SCORPIO, South Africa

amaBhungane and Scorpio #GuptaLeaks: The confidence game – how professionals missed colossal fraud at the heart of Oakbay listing

By amaBhungane & Scorpio 15 December 2017

The #GuptaLeaks prove what many long suspected: the November 2014 JSE listing of the Guptas’ Oakbay Resources & Energy – sponsored by Sasfin Capital, audited by KPMG and banked by Absa – was rooted in fraud. The Guptas not only appear to have violated JSE listing requirements, but also used the listing to launder R185-million – seemingly mostly stolen from Transnet – via Dubai, also defrauding the state-owned Industrial Development Corporation of hundreds of millions. At the time, the Guptas were already synonymous with scandal, and journalists raised alarm bells within days of the listing. Yet the professionals involved in the listing relied on the representations of Oakbay’s management and board, claiming they were under no obligation to conduct due diligence. For anyone that owns even a share of a JSE-listed company, the story of Oakbay Resources begs the question: If outside professionals standing behind listed companies blindly accept the word of already notorious individuals waving obvious red flags, is the JSE regulated at all? By AMABHUNGANE and SCORPIO.

Little thieves are hanged, but great ones escape.

That is not the motto of the Hawks, but rather a Russian proverb, perhaps most apt in the context of complex financial fraud. The more intricate a fraud, the more difficult it is for those on the outside to detect.

In the context of publicly-traded companies, massive, unchecked frauds not only undermine market confidence but could be disastrous for ordinary investors who stand to lose their savings.

By the time regulators arrive at the scene of a financial crime, the damage has been done and is often impossible to unwind. That is why market regulation depends on a system of independent checks and balances that should deter or detect fraud before it spirals out of control.

Perhaps the key checks and balances are the outside professional firms – independent auditors, advisors, sponsors and bankers – that give their imprimatur to a listed company.

The foundation of this arrangement is as follows: clients will come and go, but the professional firms depend upon their reputations and licenses. In theory, these firms have more to lose than their clients. In this way, stock markets are built on a system of trust, which becomes nothing more than a confidence game if the outside professionals fail to detect fraud.

By this point, few would be surprised to learn that the Guptas’ only foray into the public marketplace – the listing of Oakbay Resources and Energy – was tainted, if not exclusively motivated, by fraud.

What is surprising is how outside professionals working for Oakbay Resources claim no responsibility for examining seemingly obvious signs of fraud, many of which amaBhungane raised within days of Oakbay Resources’ listing.

The Guptas appear to have falsified their compliance with JSE listing requirements, then used Oakbay Resources to simultaneously launder hundreds of millions of rand seemingly purloined from Transnet while also defrauding another parastatal, the Industrial Development Corporation (IDC), of hundreds of millions of rands.

All professionals and regulators involved with the listing deny any wrongdoing and, moreover, deny any responsibility for examining evidence of fraud.

The IDC has recently commenced legal action to recoup its money, alleging the Guptas’ Oakbay Investments – Oakbay Resources’ largest shareholder – breached representations by laundering money stolen from the Free State government’s Estina dairy project.

171129 IDC v ORL Et Al Combined Submissions

Securities fraud in four acts

To set the scene of the crime, let us go back to April 2010, when Oakbay Resources and a black economic empowerment consortium, including President Jacob Zuma’s son Duduzane and Umkhonto weSizwe veterans, bought a company they renamed Shiva Uranium from the Toronto-listed mining company Uranium One.

The company had uranium and gold properties and plants in the Klerksdorp area, but Uranium One had put them on care and maintenance, unable to run them profitably.

Oakbay Resources financed a whopping 93% of the acquisition price with a R250-million loan from the IDC, but Oakbay Resources fared no better than Uranium One had before it and soon defaulted on its debt.

The IDC should have been repaid in full by 13 April 2013. The R250-million principal was due in one lump sum, and the unpaid interest at end-April 2013 stood at R202-million.

The IDC was the senior secured lender, which means the IDC could have demanded its money back or seized assets to cover the shortfall.

Moreover, as a matter of South African law, time was of the essence. Ten months later, by end-February 2014, the interest due to the IDC exceeded the principal amount of the loan. Under the in duplum rule, interest ceases to accrue once the sum of the unpaid interest equals the principal amount outstanding at the time.

By failing to act, the IDC was effectively capping the interest it could ever recover at R250-million, drastically reducing the 10% after-tax rate of return it was expecting.

The IDC could have forced the Guptas’ Oakbay Investments, which held a majority stake in Oakbay Resources and had guaranteed the loan, to come up with the cash. Or the IDC could have foreclosed and taken control of the mines.

The Guptas’ accounting ledgers show that between 2013 and 2014 Oakbay Investments had received roughly R350-million from the Guptas’ UAE front companies, meaning it was flush with cash.

Instead of demanding that Oakbay Investments cough up the cash, for unclear reasons, the IDC generously spared the Guptas and agreed to restructure the defaulted debt, extending the repayment date another five years past the original three-year term.

The IDC declined to comment on specific details of the restructuring, replying: “It is not in the interests of the IDC at this stage to set out, in a public statement, the detail of its dealings with Oakbay Resources and other parties as this may compromise its case.”

A banker with decades of restructuring experience called the IDC’s forbearance considering the in duplum rule and the IDC’s loan security “commercially inexplicable”.

Whether by the IDC’s incompetence, complicity, or both, the deal was about to get even worse for the IDC and much better for the Guptas, which is where our story begins.

Act One – Robbing a bank with a stroke of a pen

The IDC also agreed to restructure Oakbay Resources’ debt into what is known as a convertible loan.

A convertible loan gives a lender the option to either demand repayment of its loan in cash or “convert” all or part of the loan into equity, that is, into shares of a company.

If a company’s shares become more valuable than cash in hand, then the lender might choose to trade debt for equity.

In respect of Oakbay Resources, that scenario seemed to be a remote possibility.

Considering the Guptas had been unable to profitably operate the mines and had defaulted on their debt to the IDC, it is curious that the IDC would even entertain the possibility of trading cash for a minority, non-controlling stake in a Gupta-run enterprise.

That, however, was not the end of the IDC’s decision-making that seemingly would be at odds with its ordinary commercial interests.

As the parties sat down to sign the restructuring agreement, the IDC then allowed the Guptas to further alter the terms of the deal drastically in the Guptas’ favour.

The IDC’s loan restructuring agreement divided Oakbay Resources’ outstanding loan balance into “Accrued Return”, that is the unpaid interest, and the self-explanatory “Principal Amount”.

The agreement further defined a “Trigger Event”, which was either a sale of new Oakbay Resources shares to a private party or the company’s listing on any stock exchange.

As the agreement was originally drafted, were a Trigger Event to occur, the payment of the Principal Amount, otherwise due in full in 2018, would be accelerated. Oakbay Resources, or its guarantor, the Guptas’ Oakbay Investments, would have to immediately pay the IDC the outstanding Principal Amount in cash.

Also in the original draft, a Trigger Event accelerated the repayment of interest. There, the IDC had the option of either demanding the immediate repayment of the Accrued Return in cash or converting it to shares.

In short, as the restructuring agreement was originally worded, upon a Trigger Event, the IDC could demand the Guptas instantaneously cough up nearly R400-million in cash to repay the outstanding loan principal and interest. The IDC, at its discretion, could accept shares as payment for the unpaid interest.

An agreement reflecting these terms was printed on IDC letterhead for the parties to sign.

Before executing the restructuring agreement for Oakbay Resources, it appears that Gupta lieutenant Ronica Ragavan, with a stroke of a pen, drastically altered what would happen under a Trigger Event.

Key terms were struck through, and Ragavan’s initials appear next to the handwritten changes.

In its new form, if Oakbay Resources sold shares or listed, the principal repayment would not be accelerated, and the IDC would be forced to accept shares instead of cash as payment of all unpaid interest.

It is unclear why the IDC agreed to the Guptas’ last-minute changes.

The IDC declined to comment on specific terms, but noted: “The proposal in terms whereof the accrued interest owing to the IDC was converted into shares in Oakbay Resources and Energy was approved by the IDC’s Special Credit Committee, which has delegated authority from the Board.”

A banker told us the IDC’s actions were “incomprehensible… If you’re the senior creditor, why in the world would you allow yourself to be forced into equity?”

He added: “This really begs an explanation from the IDC. Why did the IDC ever accept this reversal in loan terms? And who may have benefitted from it other than the Guptas?”

The IDC responded that it had not investigated potential ties between its employees and the Guptas “as we are not aware of any allegation of inappropriate relationships between IDC employees and members of the Gupta family”.

The #GuptaLeaks show that Abel Malinga, the IDC’s divisional executive for the mining and manufacturing industries and a key decision maker regarding the Oakbay Resources loan, was invited to the Guptas’ 2013 Sun City wedding. A guest list dated a week before the nuptials listed him as “attending”.

Malinga confirmed receiving the invite but said he did not attend.

Act Two – Gaming the JSE’s listing requirements, with a side of money laundering

Two days after the Guptas made their handwritten changes to the restructuring agreement, they were in touch with Sasfin Capital, Oakbay Resources’ original JSE advisor and sponsor, to begin planning Oakbay Resources’ listing.

In addition to Sasfin, Oakbay Resources’ pre-listing document would eventually contain a list of prestigious professionals. KPMG was Oakbay Resources’ independent auditor, and Absa was listed as its banker.

Oakbay’s planned listing was not a public offering of shares, through which shares in Oakbay Resources would be sold to the public to raise new capital.

The Guptas merely wanted to list the company. Oakbay Resources’ pre-listing statement did contemplate a future capital raise, but this never occurred.

Why, then, if no capital were to be raised, would Oakbay Resources go through the trouble to list and maintain its listing?

On the heels of the handwritten edits to the IDC restructuring agreement, there was one clear reason to do so: to erase the debt owed to the IDC by forcing the conversion of R257-million unpaid interest due into shares of a potentially worthless company.

The potential for fraud was not hard to imagine. Foreshadowing Acts Three and Four, if Oakbay Resources’ share price was fraudulently pumped up in the process, then the Guptas could then dump the unpaid interest they owed the IDC at cents on the rand.

We asked Sasfin about the risk of fraud, and Sasfin responded that it believed Oakbay Resources intended to eventually raise money through a share offering. Sasfin wrote, “From the outset, we questioned what the purpose of the Listing was. The representations made by the management and the board of Oakbay Resources to us, did not appear unreasonable and was aligned with the purpose as disclosed in the [Pre-Listing Statement].”

The first hurdle to clear in terms of the JSE listing requirements was the company’s lack of “public” shareholders.

To ensure reasonable liquidity,” the JSE requires that “20% of each class of equity securities [be] held by the public”.

In other words, so common-or-garden investors aren’t stuck with an illiquid stock they cannot sell, at least 20% of a company listed on the JSE main board has to be owned by the “public” and thus, in theory, routinely traded.

Oakbay Resources only had two shareholders – the Guptas’ Oakbay Investments, with 85%, and Action Investments, with 15%.

To achieve the mandated 20% public spread, the Guptas’ stake in Oakbay Resources – held through Oakbay Investments – would have to decrease by at least 5% to a maximum of 80%.

Action forms part of the extensive corporate holdings of another Indian family, the Aggarwals, but the #GuptaLeaks, as we shall see, raise serious questions about whether Action acted independently of the Guptas.

Under the JSE rules, anyone owning 10% or more of a listed company’s stock is not considered a “public” shareholder, but rather an insider. That meant Action’s shareholding, for it to count towards the 20% public spread, would have to fall from 15% to below 10%.

Oakbay Resources, with Sasfin’s assistance, thus embarked upon a “restructuring” to meet these requirements.

Step one involved the Aggarwals’ company, Action, selling 6% of Oakbay Resources to a Mauritius shell company called Saranya Investments.

In theory, by selling those shares to Saranya, Action would no longer be an insider.

Post-sale, Oakbay Resources would have two “public” shareholders – the Aggarwals’ Action with 9% and Saranya with 6% – instead of one insider with 15%.

Oakbay Resources never disclosed that Action and Saranya were in any way related, but they were.

While planning the restructuring, the Guptas and Aggarwals forwarded Sasfin the following hypothetical example regarding Action’s prospective share transfer and those purportedly behind it: “ABC & Co”, they wrote, owns 15% of the “Listco”. ABC & Co was owned by “X, his Wife Y and X’s Adult Son only”. “X’s adult Son will resign from directorship of ABC & Co and will not be a share holder of ABC & co if required [sic].”

To meet the JSE’s public shareholder requirements, it was then proposed that “ABC & Co”, that is, Action, keep 9% of the “Listco”, that is, Oakbay Resources, and that “another company owned by X’s Son”, that is, Saranya, be transferred 6%.

In summary, the Guptas and Aggarwals represented to Sasfin that Saranya would be owned by the Aggarwals’ son, Nikhil, who would resign as a director of Action Investments’ holding company – Action Capital – and relinquish his shares in the same.

If so, this transfer of shares between the Aggarwals and their son would tick the boxes of the JSE listing requirements.

Corporate records from India and the share transfer’s underlying economic realities revealed by the #GuptaLeaks suggest that the Aggarwals, their son and the Guptas were far from independent.

For instance, Action Capital’s financial statements show that Nikhil remained “key management personnel” despite his no longer being a director.

Although Nikhil transferred his Action Capital shares to his mother, the company issued options on preference shares to two companies where Nikhil was either a director or part-owner.

Nikhil also formed a new Indian company – Saranya Ventures – which operated out of his family’s office.

Sasfin, apparently unconcerned, wrote in response to our questions: “The determination of shareholder spread requirements being met for the Listing was based on (and would be for any other listing) on shareholdings at the time of Listing rather than ‘relationships’ as you refer to.”

The JSE itself agreed with Sasfin, also looking no further than the names on the share registers to tick the boxes of the listing requirements.

We also contacted the government regulator – the Financial Services Board’s directorate of market abuse – to ask who is responsible for policing compliance with listing requirements.

The FSB responded, “We wish to bring to your attention that we have a Self-Regulatory Organisation (SRO) model in South Africa for the regulation of market infrastructures such as the JSE. In terms of this SRO model the JSE as an exchange is the regulator for the listing of companies such as Oakbay on its exchange in terms of its Listing Requirements.”

In short, with the JSE policing itself and neither the JSE nor the sponsor either obligated or willing to examine the substance of a company’s purported public shareholding, it seems the investing public has no assurance that any JSE listing truly complies with the spirit of public spread requirements.

But back to the economic realities of the Oakbay Resource share sale. Saranya was to pay Action US$4-million (R44.4-million at the time) for the shares, which worked out to be just under R1 per share. This price per share will be important in the next two acts of our story.

On 8 October 2014, the Aggarwals asked Tony Gupta if they should go forward with the share transfer between Action and Saranya. This appears to suggest the Guptas were the invisible hand behind Action, at least in respect of this deal.

The next day, US$4-million purchase consideration began to move, thanks to the Guptas. Moreover, it moved full circle: from the Bank of Baroda account of one Gupta UAE front company to Saranya, then from Action back to the Baroda accounts of other Gupta UAE fronts.

Let us explain.

Action’s financial statements show that the Guptas’ UAE front company Fidelity Enterprises lent money in several tranches to Action, which Action in turn lent to Oakbay Resources’ Shiva Uranium.

On Saranya’s creation, it too got tied into the loop.

The Guptas had received $4-million from JJ Trading, the entity that at the time was paid 21% of the value of two Transnet locomotive contracts by China South Rail.

The funds from JJ Trading had bounced among various Gupta accounts in Dubai before being placed in a “fixed deposit” at Bank of Baroda in Dubai by the Guptas’ UAE front company, Accurate Investments. Readers might remember Accurate from the Sun City wedding laundromat.

Accurate then “borrowed” $4-million from Baroda against this fixed deposit and lent Saranya $4-million on the same day Saranya purchased the Oakbay Resources shares from Action.

But it appears that Action did not keep this money.

Days later, Action wired $3,985,000 to the Guptas’ Dubai accounts. That is, the $4-million advanced by the Guptas’ Accurate Investments to Saranya to pay Action for the shares, seemingly ended up right where it started – with the Guptas – minus $15,000.

Accounting ledgers for the Guptas’ Indian companies reveal a similar circular financial relationship, indicative of money laundering, between the Guptas and Action: one Gupta company would transfer funds to an Action affiliate, which would then transfer the same amount – plus or minus a fraction of a percent – to another Gupta company.

Although such transactions can be legitimate in certain circumstances, they could also serve to obscure related-party transactions, by making it appear that the Guptas are dealing with independent third parties instead of effectively wiring money to themselves.

Action and Saranya did not reply to questions.

Act Three – Dubai ex machina

The share transfer between Action and Saranya was just the first step in manipulating Oakbay Resources’ listing. The next step involved fixing the listing price.

As detailed in Act Four, Oakbay Resources’ listing would force the IDC to convert unpaid interest into shares at a 10% discount to the listing price.

The lower the listing price, the larger the stake in Oakbay Resources the Guptas would be required to give to the IDC to erase the unpaid interest. Conversely, the higher the price, the fewer shares the IDC would receive, which would be good for the Guptas.

In short, the Guptas’ incentive to pump the listing price was obvious.

Unfortunately for the Guptas, Oakbay Resources’ listing price – were it truly determined by market forces – was unlikely to be impressive. After all, both Uranium One and the Guptas for years had failed to run Oakbay Resources’ mines profitably.

The company’s debt presented another problem. Even after the listing erased the interest owed to the IDC, Oakbay Resources would still owe its senior creditor, the IDC, and other subordinated creditors hundreds of millions of rand.

If Oakbay Resources’ performance continued on that trajectory and the company ended up insolvent, shareholders’ equity in the company could be wiped out in favour of the company’s creditors.

Under these circumstances, who exactly would jump at the chance to plough large amounts of cash into shares of Oakbay Resources?

Yet, on the heels of Oakbay Resources’ debt and shareholder restructuring, a new investor fell from the sky. This investor was willing to purchase 18.5-million shares, or 2.31% of the company, for a perfectly round R10 per share – ten times the price per share Saranya had paid Action a month earlier.

That is, not only did the Guptas have an incentive to pump the listing price, the drastic share price jump between the Saranya purchase and this deal was seemingly prima facie evidence that at least one of those transactions was not done on market terms.

When asked to account for the difference between the sales prices, Sasfin replied, “We were not involved in the drafting or the negotiations of any agreements pertaining to the Restructure, including the agreement concluded between Action Investment and Saranya.”

Adding to the intrigue, or rather the commercial incredulity, Oakbay Resources’ new investor was not a mining company or a private equity fund, but rather an unknown Singaporean company, Unlimited Electronic and Computers (UEC) engaged in “general wholesale trade”.

Yet immediately prior to Oakbay Resources’ listing, this heretofore unknown computer wholesaler just happened to have R185-million burning a hole in its pocket and apparently no better way to spend it than on a stake in Oakbay Resources.

To sophisticated professional firms involved in the listing, the UEC deal should have set off alarms. Yet all involved in the listing denied any responsibility for examining the deal.

A mere fifteen minutes of internet searches and R200 of Singaporean corporate records set off even more alarm bells, as it did for amaBhungane at the time.

Days after Oakbay Resources’ listing and months before KPMG would hand Oakbay Resources another unqualified audit opinion, amaBhungane reported that UEC’s nominal owner, Kamran “Raj” Gani Radiowala, was also a director of the Guptas’ India-based SES Technologies.

At the time of the listing, amaBhungane reported – even without the Action-Saranya sales price as a benchmark – that the listing price appeared to be fraudulently pumped. The price paid by UEC was significantly higher than the price supported by an independent valuation of Oakbay Resources’ assets.

To amaBhungane, the connection between UEC and the Guptas, as well as the inflated share price, raised the spectre that the Guptas had manipulated the listing price to the IDC’s detriment.

Sasfin responded: “Based on representations made by the management and the board of Oakbay Resources, we had no reason to believe at the time that UEC was not a legitimate investor.”

Atul Gupta was chairman of Oakbay Resources’ board. By the time of Oakbay’s listing, amaBhungane alone had written roughly three dozen stories about the Guptas’ questionable dealings.

Oakbay’s so-called lead independent director was Mark Pamensky, who also chaired Oakbay’s audit committee. Pamensky was appointed to Eskom’s board on the heels of Oakbay’s listing and has since been derided as a “Gupta deployee”.

Both certified to the JSE that they deemed “the internal controls of the Company to be effective.”

The #GuptaLeaks reveal that the Guptas’ relationship with UEC and UEC private placement was even more duplicitous than amaBhungane’s information indicated at the time.

First, Radiowala and UEC were effectively controlled by the Guptas. Records for the Guptas’ India-based SES Technologies lists UEC as an “associated concern”. Other documents suggest UEC and other companies linked to Radiowala were central to the Guptas’ money laundering schemes.

In January 2013, to move $1.6-million kickbacks paid by China South Rail on a Transnet locomotive contract from Dubai to India, the Guptas’ SES Technologies, of which Radiowala was a director, effectively “sold” shares of another Singaporean company, Alpha Computers, of which Radiowala was also a director, to the Guptas’ UAE front Gateway Limited.

Among the red flags that this was a money laundering operation was the fact that Radiowala previously had deregistered Alpha, meaning that $1.6-million was paid for shares in a company that no longer legally existed.

In another suspicious transaction, shortly before the winners of Transnet’s 1,064-locomotive tender was announced, UEC purportedly purchased 1,250 iPhones from the Guptas’ UAE front, Global Corporation, and wired Global just over $900,000 on 25 February 2014.

We could find no evidence in #GuptaLeaks accounting and other records that Global purchased iPhones in bulk or shipped them to UEC.

However, the same day, Global wired $163,433 to a jeweller in Bedfordview, Johannesburg, to pay a R1,824,000 invoice for four Rolexes – three men’s watches made from platinum, gold and steel respectively (totalling R1,157,000) and one “Lady Watch Gold & Diamonds” (R667,000). It is unclear who received the watches.

Returning to the Oakbay private placement, mails show Gupta lieutenant Ragavan repeatedly instructing Radiowala what to do and controlling UEC’s subsequent sales of Oakbay Resources’ shares.

Additionally, the Guptas’ Dubai bank accounts funded most if not all of UEC’s share purchase.

The #GuptaLeaks show that between 2013 and 2014, nearly all of the cash piling up in the Guptas’ Dubai accounts came from two sources – the Free State government (via Estina) or Transnet (via Liebherr and China South Rail).

The #GuptaLeaks reveal that four days before UEC purchased the shares, a Gupta UAE front, Fidelity Enterprises, agreed to “lend” UEC $12-million (about R130.2-million then) to fund the purchase.

Despite Fidelity’s name being on the so-called loan agreement, it appears these funds were never transferred by Fidelity to UEC. Rather, the Guptas’ Accurate Investments – perhaps pressed for time to get the funds to Oakbay Resources before its 28 November 2014 listing – wired this amount directly to the latter’s account at Absa.

The about R55-million balance of the R185-milllion purchase price similarly was not transferred by UEC, but also by anonymous third parties with no apparent connection to UEC, including another UAE shell company, RRS General Trading, and two currency exchange houses in Hong Kong and Singapore.

That this came mostly if not entirely from the Guptas can be seen from accounting records of their UAE front companies showing that they ultimately “loaned” UEC a total of $15 562 874, or R171.2-million.

Emails and accounting ledgers also show them transferring another $1-million, or R11-million, from Dubai to Radiowala personally at the same time.

In sum, out of the R185-million paid by UEC for its Oakbay Resources shares, the records suggest that at least R182.2-million came from the Guptas themselves via Dubai.

This means that the Guptas not only effectively sold shares of Oakbay Resources to themselves, they used money apparently purloined from the South African government to do so, thereby using the Oakbay Resources share sale to UEC as a means to launder that money back into South Africa.

Professional finger-pointing

The third-party wire transfers on behalf of UEC – from Accurate, RRS and the currency changers – are important, as they should have made this fraud so much easier to detect by the outside professionals, but that was, apparently, no one’s job.

Sasfin responded: “It is not the sponsor’s role to undertake a due diligence on subscribers in a private placement nor their source of funds… Absa Bank Limited was ORL’s banker at the time and it would have been their responsibility to comply with anti-money laundering monitoring as regards any ORL private placement/s and the flow of funds pertaining thereto.”

Absa pinned responsibility on the bank wiring the funds to Oakbay, explaining: “The primary Know Your Customer (KYC) requirement rests with the overseas remitting and correspondent banks that is paying the funds into Absa Bank.”

But it added: “You may note that the timing of the transaction almost coincided with what we explained in our High Court Affidavit, was the time we decided to no longer retain Oakbay as a client.”

The JSE pointed a finger at KPMG, writing: “The Listings Requirements provide that the auditors of Oakbay had to conduct certain enquiries and procedures on the subscription by UEC to prepare the pro forma financial information presented in the [Pre-listing Statement].”

KPMG, responded: “It is not the auditor’s responsibility to question an investor’s motives for investing in a company or its sources of funding. Our role included the confirmation that Oakbay Resources had received the funds for the private placement into its bank account.”

Except, of course, the #GuptaLeaks reveal Oakbay Resources had not received the funds for the private placement into its bank account at the time of listing.

Only about R150-million out of the R185-million due for the shares was received prior to listing, with the final payment not arriving until weeks later, Oakbay Resources’ bank statements show.

In sum, even taking every last professional involved in the Oakbay Resources listing at its word – that they all did exactly what was required of them – investors might take little comfort in how easy it is fraudulently to manipulate a company’s JSE main board listing price.

Act Four – The Goldilocks of securities fraud: Oakbay gets its dilution of the IDC “just right”

To summarise where we are at the end of Act Three, on paper at least, Oakbay Resources by this time had three “public” shareholders counting towards its required 20% public float.

Of course, it would seem that Oakbay actually had zero public shareholders, as Action and Saranya (9% and 6%, respectively) were artificially separated and UEC’s 2.31% stake was engineered and paid for by the Guptas, who also owned 80% of Oakbay Resources through Oakbay Investments.

Both Sasfin and the JSE disputed that UEC and the Guptas were indistinguishable, with the latter maintaining that form, not substance, is what mattered under JSE listing rules.

The JSE explained that UEC’s “shareholders were KAG Radiowala and FK Radiowala. Based on our records, neither KAG Radiowala nor FK Radiowala were directors of Oakbay or its subsidiaries. Based on these facts, the JSE is unable to agree with your assertion that UEC was beneficially owned by the Guptas. UEC therefore falls within the definition of a public shareholder of Oakbay.”

Returning briefly to Act One, upon the Trigger Event – Oakbay Resources’ listing – the IDC was forced to convert the accrued interest owed by Oakbay Resources into shares at a 10% discount to the listing price.

Based on the 10% discount to the UEC price, the IDC’s then R257-million accrued interest debt would be converted at R9 per share, meaning that for every R9 Oakbay Resources owed the IDC, the IDC would receive one newly issued share of Oakbay Resources for a total of 28,528,647 new shares.

For the Guptas, those seemingly random numbers worked out perfectly, or perhaps, as we shall see, too perfectly.

The IDC conversion price, driven by the purportedly arms-length UEC private placement – suspiciously diluted the Guptas’ Oakbay Investments to its maximum allowed shareholding under JSE rules – exactly 80%.

Why is this suspicious?

If Oakbay Resources’ shareholding were exceedingly simple, it would be easy to dilute Oakbay Investments to exactly 80%.

Let us say the company had issued a total of four shares, all owned by the Guptas. If Oakbay Resources were to issue one new share to the IDC, bringing the total issued shares to five, the Guptas would now own 80% and the IDC 20%. The Guptas shareholding thus would be diluted from 100% to 80%.

Regarding the intertwined UEC private placement and IDC conversion, with many variables at play – it is rare that the numbers would come together so neatly, unless reverse-engineered to do so.

The end result of issuing a seemingly random number of shares to the IDC based on the purported market price set by the UEC purchase, was that Oakbay Investments’ shareholding was diluted from 85% shareholding to exactly 80% – the maximum percentage Oakbay Investments could own without busting the JSE public float requirements.

This was yet another indication that the tail (the Guptas) was wagging the dog (the Oakbay Resources listing and the price UEC paid for its shares), not market forces.

Had UEC bought slightly more or slightly fewer shares or at a slightly higher or lower price, it would have altered both the IDC conversion price and the total number of Oakbay Resources’ shares issued.

Yet, UEC just happened to purchase the perfect number of shares at the perfect price, so that once new shares were issued to the IDC at R9/share, the Guptas’ Oakbay Investments would own precisely 80%, as shown in Oakbay Resources 2015 annual report certified by KPMG:

We asked the JSE, KPMG and Sasfin for an alternate explanation of this perfect math.

The JSE responded that it was “not empowered to fulfil any form of regulatory oversight over this type of transaction”.

KPMG said that it was “not involved in the setting of the [listing] price. This is generally considered between the sponsor and the directors of the issuing company.”

Sasfin replied: “Setting a target free float is a normal parameter when doing a listing.”

The IDC has now, in its court papers, alleged that Oakbay Resources manipulated the listing price in violation of section 80(2) of the Financial Markets Act.

Epilogue – the world according to Atul Gupta

Earlier this year, the JSE reported Oakbay Resources to the FSB’s directorate of market abuse, which is investigating.

But to date, the only Oakbay Resources-related enforcement action has been the FSB’s R100,000 fine levied against a man who traded R400 worth of Oakbay Resources’ notoriously illiquid shares with himself to create stock-graph art giving the Guptas the middle finger.

An alternate interpretation of his art might be that that the Guptas, along with those that form part of the JSE’s regulatory apparatus, had shown the investing public the finger.

As now alleged by the IDC itself in court papers [link again to DB folder], a colossal fraud was perpetrated in the course of listing on the JSE’s main board, and according to the professionals and regulators involved, all performed their jobs perfectly and, no one bears any responsibility except Oakbay Resources’ management and board or the IDC.

In sum, no one apparently was responsible for any additional due diligence, and all were entitled to take the representations of company’s management and board – chaired by Atul Gupta – at face value.

South African investors might find themselves asking the same questions as Stanley Sporkin, who revolutionised the enforcement of US securities laws while at Securities and Exchange Commission. Later in his career, he was appointed as a judge and presided over perhaps the largest bank fraud case stemming from the US savings and loan crisis.

In his judgment, Sporkin wrote: “There are other unanswered questions presented by this case. [The Defendant] testified that he was so bent on doing the ‘right thing’ that he surrounded himself with literally scores of accountants and lawyers to make sure all the transactions were legal.

The questions that must be asked are: Where were these professionals, a number of whom are now asserting their rights under the Fifth Amendment [against self-incrimination], when these clearly improper transactions were being consummated?

Why didn’t any of them speak up or disassociate themselves from the transactions?

Where also were the outside accountants and attorneys when these transactions were effectuated?

What is difficult to understand is that with all the professional talent involved (both accounting and legal), why at least one professional would not have blown the whistle to stop the overreaching that took place in this case.

While we in this nation have been trying to place blame for the savings and loan crisis on the various governmental participants in the crisis and on the government’s fostering of deregulation within the thrift industry, this Court believes far too little scrutiny has been focused on the private sector.” DM

* Disclosure: A member of amaBhungane’s editorial staff is in a relationship with a relevant Sasfin employee. The amaBhungane staff member recused herself from working on the story.

  • Scorpio is Daily Maverick’s new investigative unit. If you’d like to support its work, click here.

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