One of the sweetest deals in the legal fraternity must be the gig as lawyer to Investec.

Last week, Investec was back in another bruising court battle that saw it spar for five days with 11 pension funds in Johannesburg’s High Court. Investec knows the dust-yellowed windows of the dilapidated court well after clashing with shareholders of Brett Kebble’s former company JCI in a seperate case dating back to 2006.

As last weeks’ case stemmed from Investec’s 2001 takeover of Arnold Basserabie’s stricken insurer Fedsure, CEO Stephen Koseff might want to rethink doing deals with companies in trouble.

Altogether, 13 pension funds are suing Investec Employee Benefits (IEB) over ‘guarantees’ they were given by Fedsure, who had invested their pensioners’ cash. The funds claim Fedsure didn’t honour these guarantees in 2000 and 2001 and declared ‘zero bonuses’.

The pension funds teamed up  to claim the money they say they should have been paid under these guaranteed policies. By August, the combined value of these claims stood at R3,9bn. If, as some think, the case only finishes in 2013, IEB could face a R5,5bn claim.

Judge Meyer Joffe, who presided over last week’s hearing, quipped  “if the rand continues where it is going, maybe you’ll still be able to buy something with that”.

Last week’s court action wasn’t even the main event: it was an attempt by 9 of the 13 funds to prevent Investec transferring R13,8m of ‘assets’ to Liberty’s Capital Alliance, which had already been administering these policies for years.

Normally, this sort of ‘section 37’ court application is a formality: a company does a deal and goes to court with a yawn to rubber-stamp the transfer.

But Joffe wasn’t kidding when, submerged underneath thousands of pages of affidavits and actuary reports, he said wide-eyed, “this is the most contested ex-parte application I’ve ever had”.

The thrust of the pension funds’ argument is this: if Joffe approves the transfer of the R13,8bn to Capital Allliance, IEB might not have enough cash to satisfy their R3,9bn legal claim if the pension funds succeed when the main case eventually goes to court.

In legal papers, the funds say there would be a “a massive shortfall in available assets to back the claims”. IEB’s financials for the year to March shows it has a net asset value of R3,4bn — which already means it couldn’t pay a R3,9bn claim.

IEB’s argument is that this is simply an “accounting change” and  no actual assets are changing hands. The real change occurred between 2001 and 2005, when Investec put in place the “reinsurance deal” with Capital Alliance and shifted over R13,8bn in assets.

Andrew Rayner, IEB’s actuary, says of this transfer is approved now, “the solvency position of [IEB and Capital Alliance] will be unchanged”.

The pension funds don’t buy the view that this is simply an ’accounting entry’.

In legal papers, they say “in reality, there has only been a payment of a reinsurance premium, which the reinsurance agreements shall be repaid in certain circumstances”.

Briefly, those are the facts, and Joffe has said he’ll come back with a ruling before the end of December.

Business practices

But the worrying part for Investec is the accusation that has emerged about the way it does business. Ciaran Whelan, the Irish-born CEO of Investec Employee Benefits who came to SA after qualifying as a chartered accountant in the 1980s, attended every day of what was often soporific argument last week.

But he stands accused by the  funds of deliberately hiding “material facts” – a claim his lawyers claim is without merit. Since buying Fedsure, IEB has declared dividends out of IEB of nearly R4,4bn, out of profits of R5,9bn. This led to suggestions it was simply “asset stripping” Fedsure, “denuding itself of assets, and rendering the claims of the pension funds worthless”.

For its year to March, IEB made profit of R740m, and paid two dividends to Investec out of its reserves: R1bn initially, and another R290m at the end of the year.

But in its papers, IEB’s lawyers say this “dividend stripping claim” is “speculative, if not reckless”, pointing out there is “no credible evidence” of this.

However, with IEB’s assets a contentious point, it didn’t help that Whelan didn’t immediately reveal that IEB had declared that last R290m dividend to Investec. At the time, Whelan said there had been “full disclosure”.

But later, Whelan filed a “supplementary affidavit” admitting this dividend payment. He says in the affidavit “I did not disclose the … payment of the dividend [as] I took the view that such disclosure was not relevant”.

Advocate Greg Harpur, acting for the pension funds, said Whelan’s decision not to reveal this dividend while protesting “prevailed over the views expressed by its own counsel that there should be such disclosure”. He said Whelan’s earlier protestation that there was full disclosure was “clearly untrue”.

The funds also claim “IEB’s approach is not consistent with their appointed role as a guardian of pensioners money, and the trust and fiduciary position they should have been fulfilling”. 

Harpur claims “IEB engaged the pension funds in protracted litigation, refusing to furnish any proper accounting, and refusing to explain many apparent contradictions”.

He says last week’s court action could also have been avoided had Investec been willing to provide the pension funds with a guarantee that any successful claim would be honoured. But when the funds asked, Investec refused.

FSB reluctant to intervene 

So what are the consequences if Joffe does prevent the transfer going ahead?

IEB’s lawyers say it would be “inconvenient” and “more costly for policyholders”, especially as IEB “no longer has the ability to effectively administer the business of a long-term insurer”.

The pension funds fire back that this discomfort is “insignificant” compared to the prejudice that the pension funds would suffer if there weren’t sufficient assets to meet their legal claims.

The FSB has strangely decided not to intervene, although it met with both parties. CEO Dube Tshidi says: “we regulate both [IEB as an insurer] and the pension funds, and this matter is before the courts”.

But after IEB discussed  its talks with the FSB, Tshidi told the pension funds: “we have informed Investec of our extreme displeasure that they chose to issue a statement … in which they presume to speak on behalf of the FSB”.

Playing referee is a fine line though. If the funds win and IEB can’t pay, it could reflect very badly on the FSB.

Throughout last week’s hearings, it was clear that the fact the funds hadn’t yet proven their R3,9bn claim would be a problem. For one thing, you can’t technically claim IEB is insolvent because their R3,9bn is “disputed”, and so not a proven liability. Advocate Dennis Fine, speaking for Investec, argued IEB was “factually solvent by R3,4bn”.

Says Fine: “It is not necessary … to include any contingent liability as an actual liability in the measure of factual solvency”.

Gary Rademeyer, lawyer for 11 of the funds, told the FM  his clients were wedged between a rock and a hard place. “If we’re successful in the main case, we know there won’t be sufficient assets to pay our claim. But we didn’t want to get to the end and people ask why we didn’t oppose the transfer of assets”.

Whatever verdict Joffe returns, this is only the opening salvo of what could be a protracted and bitter legal case that could have a big impact on the lives of thousands of pensioners.
—