High Court fires ZAR1.7 billion salvo at top life insurer

The Gauteng High Court has fired a more than ZAR1.7 billion salvo at one of South Africa’s top life insurers, concluding a 62-page ruling with an instruction to Old Mutual Unit Trust Managers (OMUT) to pay R854 million in capital and an additional R854 million as interest at the ‘in duplum’ level, to Living Hands and others. The judgement dealt with financial decisions dating back to 2004, in the run-up to the well-publicised collapse of Fidentia and the Living Hands Trust. And it could prove short-lived, for reasons given below.

Gloves off for round two

Old Mutual wasted little time in announcing that it would appeal the ruling, issuing a statement that it was “deeply concerned at the outcome of the court judgment handed down on 12 July 2022 in the Gauteng High Court in favour of Living Hands Umbrella Trust”. The insurer said that its actions preceding the event had been “in accordance with regulations” and that it was confident that due process was followed. More importantly, the insurer flagged “the precedent which the High Court [ruling] set for the rest of the financial services industry as it relates to managing funds on behalf of trustees”. 

Some context is needed here, much of which will likely draw gasps of amazement from stakeholders involved in the fund management industry as to how accountability apparently attaches to their actions or inactions. In layperson’s terms, FAM, which was appointed by a Living Hands Trust nominee, called up the entire investment portfolio held with OMUT, and as a result, OMUT paid over R1.130 billion in cash to the MATCO Trust account held with Standard Bank. The undisputed facts of the matter are that MATCO Trust, subsequently renamed the Living Hands Umbrella Trust, then paid this amount over to FAM and associated firms. So, how does Old Mutual end up responsible for the loss? 

Guilty for not reporting a yet-to-be-committed crime?

According to the plaintiffs, Old Mutual had sufficient information at its disposal to know that the funds were at risk and should have reported the transaction to Standard Bank, being the trustee of the collective investment schemes in which the funds were invested, as well as any or all of the Registrar of Collective Investment Schemes; Registrar of Financial Services Providers; and Master of the High Court. Don’t take the writer’s word for it; quoting directly from the judge’s ruling we learn: 

“Even though the plaintiffs agree that the loss was suffered as a consequence of the conduct of the Fidentia wrongdoers, they claim that OMUT should have taken the steps to satisfy itself before transferring the funds that FAM and the first plaintiff would safeguard the funds for the benefit of the trust beneficiaries when paid; act prudently and honestly in managing the funds; and act in accordance with section 2 of the Protection of Funds Act and section 9 of the Trust Property Control Act”. The plaintiffs further argued that had these concerns been reported, the regulators may have stopped the transaction, averting the loss. This is, in the writer’s view, is rather rich given how slowly the wheels of regulatory oversight and, indeed, justice turn. 

OMUT disagreed with the plaintiff’s view. Per the judgment, its defence vested on what it referred to as “the truly extraordinary feature” of the claim against it, in that the loss was due to the criminal and fraudulent conduct of individuals, including the first plaintiff’s then controlling mind. The thrust of the defence’s case centred on four pillars, namely: 

• The absence of liability and an actionable wrong under trust laws.
• Lawful and reasonable conduct.
• Absence of an actionable wrong or wrongfulness.
• A lack of causation and limitations of claims for pure economic loss amongst others. 

This newsletter will not delve further into the deliberations on these four points, except to note that the judge dealt with each in the ruling. OMUT also relied on the fact that the potential outcome of it reporting on concerns over the transaction were speculative. The judge was not convinced, countering that “the duty to report was not merely about the effectiveness or consequences of such reporting, [rather] it was about a demonstration and discharge of OMUT’s own utmost duty of good faith and care to the Living Hands Trust”. Further on in the judgment, the more damning, and certainly more contentious, comment: “The failure to report enabled the acquisition and what followed thereafter; there is a real probability that Fidentia’s conduct would have been detected early but for OMUT’s failure to report it”. 

An alarming precedent

We spoke to a couple of insurance experts who felt that OMUT would likely succeed on appeal. “I fail to see how OMUT can be held liable for frauds committed after they handed the administration of the funds over to MATCO, on proper authority obtained; this fact is apparently not in dispute,” said one. “OMUT is also very right to be concerned about the precedent that this creates; if the finding is upheld on appeal, it would make future transfers of funds between administrators well-nigh impossible to properly and finally effect and may even call into question other transfers of the recent past”. 

Robert Vivian, Professor of Finance and Insurance at the University of the Witwatersrand, said that he had not read the judgement; but that the matter immediately drew parallels with the Mostert versus Old Mutual case, more than two decades ago, in 2001. “That case centred on a company pension fund that had been administered by Old Mutual for decades,” explains Vivian. “The company then advised Old Mutual it was going to take back the pension fund and administer it itself and instructed Old Mutual to transfer the money back”. Old Mutual did as it was instructed… 

The company proceeded to  illegally invest these funds into the business and went bust, taking the pension fund assets with it. “The pension fund represented by an attorney, Mr. Mostert, sued the Old Mutual and won the case,” said Vivian. “I did not agree with that judgement and will probably not agree with this one”. 

Writer’s thoughts:
The 62-page judgement in the Livings Hands (Pty) Limited and others versus Old Mutual Unit Trusts Managers is too dense to precis in a 1000-word newsletter… This writer admits to concerns over some of the revelations contained in the judgement, most notably on the apparently cavalier attitude taken in transferring ZAR1.2 billion worth of other people’s money. We would love to hear from the legal and pension fund experts among our readers: Is this ruling going to stand? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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