Cape Town - The Financial Services Board (FSB) did not have the authority to inspect Fidentia's offices in 2006, the Western Cape High Court heard on Monday.
Braganza Pretorius, for former Fidentia boss J Arthur Brown, said the FSB had not taken into account the correct inspection legislation, the definition of a financial services provider, and when Fidentia was licensed.
He put it to the FSB's chief financial officer Dawood Seedat that the inspection of Fidentia was therefore not authorised in terms of the Financial Advisory and Intermediary Services Act.
He said any information obtained during an unauthorised inspection would have been illegal.
Seedat replied that the inspection was authorised in terms of the Inspection of Financial Institutions Act, which made provision for associated institutions.
Judge Anton Veldhuizen said the FSB would have been compelled to do something about anything criminal it might have found during an unauthorised inspection.
The court earlier heard that the FSB started investigating Fidentia after receiving complaints of mismanagement of clients' funds from a former Fidentia employee.
The investigation spanned from June 2006 to the end of January 2007, and included an inspection and interview with Brown.
Seedat was testifying in aggravation of sentence in Brown's trial, after his conviction on two counts of fraud.
Seedat said one of the key findings was a R406m discrepancy in Fidentia's funds.
He said Fidentia's auditors indicated in a report they could not conduct an audit for 2004/05 because of various outstanding documents and obstacles.
One of their findings indicated that the liability to clients exceeded their investments.
Pretorius asked Seedat why the FSB had not noticed this key finding in 2004.
Seedat replied he was the wrong person to ask such a question.
Judge Anton Veldhuizen criticised the State for calling a witness whose testimony was unrelated to Brown's admissions.
"He hasn't been convicted of having stolen any money from Fidentia Asset Management, Fidentia or anywhere else... He hasn't appropriated any client's money. I don't understand this," the judge said.
"This is not correct. I think the State has mismanaged this. You accepted the plea of the accused on the basis of what he did; he saw potential prejudice."
Veldhuizen told Brown's lawyer he would take into consideration only the parts of Seedat's evidence which were directly related to the convictions.
"I cannot sentence the accused for something more serious than what he has been convicted of," he said.
Seedat's cross-examination resumes on Tuesday.