The R230m question: Why didn’t the law protect investors?
Dynamic Wealth, the main investor in the CMF unit trust fund that lost R230 million of investors’ money, has blamed the losses on fraud and a failure to carry out its investment mandate. However, Dynamic Wealth is itself the subject of an investigation by
A battle royal is shaping up in the financial services industry in the wake of the implosion of Corporate Money Managers (CMM) and its Cash Management Fund (CMF).
CMF included a fixed-interest varied specialist unit trust fund of the same name, which masqueraded as a money market fund, as well as segregated funds.
The main parties in the battle are the regulator, the Financial Services Board (FSB); the custodian of the CMF unit trust fund, Absa Investor Services; the credit rating agency, Global Credit Ratings; and the major investors in CMF, the chief of which is Pretoria-based financial services company Dynamic Wealth.
The outcome of the battle may provide investors with an answer as to why there was a major failure of the regulations, in terms of the Collective Investment Schemes Control Act (Cisca), that are aimed at preventing fraudulent losses in unit trust funds.
The FSB is already taking a close look at how credit rating agencies and the custodians of unit trust investments do their job.
Dynamic Wealth says it gave CMM a specific mandate that R230 million of investors’ money was to be invested in the Cisca-regulated CMF unit trust fund.
But Dynamic Wealth says CMM, in contravention of the mandate and Cisca, moved about R90 million out of the fund and used the money to finance property developments.
The move also contravened Cisca and the mandate, because the money should have been invested in tradable, shorter-ter m securities that had been risk-rated.
Phillip Hattingh, the chief executive of Dynamic Wealth Administration, who has been appointed to deal with this and other problems in the Dynamic Wealth group, says there was “negligence by certain supervisory roleplayers” in allowing the money to be moved out of the CMF unit trust fund.
He says Absa Investor Services – the custodian, trustee, clearing agent and safe custody agent of the CMF fund – should have approved all the assets bought by the CMF unit trust fund, cleared all the transactions, kept all the assets in safe custody and reviewed all the calculations of CMF’s managers.
Hattingh says an investigation by Dynamic Wealth has revealed that fraud was committed and that the mandate was contravened, with CMM misappropriating money from the CMF fund. He says Absa failed to pick this up timeously.
Hattingh says Dynamic is insisting that the money is paid back to the unit trust fund from other CMM sources and, failing that, that Absa makes up any shortfall.
But Charles Russom, the chief financial officer of Absa Capital, rejects Hattingh’s claims, saying “there is no legal basis on which Dynamic can claim that Absa Investor Services should ‘make up any shortfall’.
“The curators (of CMM and its entities) are managing the portfolio and ought to be realising the value of the underlying investments ... Until the final report of the curators is handed to the High Court, all claims against different parties are premature.”
Russom says it is not Absa’s fault that CMM misrepresented the facts by saying that Dynamic’s money was in the unit trust fund.
He says Absa has “fulfilled the function of clearing agent and the function of custodian”.
Russom says Absa also approved all the assets at the time they were included in the CMF portfolio. In doing this, Absa relied on the Ciscarequired credit ratings of the instruments, which were provided by approved rating agencies.
Dynamic Wealth, meanwhile, has problems of its own.
The R230 million it told CMM to invest in the CMF unit trust came from clients whose money was channelled through a complex structure of an investors’ club and a non-Cisca investment portfolio, the Dynamic Specialist Money Market Portfolio.
This structure and other issues have made Dynamic Wealth the subject of a 15-month FSB investigation. The FSB is concerned that Dynamic Wealth’s structures contravene Cisca.
Hattingh confirmed this week that the FSB investigation concerns whether the structures Dynamic uses to channel investors’ money – including non-Cisca portfolios – contravene the provisions of Cisca.
He says Dynamic has received the investigators’ draft report and will send its comments on the report to the FSB on Monday.
Hattingh says he does not expect that the FSB will take any action against Dynamic.
Gerry Anderson, the FSB deputy executive in charge of market conduct, says the investigation took a long time to complete because it was very “complex”.
Hattingh says Dynamic closed the non-Cisca portfolios to new investments in July last year, shortly after the FSB investigation was launched.
Dynamic is in the final stages of closing down the portfolios and of transferring investors into its whitelabel, Cisca-regulated unit trust funds, which are administered on the Metropolitan unit trust platform. Hattingh says the closing of the portfolios is part of Dynamic’s plans to restructure its business.
However, Dynamic’s problems with its non-Cisca investment portfolios (which have been closed to new investments) are not restricted to the Dynamic Specialist Money Market Portfolio.
It has another problematic structure, the Specialist Income Fund, which started as a portfolio that aimed to provide “higher than money market returns”. The main underlying investments in the Specialist Income Fund were bank guarantees for property developments – in effect, bridging finance for the period from when developers sold or completed developments to when the owners took transfer of and paid for the properties.
Hattingh says the portfolio ran into problems when, in the economic downturn, banks started to review the mortgage bond guarantees they were providing and property sales started to fall through.
As a result, the property developers, in effect, defaulted on the loans, and Dynamic had no option but to take possession of a number of developments. However, the properties could not be held in the portfolio and had to be placed in a company structure.
So last year the portfolio was converted into a public company, Specialist Income Ltd. Investors were given preference shares in Specialist Income Ltd in proportion to their investments in the portfolio.
Personal Finance has received complaints from Specialist Income Ltd shareholders that they are not receiving the anticipated returns and cannot access their capital.
Hattingh says Dynamic is doing its best to sort out the liquidity problem caused by having to take control of the properties rather than receive the returns on the guarantees, which were short-term investments. Investors are receiving at least one percent a month, he says.
Plans are being put into place to sell the developments, which, Hattingh says, are prime properties. Dynamic hopes to resolve the situation within 12 months.
‘LIFE WITH CAMERON’: PAGE 3