Absa on the warpath after losses

At the Securities Regulation Panel (SRP) hearings into Nedbank's trading in single-stock futures this week, the elephant in the room was a team of Absa lawyers.

Led by Absa Capital lawyer Peter Mason, the team was tracking proceedings after being instructed by Absa CEO Maria Ramos to leave no stone unturned in an effort to recover "every cent" that Absa has lost from the single-stock futures debacle.

Absa has lost over R1.4-billion after it was forced to make good on defaults by broker Cortex Securities and its clients. The biggest slug of that was a R931-million cheque to Nedbank to take delivery of shares in Pinnacle Point and a handful of other companies.

Absa was the clearing bank for Cortex, which means it acted as the guarantor for Cortex's trades. Absa could have refused to do so and should have, considering that Cortex's main client was Jac de Beer, a man who was once sequestrated and found to have run a pyramid scheme, and who had been subjected to investigations by the Scorpions and the Financial Services Board.

De Beer had put down a deposit of about 10% of the exposure to 1.2billion shares in Acc-Ross (at one point worth R1 each) and did not have the money to pay for them when the futures contracts eventually expired.

But while Absa was painfully ignorant of the risks it faced, it is clear that Nedbank was well aware that Absa was heading for a big and painful smack, and did nothing to avert it.

Nedbank was earning good money out of trading the single-stock futures and financing the substantial exposures that, down the line, Absa would be paying the price for.

The potential for Absa action is now a play-within-a-play in Nedbank's battles to fend off shareholders in Pinnacle Point, who are attacking the bank on numerous legal fronts in an effort to recover their own losses from their acquisition of Acc-Ross.

Nedbank has been careful to make out that it was not reckless in its trading in single-stock futures. Nedbank counsel Fanie Cilliers was at pains to point out that Nedbank was "not aware" that Absa was Cortex's clearing bank.

In fact, Nedbank deliberately moved to restructure certain contracts-for-difference (CFD) positions it held into single-stock futures, which had the effect of transferring the risk on its balance sheet to Absa's. It then fired the equities trading team that had created the CFD positions that had put Nedbank at risk.

As soon as Nedbank faced no risk, it folded its arms and waited for the wrecking ball to land in Absa's lap.

Nedbank may find itself in a spot of bother if Absa is able to make a case that Nedbank was reckless and failed in a duty of care it should owe to Absa. Cilliers also made sure it entered the SRP process that the size of the Acc-Ross exposure was available through three public sources, weakening the ground for Absa to claim Nedbank was being secretive.

Of course, Absa is also after the single-stock futures defaulters themselves, but that seems a difficult task. De Beer, apparently ensconced at his farm in Paarl, was operating through various offshore entities and the money appears to have vanished.

While Nedbank did not look good at last week's SRP hearings, the losses it faces are probably relatively small, as it will be difficult for the Pinnacle shareholders to argue that it was Nedbank's fault that they lost so much money in their investment in Acc-Ross. Luxury golf course developments were going to have a rough patch during the financial crisis, irrespective of Nedbank's actions. - banknotes@intellidex.co.za