The lid is rapidly being lifted off a massive scandal which involved stripping the surpluses of a number of companies' pension funds and which has undermined the financial well-being of thousands of pensioners.
The lesson of this saga is that you, as an ordinary member of a retirement fund, can do something about these wrong-doings.
It was the persistence of one member of the Mitchell Cotts Pension Fund that led, firstly, to an investigation by the Financial Services Board (FSB) and then to a far deeper investigation led by lawyer Tony Mostert, who was appointed as a curator of the affected retirement funds. Mostert's probing has blown open a massive scandal that penetrates to the core of the financial services industry. A separate police investigation has led to the arrest of 14 people so far.
Mostert has gone to court on a number of occasions in an attempt to win back some of the R900 million (with interest) that he says is now owing to the various funds. In doing so, Mostert has revealed a complex web of dealings that enabled the surpluses to be stripped out of the various funds.
Mostert went to the High Court again last week to apply to have a company called Soundprops178 (Pty) Ltd placed in liquidation. Peter Ghavalas, the owner of the company, is opposing the application.
Ghavalas has been named in various court documents as the mastermind behind the surplus-stripping scheme. Ghavalas used to work for Finans Bank (which was used as one of the channels for laundering the surpluses) and was a senior executive in the Nedcor group.
Mostert says Ghavalas personally netted at least R35.6 million from the surplus-stripping schemes. Ghavalas moved to Australia in 1998, but was arrested last year when he unsuccessfully attempted to sneak back into the country to visit his mother. He was released on bail of R1 million.
If Mostert's application to liquidate Soundprops178 is successful, it will enable the liquidator of the company to unearth more facts.
Who was involved
The facts about the surplus-stripping scheme published so far by Personal Finance are based on the various untested affidavits that Mostert has made in his High Court applications. Here is a summary of how the alleged scheme worked and the parties who participated in it:
- The affected retirement funds are the Mitchell Cotts Pension Fund, Lucas South Africa Pension Fund, Picbel-Groep Versorgingsfonds, Datakor Pension Fund, Datakor Retirement Fund, Coretech Pension Fund, Sable Industries Pension Fund, Prestolite Pension Fund and Powerpack Pension Fund.
- The companies that provided financial services to the affected funds at the time of the surplus stripping include consultants and/or administrators Alexander Forbes, Jacques Malan, Wynne Jones and Sanlam; accounting companies Arthur Andersen and KPMG; and lawyers Weber Wentzel.
- Mostert says that from 1994, Ghavalas used Soundprops178 "as a vehicle and integral part of fraudulent schemes to defraud pension funds of millions of rands".
- The proceeds of the pension surpluses were divided between the companies that sponsored the affected retirement funds, Ghavalas (mainly through Soundprops178), the Lifecare Group Holdings company, the Lifecare Group Holdings Pension Fund and a few other bit players, such as three Sankorp/ Datakor employees.
- Graham Sommerville, the former chief executive of the Lifecare hospital group and former chairman of the Lifecare Pension Fund, allowed the Lifecare fund to be used to launder the surpluses for a "fee" to the Lifecare fund of about 10 percent of the proceeds and further amounts to the Lifecare company.
- The surplus-stripping schemes were similar in nature. The organogram depicts what happened with the Datakor Funds.
However, in the case of the Mitchell Cotts Pension Fund, the Bailey family - which took control of the Mitchell Cotts shell company after the British-based owners withdrew from South Africa in the 1980s - also plundered the pension fund by ensuring that various members of the family would receive excessive pensions to which Mostert says they were not entitled.
Stripping the surplus
- The steps followed in stripping the surplus from a scheme were:
1. The payment of pensions to pensioners would be out-sourced. In other words, the affected pension fund would purchase pensions from a life assurance company.
For example, in the case of the Datakor funds, R56.3 million was used to purchase annuities (pensions), leaving a surplus of R70 million in the fund. This effectively excluded the pensioners from any surplus entitlement.
2. The pension fund would then apply to the Registrar of Pension Funds (at the FSB) for what is called a section 14 transfer (in terms of the Pension Funds Act) to amalgamate with the Lifecare Pension Fund.
The ostensible reason for seeking the amalgamation was that the funds' participating employers would be merging as well.
As a result of the amalgamation, the Lifecare fund should have assumed responsibility for the affected fund, taking control of all its assets, liabilities and members. Mostert says the Lifecare fund allowed itself to be represented to the registrar in the section 14 application as the recipient, knowing that "the registrar's approval would have been fraudulently obtained, only to launder the surplus for the benefit of its participating employer, which would, through a bogus share allocation agreement, distribute the spoils to the participants in the fraud".
3. Unbeknown to the registrar, and the pensioners of the affected pension fund, "the fraudsters had no intention of , and did not transfer, the assets, liabilities and members to the Lifecare fund". Mostert says all that was transferred was the surplus in each fund, totalling R174.5 million.
(This is the estimated total of the surpluses in the funds that are now under the curatorship of Mostert. It is suspected that other funds that were victims of scheme could still be uncovered.)
4. The total surplus amounts transferred did not appear in the books of the Lifecare fund or company, but only the fund's cut from the rake-off for allowing itself to be used for the section 14 applications.
5. The bulk of the surplus money was laundered through the bank account of the Lifecare company, which in turn also took a slice of the surpluses transferred.
6. The surplus money would then flow back to the original participating employer of the affected fund to be distributed between the employer and other parties in the "fraudulent" scheme.
Ghavalas and/or Soundprops178 would obtain one or more ordinary shares in a subsidiary of the fund's principal employer, allowing him to rake off about 30 percent of the funds as a dividend.
In his application for the liquidation of Soundprops178, Mostert says it would appear that the bulk of the money gained by Soundprops178 was unlawfully transferred offshore to a trust known as Shancarrig in Jersey (in the Channel Islands). From there, the money was distributed to Ghavalas and his family.
Mostert argues that Soundprops178 should be liquidated because it has no right to the proceeds of the surplus stripping and therefore has no assets.
He says Soundprops178 also owes the South African Revenue Service R3 million.
It will probably be about three weeks before Mostert knows whether or not his application has been successful.
Credibility crisis
Mostert's revelations paint a very sorry picture of a financial services industry already suffering from a serious credibility crisis because of its many other excesses.
The alleged role of Sanlam and Alexander Forbes as major players is particularly galling.
Alexander Forbes's involvement in the scandal seems to be limited to it being a fund administrator that facilitated the surplus stripping.
To restore public confidence and trust, both Alexander Forbes and Sanlam need to:
- Publicly tell the whole truth;
- Identify the people in their ranks who were involved in the surplus-stripping scheme and take action against them;
- Provide the investigators (Mostert and the police) with full documentation; and
- Compensate the defrauded pensioners appropriately.
Alexander Forbes so far seems to be intent only on a damage-control exercise to protect its interests.
Sanlam is showing signs that it intends co-operating fully with Mostert. The current management, under chief executive Johan van Zyl, has a no-nonsense style and hopefully he will ensure that Sanlam does the right thing - only that more in the industry would do so.