I pay into a retirement annuity every month and this is my retirement nest egg, one of my most important assets. Yet how do I know if my money is safe?
The linked investment services provider (Lisp) I invest through is regulated by the Financial Services Board (FSB) and has a track record but it is not one of the massive houses such as Old Mutual or Momentum.
What protection is the FSB offering me? If you ask the investors in the Ovation Global Investment Services Lisp, the answer is “not a lot”. After a court hearing on August 4 it will be paid out only 95% of its investments after spending R44-million on a curatorship that has seen its assets tied up for more than two years.
In March 2007 Ovation Global Investment Services and nominee company Ovation Global Investment Nominees were put into curatorship on the recommendation of the FSB — which had not received audited financial statements from Ovation since its December 31 2004 financial report.
According to the curators’ report, “financial management and accounting controls were seriously compromised since at least March 2006”. KPMG resigned as auditors in August 2006 and informed the registrar that it had reason to believe that reportable irregularities were taking place.
So, despite missing the submission of its 2005 audited annual financials, as well as a startling report by KPMG, action was taken against Ovation only in 2007. By this time about R190-million had been misappropriated.
Although curatorship costs for the past 12 months are not publicly available, investors have paid about R44-million in special levies and there is a court order to withhold a further R240-million for future claims and costs.
From the court records that are available, the curatorship costs are staggering. The two curators, John Levin and Barend Petersen, were paid R8.3-million for the first 16 months that these companies were under curatorship. This equates to R500 000 a month being paid to the curators. Add this to the R10.6-million authorised for forensic and legal costs and investors are understandably concerned about the effect this is having on their investments and what benefits they have gained from curatorship.
Although a salary of at least R250Â 000 a month seems exorbitant to any investor who is paying for it, curator Levin argues in an interview with the Mail & Guardian that it is justified because 98% of his time is spent managing the curatorship of the two businesses. He says the monthly fee agreed on with the FSB has not fully compensated him for the opportunity cost of not being able to build his law practice and that once he has wound up the Ovation saga he will have to start his practice from scratch.
The reality is that in legal and accounting circles, curatorship is seen as dogsbody work so there isn’t a queue of lawyers and accountants lining up for the honour. As a result curators can name their price and the price is always paid by the investors.
The questions that need to be asked are whether the exceptionally expensive route of curatorship has been in the best interests of investors and whether more could have been done to protect investors’ interests. According to Levin and the FSB, most of the costly work has been a result of trying to reconcile accounts and statements that had not been administrated properly for more than a year.
The FSB says that a large amount of the costs incurred by the curatorship was to reconcile the records the previous management of Ovation had not kept up to date.
Not only were there no records but about R190-million had been misappropriated. The money had been invested in the Common Sense Money Market fund which was managed by the ill-fated Fidentia Asset Managers and subsequently plundered.
Had an investigation of Ovation taken place sooner, the amount of work would have been less and possibly the fraud would have been detected earlier and the fund closed before more funds were lost.
When investors invest through what they consider to be regulated financial institutions, they expect to be protected by the regulator. To this end the FSB is paid a levy by financial institutions which ultimately investors pay as part of their administration fees.
When the regulator fails, one could argue that those levies should be used to pay for whatever legal remedies are required. But in the case of Ovation the investors are footing the bill, which is being paid for from, in many cases, retirement funds held in nominee accounts.
As an investor in what I consider to be a protected nominee account, I am concerned that the courts have allowed investors’ money to fund the curatorship of a business.
When one invests through a nominee account one believes that those assets are protected from any legal action taken against the nominee or trust company. This is the principle behind unit trusts and attorney trust accounts.
The Financial Institutions (protection of funds) Act 28 of 2001 states: “Despite anything to the contrary in any law or the common law, trust property invested, held, kept in safe custody, controlled or administered by a financial institution or a nominee company under no circumstances forms part of the assets or funds of the financial institution or such nominee company.”
Yet the courts ruled that as the institution needs “to be steered though a crisis, drastic steps have to be taken even if they impinge upon the rights of third parties”.
The protection of a nominee or trust account appears to be as flawed as that of our regulators.
With the saga of Ovation as a lesson, I will follow up each year with my service provider to ensure its financials have been filed on time. If not, I will move my investments before the FSB can yell curatorship.
Curator answers questions from frustrated investors
Mail & Guardian has received the complaints from Ovation investors dissatisfied with the workings of the curatorship. Curator John Levin puts forward his case.
Lack of service
There have been numerous complaints by advisers whose clients’ investments are sitting on the Ovation platform. One private client firm told the M&G that there has been no access to the curators, calls have not been returned and meetings have been cancelled.
“They [the curators] have done the bare minimum in terms of the law to satisfy the investors’ needs,” says one of the directors.
Levin says the staff at Ovation work under difficult circumstances and that from time to time there will be complaints. He says, however, he will personally deal with any complaints from investors directly.
Lack of transparency
Details of the expenses accrued as part of the curatorship have not been provided to investors, despite many requests. Levin argues that it would be impossible to have 16 000 different investors analysing costs and debating them. The FSB, as the authority, approves the costs and Levin sends a monthly report to the board.
“The public perception is that curators are there to milk them. They will debate every decision,” says Levin, who adds that the curators are required to report back to the FSB only. However pension fund trustees of assets held on the Ovation platform say that they have a fiduciary responsibility to understand the costs paid from pension funds.
Withholding of further funds
Investors are angry that a further R240-million (about 5% of total assets) will be withheld when their funds are finally released from the Ovation platform. Levin says that this is necessary so that the investors can be paid out knowing that there will be no further claims on their investments.
“We expect we are accurate to within 5%,” says Levin, adding that investors could still see these funds repaid if there are no further claims.
Any recoveries will first go to refunding investors the curatorship costs before providing for losses suffered by specific investors (such as Common Sense). Investors may thus receive some of the R44-million they have paid in curatorship levies. So far R73-million of the estimated R190-million Common Sense-related losses have been recovered from Metropolitan and Mcubed on behalf of investors holding linked policies underwritten by these institutions.
Conflict of interest
Questions have been raised about the conflict of interest of legal firm Webber Wentzel providing legal services to the curators. Curator Levin has been a consultant at Webber Wentzel since his previous firm Mallinicks, at which he was also a consultant, merged with Webber Wentzel. Webber Wentzel’s legal council on this account, Lara Khan, worked at Mallinicks before joining Webber Wentzel.
Levin says that working from the Webber Wentzel offices was cost-effective because he did not need to set up appointments specially and could work more informally with staff whose abilities he knew well. He believes that using an independent legal firm would have increased the costs for the investors and extended the period of the curatorship.