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The trustees of Medshield Medical Scheme have been ordered to pay an estimated R1 million in legal fees out of their own pockets after they opposed the curatorship of the scheme.
This concluded a case that also revealed that five of the scheme’s 10 trustees were elected in a flawed election process and were in a conflict of interests in their relationship with one of the scheme’s service providers, marketing and administration company Sapling Trading & Investment.
The North Gauteng High Court confirmed late last month that there was “good cause” to remove the trustees of Medshield and put a curator in charge of the scheme.
Dr Monwabisi Gantsho, the Registrar of Medical Schemes, had applied for the scheme to be put under curatorship in September last year. It has been under provisional curatorship since October.
Judge John Murphy’s ruling confirming the curatorship order reveals that after attorney Themba Langa took over as provisional curator of the scheme in October last year, he discovered that the election of five of the scheme’s 10 trustees in June last year was “a sham” and “illegitimate”, because up to 75 percent of the votes cast were invalid.
He said the election was an attempt by Sapling to gain control of the board of trustees and protect its contract with the scheme to manage brokers and provide marketing.
Six months earlier, the scheme had signed a three-year contract with Sapling to the value of about R44 million a year and close to R135 million over the entire period.
Two weeks before the election of the trustees, Gantsho had directed the scheme to terminate the contract with Sapling. An inspector appointed by the registrar had found that the contract with Sapling involved a duplication of services, and the services could be provided more cost-effectively by the scheme, the administrator and brokers.
Langa said the outcome of the election should be disregarded, because the trustees were “beneficiaries of elaborate fraudulent and corrupt activities”.
In January last year, Sapling acquired the business of Medshield Distribution Services (MDS). Sapling’s director, Jan le Roux, was previously the chief executive of MDS.
Medshield had previously been directed by the registrar to terminate an arrangement which resulted in the scheme making illegal payments of R28 million to brokers through Traffic Integrated Marketing and MDS.
The curator found that five of the scheme’s 10 trustees elected in June last year became members of the scheme a mere four weeks before they were elected. They were all introduced to the scheme by the same broker, and four of the five had previously been members of other schemes for periods ranging from 11 to 23 years.
Only 38 members attended the scheme’s annual general meeting in June last year, and the five new trustees were elected by way of proxy votes. (Proxy votes are used by members who are unable to attend an AGM to delegate their vote to another member.)
The ruling states that 1 354 of the 1 396 proxy votes recorded at the meeting were held by four people, all associated with Sapling.
The judgment also reveals that the proxy vote papers used to elect the five new trustees were not the same as those sent to members with notification of the AGM. The font was different and the name of the proxy holder had been photocopied rather than written onto the form, the court ruling says.
The registrar labelled the election “highly irregular and questionable”, and Judge Murphy says the registrar’s anxiety that Sapling had acquired indirect control of the board of trustees by means of an orchestrated and possibly irregular election for the purposes of protecting its interests, was “well founded”.
Langa also found out that Sapling had agreed to fund the trustees’ opposition to the registrar’s court application to appoint a curator for the scheme.
The registrar says this made the trustees beholden to Sapling, and Murphy says the registrar had a reasonable apprehension that the trustees were unable to assess and administer the Sapling contract “in a detached and unbiased fashion”.
The trustees had agreed to Sapling funding their court case because they were not in a position to fund the opposition personally.
Murphy says the trustees’ acceptance of Sapling’s funding suggests they were not confident that opposing the curatorship would be in the best interest of the scheme and that it would justify the scheme paying the legal costs.
Gantsho said the trustees had placed themselves in an indefensible, conflicted position when they agreed to Sapling funding their litigation.
The court papers also reveal there were reservations about the services Sapling was contracted to provide to the scheme.
Jabu Mahlangu, an inspector appointed by the council, who inspected Medshield’s affairs, reported that excessive payments had been made to MDS, and the scheme did not follow a proper procurement process when contracting MDS.
Mahlangu also noted a number of interlocking directorships on the boards of MDS, Medshield Brokers and Sapling.
Before the provisional curator’s report on the “irregular” election of half of the members of the board and their decision to accept funding of their legal costs from Sapling, the registrar was already arguing for the permanent appointment of a curator. The reasons put forward by Gantsho for curatorship were:
* The trustees had failed to comply with his directive to recover the R28 million of illegal payments to brokers. Brokers were paid between R400 and R800, when signing up members younger than 42 years of age, for conducting research with them. Schemes may pay brokers who sign up members, but only three percent of their contributions, to a maximum of R65 (excluding VAT) a month. They are not allowed to pay higher amounts to brokers who sign up younger members.
Murphy says the “so-called research added little value to the scheme” and had not been used.
The trustees refused to recover the money for the scheme, saying they had obtained legal opinion that the amounts may not be recoverable.
* The scheme had paid Medshield Brokers, which had paid unaccredited brokers, in contravention of the law, and had paid VAT to people who were not registered for VAT.
The registrar’s office had instructed the scheme to terminate the arrangements and to recover the illegal payments.
Murphy notes that there is no evidence that Medshield did recover any amounts.
In confirming the order for curatorship, Murphy notes that the scheme is financially sound, but says this is not enough to avert the appointment of a curator, because “the scheme has not observed the principle of utmost good faith, there have been improper conflicts of interest and a subordination of the interests of the beneficiaries of the scheme to those of service providers”.
MP’s INVOLVEMENT IN THE MEDSHIELD SAGA
The chairman of Parliament’s health portfolio committee sent the Council for Medical Schemes a letter warning that its budget could be cut if its insistence on an inspection of Medshield Medical Scheme ended up, as expected, in litigation, the curatorship judgment says.
The Registrar of Medical Schemes, Dr Monwabisi Gantsho, ordered an inspection of Medshield in February 2011. The inspector was blocked by the scheme’s chairman, Thabo Mabeta, who made it impossible for the inspector to get information or documents, Judge John Murphy says in his judgment on the curatorship issue.
The registrar asked the trustees to allow the inspection to continue without obstruction or he would proceed with action to remove them from the board.
Mabeta then contacted Dr Bevan Goqwana, the chairman of Parliament’s health portfolio committee, Murphy’s judgment says.
Goqwana, members of the Council for Medical Schemes and scheme representatives met and agreed the inspection would go ahead, but conflict arose when the scheme tried to dictate the terms of the inspection.
Goqwana then wrote to the former chairperson of the council, Professor William Pick, predicting that the matter would end in litigation and saying Parliament was concerned about the council’s budget, which reflected large sums allocated to legal fees.
Goqwana said the council’s legal budget had increased from R3 million to R8 million in three years and said Parliament was of the view this could be “managed better”.
Judge Murphy says R8 million for legal fees for a regulator with authority over a R100-billion industry is “not excessive. In my opinion, it is worryingly modest.”
He goes on to say that Goqwana’s expectation that regulation can be managed amicably and without legal wrangles is “naïve, misplaced, and in the current economic climate, positively dangerous”.
The failure by Mabeta and other Medshield trustees to co-operate with the inspection ordered by the registrar was one of many actions that troubled the registrar, the curatorship judgment reveals.
The registrar was also concerned about the conflict of interest that arose when Mabeta was appointed as chief executive officer (the role of the principal officer) of the scheme while he was chairman of the board. He earned a monthly salary of R99 290 for being the chief executive.
Murphy says the appointment is “undesirable from the perspective of good governance” and demonstrates the trustees’ incapacity in fiduciary responsibility.
The registrar also charged that the trustees’ remuneration was excessive. The court papers reveal that Mabeta at one stage earned R150 000 a month and the average trustee remuneration was R280 000 a year.
Murphy says that while this remuneration “seems generous”, the registrar had failed to demonstrate that it was beyond the acceptable norm.