Issue: March 2012 / May 2012


Who guards the guardian?

Millions of rand in workers’ funds have been lost. It would be extra-tragic if it were avoidable. The debacle at Trilinear suggests either that financial regulation was inadequate or its implementation was ineffectual.

The blow-up at Trilinear, leaving the life savings of 20 000 textile and clothing workers vapourised, might be hugely uncomfortable for the Financial Services Board. With events following a traceable sequence over critical years, it depends on the explanations offered.

Wait and see. Under wraps is an FSB report of 113 pages, excluding a volume of annexures, completed last July. Because it is being kept confidential, the FSB’s version of how these ghastly shenanigans could have been perpetrated under its nose cannot at this stage be available for public scrutiny.

But the fact that they were perpetrated itself begs questions of whether there was a failure of regulation or a failure by the regulator. Just as the Madoff ponzi scheme upended the Securities & Exchange Commission in the US, and the collapse of Royal Bank of Scotland embarrased the Financial Standards Authority in the UK, it wasn’t as though there’d been little forewarning.

For one, there’d been a well-documented application in 2010 by the Pep Limited Provident Fund against Trilinear Investment Managers and “trustees for the time being of the Trilinear Empowerment Trust” that had apparently been settled out of court (TT June-Aug ’11).

Even before this, the FSB had itself suspended Trilinear as a financial services provider from November 2007 to May 2008 for failing to submit financial statements. During its suspension Trilinear nonetheless appeared to carry on investing clients’ money in blatant disregard of the suspension.

In June 2008, one month after the suspension had been lifted, the FSB received a whistleblower’s tip-off concerning Trilinear’s management of SA Clothing & Textile Workers Union (Sactwu) funds and possible pay-offs to Trilinear officials. The whistleblower indicated that ridiculous fees had been paid to a company called Trilinear Specialised Finance.

The FSB was warned that Trilinear had invested the money via loans in unlisted entities. Further, these entities were unable to repay the loans because of their poor financial position.

Having already given Trilinear a suspension, it might have been expected that the FSB would treat the whistleblower’s assertions with concern. Yet it took the FSB a full seven months, until January 2009, before it appointed inspectors to look into the matter.

When the investigators started asking questions, it appears from evidence before the ongoing public inquiry that Trilinear retrospectively wrote up and signed a loan agreement with Canyon Springs (a company associated with Enoch Godongwana, then a deputy cabinet minister) to cover the funds that had started flowing to Canyon Springs two years earlier.

The inspectors found that five union provident funds together had placed R314m with Trilinear which had invested R276m into:

  • Canyon Springs (R66m);
  • Arrow Creek and Grand Parade Investments (R120m);
  • Sawit (R35m);
  • Ilima (R55m).

Trilinear advised its provident-fund clients that these were investments in listed securities. The inspectors found that this was not the case, clearly in contravention of the prudential-investment requirements of Regulation 28 under the Pension Funds Act regulated by the FSB. (Although there were Trilinear references to some investments going through trusts, regulated by the Master of the High Court, there was no evidence that any had ever been near a trust.)

The inspectors also found out that, while it had been suspended, Trilinear had failed to advise clients of its suspension. It had set up another bank account through which it moved another R120m of union money. Trilinear then avoided telling the FSB inspectors about any of this. The inspectors said it showed “great dishonesty”.

The inspection report recommended:

  • Referral to police and prosecutors “for further investigation and prosecution”;
  • Withdrawing the financial-services provider licence for Trilinear Asset Management (later called Trilinear Capital);
  • Declining the licence application from Trilinear Specialised Solutions, and
  • Debarring Trilinear head Sam Buthelezi from conducting financial services.

It would appear that this report was provided to the FSB in October 2009. Still, no action seems to have been taken.

Then, in November 2009, the FSB was handed a report by KPMG which had been invited to audit the Trilinear group. Irregularities which KPMG discovered during the audit were reported under s45 of the Auditing Profession Act which imposes an obligation on auditors to report any unlawful act or omission.

It’s understood that copies of the KPMG report were sent to the Independent Regulatory Board for Auditors (IRBA) and to the Registrar of Pension Funds in the FSB. Because the irregularities had been reported, KPMG didn’t complete the audit. Apparently the auditors were advised in discussions with the FSB that it was aware of the irregularities at Trilinear.

The continued absence of action cost a further R150m when Trilinear made an additional investment


Trilinear had built a 48% stake in resorts developer Pinnacle Point, now in liquidation. First, it injected R100m in new funding for a 9% interest. Later, in February 2010, it paid R150m for shares that Absa was only too happy to sell despite an enormous loss on the R1,15m that Absa had resentful paid for them.

Absa had obtained title to the Pinnacle Point shares at a cost of over R1bn through acting as underwriter to Cortex Securities. Absa is now suing Nedbank to recover losses of R700m.

If the matter ever gets to court, the role of the banking regulator and the Securities Regulation Panel (since renamed the Takeover Regulation Panel) will be highlighted in explaining how single-stock futures representing nearly 90% of the market capitalisation of a small, thinly-traded share were capable of being written and owned by Nedbank.

in the troubled Pinnacle Point through purchasing shares from Absa (see box). This was three months after the FSB had received the KPMG report.

Only last November, in light of the inquiry launched by Sactwu, did the FSB withdraw Trilinear’s licence. No longer could Trilinear conduct business as a provider of financial services. Neither could it continue to manage or invest clients’ money.


Replying to a parliamentary question last February, Finance Minister Pravin Gordhan stated:

The honourable member should note the right of the FSB to take action against those financial-service operators accused of breaking the law and/or accused of misusing policyholders’ funds and savings.

In performing this duty the law recognises that financial-service regulators have to act as soon as they become aware of such accusations or allegations.

At last, the stable door was forcefully shut. By then, however, the horse had not only bolted but it had already passed through a meat-processing facility and its hooves were in a glue jar.

The SA constitution requires that organs of state deliver administrative action that is lawful, reasonable and procedurally fair. Where rights have been adversely affected by a decision or a failure to make a decision, people affected have the right to be given reasons.

It’s a right that Sactwu, on behalf of its members, is entitled to exercise. And it should. Let it become clear whether they suffered from the FSB’s decisions or failure to make decisions. Whatever the consequences, the SA financial system can only emerge healthier.