Paying the price for the 'Ghavalas Option'

Almost two decades ago a number of individuals committed a series of fraudulent transactions to relieve local pension funds of surpluses. The scam, often referred to as the 'Ghavalas Option' or Lifecare pension surplus scam, affected as many as eight funds and involved as much as R800 million rand in pension fund surpluses.

One affected fund was the Mitchells Cotts Pension Fund. Local companies in the Mitchells Cotts group stopped trading in 1987 when their British owners decided to close shop in South Africa. In the early 1990s all that remained of this group of companies was the pension fund (already mentioned) and a non-trading shell company called Swainswick. What followed was series of transactions to relieve the Mitchell Cotts Pension Fund of around R23.5 million in surplus funds.

The pension surplus stripping was carried out in part by Roland Bailey (an ex Michael Cotts employee) whose family had acquired the entire shareholding of Swainswick. As the only shareholders of Swainswick, the Baileys became directors of the company and also members of the retirement fund. The Baileys then ensured that the surplus on the Mitchell Cotts Pension Fund was transferred to another fund known as the Mitchell Cotts Magnetics Pension Fund.

The Baileys were then allegedly assisted by one Peter Ghavalas, a former senior executive at Nedcor, to transfer the surplus from the Mitchell Cotts Magnetics Pension Fund to the Lifecare pension fund, from where the funds were shared between Ghavalas and themselves.

First conviction in pension fund surplus stripping scam

Some 17 years later it appears the long arm of the law has finally caught up with the Baileys. Yesterday the Financial Services Board (FSB) issued a press release which confirmed that both Rowland Bailey and his wife Shirley Bailey were convicted after pleading guilty to various charges in the Johannesburg Specialised Commercial Crime Court.

The release states: "Rowland Bailey (64) pleaded guilty and was convicted of fraud, contravening sections of the Financial Institutions Act and money laundering. His wife, Shirley (63) pleaded guilty and was convicted of contravening sections of the Proceeds of Crime Act and the Prevention of Organised Crime Act."

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. Neither Rowland nor his wife will spend any time in jail. Instead they will pay their fines and return most of the proceeds of their pension fund stripping transgressions. They will also forfeit most of the illegal pension benefits they secured while in charge of the Mitchell Cotts Pension Fund.

The Baileys also "agreed to transfer, cede and assign all their worldwide assets, together with the balances of all other bank accounts and investments to the liquidator" of the Mitchells Cotts Pension Fund. "The total amount paid over to pay the liquidator is R20, 648, 990. They have also waived their rights to any surplus in the Mitchell Cotts Pension Fund as well as any pension they were entitled to receive, other than that agreed to with the liquidator in terms of the Settlement Agreement."

More prosecutions to follow

The Bailey conviction is a first on two counts. The case represents the first successful prosecution for contraventions of the Financial Institutions Act and is the first successful prosecution of individuals involved in the so-called 'Ghavalas Option' pension surplus stripping scam.

One of the conditions of the plea entered into by the defendants in this case is that they will both be available to assist the state with further investigations and prosecutions. In this regard "they will give their full cooperation to the liquidator of the fund in providing evidence and facts relevant to the surplus stripping transactions and any other information which the liquidator might require."

Perhaps more successful legal actions will follow.

Editor's thoughts:
The plea bargain entered into by Rowland and Shirley Bailey comes nearly two decades after the crime was committed. While this case says little for the speed with which the wheels of justice turn, it does prove that your wrongdoings will eventually catch up with you. One surprise in this case is the apparent leniency of the sentences. Do you believe the punishment fits the crime in this case? Send your comments to [email protected]

To read the court record click here (PDF file 425KB) and also note on page 14 under 1.2, the amount must read R200 000, NOT R500 000 as the Court can only impose a maximum fine of R200 000