Court finds FSCA acted correctly when questioning Tongaat executive

Accusations that correct procedure was not followed during an investigation and allegations of unfair treatment are the standard defence when attorneys defend clients accused of wrongdoing – and an effective delaying tactic.

On cue, lawyers acting for former Tongaat Hulett executive Michael Deighton approached the court with arguments that the investigation by the Financial Sector Conduct Authority (FSCA) was unlawful on the basis that it was procedurally unfair.

First, they won. The court set aside the investigation insofar as Deighton was concerned and declared the outcome of the investigation invalid.

The court also ordered that the three FSCA investigators who conducted the investigation should not be involved if the FSCA decided to conduct a new investigation.

However, the FSCA appealed the ruling and the high court came to the conclusion that the previous court had erred in its judgment. That ruling was set aside.

“The FSCA notes and welcomes the judgment delivered by the full bench of the High Court, Gauteng Division, Pretoria (sitting as an Appeal Court) on 7 February 2024, in an appeal application brought by the FSCA against the decision of the High Court delivered on 1 August 2022,” the FSCA said in a statement.

“The court gave a thorough assessment and approval of how this investigation was conducted. It found that Mr Deighton was given fair notice of his interview, was furnished with a detailed list of the issues to be covered, was informed of his rights and was allowed legal representation.

“The FSCA welcomes the Appeal Court’s approval of the procedures adopted by the investigators in this matter, especially because this is the FSCA’s standard investigation protocol.”

Background

The FSCA instituted an investigation during 2020 to determine whether any individuals were involved in the publication of false, misleading or deceptive statements regarding the performance of Tongaat Hulett during certain reported financial periods and in breach of the Financial Markets Act 19 of 2012.

When the accounting problems emerged in 2019, Tongaat’s share price immediately crashed from more than R46 to less than R16, and to barely R2 a year later. It opted for business rescue, and trading in the share was suspended in July 2022.

The court documents state that Deighton became a subject of the investigation due to his position as a senior executive at Tongaat. “He was managing director of a subsidiary of the group, Tongaat Hulett Developments (Pty) Ltd in the period [under investigation].

“Certain findings that emanated from the [PricewaterhouseCoopers] report [into the matter] identified that senior executives were involved in irregular and undesirable accounting practices that resulted in revenue being recognised in a prior reporting period,” according to the court documents.

Basically, allegations were made that sales of properties were booked as revenue before the sales were finalised.

Tongaat’s accounting policies stated that revenue from property sales could only be seen as revenue once the property was transferred to the buyer and Tongaat actually received the money.

The FSCA questioned Deighton about policies and procedures, as well as specific property transactions.

It says Deighton approached the court on the basis that the investigation process denied him prior access to related documents before his interview and as a result the interview was unfair.

The FSCA view was that the investigators’ discretion to refuse prior access to the documents is valid, is informed by the fact that the investigation was at a sensitive stage, and that their disclosure of the documents would prejudice the proper execution of the investigation.

Appeal

The appeal court accepted that a distinction must be drawn between an investigation stage and an adjudication stage within the investigative procedure.

“At investigation stage, affected persons merely have a right to know the substance of the case that they are required to provide evidence about, hence they are not entitled to full disclosure of documents they are to be questioned on,” according to the court ruling.

“The appeal court found that at this particular stage, being the investigation stage, the documents were indeed sensitive, and their disclosure had the tendency to compromise the investigation. The court further held that unless there is grave injustice, midstream reviews of the exercise of public power that is not final in effect are both premature and impermissible, as this will unduly restrain the FSCA from executing its statutory duties.”

In addition, investigators informed Deighton that he could consult with his legal representatives at any stage prior and during questioning.

Significantly, he was afforded an opportunity during questioning to consider each document put to him.

Deighton was also given a list of the subjects that were to be discussed, including a list of the specific property transactions that were under investigation.

The appeal court said there must be an appreciation that the FSCA delineates the functions and powers of the investigators from that of the FSCA officials responsible for decision-making at the FSCA.

When complaining about the procedure, Deighton also took exception to the fact that the investigators used the phrase “game-set-match” several times during the questioning when discussing the facts.

On appeal, the judges did not buy this argument and ruled that investigators were not bestowed with a judicial or quasi-judicial function.

“As such, any opinion expressed by the investigator in a report relating to the involvement of any person or institution in maleficence, uncovered during the course of the investigation by the collation of information – in the form of documentary evidence and viva voce evidence – does not establish a factual finding but constitutes nothing more that the conveyance of [a] prima facie view expressed by the investigator,” it said.

The court also ruled that the FSCA has absolute discretion to deal with the information collated in an investigation in a manner it deems fit.

The information is passed on to the decision-makers to decide on.

Furthermore, any person can appeal an FSCA decision by approaching the Financial Services Tribunal to reconsider the decision, including the finding itself and any fines and penalties the FSCA might order.

Costs

Interestingly, the appeal court found there was no reason to add insult to injury and make a cost order against Deighton.

“In exercising my judicial discretion, I find that Mr Deighton was entitled to vindicate his constitutional rights.

“The [original] application was neither frivolous nor instituted in bad faith,” according to the ruling.

“There is no reason why the respondent should be penalized with costs. Our court[s] have emphasized that judicial officers should caution themselves against discouraging parties who are entitled to test their constitutional rights.”