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Opening the Fidentia can of worms (again)

Where were the trustees of the Living Hands Trust when orphans’ and widows’ money was spent on excessive salaries, a Ferrari and lunches?
Moneyweb reported extensively on the scandal in 2007 after reports of J Arthur Brown acquiring big houses and expensive sport cars. Image: Bloomberg

It is not surprising that Old Mutual will lodge an application to appeal this week’s judgment by the Gauteng High Court that the life office can be held liable for losses suffered by the Living Hands Trust – for fraud committed by another party between 2002 and 2006, and for which the perpetrator was found guilty in 2013 and sent to prison for 15 years.

Rather, it is surprising that the high court decreed that Old Mutual should be liable to the amount of R1.7 billion to the trust to cover its losses.

Even more surprising is that news reports created the impression that Old Mutual ‘paid out’ hundreds of millions to a convicted criminal, with all referring to him by his rather pretentious moniker,  J Arthur Brown.

The fact is that no money was paid out to Brown, nor was he a convicted felon at the time.

Some people might also remember that testimony during the 2013 court case against Brown disclosed that Old Mutual seemed reluctant to liquidate the Livings Hands investment and transfer the money to the trust.

Old Mutual says in a press release following this week’s court ruling that it believes it acted in accordance with regulations and followed the correct process years ago.

It notes that the Living Hands funds were invested in Old Mutual unit trusts by the trust’s investment management company, Mantadia Asset Trust.

Sequence of events

Old Mutual describes the sequence of events, in that Fidentia Holdings acquired the majority ownership in Mantadia and then instructed Old Mutual to liquidate the Living Hands investment.

“After Old Mutual had verified the authenticity of the transfer of such ownership, it carried out the disinvestment instruction,” according to the Old Mutual statement. “The disinvestment instruction was carried out and Old Mutual Unit Trusts transferred the cash value of the assets held at the time into the bank account of its client, the Living Hands Umbrella Trust.”

The subsequent transfer of the money to another party or into another investment was a separate decision and a separate transaction.

Old Mutual would not have been involved in it at all.

“The direct cause of the loss and pain suffered was the fraudulent actions of Fidentia well after Old Mutual had transferred funds following a formal client instruction to do so,” says Old Mutual in its statement.

“In the circumstances, and following our verification of the authenticity of the transfer of ownership, we were legally obligated and had no other option but to transfer the money.

“We are of the view that there are reasonable prospects that another court would come to a different conclusion,” Old Mutual adds, referring to the court ruling that it is liable to cover the loss of R855 million in capital and about another R855 million in lost interest.

‘Precedent’ concerns

Old Mutual also says it is concerned about the precedent the high court sets for the rest of the financial services industry as it relates to managing funds on behalf of trustees.

“This is an additional compelling reason for Old Mutual to seek leave to appeal against the High Court judgement.

“It is important to note that the facts of the case [the transfer of the funds and the subsequent fraud] are not in dispute,” according to the Old Mutual statement.

The statement also points out that the court did not dispute that Old Mutual followed procedures in accordance with the mandate with Living Hands, but “should have further interrogated the instruction and informed the regulator about it”.

FSCA investigation 

A later investigation by the regulator, the Financial Sector Conduct Authority (FSCA), found that Old Mutual had acted according to procedures.

The FSCA – not a court, but the formal authority with enough legal professionals to ensure compliance with the laws governing the investment industry – cleared Old Mutual of wrongdoing.

“We understand the need for someone to be held accountable, but we are resolute that Old Mutual is not liable for the damages being claimed,” says Old Mutual in its statement.

“As a responsible business that always acts in the best interests of our clients, we have continued to focus on ensuring good governance, whilst strengthening our processes with increased focus on the environment, communities and social welfare.”

Parole

Incidentally, Brown was released on parole only a few months ago (October 2021). He served seven years of a 15-year sentence.

Originally, the court only imposed a fine of R150 000 and a suspended sentence after around R1 billion in investments entrusted to Fidentia and related entities disappeared.

The National Prosecuting Authority (NPA) baulked at the seemingly light sentence, noting at the time that the bulk of the money entrusted to Brown belonged to the widows and orphans of deceased mineworkers. The court listened and upped the sentence to 15 years.

Brown was not granted parole in 2019, the earliest it could have been granted.

Lavish lifestyle

Moneyweb reported extensively on the Fidentia scandal in 2007 after reports of Brown acquiring big houses and expensive sport cars, as well as his rumoured salary of R400 000 per month.

Read these articles from 2007:

At the time, the court found that none of the funds were invested in collective investments schemes, or any other market instrument.

“None of the funds were held in the name of the trust, or on its behalf. All assets bought were held in the names of Fidentia-owned companies, without any indication that it was held on behalf of the trust,” according to court documents.

One of the biggest ‘investments’ was the acquisition of the Santé Hotel and Spa for a total of R126 million (including operating losses). It was later sold on auction for R40 million to recoup some money for the trust.

Years later, in 2016, the leak of the so-called Panama Papers raised suspicions that Brown hid money offshore.

Trustees

Meanwhile, nearly 50 000 orphans and widows were left destitute.

The mismanagement and fraud involving R1 billion over a period of four years raises questions: Where were the Living Hands trustees? Did they receive monthly statements? Did they have regular meetings with their ‘asset manager’? Did they ask questions?

Whatever the outcome, one can assume that the lawyers driving the legal action will be paid.

Read these articles from 2011 to 2014:

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