/ 2 September 2011

Gatekeepers accused of predatory tactics

Gatekeepers Accused Of Predatory Tactics

A remarkable battle has erupted which threatens to unseat two of the most powerful figures in the financial services industry.

They are Dube Tshidi, the chief executive of the Financial Services Board (FSB), and Tony Mostert, a high-profile attorney who has cornered a highly lucrative market in relation to an unusual set of pension funds.

Tshidi leads the body that regulates virtually all aspects of the financial services industry, including banks, pension funds, insurance and investment.

He has been accused in court papers of lying under oath, colluding with Mostert and generally behaving in a “despicable fashion”.

Private conversations between Mostert, his team and Tshidi, taped by a rogue lawyer, strongly suggest that Tshidi abandoned his legally required independence to follow Mostert’s dictates.

The tapes show that together they ganged up to gain control of a fund, the Cadac Pension Fund, and its assets.

On December 23 last year Tshidi applied to court — on an urgent ex parte basis (without hearing the other side) — to have the Cadac fund placed under the immediate control of Mostert via a curatorship order.

Ghavalas funds
Although the move was portrayed as a bid to protect the fund, the taped private comments that have now emerged suggest it was really intended to cut off the financial oxygen to the last obstacle to Mostert in his bid to gain total control of pension funds dubbed the “Ghavalas funds”.

When, in January this year, Tshidi was cross-examined under oath about the affidavit in his name that launched the Cadac curatorship application he attempted to distance Mostert from the process.

It was an exchange that may emerge as entirely destructive of his credibility:

Advocate: “Well, who drafted this affidavit? Was it your legal department or was it Mr Mostert?

Tshidi: “My legal team.”

Advocate: “Did Mr Mostert ever play a role in the drafting?”

Tshidi: “I talked to my legal team, I did not talk to Mr Mostert.”

Now tapes have emerged showing that on December 15 and 16 last year Tshidi attended an urgent meeting called by Mostert at his office.

The reason for the meeting was that an attorney, June Marks, wanted to disclose information and documents she had obtained while serving as the Cadac Pension Fund’s lawyer, in spite of apparent breaches of legal ethics and client-attorney privilege.

Transcripts of the meeting, attached to a legal challenge to Mostert’s appointment, suggest that Mostert’s team and his advocate played the lead role in planning and executing the curatorship application, which was launched formally in Tshidi’s name a few days later.

Tshidi has declined to respond to this allegation in the media, telling the Mail & Guardian he would respond in court papers where necessary.

But if the allegations are given judicial imprimatur when the case comes to court in November, such a judgment would render him unfit for his current position.

Mostert also bats away the allegations, but has a lot at stake.

Beginning in 2005, in collaboration with the FSB and the National Prosecuting Authority, he took on individuals and companies alleged to be conspirators in a scheme in the 1990s that became known as the “Ghavalas option”.

The scheme, named after its “inventor”, Peter Ghavalas, involved a complicated series of transactions designed to gain access to the surplus in a pension fund, with a 30% commission for Ghavalas.

The transactions, which all took place in the 1990s, were approved by the FSB and Ghavalas maintained for years that they were legal.

Later the FSB argued that their approval — via so-called Section 14 certificates — was based on deliberate misinformation and the scheme constituted fraud.

The FSB laid charges and in 2005 appointed Mostert to pursue civil recoveries against the beneficiaries of the surplus-stripping operation that ultimately involved 10 pension funds.

Plea bargain
Ghavalas, who was arrested on Mostert’s instigation during a visit from Australia, where he had moved, eventually changed his tune and reached a plea bargain with the state in 2009 in which he admitted fraud and imputed guilty knowledge to others.

He reached a deal, however, only after Mostert had effectively cut off his ability to fund his defence by obtaining an interdict freezing Ghavalas’s assets.

So Mostert has been highly successful, though the backing of the powerful FSB has been crucial to his success in forcing the repayment of close to R1-billion.

It has also been extremely lucrative for him and his associates, based on agreements with the FSB that grant him a share of the recovered amounts and allow him to employ his own law firm and chosen advocates.

According to written answers in Parliament by Finance Minister Pravin Gordhan on February 18 this year, Mostert and his associates received about R234-million in fees and legal disbursements, amounting, so far, to just less than 25% of the recovered R946-million.

The curators’ fees, based predominantly on varying contingency fee agreements, make up just less than 20% of this, with the other 5% going to legal and professional expenditure.

About R700-million is available for distribution to pensioners and beneficiaries, although only 7 000 of an estimated 27 000 former members have been traced. Actual distribution seems quite distant.

Mostert argues that, initially, there was a chance that he would get nothing and the returns should be seen in the light of his risk.

He said: “The ‘benefits’ were obtained as a result of relentless endeavours, with great risk and forfeiting other business and financial opportunities, so much so that the entire resources of this law firm are engaged.”

But his personal enrichment has been significant. In 2008 he was able to pay cash for a R23-million Clifton apartment.

Along the way Mostert has also gained a reputation as something of a giant-killer, having taken on and extracted very large payouts from both Sanlam and Alexander Forbes, who administered or advised pension funds used in the Ghavalas scheme.

The question now is whether, in the process, Mostert has not become something of an ogre himself. The answer has possible implications for his standing as an attorney and continued fitness to act as a curator and liquidator.

The same question has been raised previously during sometimes bitter litigation, but has been brought starkly to the fore by the legal battle over the latest fund to be placed under Mostert’s provisional curatorship, the Cadac Pension Fund.

In his bid to gain control of the Cadac fund Mostert may have overreached himself.

Cadac, which manufactures and sells outdoor leisure equipment, is an iconic South African brand, but in 1995 it was part of a clutch of struggling businesses owned by Cullinan Holdings, which Simon Nash chaired.

Nash was introduced to Ghavalas and jumped at the chance to access the pension-fund surplus in various funds associated with the group.

In 2001 the law was changed to give past and present members, as well as pensioners and the employer, the right to negotiate a distribution of a surplus in a defined benefit pension fund. But in the 1990s many companies viewed themselves as at least morally entitled to benefit from the surplus in a defined benefit fund since they were liable for any shortfall.

The applicable legislation at the time partially endorsed this view by allowing companies to take a “contribution holiday” if their pension funds were in surplus. That is, they could stop making the employer portion of the pension contribution for employees and so run down the surplus and achieve a saving to the company over time.

The Ghavalas scheme was presented as a creative, ostensibly legal way to turn the surplus into cash immediately available to the employer.

Nash and his board embraced Ghavalas’s schemes involving two of the funds within the group, Sable and Powerpack.

They removed about R78-million in surplus, of which more than R25-million went to Ghavalas and other transaction expenses, while the rest was apparently used to reduce debt and fund capital investments in the struggling companies.

Nash was arrested in 2006, with a whole string of those allegedly involved in other surplus-removal schemes engineered by Ghavalas.

His trial, separated from those of the other accused, began last year and is scheduled to resume in November.

Nash says he is happy to defend himself in court on the criminal charges, but his contention is that Mostert has used his powers as curator and influence with the FSB to bully opposing parties into submission.

In an affidavit in support of an application to remove Mostert as the Cadac Pension Fund curator, Nash states: “Not one of the [FSB Section 14] certificates has been set aside — Mostert’s tactic is not to challenge the transactions on their merits, but rather to control the criminal prosecutions and extort settlements from (accused persons) by settling the criminal prosecution in exchange for large amounts of money in which he shares handsomely.”

Mostert counters: “It does not lie in the mouth of any of the perpetrators of the crimes to complain about the fact that the curators/liquidators are incentivised to make recoveries.”

Mostert dismisses as “preposterous” claims that he can control the National Prosecuting Authority, pointing out: “For years, at least three, there has been a rift between the prosecution, NPA and Mr Mostert, given the fact that he has levelled criticism for not assisting the curators in certain respects. This — flies in the face of Nash’s claim of a close bond between these parties, that is, the gang against him.”

But criticism of the relationship between the FSB, the prosecution and Mostert has been raised by others.

Ghavalas applied for the removal of the two private prosecutors appointed by the NPA on the grounds that they were being funded by the FSB, the complainant in the matter. The application was resisted, but the two external advocates, who also represented the state in the other prosecutions, were eventually removed.

At one point advocate Mike Hellens, for Ghavalas, put on record that Mostert’s advocate had confirmed that Mostert had attempted to gain control of Ghavalas’s company in order, as curator, to withdraw the company’s challenge to a search warrant obtained against it.

Hellens put it thus: “In other words, rather than face this application to set aside the search warrant being successful, it was intended by the curator, who is working hand in glove with the FSB, who are the complainants in this case … to hijack one of the accused and take over the captaincy of that ship … and then abandon the application.”

It is testimony to the clout he carries that, in response to the M&G raising this issue, Mostert procured a statement from Hellens that now characterises this behaviour as sweetly reasonable.

Cadac: Another hijack?

After Mostert was appointed provisional curator of the Cadac Pension Fund, fund members appointed new trustees to take a position on how to respond.

Mostert repeatedly characterises them as Nash’s puppets, without offering any evidence to back up this claim. Contrary to that view, the new trustees accepted that a curator should be appointed to investigate the fund’s affairs, given that there were serious allegations against both Nash and Marks, but they argued that Mostert was entirely unsuitable to serve in that position.

In the first place, they pointed out, he was already the curator of the Sable fund, which had a potential claim against the Cadac fund flowing from the Ghavalas transactions. Mostert was, therefore, conflicted.

Mostert denies a conflict exists and this is a key dispute that the court will have to rule on.

Volte face
However, the trustees’ objection escalated dramatically when Marks, the former attorney for the fund, and Nash personally, did another volte face and disclosed recordings she made of the meeting in December 2010 with Mostert and Tshidi.

By this time Mostert had used his control of the pension fund to cut off their funding. It is a measure of the professional outrage provoked by the recordings that the trustees’ legal firm, Werksmans, opted to continue the litigation at risk, while giving notice that it intended to claim costs from Mostert personally.

In their petition the trustees state: “We are advised that it will be argued at the hearing of the application that at least Marks and Mostert have rendered themselves guilty of unprofessional conduct of the most egregious nature.

“Tshidi and the inspectors of the FSB, and Mostert and his legal team, received legally privileged information from Marks, which formed the basis of the curatorship application, with full knowledge that neither the Cadac Pension Fund nor Nash had waived legal privilege.

“It will be submitted at the hearing of this application that the manner in which Mostert and Tshidi colluded in instituting the curatorship application is consistent with a ‘sinister’ and ‘undesirable’ relationship.”

In his formal response these allegations, Mostert said: “This matter is the subject of the pending application for curatorship of the Cadac Pension Fund, the allegations will be addressed in the course of the litigation and will be pronounced upon by court in determining this matter.

“Mr Mostert is therefore unable to provide you with a response at this point in time. Mr Mostert denies that he has rendered himself guilty of unprofessional conduct.”

Mostert points to a court order entitling him to conduct investigations and deeming such discussions “private and confidential”.

“In flagrant breach of these provisions, and in contempt of the court order, Ms Marks made illegal recordings of such discussions and furnished such discussions to Mr Nash and the new trustees.”

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The M&G Centre for Investigative Journalism, a non-profit initiative to develop investigative journalism in the public interest, produced this story. All views are ours. See www.amabhungane.co.za for all our stories, activities and sources of funding.

To: The editor
Mail & Guardian Newspaper

Dear sir/Madam

RE: Article “Gatekeepers accused of predatory tactics”-

Your article published on the 02/09/11 hurled a number of allegations at the Executive Officer and the Financial Services Board. Mr Sole, having seen fit to ignore the FSB’s response to the draft article which was forwarded to him beforehand. Although I am not at liberty to discuss the Cadac curatorship issue in great detail as the matter is pending in court, we need to clarify some of the points raised in the article as they convey an utterly distorted picture:

      1. The impression has been created that our EO’s independence and that of the FSB was compromised when the EO and other FSB officials attended a meeting with Mr Mostert and Ms June Marks on the 15th December last year. The FSB attended the meeting after I received a phone call from Mr Mostert indicating that he had a material witness who was prepared to make significant disclosures to Mr Mostert concerning the Sable Fund as well as irregularities occurring in the Cadac Fund. The EO was informed that this witness was Ms June Marks who was formerly Mr Nash’s attorney and had since resigned as such. As Registrar of Pension Funds, the EO felt duty bound to attend the meeting. Interchanges between the FSB and a curator are frequent. Curators function under the control of the Registrar. Curatorship orders oblige a curator to report to the Registrar should it appear that the curatorship needs to be extended to another entity. Therefore, there was nothing strange or sinister in a meeting between Mostert, qua curator of the Sable Pension Fund, and the Registrar to discuss the feasibility of or the need for a curatorship of the Cadac Fund, that having been a possibility for a considerable period of time.
      2. The claim of “breach of professional privilege” employed to cast doubt on the integrity of both the inspection and the curatorship application, is devoid of merit. The question of legal privilege was discussed at the meeting. Ms Marks said she had obtained legal advice in this regard and was comfortable that she was not breaching her duty. Ms Marks’ only significant contribution to the evidence already known to the FSB at that stage, was that she told the meeting that, only days before, Mr Nash was still abusing the Cadac Fund’s assets by having a mortgage bond of R 10 million registered over property owned jointly by the Cadac Fund and the Cadac company, the Fund receiving no benefit from the proceeds of the bond. (This issue was dealt with in the application). This information came to the attention of Marks long after she had withdrawn as attorney for Nash and the Cadac company.
      3. By coincidence, during the week when the application was prepared, the two in-house lawyers of the FSB who normally attend to the drafting of curatorship papers were both absent from office. In the absence of the FSB’s own two lawyers, the EO cannot be faulted for asking Adv van Tonder (who was then present) to attend to the preliminary drafting of the application and collating the supporting documentation. We all knew at the time that one of our lawyers, Mr Wessels, was returning over the weekend that followed and would work on the draft application before it was presented to Court.
      4. A significant part of your article centres on the cross examination of Mr Tshidi in court in January this year. He was questioned on the curatorship application, and was asked: “Who drafted this affidavit?” to which he replied “My legal team.” This answer is correct because Mr Wessels worked on and finally settled the entire affidavit. The next question was “Did Mr Mostert have a role in the drafting …?” to which the reply was “I don’t know.” This answer is also correct as Mr Tshidi didn’t know what role Mr Mostert had played. To the EO’s knowledge, Mr Mostert did not draft the application, and his role was to assist with information that would have been, for the reason already mentioned in paragraph 1, quite in order.
      5. Your article suggests that there are other individuals that are critical of the “relationship” between the FSB, the prosecution and Mr Mostert. None such individuals has raised these concerns with Mr Tshidi or the FSB.
      6. Your article makes reference to Mr Ghavalas’ application to have the two prosecutors removed. It fails however to tell the full story. That application was withdrawn. The prosecutors remained on the prosecution team and continued with the prosecution including that of Nash until expiry of their contracts with the NPA. The two prosecutors were not removed. Did you obtain the NPA’s comment on this? You are referring to two distinguished previous State Advocates.
      7. Your attention is again drawn to the response supplied by the FSB to Mr Sole. This is a complex matter with a long history. A number of the allegations raised by Mr Sole seem to be a slavish repetition of what Mr Nash told him. The slanderous brush wielded by your newspaper on behalf of Mr Nash indiscriminately taints many individuals who have nothing to gain personally and who are merely performing their official duties. It is suggested that in matters of this nature involving years of litigation, professional journalism requires a careful study and understanding of the court papers. Your article is selective in emphasising Mr Nash’s (unsubstantiated) allegations while ignoring how they were addressed in the court papers. Mr Sole should also have cared to look at the indictment against Mr Nash and, if nothing else, at least have awaited the outcome of the trial and the pending civil litigation.

Tembisa Marele
Head: Communication and Liaison
Financial Services Board