Issue: June - Aug 2013
“Something is sorely wrong”, said the judge. Indeed there is.
Brown . . . sore wrist
There should logically be a stage-by-stage continuum between an investigation by the Financial Services Board, its production of a report and then the placing of an institution under curatorship where considered by the FSB to be necessary in terms of
Once under curatorship, the primary role of the curator is to protect the interests of those who’d invested in the institution. It can be done either by attempting to restore the institution to health or, failing this, to realise the institution’s assets for the investors’ optimal benefit.
The complementary role is to pursue wrongdoers for punishment.
Throughout the process, the veracity of the FSB inspection report is central. It guides the curators in the performance of their duties and, where wrongdoing is found, it lays the basis for successful prosecution.
In the trial of former Fidentia boss J Arthur Brown, the continuum was disconnected. There was no interrogation of there port that had been prepared by a senior FSB official. There was no call on the curators to explain what their investigations had revealed. It beggars belief that the prosecution was conducted in this way unless, in its wisdom, it feared that their evidence would be more harmful than helpful to the state’s case.
The FSB official presented evidence, only in aggravation of sentence, after Brown’s conviction. He should have been the first witness the state brought, Justice Veldhuizen remarked at the time, or he might have rejected Brown’s plea and forced the state to proceed with prosecution: “How can I sentence the accused on facts that indicate that there has been theft when there has been no conviction for theft?”
By sidelining the FSB and the curators, justice has been denied. There was opportunity for them neither to testify in support of the indictment nor be cross-examined. Why, oh why, was the FSB not called before conviction and why were the curators not called at all? It leaves the entire matter unsatisfyingly incomplete, the pre-trial publicity hopelessly at odds with the trial’s outcome.
Without their evidence, Brown was convicted on two minor charges for which he’d pleaded guilty. Much more serious charges were abandoned. Inexplicably, the state accepted that Brown never intended to cause actual prejudice or damage. The best an astounded court could do was impose a R150 000 fine.
Pre-trial hype, derived from FSB and curator reports, creates the benchmark for public expectations. It can also frighten individuals into plea bargains and embarrass institutions into settlements. But it cannot provide a basis for conviction and sentence when their contents (“if correct”, as the judge noted) aren’t tested at trial.
The state says it will appeal against sentence. Brown says he’ll take on the curators, for them and not him having caused the Fidentia losses. This matter might still have a way to go.
Shades of Masterbond, where the directors were eventually imprisoned for long terms? Conversely, remember what happened with Fedbond?
Vilified while under curatorship but vindicated after a four-year battle through the courts by chief executive John Field, Fedbond was ultimately turned into the thriving FedGroup. That’s without thanks to the FSB, the curators and the Scorpions who’d tried their utmost to kill it notwithstanding the cost to investors.
It must be with feeling from his own experience that Field has pledged R1m from FedGroup to help mineworkers dispossessed in the Fidentia debacle. Field, a vociferous critic of the curatorship system because he has first-hand knowledge of its defects, points out that beneficiaries have no way of paying attorneys or forensic accountants to trace their monies.
Thrown into sharp relief is the correlation between curatorship costs and benefits to investors.
In the case of Fidentia, the curators are Dines Gihwala (an attorney) and George Papadakis
(a forensic accountant). By early 2012 they’d knocked up over R60m in fees. Only when they finally account can it be assessed whether the fees were well spent or whether investors are left more with a sour taste in their mouths than money in their pockets.
Issues on curatorships and costs arise from other matters too.
Trial of Simon Nash
It appears to be going nowhere fast. Now well into its third year, it’s also onto its third prosecutor. To get up to speed, he’ll have to study documents and trial records running to over a million pages before the hearing resumes in September.
Nash – in perpetual dispute with curator Tony Mostert - is the first person to have defended the charges brought against him for surplus stripping under what’s known as the “Ghavalas scheme”.
When the trial was supposed to have resumed in March, the presiding magistrate at the Johannesburg Specialised Commercial Crimes Court called in the prosecution and defence teams. The trial can only proceed, he told them, when “mastermind” Peter Ghavalas arrived in the witness box.
Fair enough, because his evidence and cross-examination are essential. But there are a few problems.
Ghavalas now lives in Australia. He was allowed to return there after having reached a plea-bargain agreement with the state, refunding a slice of his takings and being granted indemnity from prosecution provided he returned to SA when required to give evidence against his former clients.
If he returns, he’s assured of a memorable experience in the witness box. He could also find himself facing charges of perjury where sworn affidavits he’d signed before and after his plea bargain are contrasted.
If he doesn’t return, he’ll be in breach of his plea bargain and so extinguish his indemnity. But SA has no extradition agreement with Australia. At this stage it cannot be guessed whether the trial can proceed or will have to be abandoned.
Legal costs would by now be running well into seven figures for the defence and prosecution.
TT asked the National Prosecuting Authority how much it had budgeted for the trial, how much of this budget had already been spent, and how much more it intended to spend.
Although the NPA promised to respond, it has not done so.
They apply when the curator goes at risk. Nothing recovered, nothing made. The more recovered, the more made. Tony Mostert, the most prominent curator being remunerated by receiving a proportion of amounts recovered, has made many millions.
Although the proportion had been authorised by the High Court at 25%, in practice (by agreement with the FSB) it has dropped to slightly below 20%. Mostert is an attorney heading his own law firm.
Earlier this year, in cases involving the Road Accident Fund, there were two Gauteng judgments on contingency fees. They held that this “success fee” could be up to double the attorney’s usual fee, or 25% of the amount recovered if the matter relates to a claim for money, whichever amount is lesser.
Would these judgments affect retirement funds under curatorship where contingency-fee arrangements apply? Might they cause the FSB to call for these fees to be taxed in order that the lesser amount is determined?
No, says FSB executive officer Dube Tshidi: “A contingency-fee arrangement will apply to a curator if endorsed by an order of court, or agreed in terms of an order of court following an application by the Registrar (of Pension Funds). The High Court judgments referred to dealt with contingency-fee arrangements entered into by legal representatives with their clients involving claims against the RAF. It has been held that these latter contingency arrangements can only be agreed upon in accordance with the Contingency Fees Act. The judgments referred to therefore do not affect curatorships of retirement funds.”
A majority decision in the Supreme Court of Appeal has dismissed an appeal by Tony Mostert, as curator of seven pension funds engaged in the surplus-stripping “Ghavalas scheme”, against a judgment of the Johannesburg High Court.
Implications for the funds, potentially to be some R600m better off, will depend on whether Mostert succeeds in the Constitutional Court on an appeal against the SCA decision. If he does succeed, there might still be a problem of prescription.
The aggregate losses suffered by the funds, due to the surplus strips, exceed R900m. The funds had issued summons against Alexander Forbes, an alleged wrongdoer, which then gave notice under the Apportionment of Damages Act (ADA) for other alleged wrongdoers (Simon Nash, Midmacor Industries, Aubrey Wynne-Jones, Nedbank and Graham Somerville) to join it in the proceedings. None accepted Forbes’ invitation.
Tshidi . . . no need to review
In 2009, Forbes settled the claim against it (without admitting liability) by paying R325m. It also purported to cede to the funds its claims for contributions, in terms of the ADA, from the other alleged wrongdoers. The funds then sought to exercise the right that Forbes had purportedly ceded to them by launching claims, for the balance of the losses, against the other alleged wrongdoers.
They excepted, arguing that Forbes had settled all the claims for the funds’ losses. In the Johannesburg High Court, Justice Sutherland upheld their exception.
Taken to the SCA, two judges upheld the funds’ appeal while three judges dismissed it.
The majority held that the purpose of the ADA is to allow an adjustment of the burden of liability amongst wrongdoers after a claim has been finalised by one of them. But the ADA did not apply here.
This statutory ADA remedy, which doesn’t exist in common law, cannot operate if the total claim against joint wrongdoers is settled. Forbes had settled only the claim related to it. Under the ADA, however, there was no right of recourse against other wrongdoers that Forbes could have ceded.
Unless the funds win in the Conscourt, it would seem that the other alleged wrongdoers are home free. But even if the funds do win, does prescription kick in? Prescription means that money claims lapse after three years. More than three years have elapsed since Forbes settled.
Should prescription apply, by virtue of summons not having been served on the other alleged wrongdoers within three years, it could be that the funds will be unable to claim from them some R620m excluding interest (the difference between the Forbes settlement and the amount extracted by surplus stripping).
Are there other possibilities for recourse? Having asked FSB executive officer Dube Tshidi for his views, Tshidi referred the TT inquiry to Mostert Attorneys for reply. Such was the vigour of the exchanges which followed that, in light of the matter being sub judice before the Conscourt, it is considered preferable not to publish them.
From one round to the next goes the arbitration between Standard Bank and curator Tony Mostert, representing the provident fund of the SA Commercial, Catering & Allied Workers Union, over the transfer of certain shares that were part of Johnnic prior to its unbundling. The hotly-disputed matter concerns a hedging strategy, under a 2002 agreement, that Standard had conducted for the fund to protect the value of its portfolio (TT March-May).
Were the bank to lose, it would have to pay to the fund some R527m worth of shares – in MTN, Naspers, Avusa and Element One – plus dividends and penalty interest (roughly R700m on present calculations). So far, the bank is winning more than its losing.
In the first round, the arbitration award went to the curator. In the second, the three-person appeal tribunal overturned the award by the single arbitrator and ruled that the dispute be referred back to him for completion of the arbitration subject to the tribunal’s findings. These were that the agreement with Standard that the curator had impugned was “voidable but not void” and that the curator was not bound by the Saccawu fund rules.
In the third round, back before the single arbitrator, all but one of the curator’s claims were dismissed. It was for delivery by the bank of 2,9m MTN shares.
So on it goes to the next round. It will be Standard’s appeal against this MTN aspect of the ruling. A principal ground is that the arbitrator had side-stepped the appeal tribunal’s award on the transactions being “not void but voidable”, with “voidable” to mean “non-existent”.
The arbitrator is retired Appeal Court judge Louis Harms. The appeal tribunal comprises retired Appeal Court judges Smalberger, Howie and Nienaber.
The engagement of four such distinguished lawyers cannot come cheap. Neither can the employment of heavyweight legal teams on both sides. Jeremy Gauntlett SC is leading for the curator and Willem van der Linde SC is for Standard. The longer the matter proceeds, the more costs mount.
Once it’s wrapped up, the ultimate findings will be as interesting as the award for costs; the former for what’s said about the merits and the latter for who’ll pay them.