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old-mutual

Trust takes on Old Mutual over R850m loss to Fidentia

Fifteen years on, the fall-out from the Fidentia scandal continues as Living Hands Umbrella Trust’s R850 million lawsuit against Old Mutual Unit Trust Managers (OMUT) got under way in a virtual sitting of the Gauteng High Court this week.

Living Hands accuses OMUT of handing over R1.1 billion to the Fidentia-controlled Mantadia Asset Trust Company (Matco) when OMUT had reason to believe that the trust had come under the control of individuals who might not act in the best interests of the beneficiaries.

Matco, which later became Living Hands Umbrella Trust, managed the trust funds of about 50 000 beneficiaries, the vast majority of whom were minors.

Matco was sold to Fidentia for R93 million in 2004.

Old Mutual says it cannot be held responsible for the financial losses caused by Fidentia’s mismanagement and looting.

It also argues that prescription prohibits the trust from pursuing its case.

Events of October 2004

Central to the trust’s case against OMUT is a series of events in October 2004, when Matco became a wholly owned subsidiary of Fidentia Holdings.

On 15 October, Fidentia representatives Steve de Kok, Johan de Jongh and Johan Linde met Old Mutual Fund Administration Services compliance officer Andries Cronje. During this meeting, a letter from Matco was handed to Cronje instructing OMUT to transfer R150m of Matco’s funds to Fidentia Asset Management’s trust account.

Advocate Hilton Epstein, appearing for Living Hands, told the court that Cronje, who was uneasy about the request, that day wrote to Matco director Geoff Gover (now deceased), who was in the process of selling his shares to Fidentia, about the meeting. Cronje referred to the letter in which Matco appointed FAM as its portfolio manager with immediate effect and with a discretionary mandate.

Cronje was not satisfied with the undated letter because, among other things, the instructions were “vague and unclear”, and the letter was addressed to FAM, “an unknown third party”, and not to OMUT.

On 19 October, Matco became a wholly owned subsidiary of Fidentia. That day, Matco managing director Philippus Malan wrote to Symmetry Multi Manager (Old Mutual portfolio management company) and OMUT, immediately calling up the trust’s entire R1.1bn portfolio, citing moral and legal reasons for discontinuing the relationship.

The following day, Old Mutual compliance and risk officer Chris Potgieter replied that Old Mutual would accept the instruction as valid “as soon as we receive confirmation of authority from the beneficial owner, the Matco Trust”, Epstein said.

The same day, Malan confirmed the mandate that had been given to FAM.

OMUT paid out the money over two-and-a-half weeks.

‘Duty to safeguard the funds’

Living Hands’ case is that, based on the events from 15 October until when the money was handed over, OMUT knew or should have foreseen that material risk existed that the trust had come under the control of individuals who may not act in the best interest of the trust’s beneficiaries.

It says OMUT should not have handed over the money without taking steps to safeguard the funds, in compliance with its statutory duties and its duty to protect the beneficiaries.

Specifically, OMUT should have informed Standard Bank (the trustee of the collective investment schemes in which the funds were invested) and the registrar of collective investment schemes of the facts that had taken place from 15 October.

In this regard, Living Hands says OMUT failed to comply with the following sections of the Collective Investment Schemes Control Act:

  • Section 4(4)(e), which requires a collective scheme manager to “maintain an open and co-operative relationship with the office of the registrar and must promptly inform the office about anything that might reasonably be expected to be disclosed to such office”.
  • Section 2(1): “A manager must administer a collective investment scheme honestly and fairly, with skill, care and diligence and in the interest of investors and the collective investment scheme industry.”

Living Hands further claims that OMUT contravened:

  • Section 9(1) of the Trust Property Control Act: “A trustee shall in the performance of his duties and the exercise of his powers act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.”
  • Section 2(b) of the Financial Institutions (Protection of Funds) Act, in terms of which a financial institution “must, with regard to the trust property and the terms of the instrument or agreement by which the trust or agency in question has been created, observe the utmost good faith and exercise the care and diligence required of a trustee in the exercise or discharge of his or her powers and duties”.

The trust says OMUT’s conduct caused the loss of the R1.1bn.

If OMUT had informed Standard Bank of the events of October, it says, the bank would have been obliged to report them to the registrar of collective investment schemes, and the registrar would have reported the matter to the registrar of financial services providers, who would have conducted an inspection of FAM.

Epstein told the court that OMUT “did not properly supervise its staff in the execution of their duties, and there were no adequate internal compliance procedures”.

The curators of Fidentia recovered some R400m of the R1.1bn.

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