Seeking R1bn in compensation

Last week Friday a group of curators for various pension funds launched a civil claim of more than R1bn against Alexander Forbes. They are trying to recover money that was allegedly stolen by way of an elaborate pension surplus stripping scam often referr

How the surplus stripping scam operated

From the charge sheet it appears that the Lifecare Fund (later the Lifecare Company) purchased dormant companies that owned defined benefit pension funds with substantial surpluses. In pension industry parlance a surplus occurs where a pension fund has assets in excess of the actuarial liabilities of the fund.

The pension fund holding companies then allegedly transferred the control of these funds to Lifecare. The transaction was cleverly ‘sold’ by Lifecare as an amalgamation of pension funds… Once control was obtained approximately 80% of the surplus in each of these funds was paid back to the dormant holding company. According to the FSB these transfers were enacted as “transfer of business in terms of Section 14 of the Pension Funds Act.” Ghavalas’ company (Soundprops 178) received a large commission in each case. “The charge sheet alleges that Ghavalas benefited to the tune of almost R42-million through dividend payments,” says the FSB.

The charge sheet includes nine counts of fraud and theft relating to an amount of R213m misappropriated from the various funds mentioned earlier.

From R213m pension stripping scam to R1bn civil claim

The civil case against Alexander Forbes is not the only civil action in the wake of the surplus stripping scandal. Tony Mostert & Associates have already instituted a claim of R304.3m against Sanlam on behalf of various pension funds. Another R133.6m is being sought form Life Esidemi Holdings. Sanlam incidentally paid an amount of R106m to the curators in December 2006 when it became apparent they had unknowingly contributed to losses at two Datakor funds.

An article in Today’s Trustee makes some interesting allegations which could explain the raft of civil actions. They say curators Tony Mostert and Tony Wandrag negotiated a contingency fee of 25% of moneys recovered with then deputy chief executive of the Financial Services Board, Dube Tshidi. If this is true they may already have pocketed R26.5m of the R106m paid over by Sanlam (in good faith) to the two Datakor funds. With a total recovery target of R1bn the potential ‘cash reward’ could reach R250m.

Alexander Forbes responds

Alexander Forbes group chief executive Bruce Campbell responded to the lawsuit in an open letter to clients. He notes that “this is a very complex issue involving a number of financial institutions and individuals.” The reason Alexander Forbes has been named in the civil suit is that the Lifecare Pension Fund which was at the heart of the pension surplus scandal was a client of Alexander Forbes when the ‘Ghavalas option’ pension stripping scandal took place. Two of the accused were also in Alexander Forbes’ employ at the time.

We can go back to a 2006 press release issued by the Financial Services Board to find out exactly how many companies and individuals were criminally charged for their transgressions. The first court appearance was made on 15 March 2006 at the Specialised Commercial Crimes Court in Johannesburg. The seven accused include five individuals and two companies: Peter Ghavalas (the scheme mastermind), Aubrey Wynne-Jones, Anthony Dixon-Seager, Peter Martin, Neil van Hees, Soundprops 178 (a Ghavalas company that was used to channel ill-gotten commissions) and Wynne-Jones & Company EB Consultants. At the time Martin was employed by Alexander Forbes and Van Hees was marketing director of an asset management company associated with Alexander Forbes. The case was postponed to 1 August 2006 and is still underway. Campbell says “the legal process will continue for some time and we understand that the actual criminal case is only likely to be heard in the second half of this year [2008].”

Campbell says his company will defend the civil claim. “It is important to note that there is no allegation or evidence that either Alexander Forbes or any of its employees or former employees benefited from or received any of the surpluses that allegedly left these funds. Our legal counsel has been instructed and we will be defending the matter.”

Editor’s thoughts:
Alexander Forbes has taken a beating for a variety of unethical decisions in the last two decades. However the motivation for the latest civil suit has to be questioned. Is it acceptable for the curators to pocket up to 25% of any successful award? Send your comments to gareth@fanews.co.za, or respond below.