A two-decade-long pension fund scandal nears its end

Gareth Stokes, FAnews Online Editor

Some 20-years ago, in the mid-to-late 1990s, one Peter Ghavalas (and others) used a stratagem subsequently dubbed the “Ghavalas option” to raid the surpluses of a number of pension funds. We have written extensively on the matter in both FAnews and FAnews

Senior Counsel Jan d’Oliveira recently described the scheme as follows: “The Ghavalas option was designed to appropriate the surplus of a fund under the cloak of an outwardly lawful transfer of business from one pension fund to another.” The fraud targeted defined benefit pension funds because these were the only funds to which a surplus could accrue. A fund surplus is defined as any capital remaining in the fund after the payment of all member benefits. That is why Today’s Trustee (TT), in The Multi-sided Saga of Surplus Stripping, observes that “surplus stripping [could be seen as] a victimless crime.” (Nowadays the majority of pension funds are defined contribution funds wherein fund returns accrue directly to the fund members).

Bringing the surplus “strippers” to book

Although most of the fraud took place in the 1990s it was only in 2006 that the regulator identified five individuals and two companies that would face criminal charges for their roles in the pension-stripping saga. The list included Ghavalas, Aubrey Wynne-Jones, Anthony Dixon-Seager, Peter Martin and Neil van Hees as well as Soundprops 178 and Wynne-Jones & Company EB Consultants. Criminal proceedings were instituted against Simon Nash and his company Midmacor Industries – also for alleged surplus stripping transgressions – during October 2010.

Following his arrest in August 2005 Ghavalas entered into a plea bargain with the National Prosecuting Authority in terms of which he received a 15-year suspended sentence. He also agreed to pay a R6 million fine to the FSB and return R18.6 million to the affected funds. (The plea bargain was entered into on 16 February 2009). Other settlements include the Baileys of Mitchell Cotts (R20 million), Jan Pickard Jr of Picbel (R31 million), the former Lifecare company (R60 million), and the Lifecare Pension Fund (R26.2 million). In most cases the plea agreements offered indemnity from further prosecution.

Taking steps to fix the mess

The Ghavalas option worked because the targeted pension funds applied for – and were granted – permission to complete fund transfers under Section 14 of the Pension Funds Act. During August 2009 the Registrar of Pension Funds and the FSB applied to have these contentious certificates set aside. They felt they had an “open and shut” case because one of the charges Ghavalas pleaded guilty to was committing fraud on the Registrar’s office. This action eventually fizzled out. In September 2011 the FSB again attempted to have the certificates set aside on the unopposed Court roll. But Nash and Wynne-Jones opposed the motion and the Judge ruled that it would have to be argued on the opposed roll, set down for March 2012.

In a press release issued yesterday (9 July 2012) the Registrar of Pension Funds noted that  some significant milestones had been achieved in the ongoing surplus stripping saga. They confirmed that on 20 June this year the South Gauteng High Court completed its review of the Section 14 transfer matter and agreed to set aside the certificates issued in the Datakor Group Pension Fund, Datakor Group Retirement Fund and Cortech Pension Funds cases.

Paying out the surpluses

The registrar also announced the approval (during May 2012) of the surplus apportionment schemes submitted by the following funds:

· LUCAS SA PENSION FUND (12/8/10121) (in liquidation)

· PRESTOLITE PENSION FUND (12/8/27521) (in liquidation)

· PICBEL GROEPVOORSORGFONDS (12/8/9087) (in liquidation)

· SABLE INDUSTRIES PENSION FUND (12/8/20317) (under curatorship)

· DATAKOR GROUP PENSION FUND (12/8/8849) (under curatorship)

· DATAKOR GROUP RETIREMENT FUND (12/8/19919) (under curatorship)

· CORTECH PENSION FUND (12/8/7696) (under curatorship)

The surplus apportionment scheme of the Mitchell Cotts Pension Fund was approved in February 2011 and payments in respect of this fund have already commenced. Payments to stakeholders of the above-mentioned funds are expected to begin shortly. In a November 2011 update on all the funds affected by the surplus stripping the FSB said that R748.147 million was available for distribution to the funds. This was made up of the surplus assets in the funds at their surplus apportionment dates of R231.278 million and subsequent interest and returns on these funds. The surplus apportionments were completed around eight years ago.

Editor’s thoughts: When we sat with the Financial Services Board (FSB) on 13 June this year they acknowledged that lengthy court processes make it difficult for both the regulator and the court-appointed curators to finalise surplus stripping and other financial frauds. Do you believe that South Africa’s legal system is successful in dispensing justice in complex financial fraud cases? Add your comment below, or send it to gareth@fanews.co.za