatically mean that you will succeed, in a court of law, in obtaining judgement against your adviser for the monetary loss you have suffer

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