SCA: Errol Elsdon Living Hands Ruling Overturns Old Mutual Liability

• The Supreme Court of Appeal overturned a R1.124 billion negligence ruling against Old Mutual Unit Trust Managers in 2024, finding no legal duty or negligence related to the Fidentia scandal.
• The case originated from the Living Hands Umbrella Trust's claim that Old Mutual was negligent in transferring funds later swindled by Fidentia boss J Arthur Brown.
• In 2013, Errol Elsdon offered an "interest in the LHUT case" as security for a £250,000 loan to Nkosana Makate for his Vodacom litigation, despite never being involved with LHUT.
• South African law has permitted litigation funding since a 2004 Supreme Court of Appeal ruling, with funders like Elsdon's Sterling Rand claiming rigorous due diligence processes.
• The SCA's decision clarifies the scope of financial institutions' liability for third-party fraud and underscores the necessity of robust due diligence for litigation funders.

The Supreme Court of Appeal's decision clarifies the boundaries of a financial institution's duty of care, particularly when funds are subsequently misappropriated by third parties, and sets a significant precedent regarding liability in complex financial fraud cases.

In a significant development for South African financial institutions, the Supreme Court of Appeal (SCA) in 2024 overturned a 2022 Gauteng High Court ruling that had found Old Mutual Unit Trust Managers liable for R1.124 billion plus interest. The original claim, brought by the Living Hands Umbrella Trust (LHUT) in 2010, alleged Old Mutual was negligent in its management of an investment portfolio. This portfolio comprised death benefits from the Mineworkers Provident Fund, intended for dependants of deceased members of the National Union of Mineworkers.

The funds were subsequently transferred to another fund manager and, in 2004, fell under the control of Fidentia Asset Management. They were then swindled by Fidentia boss J Arthur Brown, in what became one of the country's most notorious corporate scandals. Brown was later sentenced to an effective 15 years in prison in 2014, while Fidentia's Financial Director, Graham Maddock, received a seven-year sentence following a plea agreement.

The Gauteng High Court had initially sided with LHUT, concluding that Old Mutual had acted wrongfully and negligently in paying out the funds. However, the SCA reversed this decision, determining that Old Mutual had no legal duty to prevent the subsequent loss and had not acted negligently. Crucially, the appellate court found no factual or legal link between Old Mutual's transfer of the money to Matco Trust's Standard Bank account for investment by Fidentia Asset Management and its ultimate plundering by Brown.

The Living Hands Umbrella Trust case gained an unexpected tangential connection through Errol Elsdon, a representative of Black Rock Mining. In 2013, Elsdon sought to secure £250,000 in financing for Nkosana Makate's protracted legal battle against Vodacom over the 'Please Call Me' service. Court papers reveal Elsdon's email on July 12, 2013, offering "as security our interest in the LHUT [Living Hands Umbrella Trust] case" to Walton Eddlestone, contingent on a win in the LHUT matter.

Elsdon also committed to repaying the £250,000 within 90 days if Makate's Vodacom case was unsuccessful. While this investment, equivalent to R3.75 million at the time, was successfully secured for Makate's 18-year legal fight, Elsdon's proposed security would have proven worthless. Wilna Lubbe, a trustee for LHUT and Makate's lawyer, explicitly stated that Elsdon was never involved with the Living Hands Umbrella Trust. Furthermore, the Old Mutual lawsuit was reportedly funded by GDAF on behalf of Elsdon and the late advocate Chris Schoeman. Elsdon, who had been largely absent from the public eye for nearly a decade, re-emerged as Black Rock Mining's representative towards the end of last year, subsequently claiming 40% of Makate's settlement.

The broader context of litigation funding in South Africa provides important background to Elsdon's activities. In 2004, the Supreme Court of Appeal affirmed the legality of litigation funding under South African common law in the case of PricewaterhouseCoopers Inc and Others v National Potato Co-operative Ltd. This ruling paved the way for entities like Sterling Rand, a firm Elsdon was associated with, to operate in the sector.

Thirteen years ago, Elsdon, then representing Sterling Rand, articulated a stringent due diligence process for selecting cases. He stated that his company only invested in matters with a greater than 70% chance of success, following a comprehensive desktop study, review by in-house lawyers, committee discussion, and full due diligence conducted by their panel of retained attorneys and advocates. Sterling Rand was described as a partnership involving Elsdon, Tracey Roscher, and Schoeman. Elsdon's history includes representing both Sterling Rand and Raining Men before his recent re-emergence.

The Supreme Court of Appeal's decision clarifies the boundaries of a financial institution's duty of care, particularly when funds are subsequently misappropriated by third parties, and sets a significant precedent regarding liability in complex financial fraud cases. By absolving Old Mutual of negligence and a direct causal link to the Fidentia scandal, the ruling provides a clearer framework for assessing the responsibilities of financial service providers.

For legal professionals advising on litigation funding, this case underscores the critical importance of rigorous due diligence, especially concerning the nature and enforceability of any security offered. Elsdon's attempt to use a non-existent interest in the LHUT case as collateral highlights the potential pitfalls for funders. It emphasizes the necessity of thoroughly verifying the funder's actual involvement and the validity of any claims or assets presented as security, particularly when tied to complex, ongoing litigation where the funder's entitlement to proceeds might be disputed or non-existent.

The Supreme Court of Appeal's overturning of the Living Hands Umbrella Trust ruling against Old Mutual provides a significant precedent on the scope of financial institutions' duty of care and negligence in managing client funds, particularly in cases involving subsequent fraud. For lawyers advising on litigation funding, this case underscores the critical importance of rigorous due diligence on the nature and enforceability of any security offered, especially when tied to complex, ongoing litigation.

Source: Original reporting via Business Report and ITWeb