So you want to sue a corporate giant?

Gareth Stokes, FAnews Online Editor

“Clearly the [Leaderguard] audit was performed by KPMG Mauritius – KPMG South Africa and even KPMG International are separate firms and we believe there is no basis for a claim against either,” said Danie van Heerden, KPMG South Africa’s executive director for risk management. His comment was included in an article published in The Mercury, 19 August 2009, in response to a proposed class action against KPMG International. “KPMG will certainly defend [the action],” said Van Heerden. The court action is the latest instalment in the ongoing ‘investors versus Leaderguard Spot Forex’ battle that started with the company’s liquidation in 2005.

How can investors recoup their cash when a financial scheme collapses? One way is to recover part of the investment from the defaulting company, with the assistance of regulatory authorities and the courts. Unfortunately most of these companies have precious few assets to share among the hundreds of wronged claimants. A second option is to cast as wide a net as possible and determine if anyone else should shoulder part of the blame.

Assigning blame when an investment scheme collapses

It’s surprisingly easy to ‘tag’ someone else for a poor investment result. The introduction of the Financial Advisory and Intermediary Services (FAIS) Act in 2004 enables wronged investors to seek recourse from the FAIS Ombudsman in the event their financial advisor ‘fails’ them by dispensing inappropriate financial advice. Many Leaderguard investors took that route, and the FAIS Ombudsman obliged by instructing a number of financial services providers to pay compensation. In their 2006/2007 report the regulatory watchdog admits to receiving 35 complaints involving R11.5m between October 2004 and 20 March 2007. “The investments were mediated through small firms of financial services providers,” said the Ombudsman. “Twenty-two of the complaints fell within the jurisdiction of the Office and by year-end [30 June 2007] we had pronounced on seven such complaints!” In most cases the complaints were resolved in favour of the complainant.

But hundreds of Leaderguard investors lost the funds they invested before this regulatory safeguard was in place. These wronged investors had to find someone else to take to task. Who is accountable for their losses? Senior Durban advocate Barry Skinner – who chaired a recent judiciary enquiry into the matter – concluded that “accountability for the losses and damages could be attributed to the conduct of the directors of Leaderguard, the banks used as ‘investment platforms’ and KPMG.” Investors now have to decide. Do they pursue Leaderguard’s directors, the banks or the audit firm? What follows is a simple process of elimination… The ex-directors of Leaderguard probably don’t have the financial means to settle and it’s near impossible to launch a successful court action against one of the country’s leading banks – which leaves KPMG.

According to The Mercury, Durban businessman Sergio Domiro has launched a class action against KPMG on the behalf of 889 people who collectively invested $38.5m (R308m at today’s exchange rate) with Leaderguard. This court action will establish jurisdiction to sue, with the hope of tackling Swiss-based KPMG International in South African courts. The basis for the court action is that Leaderguard promised investors their funds would be pooled in individual accounts at Saxo Bank (in Denmark) and applied and “supervised by KPMG International and KPMG Mauritius.”

Court action requires money and time

You need time and money (and plenty of each) if you hope to tackle a multinational corporation in the courts. The group’s initial attempt to take on Saxo Bank – reportedly in December 2008 – petered out when the bank demanded security of €1m. This demand is usually made to ensure that those implementing legal action have enough funds to cover legal and other costs in the event the courts find against them. The second option – to pursue KPMG Mauritius through that country’s legal system – was abandoned when it became clear the process would take between eight and 10 years to complete.

Will the legal action against KPMG International succeed? One must assume that the aggrieved parties wouldn’t proceed without some hope of success. However, they could trip up at the first hurdle, which is merely an application to get permission to sue in a particular domicile! The class action members’ major problem will be one of perseverance. They’re out of pocket almost five years after the Leaderguard collapse. And unless the corporate giant (KPMG) decides to settle out of court they could easily spend the next decade untangling the red tape!

Editor’s thoughts:
Although South Africa boasts one of the world’s most impressive constitutions, the legal system remains skewed in favour of those with money. Large corporations use their financial and human resources to crush the ‘flies’ that dare to take them on. Would you be prepared to tackle one of South Africa’s banks or insurers in a court of law? Add your comments below, or send them to gareth@fanews.co.za