Litigation: Editorials: Edition: April / June 2019


Full of pep

Battle prepared for landmark case on duty of the regulator to protect retirement-fund investments. R70m claim to be defended.

Like a hand arisen from the grave, the PEP Limited provident fund (PEPF) is holding the Financial Services Board accountable for some R70m in losses it sustained from the Trilinear debacle that’s been hanging around for ages.

With the FSB first having inspected Trilinear over a decade ago, matters didn’t come to a head even with the “confidential” report of an inspection it concluded years later (TT Sept-Nov 2012). In at least one respect, they will now.

Since the PEPF has about zero chance of recovering a cent from Trilinear, it is suing the FSB (effectively the Financial Sector Conduct Authority which has taken over the old FSB’s assets and liabilities) for the R70m. The litigation will be heard by the North Gauteng High Court in October.

Defendants are the FSB and its then executive officer Dube Tshidi. PEPF holds them liable for losses allegedly suffered by the fund for them having failed in the performance of their statutory duties; in a nutshell, for not having supervised and enforced compliance with the laws regulating financial institutions and the provision of financial services.

Implicitly, had the PEPF known what the FSB knew, it could have responded to avoid the loss.

PEPF was not alone in its loss. The FSB’s damning report of 2011 showed that, as at April 2010, Trilinear had received R467m from funds participating in the Clothing Industry Northern Chamber Provident Fund.

The Trilinear group, which included an investment-management firm (TIM) and an empowerment fund (TEF), had as its “guiding force” one Sam Buthelezi. It had made disastrous investments. For example:

  • Canyon Springs. Associated with then Economic Development minister Enoch Godongwana, it was lent R91m by TEF. By the time the FSB report was completed, it was in provisional liquidation;
  • Pinnacle Point, into which TEF had invested R195m from retirement funds, became insolvent.

The essence of PEPF’s claim is that the FSB and its executive officer had knowledge of Trilinear’s affairs that they didn’t disclose to the fund. Their omissions caused the fund’s loss.

These were actionable failures in the regulators’ duties not only to comply with their own statutory requirements but also in their duty of care and obligation reasonably to prevent harm, amongst them by not having:

  • Taken timeous and appropriate action against the Trilinear group, or taken preventative measures at their disposal to divest Trilinear of assets it managed;
  • Notified the fund during August 2009 at the latest that TIM was or appeared to be acting unlawfully;
  • Appointed a curator by August 2009 to take control and manage Trilinear’s affairs.
Centred on workers

For their parts, the FSB and its executive officer deny that they breached any duty of care or that they owed obligations to the PEPF that give rise to civil liability. They further deny that they acted with gross negligence or that “a causal link exists between any of the omissions and the alleged losses”.

They add that at all material times the FSB Act provided for the FSB to perform its enforcement function by establishing an enforcement committee to deal with alleged contraventions of the law: “At no material times…(has any) law relating to the enforcement committee conferred any powers on the FSB.”

Then they introduce Richard Kawie (purportedly national benefits coordinator of the SA Clothing & Textile Workers Union) as a third defendant. Kawie, they say, was a trustee or alternate trustee of PEPF. As such, he was obliged to act with due care and in good faith, to avoid interest conflicts “and disclose any facts or circumstances known to him which gave rise or may give rise” to interest conflicts.

But according to the FSB, Kawie had failed to disclose to his fellow PEPF trustees that amongst other things:

  • He and Buthelezi were influential in decisionmaking of the TEF (into which TIM was entitled to invest PEPL funds);
  • TEF had never been audited;
  • An entity to which TEF provided finance, primarily in the form of unsecured loans, was Canyon Springs;
  • He exercised effective control over all Canyon Springs’ decisions;
  • A material reason for him recommending investment in TEF was his expectation of personal financial gain from Canyon Springs.
Kawie and Buthelezi . . . centered in scandal

Had Kawie disclosed such matters to the PEPF, the FSB contends, it would not have granted a private-equity mandate to TIM. Or PEPF would have withdrawn the mandate, reclaimed amounts invested in TEF and made no further investments.

In the event that damages are awarded against the FSB, it urges that the court considers where losses were caused by the PEPF’s negligence. Consequently, the amount of damages should be reduced “to the extent that the (PEPF’s) losses were caused by (its) own fault”.

Having taken eons to reach the civil court, the aftermath must eventually play out in a criminal court. Sleep uneasily, Kawie and Buthelezi.