The facts are: The Living Hands Umbrella Trust (previously, the MATCO Trust) (Trust), held trust assets on behalf of beneficiaries of deceased members of the Mine Workers Provident Fund. The Trust was created and its funds held for the dependents of the fund members, the majority of whom are widows, orphans, guardians of minors, and breadwinners. The former sole corporate trustee and the two current trustees of the Trust are the plaintiffs in this matter.
In 2002, Old Mutual Unit Trust Managers Ltd (Old Mutual), the defendant in this matter, was appointed as an investment advisor to the Trust administration company, Mantadia Asset Trust Company (Pty) Ltd, in respect of the beneficiary trust funds under management. Old Mutual designed the investment portfolio and was contracted to buy, sell, and switch units in the various portfolios forming part of collective investment schemes on instruction of the Trust administration company as and when the need to liquidate units arose.
During the process of Fidentia Holdings Group’s (Fidentia) acquisition of the Trust administration company through male fide methods, Fidentia Asset Management (Pty) Ltd (FAM), a wholly controlled subsidiary of Fidentia, was appointed as the discretionary investment manager of the Trust. FAM called up the Trust’s entire investment portfolio held with Old Mutual. Prior to paying out the funds, Old Mutual raised concerns to the Trust administration company and FAM regarding the validity, scope and intended impact of FAM’s instructions to liquidate the Trust portfolio and transfer such funds to FAM.
After numerous correspondences, and instructions from the Trust administration company, Old Mutual paid over R1,130,319,447.32 to the Trust’s account which had come under the control of Fidentia. From the date of receipt of the payments from Old Mutual, the Trust paid an amount of R1,239,842,219.49 into bank accounts held by Fidentia and its controlled companies. The funds were used by Fidentia to defray business expenses and to acquire property and private equity investments for the Fidentia Group. All assets bought were held in the names of Fidentia owned companies, without any indication that it is held on behalf of the Trust.
In 2006, as a consequence of a broad investigation by the Financial Services Board into the conduct of the Fidentia Group in regard to a number of alleged illegal actions and misappropriation of client funds, the Fidentia Group was placed into final curatorship in 2007. As part of this curatorship process, the plaintiffs were able to recover R272,689,727.00. They sought in this High Court case to recover damages of R861,222,095.12, plus interest at 15,5% per annum from Old Mutual.
The plaintiffs claim and Old Mutuals defense
The plaintiffs’ claim against Old Mutual is based on a delict, arising from an omission, for pure economic loss. The plaintiffs allege that Old Mutual: (i) had knowledge of the Trust’s business and the vulnerable nature of the Trust beneficiaries; (ii) 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; and (iii) 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.
Although the plaintiffs argued that the loss suffered was a result of Fidentia’s wrongdoing, they alleged that Old Mutual did not take sufficient steps to safeguard the funds before implementing the transfer to the Trust’s account that was under the control of Fidentia. This should have included Old Mutual satisfying itself that FAM would preserve the funds for the benefit of the beneficiaries and act in a prudent and honest manner when managing the funds and act in accordance with the Protection of Funds Act and Trust Property Control Act.
From the outset, Old Mutual never disputed the facts and the wrongdoing by Fidentia, but disputed its liability. Old Mutual contended that it could not be held liable as the liability for the loss sat with the trustees of the Trust and that the statutory and constitutional duties the plaintiffs relied on did not extend to situations where a financial institution invests trust funds pursuant to a mandate, and then returns those funds following the instruction of its principal, whereafter the principal then misappropriates, dissipates or fraudulently handles the funds. It argued that the legislation does not contemplate that a financial institution should be required to compensate beneficiaries whose interests the principal failed to protect. Old Mutual further argued that the statutory provisions do not impose a duty on a financial institution to second-guess a duly authorised instruction received from its client, it only owed a duty of good faith and proper care and diligence to the Trust in respect of the management and administration of the portfolio.
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 conduct associated with the management and administration of the portfolio, but included the whole value chain of institutional conduct up to the disposal of the portfolio. Given the particular facts of the case, the Court found that the material risks and the detrimental consequences associated with the liquidation of the portfolio were foreseeable and would have been foreseeable by a prudent manager. The plaintiff’s case was based on omission and it was contended that it was not, however, the paying over of the money per se that was wrongful, but the paying over of the money without having reported the events. The Court held that Old Mutual should have informed Standard Bank, as trustee of the collective investments schemes, the Registrar of Collective Investment Schemes and the Registrar of Financial Services Providers, of the facts leading up to the disposal of the funds, and of any irregularities. As a result, the Court found there is a real probability that Fidentia’s conduct would have been detected early, but for Old Mutual’s failure to report the events.
Quoting both public and legal policy considerations, the Court found that it would be reasonable to impose liability based on pure economic loss and it ordered Old Mutual to pay R854,650,643.00 as damages, and R854,650,643.00 as interest according to the in duplum rule where interest ceases to accumulate once it is equal to the outstanding principal debt.
This case sets a notable precedent for the financial services industry. Investment managers should conduct thorough due diligence and precautionary checks before releasing funds to principals, even after receipt of a valid formal instruction to do so, and to report any concerns or irregularities to the relevant regulatory authorities. Failure to do so may risk the investment manager being held liable for misconduct or frauds committed after they have handed over the administration of the funds.
We note that Old Mutual has applied for leave to appeal the judgment, so this is definitely not the final word to be spoken on this topic.
A copy of the full judgment is accessible here.