Old Mutual Unit Trust Managers found liable for R1.7-billion loss related to Fidentia scandal

The South Gauteng high court this week found Old Mutual Unit Trust (Omut) Managers liable to pay R1.7-billion to the Living Hands Umbrella Trust following the losses the trust suffered in the Fidentia fraud scandal more than ten years ago. 

The R1.7-billion payment is made up of a capital amount of R855-million and another R855-million in interest. The capital amount will also attract further interest of 15.5% or R722,000 per day from the date of judgment this week until it is paid. 

In a 62-page ruling, Judge Thina Siwendu said it was clear that Omut acting as the administrator was the owner of the investment portfolio, acting administratively for the trust and its beneficiaries. She found that as such, Omut owed a direct duty of care to the trust on whose behalf the assets were being managed. 

According to the plaintiff, the Living Hands Umbrella Trust, Omut should never have released funds to the Matco Trust without taking steps to safeguard the funds. The Matco Trust, which later had its name changed to the Living Hands Trust by Fidentia, held funds for more than 50,000 beneficiaries, the majority of whom were, literally, widows and orphans.

About 80% of trust assets or R860-million held on behalf of beneficiaries of deceased members of the Mine Workers Provident Fund was squandered after Fidentia, led by criminal mastermind Arthur Brown, took control of the trust administration company. Brown was released from prison last year after serving seven years of a 15-year sentence. “In what appears to have been a well-calculated strategy to gain access to the trust funds, Fidentia engineered the appointment of one of its employees as its nominee and trustee of Matco Trust,” Siwendu said. 

Where did the money go?

On investigation, the curators of the Trust found that: 

• Just over R12.5-million was paid as dividends to the shareholders
  of Brown Brothers;


• More than R25-million was used to pay restraint of trade payments
  to shareholders of Brown Brothers;


• More than R8-million was spent on buying a 50% interest in
  Boland Rugby and sponsoring the club;


• Just over R90-million was paid to an entity called Cornerstone, to
  cover the theft of investor funds;


• Over R32-million was spent buying a game farm;


• More than R86-million was paid for Santa Hotel, and thereafter
  more than R40-million was spent on covering its operating losses,
  including those of its predecessor;


• More than R25-million was “lent” to Brown as a director’s loan; and


• Other funds were used to pay the running expenses of the Fidentia
  Group and its acquired companies.

• Once Fidentia Asset Management (Fam) entered the picture, Omut should have reasonably foreseen that a material risk existed that the trust had come under the control of individuals who (might) not act in the best interest of the trust beneficiaries.


• Omut should reasonably have known or suspected that Fam did not have the authority of the Matco Trust to present correspondence to Omut and that Fam had not been appointed as investment manager nor had it received an investment mandate.


• Omut did not ensure its staff were properly supervised and failed to put in place adequate internal compliance procedures required to report any suspicious transactions. Alternatively, if adequate compliance procedures were available, Omut and its employees did not follow these procedures.

In response to the judgement, Old Mutual said in a brief statement that it is " deeply concerned at the outcome of the court judgment" and plans to appeal the decision.

"Old Mutual  maintains that despite the court ruling, it believes that Old Mutual Unit Trust Managers'  actions were in accordance with regulations, and we followed due process. Quite apart from Old Mutual, the direct cause of the loss and pain suffered was the fraudulent actions of Fidentia well after Old Mutual had transferred funds following a formal client instruction to do so. In the circumstances and following our verification of the authenticity of the transfer of ownership, we  ...  had no other option but to transfer the money," the company says.

Old Mutual is of the opinion that "there are reasonable prospects that another court would come to a different conclusion. We are also concerned about the precedent which the High Court sets for the rest of the financial services industry as it relates to managing funds on behalf of trustees".