Namfisa must pay back investors after negligent supervision in Prowealth collapse

The Supreme Court has ruled that negligent financial watchdog Namfisa must pay back investors who lost millions when the company Prowealth Asset Managers collapsed.

The Namibia Financial Institutions Supervisory Authority (Namfisa) will have to pay the investors who invested with the company before its collapse 17 years ago, the court has ordered.

Namfisa was negligent when it failed to carry out its duty to supervise the business of Prowealth Asset Managers (PAM) from 2005 until the company collapsed, following the suicide of its founder, Riaan Potgieter, in December 2008, two judges of the Supreme Court concluded in a judgement delivered on Friday.

Acting judge of appeal Dave Smuts and appeal judge Hosea Angula upheld an appeal against a judgement delivered in the Windhoek High Court in March 2022 and ordered that Namfisa is liable for the losses suffered by investors of PAM after the end of August 2005.

The amount that Namfisa will have to pay to investors who lost money invested with PAM will have to be determined by the Supreme Court at a later date, the two judges ordered as well.

A dissenting judgement was also handed down on Friday. In the minority judgement, appeal judge Sylvester Mainga concluded that the appeal of PAM’s liquidator, Alwyn van Straten, PAM itself and 71 investors who entrusted money to PAM against the High Court’s judgement should have been dismissed.

Some 87 people who invested money with PAM, Van Straten and PAM itself launched a lawsuit against Namfisa, the auditing firm SGA and the executor of Potgieter’s estate in March 2012.

Some of the plaintiffs – many of whom were pensioners or approaching or planning for retirement when they invested money with PAM – died before their claim was heard in the High Court.

During the hearing of the claim in 2020, Van Straten told the court that Potgieter operated a fraudulent scheme in which he used investors’ money to pay the operating costs of the Prowealth group and enrich himself, instead of investing the funds on behalf of his clients.

The Prowealth group collapsed when its bankruptcy was exposed after Potgieter took his life.

The plaintiffs who sued Namfisa, SGA and the executor of Potgieter’s estate initially claimed nearly N$105.7 million from Namfisa and SGA, alleging this was the amount in losses they suffered due to negligence on the part of Namfisa and the auditing firm. After reaching a settlement with SGA, the plaintiffs continued to sue Namfisa alone for N$58.6 million.

The plaintiffs informed the High Court that about N$12.2 million had been recovered from Potgieter’s insolvent estate and life assurance policies paid out after his death. This decreased their final claim against Namfisa from an amount of N$70.8 million to N$58.6 million.

JUDGEMENT

In the majority judgement delivered on Friday, Smuts recounted that Namfisa’s chief executive registered PAM as an asset manager at the start of August 2003.

Smuts noted that several of the investors testified in the High Court that they were impressed by Potgieter’s sales pitch and the prospects of high returns on their investments with his company.

Several of the investors also gave evidence that PAM’s registration with Namfisa as an asset manager authorised by Namfisa was instrumental in their decision to place investments with PAM and Potgieter, Smuts said.

After Potgieter’s death, an investigation ordered by Namfisa revealed that Potgieter misappropriated some N$75 million of investors’ funds invested with PAM, Smuts noted.

Two expert witnesses who testified on behalf of the plaintiffs in the High Court said Namfisa did not do what a prudent and reasonable financial supervisor should have done, Smuts recounted.

He said: “Their criticism was in essence that Namfisa was negligent in two fundamental respects. Firstly, they testified that a reasonable and prudent supervisor would not have granted PAM registration in the manner done by Namfisa. In the second instance, they both testified that Namfisa failed to exercise reasonable and prudent supervision over PAM after registration by failing to require PAM to submit its annual financial statements.”

When PAM applied to be registered as an asset manager, it did not comply with Namfisa’s requirement to provide a trust account number – a crucial requirement for keeping investors’ funds separate from the company’s operational accounts, Smuts noted.

‘SERIOUS WARNING SIGNS’

One of the expert witnesses also told the court a failure by Namfisa to call for PAM’s annual financial statements “amounted to a drastic oversight in Namfisa’s supervisory role”, Smuts said.

The company’s annual financial statements (AFS) for 2005 “should have given rise to serious warning signs” if it had been submitted to Namfisa, Smuts added.

“Those financial statements for that year (and for each subsequent year) revealed that PAM was technically insolvent – an untenable position for an asset management company,” Smuts recounted. “The 2005 AFS would clearly have shown that it was unlike a typical asset management concern. The AFS showed that it was propped up by loans.”

The 2005 AFS also showed that clients’ funds were not separated from PAM’s funds, were deposited directly into PAM’s operating account, and that no proper register or record of investors’ funds was maintained, Smuts said.

“Those irregularities in the 2005 AFS were glaring and at the very least would have called for urgent enquiries, leading to an inspection (which eventually did occur after Potgieter’s death),” Smuts also said.

The expert witness said Namfisa should have received PAM’s 2005 AFS by the end of August 2005 at the latest. After that, Namfisa would then have taken steps to withdraw PAM’s registration, and that would have ensured that Potgieter would not have been able to solicit further funds for PAM after the end of August 2005, Smuts said.

With both the registration of PAM and the ongoing supervision of the company, “the conduct of Namfisa’s officials fell short of the required standard”, Smuts said.

Senior counsel Jean Marais, assisted by Jesse Schickerling and Japie Jacobs, represented the plaintiffs on instructions from the law firm Van der Merwe-Greeff Andima Inc.

Namfisa was represented by Sisa Namandje and Thabang Phatela.

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