In its response to the High Court’s decision in the Living Hands matter, Old Mutual said it was concerned about the precedent that the judgment sets “for the rest of the financial services industry as it relates to managing funds on behalf of trustees”.
Read: Old Mutual to appeal R1.7bn judgment in favour of Living Hands
Old Mutual will apply for leave to appeal against the judgment. Its application might well succeed, and a higher court might reach a different conclusion, so it is perhaps premature to opine on its implications for the entire financial services industry.
However, unless the judgment is overturned, it does have implications for those who exercise a duty of care in relation to trust funds when one considers what lies at the heart of the plaintiffs’ case. Indeed, in this light, the judgment has implications for anyone who is obliged to report a “suspicious” transaction to a regulator.
It is important to note the undisputed facts of this case. Old Mutual Unit Trust Managers (Omut) did not transfer the trust’s assets to Fidentia Asset Management (FAM).
It was the Matco Trust – later called Living Hands Umbrella Trust – that, between 21 October 2004 and 17 June 2005, paid the cash value of the assets (more than R1.2 billion) to Fidentia and the companies it controlled, as the judgment records.
The heart of the matter
The nub of the plaintiffs’ case against Omut was that certain communications and events leading up to and surrounding the disinvestment should have alerted Omut that the trust funds were at risk and Omut should, therefore, have reported the transaction to Standard Bank (trustee of the collective investment schemes in which the funds were invested), and/or the Registrar of Collective Investment Schemes, and/or the Registrar of Financial Services Providers and/or the Master of the High Court.
If this had been done, what was then called the Financial Services Board and/or the Master would have conducted an investigation into FAM, which would have prevented the dissipation of the funds.
Omut submitted it was speculative to conclude that reporting the liquidation of the portfolio to Standard Bank and the CIS registrar would have triggered reports to the Registrar of FSPs and the Master, which, in turn, would have prevented the funds from being dissipated.
Judge Thina Siwendu wrote: “The duty to report was not merely about the effectiveness or consequences of such reporting; it was about a demonstration and discharge of its own utmost duty of good faith and care to the trust. Omut cannot plausibly rely on speculative consequences of such reporting. It led no evidence to show that it would have made no difference to the chain of events that ensued and the loss suffered. On the contrary, the failure to report enabled the acquisition and what followed thereafter. There is a real probability that Fidentia’s conduct would have been detected early but for Omut’s failure to report it.”
Some points to ponder
Whatever opinions one might have about the court’s judgment, none of us were party to the communications between Omut and Matco and therefore we are reliant on the information that Judge Siwendu has seen fit to include in her judgment. (In addition, the trial was heard virtually, so the proceedings can be viewed on the Judiciary RSA YouTube channel.)
A further obstacle to attempts to reach something approaching an objective assessment of who “should have done what when” is that we are all wise after the fact. Almost everyone in the financial services sector has heard of the “Fidentia scandal”. One must remember that, at the time of the transaction, no one knew where all this was going to end.
A related contextual issue is that these events took place in a different regulatory environment. The FAIS Act had taken effect only weeks before the transaction – although the sea-change it signalled had been known since at least 2002.
The court agreed with the plaintiffs that Omut owed a duty of care to the trust in terms of the legislation in place at the time (including the Collective Investment Schemes Control Act and the Trust Property Control Act). But a lot of regulatory water has flowed under the bridge since then, and I doubt it can be disputed that the industry is now more aware of the need to think about the outcomes for consumers and avoid sanction by the regulators.
And there’s something else: the three plaintiffs – Living Hands (Pty) Ltd and two trustees of the Living Hands Umbrella Trust – called six witnesses. Omut, the defendant, called none.
To quote Judge Siwendu: “Omut remained silent on what transpired between 15 October 2004 and 29 October 2004. The court is none the wiser on what steps it took to verify the sale or conduct a due diligence on FAM and the individuals behind it.”
She said an explanation from the Omut personnel who, according to the plaintiffs’ testimony, were involved with the transaction or the Matco/Omut relationship “would have been of assistance to the court”.
The plaintiffs contended that a failure to introduce evidence is usually looked upon as a strong indication that such evidence would be detrimental to the party concerned.
However, as Judge Siwendu pointed out, “the defendant’s failure to adduce evidence cannot justify a verdict in favour of the plaintiffs, unless there is enough evidence to enable the court to say that, having regard to the absence of an explanation, the plaintiff’s version is more probable than not”.
And so, we’re back to the events of October 2004 …
What would you have done?
As one would expect in a delictual claim of this nature, there are a number of elements to this case that are worthwhile considering. But for now, let’s focus on the basis of the plaintiffs’ case. As Judge Siwendu put it: “They contend it was not the paying over of the money per se which was wrongful, but the paying over of the money without having reported the events to Standard Bank, to the Registrar and to the Master.”
To that end, I have set out the chronology of events, and provided the relevant correspondence, taken from the judgment. (Much of the background information and facts were not contested, as the judge noted.) I have excluded statements by the witnesses in which they made inferences or drew conclusions based on what they saw or heard.
What would you have done in these circumstances? Would you have reported the transaction? Or would you taken the view that you have no duty to second-guess an authorised instruction from a client or to involve yourself in the inner workings of the trust?
Some important background
In 2002, Matco appointed Omut as its investment adviser for the beneficiary trust funds it managed. Matco concluded a service level agreement (SLA) with Omut in May 2002 and a second agreement on 15 September 2004.
One of the clauses in the SLA states that the agreement may be terminated by either party giving to the other party 90 days’ written notice.
In April 2004, FAM applied for registration as an FSP under the FAIS Act. FAM was issued with its FAIS licence on 5 November 2004, although its licence took effect from 30 September 2004. Prior to this, FAM was licensed in terms of the now-repealed Stock Exchanges Control Act and the Financial Markets Control Act.
Now to the events of October/November 2004:
5 October
The shareholders of Matco (Pty) Ltd, the trust administration company, sold all their issued shares to Fidentia Holdings for R93 million.
11 October
Fidentia appointed Philip Malan as a trustee of Matco Trust and the nominee for the trust administration company.
14 October
In an undated letter to FAM, the trustees of Matco Trust appointed FAM as the investment/portfolio manager. The letter granted FAM a full discretionary mandate in respect of the portfolio and the funds held by the trust. The letter was signed by Malan, Geoff Gover, as the outgoing director of Matco Pty Ltd, and J Arthur Brown, as the incoming director.
Click here to download the letter as reproduced from the judgment.
15 October
Three Fidentia representatives went to Old Mutual, where they met a compliance officer in the Fund Administration Services division.
In addition to the FAM appointment letter, Omut was presented with a letter dated 15 October 2004. This letter instructed Omut to “liquidate R150m of Matco assets with immediate effect” and transfer the proceeds into a Standard Bank account in the name of Fidentia Asset Trust Management.
One of the Fidentia representatives who attended the meeting testified that the bank account referred to in the letter was not the trust’s. It was not the designated bank account stipulated in the second SLA between Omut and Matco.
According to the judgment, the compliance officer took the letter to the legal department or to the people who needed to make a decision on its contents.
The compliance officer was not satisfied with the “validity, scope and intended impact” of the letters. He telephoned Gover and followed this up with a letter to Gover in which he expressed certain concerns.
Click here to download the letter as reproduced from the judgment.
18 October
The judgment states that an exchange of emails shows that Omut provided FAM with certain information about Matco’s investment portfolio.
19 October
Gover granted written permission to Symmetry Multi-Manager to provide FAM with information about Matco’s investments with Omut.
At midday, the directors of Matco resigned and were replaced by individuals who were directors of Fidentia.
Matco directors Malan and Andrew Tucker signed a letter addressed to Symmetry and Omut instructing them to liquidate the entire portfolio of more than R1bn by 5pm.
The letter stated that Matco was unable to continue its relationship with Omut for “legal and moral” reasons, including the absence of a legally binding written mandate and apparent non-compliance with the FAIS Act.
Click here to download the letter as reproduced from the judgment.
20 October
Malan sent another letter to Omut, confirming the mandate given to FAM and the instruction to liquidate the entire portfolio or portions of it, as they deemed fit.
Omut’s finance, risk and compliance officer (not the same compliance officer at the meeting on 15 October) acknowledged receipt of the letter dated 19 October. He stated that Omut would “accept this as a valid instruction as soon as we receive confirmation of authority from the beneficial owner, the Matco Trust”.
22 October
Omut wrote to Brown to introduce Omut and Symmetry to Fidentia, in an attempt to retain the business.
22 October to 10 November
Omut paid more than R1.3bn, in 15 tranches, to Matco Trust’s account at Standard Bank.
29 October
Omut requested outstanding Fica documents for the Matco Trust and Matco (Pty) Ltd.
Click here to download the full judgment.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
