Issue: March 2013 / May 2013
Editorials

LITIGATION

CURATORS GO FOR DEEP POCKETS

Decision awaited in Standard Bank appeal against Mostert victory. At least two other significant actions, involving pension-fund moneys, could follow.

When it comes to the big money, it’s much better to attack the big guns. They have the resources to make big payments. They also have big reputations that can be tarnished by allegations of unfairness or inefficiency. They’re also averse to incur the wrath of the regulator. Institutions are frequently at risk of being painted as bullies against the curators as white knights; rarely the other way around.

On some occasions, business sense inclines institutions to succumb to settlements. This was seen most prominently in the huge payouts by Alexander Forbes and Sanlam to Tony Mostert, curator of the funds in the so-called “Ghavalas option”, to avoid a protracted court battle where victory and reputational outcomes can never be certain.

On other occasions, it’s worth fighting. Perhaps the most celebratedcase, popularly at curators’ elbows, was Mostert’s triumph over Old Mutual in a 2001 decision of the Appeal Court (see box). Equally important are current cases, recently heard or still to be heard and defended, where the Mutual judgment in Mostert’s favour might have relevance for precedent.

There are three: Standard Bank’s appeal against an award to Mostert as curator of the SA Catering & Allied Workers’ Union (Saccawu) provident fund; an action by the curators of Corporate Money Managers (CMM) against Absa, and possibly also a claim by the Fidentia curatorson behalf of Living Hands Trust against Old Mutual.

Once these matters are finalised, an aspect worth attention is the awards for legal costs. If an institution wins, will it still be liable for a chunk of its costs? And if the curators lose, are they or pension-fund members on the hook?

Standard Bank and Saccawu

Decision awaited

Sitting as arbitrator, in December retired Appeal Court judge Louis Harms ordered that Standard hand over R527m worth of shares to the Saccawu provident fund represented by curator Tony Mostert. The bank would also have to pay dividends and penalty interest on these shares – in MTN, Naspers, Avusa and Element One – possibly amounting to a further R200m.

This was for share trading in 2002. The shares were part of Johnnic prior to its unbundling. Harms held that Standard, custodian of the shares owned by the Saccawu fund, should not have transferred these shares for Standard Corporate & Merchant Bank to execute a hedging strategy. The transfers of ownership, to outside buyers, had contravened the fund’s rules.

Standard, said Harms, had been “grossly negligent” in allowing the transfers. It and SCMB had taken “a calculated risk for commercial gain in getting involved in the trading of these securities”.

Mostert has been curator of the Saccawu fund for the past 10 years. On learning of the Harms decision, he is reported in Personal Finance to have said: “The behaviour of Saccawu and former trustees of the fund had been scandalous in delaying and not assisting the recovery to members.”

However, Standard has appealed against the Harms finding to a panel of three arbitrators. The panel comprises retired Appeal Court judges Smalberger, Howie and Nienaber (coincidentally, Smalberger and Howie also having served on the bench that ruled for Mostert against Mutual in 2001). Amongst the bases for Standard’s appeal:

  • The transactions took place in 2002 under a written agreement between the bank and the fund. Sold by the bank to the fund was a defensive position, for the fund to have a floor on the share prices, allowing the bank to trade in the shares and hedge its position;
  • On becoming curator of the fund, Mostert asked the bank for details of the transactions. These were supplied. For the next three years, not only did the bank hear nothing from Mostert but he had signed off the fund’s annual financials;
  • These financials included recordal of the transactionsí details. They also included disclosure of the fundís actuarial surplus, properly certified, and the fact of the bank guarantee. These had been accepted by Mostert as true and correct;
  • Instead of the share prices falling through the defined floor (where the bank would have been exposed), over time they exceeded the ceiling (where the bank participated in profit). At this point Mostert served summons on the bank. He made allegations of bribery and claimed that the original agreement, between the bank and the fund, was void because it had been signed by the fund’s principal officer and not by three trustees;
  • The bank says that the trustees had delegated to the principal officer their authority to sign the agreement. This had been warranted by the principal officer who had produced signed minutes of the relevant trustee meeting;
  • There had been full compliance by the bank with s91A of the 1973 Companies Act, then applicable, which deals with uncertificated securities (shares on the STRATE register). It sets out strict rules on transfer of these securities, in order to protect the market from the risk of disputes on passing of ownership;
  • By his conduct, Mostert had approved the agreement and transactions.

STOP PRESS

As this TT edition went to the printers, the appeal tribunal overturned the award made by the single arbitrator (Harms) and ruled that the dispute be remitted back to him. It found that the agreement with Standard which the curator (Mostert) impugns was voidable and not void, that the curator is not bound by the Saccawufund rules, and that the single arbitrator should now complete the arbitration subject to such findings.

This will require an amendment by the curator to his claim, possibly taking the matter outside the arbitrator’s jurisdiction.

After seven years, however, Mostert took the view that the agreement (and hence the transactions effected from it) was void. The matter then went to arbitration, Harms deciding for Mostert solely on the basis that the agreement should have been signed and not delegated by trustees of the Saccawu fund.

CMM and Absa

To be defended

Expected for hearing within the next few months is a R1,1bn claim against Absa by the curators of Corporate Money Managers. Absa was trustee of a cash-managed fund in the CMM portfolio. The CMM curators (attorney Graeme Polson of Rooth & Wessels and forensic accountant Louis Strydom of PricewaterhouseCoopers) contend that Absa had failed in its duty of care.

In the summons served on Absa, the curators calculate that individual investors in the fund had lost R849,2m and the Altron Pension Fund R48,4m. Interest payments are added.

Last June the curators reported to the FSB (TT June-Aug ’12). They noted that they had requested counsel opinion on their chances of succeeding with a claim against Absa on behalf of the investors for its failure as trustee to apply its mind to the nature of the assets and to the compliance or non-compliance by CMM with the Collective Investment Schemes Control Act.

They’d already been advised that, on the merits, their chances of success were good. However, they then awaited a written opinion because they were reluctant to embark on litigation “without absolute certainty” of the outcome. If successful, they said, “we could pay all the investors from the proceeds of this claim. The investors feel strongly that the action against Absa must be pursued”.

Doubtless, Absa will defend it. Litigation, protracted and expensive, lies ahead.

Fidentia and Old Mutual

Matter of opinion

There’s a due diligence report, prepared by counsel for law firm Wertheim Bekker, into the merits of proposed litigation by Living Hands Pty (LHP) against Old Mutual and others. If litigation is to proceed – Fidentia curators Dines Gihwalaand George Papadakis would possibly have to instigate it -- the amount involved could also be of the R1,1bn order.

The issue was whether the conduct and omissions of Old Mutual reveal a breach of the duty owed to the Living Hands Umbrella Trust (LHUT), said counsel Hilton Epstein SC and Andy Bester: “In our view, LHP has a good prospect of establishing on a balance of probabilities that the duty owed to the trust was breached and, further, that the remaining criteria to establish liability and delict (civil wrong) will be established.”

LHP was a trust-administration company and the corporate trustee of LHUT. In turn, LHUT was the custodian of beneficiary funds received from the beneficiary funders, mainly the Mineworkers Provident Fund. The fund paid money to LHUT which administered it for the benefit of fund managers.

Relevant background is set out in the opinion. Briefly:

  • Back in September 2004, Fidentia Holdings showed interest in buying Living Hands, formerly known at Mantadia Asset Trust Company (Matco) for R93m. Old Mutual Unit Trust Managers had an agreement with Matco. This agreement governed the management of the funds for the investors, also regulating administrative matters between Mutual and Living Hands;
  • The shares in Living Hands were sold to Fidentia, but Fidentia did not have R93m;
  • Living Hands appointed Fidentia Asset Management (FAM) as portfolio manager for funds held by Matco (which later became LHUT);
  • Whereas Mutual held a restricted mandate, FAM was given full discretion to move funds within the portfolio and to make investment decisions;
  • In October 2004, FAM instructed Mutual immediately to liquidate R150m of Matco assets and transfer this amount to FAM. From these funds, Fidentia paid the purchase price for Matco;
  • Also in October 2004, Mutual was informed by letter that FAM had been mandated to liquidate the entire portfolio, or portions of it, as FAM deemed fit;
  • The funds redeemed by Mutual from Matco, and paid over to FAM, exceeded R1,1bn. This amount was then dissipated and depleted;
  • Fidentia was subsequently placed under curatorship.

In essence, according to the opinion, Mutual’s conduct had caused loss in that:

  • It was the custodian of the funds;
  • Mutual was given notice of the mandate’s termination. It had immediately accepted termination although, according to the agreement, there had to be 90 days’ written notice;
  • Money held under Mutual’s custody was used by Fidentia to purchase Matco (over which Fidentia had already assumed control and appointed FAM as portfolio manager);
  • In an extremely short period, Mutual realised all the funds under its control. The moneys were paid to FAM “which misappropriated all the money, thus causing the loss”.

Counsel advised that only Mutual should be sued because it would be in a position to meet the claim.

FAMOUS FLASHBACK

Famous Flashback
Mostert...notable precedent

In 2001 the Supreme Court of Appeal ordered that Old Mutual pay R128m in damages, plus interest for seven years, to Tony Mostert as curator of the CAF pension fund. This amount should not have been paid by Mutual from the fund which it had underwritten and administered by way of an insurance policy.

Laurie and Jan Korsten, brothers who controlled a private company called Corporate Acceptances Finance (CAF), had attempted to have the fund changed from underwritten to privately administered. These attempts were legally invalid, yet Mutual had paid over the money from the insurance policy and CAF had administered it.

“At all material times, what was left of the payments (which had intermingled with CAF’s own moneys) remained in the account of CAF and under its control,” the court noted. This was precisely what the Pension Funds Act sought to avoid.

CAF was not an approved fund, let alone the underwriter of an approved fund. It was not entitled to receive any moneys on behalf of the fund, or to have become its “investment manager”, for so long as the fund remained underwritten. Mutual’spayment to CAF “was no more than an invalid purported compliance with an invalid directive,” it held. “Mutual should have refused to pay because the instruction given required it to act in breach of its contractual obligations.”

Although Mostert would have been entitled to look only to Mutual to recompense the fund, said the court, he cannot be faulted for having taken “wide precautionary steps” to pursue “perceived rights of action against the Korstens and their companies”. Mostert undertook to repay to Mutual any moneys received from other recoveries.

The court lauded him for having “clearly acted to protect the fund’s interests”.