When Peter Ghavalas was arrested in August 2005 for masterminding a complex financial fraud we were sure he’d face jail time. But it’s not to be. Sapa reports that Ghavalas entered a plea bargain with the state earlier this week in terms of which he will pay ‘compensation’ of R18.6m to the pension funds he defrauded. Sapa notes that “Ghavalas admitted to masterminding a pension fraud scheme that ransacked seven pension funds of R300m.”
No mention was made of how much (if any) of the settlement would be retained by the curators in the matter. It was alleged in the editorial section of the Dec07/Feb08 issue of Today’s Trustee that the curators had negotiated a contingency fee of 25% of all monies recovered with Dube Tshidi, then deputy chief executive of the Financial Services Board (FSB). FAnews Online wonders whether the FSB and curators will reveal details of this ‘deal’ as the legal process draws to completion.
How the ‘Ghavalas option worked
The fraud – which took place in the mid-to-late 1990s – was uncovered in 2003 and rocked the pension funds industry. Ghavalas had instigated a series of transactions to ‘relieve’ various pension funds of their surplus assets, siphoning around R42m for his own account in the process.
The initial charge sheet against Ghavalas and his co-accused describes how the elaborate fraud was engineered. The Lifecare Fund (later the Lifecare Company) purchased dormant companies that owned defined benefit pension funds with substantial surpluses. In pension industry parlance a surplus occurs where a pension fund has assets in excess of the actuarial liabilities of the fund.
The pension fund holding companies then allegedly transferred the control of these funds to Lifecare – a transaction cleverly ‘sold’ by Lifecare as an amalgamation of pension funds. Once control was obtained approximately 80% of the surplus in each of these funds was paid back to the dormant holding company. According to the FSB these transfers were enacted as “transfer of business in terms of Section 14 of the Pension Funds Act.” Ghavalas’ company (Soundprops 178) received a large commission in each case. Affected funds included the Mitchell Cotts Pension Fund, Jacaranda Pension Fund, Lucas SA Pension Fund, Sable industrial Pension Fund, Picbel-Groepvoorsorgfonds, Datakor Pension Fund, Datakor Retirement Fund, Cortech Pension Fund and Power Pack Pension Fund.
A history of litigation
In 2006 the Financial Services Board (FSB) issued a press release detailing individuals and companies that would face criminal charges for their transgressions. The seven accused include five individuals and two companies: Peter Ghavalas (the scheme mastermind), Aubrey Wynne-Jones, Anthony Dixon-Seager, Peter Martin, Neil van Hees, Soundprops 178 (a Ghavalas company that was used to channel ill-gotten commissions) and Wynne-Jones & Company EB Consultants. At the time Martin was employed by Alexander Forbes and Van Hees was marketing director of an asset management company associated with Alexander Forbes. Further names have since been added.
Pension fund administrator Alexander Forbes was also drawn into the fray when the R213m pension stripping scam morphed into a civil claim for R1bn against the company. The claim, instituted by the curators, Tony Mostert & Associates, followed a claim of R304.3m issued against Sanlam and one of R133.6m against Life Esidemi Holdings. Sanlam subsequently paid an amount of R106m to the curators in December 2006 when it became apparent they had unknowingly contributed to losses at two Datakor pension funds.
Alexander Forbes group chief executive Bruce Campbell responded to the lawsuit in an open letter to clients at the time. He noted that “it was a very complex issue involving a number of financial institutions and individuals.” The reason Alexander Forbes has been named in the civil suit is that the Lifecare Pension Fund, which was at the heart of the pension surplus scandal, was a client of Alexander Forbes when the ‘Ghavalas option’ pension stripping scandal took place. Two of the accused were also in Alexander Forbes’ employ at the time. Campbell said his company would defend the civil claim, adding that “it was important to note that there was no allegation or evidence that either Alexander Forbes or any of its employees or former employees benefited from or received any of the surpluses that allegedly left these funds.”
Admissions and early successes
One of the first successful prosecutions was secured for fraud relating to the Mitchell Cotts Pension Fund. On 27 August 2007 the Financial Services Board issued a press release which confirmed that both Rowland Bailey and his wife Shirley Bailey had been convicted after pleading guilty to a number of charges in the Johannesburg Specialised Commercial Crime Court. The case was the first successful prosecution for contraventions of the Financial Institutions Act and also the first successful prosecution of individuals involved in the ‘Ghavalas option’ pension surplus stripping scam.
Rowland was sentenced to ten years imprisonment (suspended for five years) for fraud. He was also sentenced to three years (suspended for five years) for contravening the Financial Institutions Act and six years (suspended for five years) for money laundering, though these sentences came with the option of a fine of R200, 000 and R3 million respectively. Shirley has the option of a five year prison sentence or a R1 million fine for contravening section 30 of the Proceeds of Crime Act.
Although the main ‘players’ in the so-called ‘Ghavalas option’ are getting their day in court early, indications are that none of the transgressors will spend a single day in prison. What message does the state’s plea bargain with Peter Ghavalas send to the thousands of white collar criminals plying their trade in South Africa? Add your comments below, or send them to email@example.com