No end in sight for Ovation investors

Last week frustrated Ovation investors expected to see an end to the drama that unfolded when Ovation Global Investment Services, a linked-investment service provider, and its nominee company, were put under curatorship more than two years ago.

But rather than hearing a court application for funds to be released, the court was issued with a last-minute application by the curators of Common Cents Investment Portfolio Strategists, which has now delayed this process until the application
is heard on September 3.

There are concerns that the matter might not be resolved by the court on application and could be referred to trial, which would be a lengthy procedure.

Apart from delaying the process, the structure of linked-investment service providers, which manage about R281-billion, may need to be addressed.

The Ovation issue relates to losses made in the Common Cents cash portfolio and which investors should carry those losses.

Court papers show that R147-million invested in the Common Cents cash portfolio was misappropriated by the late Angus Cruickshank. He was a shareholder in the Common Cents business as well as the manager of the Common Cents cash fund and a key representative of Ovation. In this role he controlled all cash flow, bank accounts, the creation of units and portfolio valuations.

The curator of Common Cents argues that all investors invested through Ovation nominees should carry the losses, whereas the curator of Ovation says that only those investors in the Common Cents cash portfolio should carry the losses.

According to John Levin, the curator for Ovation, the fraud was perpetrated when Common Cents acted as both an adviser and an asset manager and managed assets on the Ovation platform known as the Common Cents cash portfolios.

In its role as adviser Common Cents gave instructions that the investments on the Ovation platform known as the Common Cents wrap funds be invested in the Common Cents cash portfolios, which they managed directly.

As a result, a portion of underlying investments in the wrap funds (invested on behalf of certain clients) were redeemed and the redemption value was paid to the Common Cents cash portfolios and the clients’ investments were re-allocated accordingly.

It has transpired that Cruickshank, who was the asset manager responsible for the cash portfolios, did not invest these monies but misappropriated them. The result is that the Common Cents cash portfolios do not have assets matching the funds put in by investors.

Common Cents curator Horton Griffiths argues that the theft took place before the funds were invested in the underlying assets and therefore it is impossible to calculate which investors suffered the loss.

He argues that the theft by Cruickshank as the custodian of the assets took place not from Common Cents but from bank accounts in the name of nominees. Therefore all investment funds that were paid into the nominees’ bank accounts, including the Ovation retirement funds and investments made by Metropolitan and M Cubed, are all affected.

The application states that ‘the allocation of investment funds as being in Common Cents cash pools was merely incidental”.

Griffiths’s argument is based on the principle of ‘commixtio”, which means that once money is stolen out of a pooled bank account (in this case that of the nominees), it is not possible to say what money belonged to whom. Therefore the investments purchased with that money must be pooled for the benefit of all.

According to Peter Blohm, of the Association for Savings and Investment South Africa (Asisa), the court papers show that Cruickshank had full control of the assets as they entered the nominee account.

As a nominee in a linked-investment service provider, investor funds are received and subsequently units in the underlying collective investment scheme portfolios are allocated.

It would not be difficult for Cruikshank to ‘skim” funds before allocating the units. So, for example, if a client should have received 110 units, his statement may reflect only 108 uni ts and the client would not necessarily be aware of this shortfall.

A recent example of how assets can be priced wrongly occurred within the Investec Global Equity Fund of Funds. In this case the fund was incorrectly priced because an investment in the fund was understated.

After picking up the error, Investec purchased additional units to compensate for the error. As a client, one would never be aware of the mistake.

Blohm says that investments in collective investment schemes (unit trusts) require a separate trustee and asset manager to ensure that the correct number of units are purchased.

But linked-investment service providers do not have such separation of roles. Rather, as the administrators, they are obliged to have either a nominee or a trust act as custodian of the underlying assets.

There was nothing legally preventing Cruickshank from being administrator, adviser and asset manager. The Ovation curators will be opposing the application by Common Cents.

Levin argues that Ovation knows exactly who the affected investors are, so there has been no ‘commixtio”. He says that if Ovation carried out the instructions of an investor and bought the designated assets for the investor, which are then reflected in its records, then those assets become trust assets and are sacrosanct.

At this stage there is no right or wrong answer and only a court of law can decide on the final outcome. It is likely that Ovation investors will have to wait a considerable length of time and pay even more fees to curators and lawyers as this argument is debated in court.

The bottom line for investors is that if this application is successful, they may find that they will experience even greater losses than they have been led to believe.

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