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

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

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.

‘MAN­DATE IG­NORED’

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.

FSB IN­VES­TI­GA­TION

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

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