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Everything you know about advice & adviser liability could be wrong

10 October 2022 Gareth Stokes

A recent court ruling could render everything that financial services professionals understand about discharging their mandate moot, forcing thousands to reflect on financial decisions taken over the last decade or longer. This follows a recent matter in which a court ordered one of the country's largest asset managers to hand back more than a billion rand of beneficiary funds that it had transferred to another asset manager, within mandate, more than a decade ago.

The wheels of justice turn slowly in South Africa, especially in the realm of complex financial crimes. Case in point is the Gauteng High Court ruling in Living Hands (Pty) Ltd N.O. and Others v Old Mutual Unit Trust Managers Ltd [2022] ZAGPJHC 456, which is a spin-off from a well-executed trust fund ‘heist’ dating back to the early- to mid-2000s. Although not strictly an employee benefits matter, the ruling has the potential to affect asset managers and investment advisers across the asset management industry, thus earning a presentation slot at law firm Bowmans’ recent  employee benefits webinar. 

The now infamous ‘widows and orphans’ heist

Graham Damant, senior consultant, Employment and Benefits Practice at Bowmans, took to the virtual podium to share the history, outcome, and potential consequences of the High Court decision. He explained that Living Hands was an umbrella trust established to manage the death benefits of beneficiaries of a mine workers’ pension fund, as was common before beneficiary funds became a thing. “This trust was established largely to receive the benefits of employees employed in the mining industry, so we are talking about vulnerable, minor beneficiaries that were located all over Africa,” he said. The ‘widows and orphans’ tagline emerged over time, courtesy the mainstream media. Living Hands Umbrella Trust was administered by a company called Matco, who had appointed Old Mutual as its investment adviser. 

What happened next is still among the largest financial heists to have taken place in South Africa, and one perpetrated more or less within the letter of the law. J Arthur Brown, who subsequently served time for his role in the crime, through a company called Fidentia Holdings, purchased Matco. He also purchased a small ‘father and son’ brokerage that was relicensed as an investment adviser and asset manager, Fidentia Asset Management (FAM), and immediately appointed to replace Old Mutual as the investment adviser to Living Hands. “The first thing that the new asset manager did was write a letter to Old Mutual asking them to liquidate ZAR150 million and pay it over to a nominated bank account,” Damant said. This and other liquidation instructions, alongside the various communications between the parties, became the topic of the High Court’s deliberations. 

Would you had handed over ZAR1 billion so easily?

One of the facts that emerged from the court proceedings was that the SLA between Old Mutual and Living Hands carried a 90-day notice period, potentially voiding any immediate fund transfer. But Damant said there were many other warning flags at the time, including that Old Mutual had not dealt with the asset manager or newly appointed trustees before…“They did not know that they were actually being fired.; and they did not know why they were suddenly being asked to pay over ZAR150 million,” he said. Old Mutual refused the request, only for FAM to up the ante, with a strongly worded letter full of inuendo and threats and a demand that the whole investment amount of more than ZAR1 billion be liquidated and paid over. Old Mutual capitulated to the pressure, liquidating the portfolio within two days, and paying the money to the trust account's bank account. 

Old Mutual then proceeded as any asset manager would, absolved from further liability due to having fulfilled its mandate per the client’s legal instruction. “From any ordinary asset manager’s perspective, you would have thought that you had discharged your mandate: you were given notice to liquidate; you liquidated the portfolio, and you paid the capital back to your client … you have no interest in what happens next,” said Damant. The High Court took a different view, for reasons we will discuss in the following paragraphs. For further context, readers are reminded that following the transfer, J Arthur Brown and associates burned through around ZAR860 million by purchasing a variety of assets and running (sic) Fidentia. 

Living Hands sued Old Mutual in delict for the loss of the ZAR860 million, arguing that the asset manager was negligent in handing over the money to FAM, and had thus caused the loss. Damant summarised the alleged failings as: 

  • First, the initial request for ZAR150 million should have put Old Mutual on high alert. “When you got that instruction to liquidate ZAR150 million from people you had never heard of, to pay an asset manager that nobody had ever heard of, and to pay it over to a bank account that you did not know about, that should have immediately put you on high alert,” he said.
  • Second, that Old Mutual, rattled by the demand just mentioned, should have immediately reported the suspicious activity to the regulator. Living Hands further argued that had Old Mutual alerted the regulator “at this very early stage, none of the events that would subsequently unravel would have unravelled”. 

Putting duty of care under the microscope

The High Court referenced the entire relevant regulatory framework in drawing its conclusion, including the Trust Property Control Act; the Financial Institutions (Protection of Funds) Act; and the Collective Investment Schemes Act (CISCA). Each of these acts “place very onerous obligations in relation to trust monies … in order to protect vulnerable people”. The court, according to Damant, indicated that the duty of care created by the legal framework, trumped any contract. Additionally, the asset manager or investment adviser’s duty of care extended to the entire investment chain, from when it received the money, to how it invested the money, and to how it discharged its mandate. 

“The court said you have got to satisfy yourself about the new manager and that the new manager is going to safeguard the property and is going to do it prudently and honestly; and that has far-reaching consequences for investment managers,” Damant said. He was not, however, entirely convinced that the ruling would stand on appeal. “This is a very surprising case with an improbable outcome; you would never think that an investment manager that has been terminated could be held liable for the new investment managers and trustees dissipating and stealing all of the money,” he concluded. “Also, in terms of the delict ‘tests’ it does seem a very improbable outcome of causation foreseeability”. 

Make sure when exiting financial relationships

Going forward, asset managers and investment advisers will have to interrogate termination instructions from clients, asking questions like: Why is this being terminated? Where is this money going to go? Which asset manager is it and are they credible? etc. 

On the face of it the High Court ruling seems harsh, until we view events through a common-sense lens. Surely, an adviser has some responsibility to end or exit his or her financial relationship with a client without potentially compromising that client, which process would include confirming the identity and integrity of the account they are instructed to remit the client’s funds to? On the flipside, an adviser or client cannot be expected to second guess his or her client’s instruction, nor could they legally refuse it. 

Writer’s thoughts:
Duty of care is one thing; but it is a whole different story if you try to stand between an individual investor and his or her desire to withdraw from your practise to  invest in an objectively ‘questionable’ opportunity. Have you ever tried to stop a client from withdrawing funds from an investment, and what, if any, legal standing exists for you to intervene? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Frederick van Heerden, 17 Oct 2022
To think that the regulator would do anything prior to people losing their money is an absolute dream..... In the case of Share Max the Regulator was approached for preventative help & Action. Did they help?...........NO There are many cases where the Regulator was informed about very Dicy happenings ....Did they react? off course not.... I Think it is ludicrous to keep Old Mutual responsible in this case... The Court Erred in this instance. OM should Take this further.
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Added by Adam Samie , 10 Oct 2022
The judgement takes the duty of care concept too far in my view. Feels like someone is looking to make a recovery of stolen funds from the wrong parties. Most likely this judgment will be overturned on appeal
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Added by Lucille Horn, 10 Oct 2022
What about the trustees of the Living Hands Trust, where were they? Are they not actually responsible for the loss and theft????
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