Issue: September 2012 / November 2012
Editorials

TRILINEAR

Too late, they cried

The comprehensive FSB report is helpful for the dirt it details. How sad for the fund members that it didnít come much earlier.


Kawie and Buthelezi...fingered
At last TT has secured a copy of the ‘confidential’ Financial Services Board inspection report into the Trilinear debacle. Completed last July, it adds little to what’s already been said (TT March-May ’12) but is revealing for what it doesn’t say.

It doesn’t say why, after the first FSB inspection report in 2008, the Registrar lifted his suspension and allowed Trilinear to carry on trading. Neither does it say what sorts of “appropriate action” are recommended against Trilinear Investment Managers, Trilinear Capital and Trilinear boss Sam Buthelezi.

Nor does it say what use will be served by “referring this report to the Registrar of Pension Funds to take appropriate action against the retirement funds and to investigate Kawie’s involvement in various matters” (Richard Kawie being the purported national benefits coordinator of the SA Clothing & Textile Workers Union).

For a report that certainly isn’t short of damning detail, these recommendations look limp. At most they’re a precursor to prosecuting the individuals responsible for denuding trade-union members’ provident funds of over R300m, then leaving it to the courts. Long prison sentences are more likely to be extracted than significant financial recoveries.

The report is a record of gloom. Chances of the funds getting back much money are bleak. The ways it was taken are sinful, flouting just about every regulation that the FSB exists to supervise. Where was the FSB? Where were the funds’ trustees? Asleep on the job or foiled by fraud? Regulations, to be sure, can only offer protection to the extent that they can be enforced.

To illustrate just how chaotic things were at Trilinear, take this as an illustration from the report:

As at April 2010, Trilinear’s so-called Empowerment Fund (a term used interchangeably by Trilinear with its so-called Empowerment Trust) had received R467m from the Clothing Industry Northern Chamber Provident Fund and the five participating provident funds.

Yet the monthly investment report of the EF as at end-April 2011 shows that the amounts in respect of trustees’ fees (R261 000), management fees (R850 000) and legal fees (383 000) are the same for the month of April 2011 as for the period between December 2006 and March 2011. This “patent error” renders meaningless the cost-reconciliation statement and consequently the entire monthly investment report, say the FSB inspectors.

Trilinear’s records, they add, indicate that the EF failed to make positive returns in at least two years of its five-year existence. There were unrealised losses of R44,5m at end-March 2010, R99,5m at end-May 2010 and R141m at end-April 2011. “The fact that these losses are unrealised is not an unimportant factor as it signifies a real risk of loss while it locks the investors into potentially undesirable investments for fear of realising the loss,” the FSB report submits.

The report is brimful with such losses. Amongst them:

  • Canyon Springs. Associated with Economic Development deputy minister Enoch Godongwana, between March 2007 and December 2009 it was lent R91m by ET. When the FSB report was completed, the company was in provisional liquidation;
  • Arrow Creek, from which Trilinear Specialised Finance took R26,4m in advisory fees for structuring and sourcing finance of R122m from ET. The fees were paid from the retirement funds’ capital;
  • Pinnacle Point, into which ET had invested R195m sourced from the retirement funds. Total cost of ET’s investment in the group, now insolvent, was R233,4m.

“Against the backdrop of the problems of liquidity faced by the ET, investments in the ET have declined from total contributions of R371,1m to net investments of R127,8m,” found the report last July. Unable to repay such liabilities as R63m to the PEP provident fund and R55m to Absa, “we conclude that the liquidity position of the ET is dire at best”.

On and on in similar vein continues the 113-page report. Instances of misleading disclosures, interest conflicts, regulatory evasions and fiduciary breaches stare out. In the result it presents overall conclusions:

  • Both the first and this inspection have revealed Trilinear’s inability to render financial service in compliance with legislation and in the best interest of clients;
  • In commenting on the draft of this report, Trilinear emphasised that Trilinear Investment Managers (TIM), Trilinear and ET should not be mixed up. But it was in fact Buthelezi, the “guiding force” behind the Trilinear group, who had done the mixing. “In his interactions with the various retirement funds, he failed to draw a distinction between certain entities.”
  •  Buthelezi, through TIM, is the “creator and controlling mind” of ET. Under his control, also noted in the first FSB report, ET offered intermediary services while not authorised to do so and administered investments on behalf of provident funds while not approved by the Registrar to do so. These respectively represent contraventions of the Financial Advisory & Intermediary Services and Pension Funds Acts;
  • TIM and Trilinear breached the code of conduct for discretionary financial-services providers. They hadn’t provided clients with required information on the R23m raising fee on the Arrow Creek transaction. They also hadn’t complied with the code in transferring, without authorisation, R63m of the PEP fund’s monies to ET for the purchase of Pinnacle Point shares;
  • Finally, in the inspectors’ view, Trilinear has shown “a lack of operational ability” in that it is unable accurately to report on the status of its clients’ investments.

Accordingly, the inspectors “submit that there is a need for the Registrar to intervene in the current affairs of ET”.

Indeed there is. Or was. Either way, intervention even by mid-2011 would have provided scant consolation for the 20 000 workers bereft of their savings.