Leaderguard investors to sue KPMG

Leaderguard investors win court order against KPMG, opening the door to $38 million claim against the firm.

Nearly 1,200 investors in the failed Leaderguard Spot Forex investment scheme have won the right to attach KPMG International’s trademarks registered in South Africa and any remuneration owed to KPMG International by KPMG Services (Pty) Ltd in South Africa.

The order was granted last week by the Kwazulu Natal High Court in favour of Sergio Domiro and the nearly 1,200 other investors who lost upwards of $55 million (R445 million) in the failed Leaderguard investment scheme more than four years ago.

Andre Matthews of Avocado Investments, who has been assisting the investors who lost their funds, says this is a major victory for long-suffering investors who put money into Leaderguard on the basis that it was backed by reputable names such as KPMG and Denmark-based Saxo Bank. Matthews says the investors will now bring an action to recover $38 million from KPMG, which is the amount investors say they lost while KPMG was involved with Leaderguard.

John Lister of Lister and Co and Sean Sim of attorneys Sim & Botsi, who brought the action against KPMG on behalf of the investors, said in a statement, “The investors’ intention in seeking this High Court order was to make the KPMG brand answerable in a South African court of law for what the investors contend is a gross breach of professional standards and duty of care by KPMG Mauritius. Leaderguard investors have attempted to hold KPMG and other big name firms accountable for their conduct in this matter, which has wiped out the savings of many investors and caused severe financial distress to many others.”

KPMG International was named as the first respondent in the High Court application, and KPMG Services, as the second respondent.

In his founding affidavit before the High Court, Sergio Domiro, a Durban-based businessman, argued that he and his fellow Leaderguard Spot Forex investors lost most of their monies because Leaderguard Spot Forex did not exercise stop-loss limits on losing trades, as required in terms of their own rules, and broke the law by failing to keep segregated accounts. Leaderguard Spot Forex, which was set up and operated by four South Africans – Stefan Pretorius, Basie Venter, Juan Venter and Renso du Plessis – was liquidated in Mauritius in 2005.

The fact that Leaderguard Spot Forex illegally pooled investors’ funds rather than keep them separate, meant investors were unlikely to realise more than 5% of what they had invested in the scheme. Had segregated funds been maintained, Leaderguard Spot Forex would have found it far more difficult to engage in the kind of reckless trading that resulted in such huge losses.

“Investors all relied on the proclaimed role of the entity KPMG as an international and reputable accounting concern to ensure that the unlawful conduct and breaches of mandate would not occur and that their investment would thus be safeguarded in such manner,” says Domiro in his founding affidavit. “It is accordingly the case that all the Applicants/Investors suffered losses that would have been prevented, had specifically KPMG Mauritius as a member of KPMG International, not breached its duty of care it owed to the Applicants/Investors….”

Leaderguard Spot Forex deceived investors that all was well by sending out, through a South African entity called Spear Management Services, false monthly trading statements. Though Leaderguard Spot Forex was using Saxo Bank as its trading platform, it was able to further deceive investors by offering them internet access to account information that did not reflect what was actually on record at Saxo Bank. Investors logged onto a falsely compiled trading statement.

Leaderguard Securities (LS) was established in South Africa in February 2001 with the purpose of trading foreign exchange (forex) outside South Africa, for which it obtained mandates from its investors. Leaderguard Limited (LL) and Hamilton Worldwide Solutions (HWS) were established in February 2002 in Mauritius, whereafter LS represented that it was the marketing arm for LL and HWS and did not actively engage in any forex trading activities. The Mauritian liquidator, Jose Thibaut, says in his report on the liquidation of Leaderguard Spot Forex, that this representation was not entirely accurate as LS “continued until its demise …actively trading in forex.”

Leaderguard Spot Forex was registered in Mauritius in October 2003 and traded until March 2005 when it was placed under judicial management. Leaderguard Spot Forex was placed in final liquidation in January 2006.

Jose Thibaut, the Mauritian liquidator, says Leaderguard Spot Forex managed to rake in $38 million in funds in a relatively short period of time, but had reduced this to roughly $4 million by March 2005. In his report, Thibaut expressed astonishment that Leaderguard Spot Forex was able to simply migrate all its accounts from LS to LL and HWS without any verifying documentation. “In practical terms, although the legal entities changed, the main role players and their business activities effectively remained unchanged.”

Stefan Pretorius and Basie Venter relocated to Mauritius to comply with Mauritian statutory requirements, but otherwise it was business as usual. “When it became apparent that the business of LL and HWS was being conducted in a manner and fashion that was unacceptable to the Mauritian authorities, it was decided during late 2002/3 by the four main role players to form a new company by the name Leaderguard Spot Forex PCC (LSF PCC) and to change the methodology and manner in which the business was being conducted,” says Thibaut’s report.

Leaderguard Spot Forex was registered as a Global Business License One (GBL1) company in Mauritius in January 2003, for which it required an audit firm and management company. KPMG Mauritius was appointed as the auditor and Federal Trust as the management company. Federal Trust was expected to ensure compliance with statutory obligations under Mauritian law. LS engaged Old Mutual subsidiary GNI as its clearing broker, but Leaderguard Spot Forex switched to Saxo Bank in August 2003, when trading losses of $12 million first came to light. Du Plessis was the main trader and risk manager. It was decided that the company would recover these losses over the ensuing six months through an improved trading performance. This never happened – in fact, the losses continued to mount. Over the 15 months LSF was involved with Saxo Bank, the losses totalled roughly $31 million, aggravated by deliberate “churning” (trading merely to generate a commission rather than for profit) of the funds under management.

According to Thibaut’s report: “The relationship between KPMG and LSF requires a number of questions to be answered, including what due diligence, if any, was carried out by KPMG in respect of LSF, how it confirmed the opening balances, and why did it not establish and discover the trading ‘difficulties’ and the problems being experienced by LSF from inception, if one has regard to LSF’s financial statements? Most importantly, did it verify and audit the (FUM) funds under management at LSF?”

The Report of the Commissioner into the insolvency of Leaderguard found that “….KPMG had not complied with it professional auditing duties and had not complied with its obligation to independently confirm the initial deposit and to agree with LSF’s monthly statements in respect of such ‘new customer’ in terms of the ‘Agreed Upon Procedures’.”

No audit or verification of the funds under management was carried out at Leaderguard Spot Forex, nor was any audit carried out on the origin of funds in the group.

“There are many questions that Leaderguard investors want answered in an effort to recover their money, and this High Court order granted last week is a major step in the right direction,” says Matthews.