Namibian investment company Trustco, which has been embroiled in a two-year dispute with the JSE over its financial statements, lodged a second reconsideration application with the Financial Service Tribunal (FST) earlier this year.
The dispute dates to November 2020, when the JSE directed Trustco to restate its annual financial statements for the year ended 31 March 2019 and its interim results for the six months to 30 September 2019, to rectify what the exchange found to be accounting errors.
Trustco has contested the finding that its financials do not comply with the International Financial Reporting Standards.
Trustco took the JSE’s findings and directive to the FST, which dismissed its reconsideration application in November last year.
Read: Tribunal upholds JSE directive that Trustco must restate its financial results
Another layer was added to the dispute the following month, when the JSE informed Trustco that it would suspend trading in the group’s shares, because of its failure to comply with the JSE Listings Requirements, the JSE’s previous decision/directive and the decision of the FST.
Trustco engaged in legal action to challenge the FST’s and the JSE’s decisions and to halt the suspension of its shares.
Click here for a summary of the background to the dispute and the legal action taken by Trustco.
High Court’s decision
On 7 November, the High Court dismissed, with costs, the group’s application to review and set aside the FST’s decision to dismiss its (first) reconsideration application. As a result, trading in Trustco’s shares on the JSE was suspended on 11 November.
In a SENS announcement following the High Court’s judgment, Trustco said it “now has actionable evidence that its financials will need to be restated after Judge Potterill ruled that the FST decision of 22 November 2021 stands”.
Trustco said it would, “in the interest of all stakeholders”, restate its financial statements, subject to its right to appeal against the decision, and without prejudice to any other legal rights and remedies it might have in law.
The announcement quoted Trustco’s managing director, Dr Quinton van Rooyen, as saying: “It is an unfortunate but necessary step that a court order is required to override the bona fide actions and representations of our independent board and auditors. With this court order, we will comply to restate our financials as directed by the JSE.”
Second reconsideration application
The FST heard Trustco’s second reconsideration application in October this year. The reconsideration application concerned the JSE’s decisions announced in December 2021, namely:
- Trustco had failed to comply with the Listings Requirements and the JSE’s decision to restate its financial statements and, in so doing, had disregarded the FST’s decision of November 2021 (the non-compliance decision); and
- As a result of the abovementioned failures, the JSE would suspend Trustco’s securities, with the JSE saying this would further the objectives of the Financial Markets Act and be in the public interest (the suspension decision).
Trustco brought its second reconsideration application on four grounds:
- The JSE’s decision to suspend its shares was premature;
- The suspension decision was implemented for an ulterior purpose;
- The suspension did not comply with the empowering legislation; and
- The decision-maker lacked authority.
Second and third grounds
This article will look at the FST’s decisions in respect of the second and third grounds. The tribunal dealt with both grounds together, saying they overlapped.
It was common cause that Trustco failed to comply with the JSE’s directive to amend its financial statements.
According to the FST’s decision, Trustco submitted that the JSE “does not meaningfully assert” that any of the objectives in section 2 of the Financial Markets Act (FMA) will be fulfilled by suspending Trustco’s listing, nor does the JSE “meaningfully contend” that suspension was in the public interest.
Further, in view of the market’s thorough knowledge of the dispute between Trustco and the JSE, suspending Trustco’s listing did not serve any legitimate purpose, other than a punitive one, which is not an objective of the FMA, the Listings Requirements or the Financial Sector Regulation Act.
Trustco submitted that the JSE could not take the suspension decision unless it was done in terms of the FMA read together with the Listings Requirements. Trustco stated that this was not the case but that the JSE sought to implement the suspension decision for some other (undisclosed) ulterior purpose.
The FST referred to section 2 of the FMA, which states that the Act aims to:
(a) ensure that the South African financial markets are fair, efficient and transparent;
(b) increase confidence in the South African financial markets by-
(i) requiring that securities services be provided in a fair, efficient and transparent manner; and
(ii) contributing to the maintenance of a stable financial market environment;
(c) promote the protection of regulated persons, clients and investors;
(d) reduce systemic risk; and
(e) promote the international and domestic competitiveness of the South African financial markets and of securities services in the Republic.
Suspension furthers the aims of the Act
The FST said the suspension decision furthered a number of these aims in the following respects:
It said accurate financial statements of listed companies are essential to “ensure that the South African financial markets are fair, efficient and transparent”.
“The markets work only if financial statements are accurate. Trustco’s financial statements are not accurate and do not reflect a fair picture of Trustco’s financial performance. The amended corrective action is aimed directly at ensuring the accuracy of the financial statements of Trustco ensuring fairness, efficiency and transparency in the market,” the tribunal said.
The suspension decision was the only effective way in which to protect the market and investors. The JSE decided that the financial statements did not comply with the IFRS, a decision with which the tribunal agreed in its first decision.
“For Trustco’s shares to trade as normal despite the aforesaid decisions erodes market confidence and undermines the regulatory ecosystem’s authority. The JSE is not merely entitled to act, it must act (FMA section 10). The JSE is obliged to protect investors,” the FST said.
The suspension decision achieves the aim of increasing “confidence in the South African financial markets” (section 2 (b) of the FMA) and promotes “the international and domestic competitiveness of the South African financial markets and of securities services in the Republic” (section 2(e) of the FMA).
In addition, the FST said the suspension decision promotes “the protection of regulated persons, clients and investors” (section 2(c) of the FMA) because it prevents people acting on the strength of misleading financial statements.
The tribunal agreed with submissions by the JSE that non-compliance with the relevant decisions “profoundly threatens the regulatory system of the JSE”.
The FST found that neither the non-compliance decision nor the suspension decision had been implemented for an ulterior purpose, and that both decisions complied with the empowering legislation.
It also rejected the first and fourth grounds on which Trustco brought its application.
In a decision handed down on 18 November, a week after the High Court dismissed Trustco’s application to review the FST’s first decision, the tribunal dismissed the reconsideration application.
The tribunal also ordered Trustco to pay 50% of the JSE’s costs.
