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Ghavalas plea bargain proves crime does pay

17 February 2009 Gareth Stokes

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.

Editor’s thoughts:
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 gareth@fanews.co.za

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Comments

Added by ba, 18 Jan 2010
Did the fraud-king Peter Ghavales end up in jail? Were the pensioners reimbursed? If it hadn't been for one of the pensioners, Mrs Doyle, how long would Ghavales and his henchmen have gotten away with their scam? Surely an audit should have picked this up sooner?
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Added by GT, 17 Feb 2009
If you have a corrupt government in place that sets the tone, can you expect otherwise?
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Added by Willie Louw, 17 Feb 2009
R300million embezzled and only R18,6million(6,2%) paid back - does this also imply it will be the only money recovered? Although it is true that a jail sentence will not replace the money lost by the pension fund members, there surely must be a penalty - and not one where ill-begotten money is used to 'repay' the lost money. Yes, jail sentence will surely be an applicable sentence.
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Added by Gregory, 17 Feb 2009
It is shoking that criminals like Ghavalas are getting off easy. The justice system in this country is a joke. South Africa is now a Banana Republic. Even our next president is being charged in court for being corrupt.
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Added by david, 17 Feb 2009
The plea bargain document should be part of the court record as admitted evidence -and thus should be available to the general public for scrutiny... interesting reading for law students about how perverse the system could be, if allowed to be.
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Added by Nancy Bowring, 17 Feb 2009
I advise all young people working for companies and who contribute to retirement funds to retain all salary slips and all benefit statements and to request benefit statements annually. This type of fraud is more rife than people are aware of and is totally unacceptable.Characters like this make our lives as honest, legitimate financial advisors more difficult. We should start a legal fund where we can take class action against unscrupulous indivduals on behalf of the defrauded investors/pension fund members and pay our own curators a fair fee not 25%. My fees are nowhere near this kind of percentage.
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