South Africa

R1.7 billion Old Mutual ruling sets a drastic precedent for asset managers

The South Gauteng High Court has handed down its judgment in the case of The Living Hands Umbrella Trust vs Old Mutual Unit Trust Managers, ruling that Old Mutual was negligent in its actions and is liable for pure economic loss.

The Court found that Old Mutual failed to uphold its duties under the Protection of Funds Act and Trust Property Control Act.

Old Mutual must now pay just over R1.7 billion in losses suffered by the Living Hands Umbrella Trust regarding the Fidentia Group scandal in 2006.

The ruling sets a drastic precedent that has implications for asset management’s due diligence and precautionary checks before releasing funds to principals, regardless of validity.

Old Mutual is now filing to appeal the South Gauteng High Court’s judgment in favour of Living Hands.

The Fidentia Group scandal and Old Mutual’s involvement

The Living Hands Umbrella Trust – previously known as the Mantadia Asset Trust Company (MATCO) – held trust assets on behalf of over 50,000 beneficiaries of deceased members of the Mine Workers Provident Fund.

In 2002, Old Mutual Unit Trust Managers – the defendant in this matter – were appointed as investment advisors to MATCO.

Old Mutual designed the investment portfolio and was contracted to buy, sell, and switch units in the various portfolios within the collective investment schemes on the instruction of MATCO.

According to Cliffe Dekker Hofmeyer (CDH), during this process, Fidentia Holdings Group acquired the trust company in bad faith, and Fidentia Asset Management (FAM) was appointed the discretionary investment manager of the Trust.

FAM then called for the Trust’s entire investment portfolio held with Old Mutual to be liquidated.

Before paying out the funds, Old Mutual raised concerns to the Trust and FAM regarding the validity, scope and intended impact of FAM’s instructions to liquidate the Trust portfolio and transfer such funds to FAM.

Despite this, Old Mutual eventually paid out R1,130,319,447.32 to the Trust’s account, which had come under the control of Fidentia.

The Trust then paid R1,239,842,219.49 into bank accounts held by Fidentia and its controlled companies. The money was used to defray business expenses and to acquire property and private equity investments for the Fidentia Group.

In 2006, as a consequence of a broad investigation by the Financial Services Board into the conduct of the Fidentia Group regarding the misappropriation of client funds, the Group was placed into final curatorship in 2007.

As part of this curatorship process, the Trust recovered only R272,689,727.00 and sought the rest in the High Court.

The issues brought forward to the High Court against Old Mutual

The former sole corporate trustee and the two current trustees of the Living Hands Umbrella Trust are the plaintiffs in this matter.

The plaintiffs argue that, while the trust suffered the loss due to Fidentia’s wrongdoing, Old Mutual failed to safeguard the funds before implementing the transfer to the Trust’s account under the control of Fidentia.

The claim against Old Mutual is one of delict since it breached its legal responsibilities, causing pure economic loss.

 The plaintiffs argue that Old Mutual is liable for the following reasons:

  • It had knowledge of the Trust’s business and the vulnerable nature of the Trust beneficiaries.
  • It knew or reasonably ought to have known that Fidentia had taken control of the Trust and that it had come under the control of individuals who may not act in the best interests of the beneficiaries.

For these reasons, The plaintiffs claim that Old Mutual breached duties imposed on it by the Collective Investment Schemes Control Act 45 of 2002, the Trust Property Control Act 57 of 1988 and the Financial Institutions (Protection of Funds) Act 28 of 2001.

Old Mutual Unit Trust Managers’ defence

Old Mutual never disputed the facts and the wrongdoing by Fidentia but denied its liability.

It argued that a financial institution should not be required to compensate beneficiaries whose interests the principal failed to protect.

Old Mutual further argued that legal provisions do not impose a duty on a financial institution to second-guess a duly authorised instruction from its principal client.

It only owed a duty of good faith, proper care, and diligence to the Trust in respect of the management and administration of the portfolio.

The High Court’s Judgement

The Court did not accept Old Mutual’s arguments and found that the duty to act in utmost good faith, with due diligence, skill, and care, went beyond just the management and administration of the portfolio.

The Court found that the consequences associated with the liquidation of the portfolio were foreseeable and would have been foreseeable by a prudent manager.

Old Mutual was held liable not for the payment of the funds instructed by FAM but for failing to report its concerns before the payment.

The Court held that Old Mutual should have informed the Registrar of Collective Investment Schemes and the Registrar of Financial Services Providers of the facts leading up to the funds’ disposal and any irregularities.

“The provisions are clearly intended to protect the trust funds and therefore are measures to protect the end beneficiaries,” said Judge Thina Siwendu.

“There are good reasons to recognise and impose liability in this case. Our law sufficiently provides for liability for wrongfulness in such instances,” she added.

Old Mutual was ordered to pay R854,650,643.00 as damages and R854,650,643.00 as interest, where interest ceases to accumulate once it is equal to the outstanding principal debt.

The precedent this ruling sets for the financial services industry

According to CDH, This case sets a notable precedent: Investment managers should conduct thorough due diligence and precautionary checks before releasing funds to principals, even after receiving proper formal instruction.

Investment managers must also report any concerns or irregularities to the relevant regulatory authorities before acting on any instructions.

Failure to do so may result in the managing body being held liable for misconduct or fraud committed, even after they have handed over the administration of the funds.

Old Mutual’s response

In a statement, Old Mutual said it believed its actions were in line with regulations and is confident it followed due process.

“In the circumstances and following our verification of the authenticity of the transfer of ownership, we were legally obligated to transfer the money,” Old Mutual said.

Old Mutual is in the process of filing an appeal against the High Court’s decision, as it is of the view that there are reasonable prospects that another court would come to a different conclusion.

“We understand the need for someone to be held accountable, but we are resolute that Old Mutual is not liable for the damages claimed,” it said.