Issue: July/Sept 2010
Alex Forbes v Sanlam
It’s a crazy situation: Forbes prepared to help the curator (against Sanlam), and Sanlam given indemnity from prosecution (by the NPA). Who’ll then be telling on whom? And who’ll be paying the price? In the middle is the FSB, watching and waiting for battles ahead.
Its taken four months for curator Tony Mostert to accept the offer by Alexander Forbes to settle the surplus-stripping dispute over whats become known as the Lifecare pension fund, the vehicle into which one Cortech and two Datakor funds had been merged to enable the so-called Ghavalas scheme for stripping these and five other funds of their surplus.
Terms of the offer had been kept confidential, except for Forbes preparedness to assist the curator (TT April-June 10). Announcing the curators acceptance in mid-June,
Forbes chief executive Edward Kieswetter didnt say for how much Forbes itself will be liable. He did say, however: Our offer is part of a R1bn claim. It represents what we and the curator consider to be our fair portion of the total claim. A statement from Forbes added: The rest of the monies, or a portion thereof, are expected to be recovered from the other third parties involved.
So the R1bn magic number is in the ballpark of the R1,1bn for which Mostert and his fellow curators had issued summons against Forbes over two years ago. Its a little less than the full amount on date of summons but excludes compound interest that would subsequently have accumulated.
The largest proportion would be the R304,3m plus compound interest for which Mostert started litigation against Sanlam in December 2006. With compound interest, the claim against Sanlam is now around R700m; in other words, the present-day value of the amount allegedly taken for the ultimate benefit of Sanlam from the Cortech and Datakor funds.
At heart is the scheme devised by former merchant banker Peter Ghavalas to strip the funds of their assets. While it might be argued that the scheme was victimless, in the sense that employee members of the defined-benefit (DB) funds received their promised benefits, fraud was in the schemes nature and intent; bluntly, to divert the surpluses from the funds, and hence from members entitled to share in the windfall, to parties who had no right to a payout. It involved, amongst other things, alleged misrepresentations to the Registrar in applying for the funds merger into the Lifecare fund (TT March-May 08). To the chagrin of the FSB, the National Prosecuting Authority has accepted plea bargains from a number of scheme participants originally accused. They include Ghavalas himself. Although neither Sanlam nor Forbes have been criminally charged an eventuality pending the outcome of civil suits -- the NPA has agreed not to bring charges against Sanlam (see box) while Forbes readiness to cooperate will doubtless get it off the hook too.
That said, the R1bn quantum of the Forbes offer appears to approximate the Lifecare funds total assets of R126,3m, plus interest, before these assets were dissipated in 1997. Whether recovery is from Forbes or Sanlam and others should be irrelevant to the curator, yet highly relevant to Forbes and Sanlam respectively.
Presuming that Mostert accepts R1bn from Forbes and that his contingency fee has not been reduced from the court-sanctioned 25% of the amount recovered, he and colleague Tony Wandrag stand to pocket R250m at the extreme upside. It certainly is a huge amount of money. Even at a significantly reduced percentage, it would merely be relatively less huge.
In fairness, Mostert has gone at risk and borne the costs over several years to get the wholly-denuded funds their recompense. The extreme downside, when the curatorship was launched, would have been for him and the funds to have received nothing at all.
Still, so lucrative is the potential reward that the FSB could have bought pretty smart in-house expertise to have pursued the recoveries itself. But thats with hindsight. Curatorship comes at a cost to those for whom monies are recovered, often victims most in need, and not at a cost to the FSB. With salute to Mostert for his efforts, hes inadvertently opened debate on whether theres an alternative to fee structures reaching such levels.
This is where Forbes and Sanlam look set to be pitted against one another. Forbes was the Lifecare funds administrator, actuary and consultant. It received not a cent from the laundering operation. The action against it, vigorously defended by Forbes until Kieswetter took the helm, derives from the role it had played (via three employees during 1992-97) in having facilitated the scheme or at least in having failed to prevent it.
Sanlam, on the other hand, was the administrator of the Datakor funds. At the same time, through subsidiary Sankorp, it controlled the Datakor/Cortech group. This made it the ultimate principal employer in the pension funds of these companies, thus putting it into a position where it could access the funds surplus.
Purportedly, it did so. On the Sanlam version, in 1997 Sankorp received R44,1m as a dividend from the Datakor/Cortech companies. On the curators version, the R44,1m had surreptitiously been raised from the surplus in the companies pension funds.
Either way, nine years later Sanlam repaid R106m (the R44,1m plus annual interest at 15,5%) for the benefit of fund members. On the Sanlam version, it had innocently benefited and wanted the money quickly to reach needy pensioners. On the Mostert version, it was the consequence of his protracted pressure on Sanlam to pay back an ill-gotten gain.
Now things start to get messier. Lets say that the R1bn offered by Forbes is in settlement of the full R126,3m, plus interest, taken from the funds in the 1997 distribution. It then follows that, with the Forbes undertaking to assist the curator in recovering monies still in dispute, the main target is Sanlam against whom the curators summons is extant. The more that can be prised from Sanlam and others, it would seem, the less Forbes will need to pay.
For it is Sanlam which, according to the curators, had abused its position to pay out all of the funds R126,3m total assets: R44,1m went to Sanlam/Sankorp which controlled the Datakor/Cortech group; R25,9m to parties which had no connection to the pension funds, and most of the R56,3m balance for the allegedly irregular purchase of a
Fedsure annuity policy to switch the funds employee members into this policy and to a preservation fund. These actions, the curators contend, were part and parcel of the unlawful scheme.
Which begs some intriguing topics:
SLIPPING FROM THE DOCK
FSB executive officer Dube Tshidi is mightily peeved with the National Prosecuting Authority. Although it was the FSB that instituted criminal charges for surplus stripping against a host of individuals, he wasnt evenconsulted on various NPA deals to avoid prosecutions. After the plea bargain that the NPA unilaterally allowed Ghavalas, the mastermind, perhaps nothing else it does should surprise.
In January, similarly behind the FSBs back, the NPA agreed not to bring criminal charges against Sanlam. It also entered plea bargains with two executives of Datakor, part of the Sanlam stable during the surplus strip. Michael McEvoy and Derrick Pettit, erstwhile Datakor executive directors, paid back some R5m that they personally shared from the surplus in the company pension fund.
For Sanlams part, the NPAhas indemnified it from prosecution because of its preparedness (indicated in 2006, almost four years prior to the Alexander Forbes settlement offer) to testify against others. If it answers all questions to the satisfaction of a court which hears the Lifecare matter, and incriminates itself in the process, the indemnity will stand.
Tshidi, as Registrar, is not satisfied with the NPAs response to his request for an explanation. Seeking legal opinion on the validity of the NPAs actions, hes additionally deposed an affidavit where he expresses his opposition to the settlement and advised the NPA that he wants the courts presiding offer to be made aware of his objections.
Following the Forbes settlement and the Sanlam indemnity, as well as the spate of plea bargains previously entered, smaller fish are left to fry. Theres nevertheless a relief in Forbes and Sanlam avoiding charges in their corporate capacities.
The events with which theyre involved took place more than a decade ago, when they respectively had quite different sets of shareholders (Forbes before its private-equity buyout, Sanlam before its demutualisation) and different management structures (the relevant Forbes executives and the Sankorp group being long gone). Yet its present shareholders wholl pay for past transgressions and present managers wholl account for them.
There was also a different environment. Only since 2001 has there been legislation to clamp down on the improper use of funds surplus apportionment, common-law fiduciary duties of care and prohibition of fraudulent misrepresentation notwithstanding.
Generally, its better to reach settlements than not to reach them; preferably, in this instance, with all parties including the FSB signing off. Fur is yet to fly, but at least it will be to music played by financial-services icons from the witness box rather than faced in the dock.