Investing in Iqbal “Doc” Survé’s business has been toxic for the Government Employees Pension Fund (GEPF), thanks to the PIC’s betrayal of its mandate to look after civil servants’ retirement money – a betrayal led by former PIC chief executive “Dr Dan” Matjila.
Court applications by Survé and his brother-in-law business partner, Khalid Abdulla, have exposed details of a shocking contract signed by Matjila that purported to provide the PIC with some protection against further losses on its R4.3-billion investment in AYO Technology Solutions.
In fact, the contract, dated 16 October 2018, provided no protection to the PIC at all.
New details have also emerged concerning the dire fate of the PIC’s separate earlier investment in Independent News and Media SA (INMSA), the newspaper group purchased by Survé’s consortium in 2013 with PIC backing.
In December 2017, the PIC had invested in AYO under controversial circumstances, taking up a pre-listing share offer of nearly 100 million shares at R43 per share, when the Net Asset Value (NAV) of the company (its assets minus its liabilities) was only 15 cents per share.
It has since emerged at the commission of inquiry into the PIC that Matjila had already signed the irrevocable subscription to buy a 29% stake in AYO at R43 per share even before the PIC’s approval committee had considered the transaction.
Matjila did not inform the committee he had done this.
Inside the PIC there was a concern that the PIC was paying too much, so when the committee approved the transaction it set a condition that AYO, which is indirectly controlled by Survé, should agree to a contract that would provide the PIC with some insurance should the share price tank.
Of course, by the time that PIC officials set out to negotiate this insurance with AYO, the company had already got its R4.3-billion, leaving the PIC in a weak bargaining position.
Negotiations over this so-called “downside protection agreement” dragged on until 16 October 2018, when Matjila signed the contract, whose final version had not been made public until now.
The downside protection agreement is now at the centre of a market manipulation investigation launched by the Financial Sector Conduct Authority (FSCA).
The FSCA is investigating trades in AYO shares between 17 December 2017 (when AYO listed on the Johannesburg Stock Exchange) and 28 February 2019, just over a month after the downside protection agreement would have come to end.
Details of the FSCA investigation emerged from court papers lodged by Abdulla, who heads African Equity Empowerment Investments (AEEI) – the controlling shareholder in AYO – and separate papers lodged by Survé – the controlling shareholder in AEEI via his family-owned Sekunjalo Investment Holdings.
Both are challenging the search warrant which authorised an FSCA raid on 9 October this year on the premises of Sekunjalo and AEEI, during which the companies’ computer servers were duplicated.
Attached to Abdulla’s papers is the affidavit used by the FSCA to obtain the search warrant.
It shows that Survé utterly dominated the trade in AYO shares and sets out the FSCA’s case that he artificially propped up the AYO share price. (See Survé’s share ‘manipulation’: the smoking gun(s).)
It also highlights the downside protection agreement.
The first item on the search warrant seeks “any document relating to the discussions, negotiations and the conclusion of the agreement in respect of the undertaking provided by AEEI Corporate Finance to the Government Employees Pension Fund in relation to the risk of the share price of the AYO share reducing below an agreed threshold”.
AEEI Corporate Finance was the AEEI subsidiary that concluded the contract with the PIC.
Abdulla also attached a copy of the contract, signed by Matjila on 16 October 2018 and on 19 October by AEEI director Abdul Malick Salie, who told the PIC commission the contract was drafted on the instructions of Survé and Abdulla.
The FSCA affidavit argues that the penalty imposed by the downside protection agreement provided one motive for the alleged improper AYO share trading.
The FSCA suspects the trading was done to prevent the share price from falling below the threshold agreed with the PIC, set at R22 per share in the 16 October contract – a price that already represented a 49% loss on the R43 per share that the PIC paid – and slightly below the R25 per share where the share was hovering at the time. (On Friday 22 November the share was at R5.50.)
But the contract shows why dealing with Survé is such a slippery business – and why Matjila has such a lot to answer for.
Survé, Abdulla and their lawyers (from the firm Webber Wentzel, who have since resigned the brief) effectively handed the PIC a condom with the tip obviously and ostentatiously ripped off.
Matjila signed the PIC up for the ride and then resigned, leaving pensioners holding the expensive baby – and not for the first time.
First up, in his affidavit challenging the FSCA search warrant, Abdulla argues the AYO downside agreement never came into force at all.
He points out that the contract required AEEI Corporate Finance to deliver written confirmation that its parent AEEI had given approval for the downside agreement, failing which the contract would be void.
Abdulla, who is the chief executive of AEEI, archly records that this never happened: “I am advised that the conditions precedent were not fulfilled… Consequently, the downside agreement lapsed.”
But there’s more.
Out of jail free
The contract purported to give effect to the interests of the PIC in protecting its investment from further loss, but it did nothing of the sort – and in fact, had the PIC give up rights in exchange for this non-existent protection.
It did this in the following ways.
The contract – which covered only 31 million of the 100 million shares purchased by the PIC – gave the PIC just one chance to exercise its rights.
The one chance occurred over a very limited time-frame, namely by our calculation during the seven days between 17 and 24 January 2019.
If, during that week, the PIC calculated that the average price per share over the preceding 90 days fell below R22 per share, then it could make one claim for the difference, multiplied by 31 million shares.
But there were more get-out-of-jail cards.
First, the average excluded 10% of the highest trades and 10% of the lowest trades, meaning that, should the share tank, the effect would be muted.
In addition, the small 90-day window and the thin trade in AYO shares (recall that almost no one but Survé and his friends seemed to want to buy, even at around R22 per share) made the avoidance of this downside risk both cheap and easy – and the current market manipulation investigation suggests that is exactly what occurred.
Finally, the contract allowed AEEI to unilaterally elect to make good any such PIC claim with more AYO shares, instead of cash.
While the contract gave AEEI a free ride, it put handcuffs on the PIC.
The PIC gave up its rights to trade in or encumber the AYO shares during the 90-day period and AEEI gained the right of first refusal to buy any shares the PIC wished to sell – forever.
That effectively locked in AEEI control over the share price.
In addition, the contract banned the PIC from any conduct or statement that might be conceived as manipulating/hurting the share price (even if such conduct was entirely justified) while AEEI and its agents bore no such burden.
To the untrained eye, the downside agreement is not capable of construal as anything other than a fraud on the GEPF as opposed to an arms-length contract.
Not so, say the experts from Webber Wentzel.
We put it to the firm that its attorneys should have cried foul, even though AEEI was their client.
The firm’s general counsel demurred: “At the instance of our board, we previously conducted an internal review of the legal work that was done for our former client, the Sekunjalo Group. We found no evidence of inappropriate conduct…
“In relation to the GEPF/AEEI agreement, there was nothing that could reasonably have given the lawyer involved cause for concern, particularly since the agreement in question was entered into well after the PIC’s investment had already been made. The lawyer was asked to document a commercial arrangement that had already been agreed in detail between two sophisticated counterparties.”
Independent News & Media SA (INMSA)
For Matjila, signing contracts off his own bat and thereby placing the PIC at potential risk seems to be something of a pattern where Survé is involved.
There was the AYO share subscription and the downside agreement. But Matjila also signed another contract that will be highly problematic as the PIC – under new management – tries to get money back from Survé.
On 13 December 2017, Matjila signed a share swap agreement with another Survé company, Sagarmatha Technologies.
Sagarmatha was an effort at another deal like AYO.
When Survé took over the Independent newspaper group (now INMSA) in 2013, it was thanks to a loan the PIC extended to his consortium, Sekunjalo Independent Media (SIM), which bought 55% of INMSA.
The debt was due for repayment as a lump sum, plus interest, on 16 August 2018, but by December 2017 it was clear that both SIM and INMSA were under water and SIM would default.
The African Unicorn
Survé proposed to throw together and list on the stock exchange INMSA plus a combination of other online businesses he owned.
The amalgamated company he was touting was technically insolvent and labouring under the burden of more than R2-billion in debt, though it was marketed as some kind of Amazon-style internet investment sensation: an “African Unicorn” as it was dubbed by Independent titles.
The pension fund (GEPF via the PIC) would again be the main investor, putting in cash and converting its outstanding loan claims against SIM into shares in Sagarmatha.
Sagarmatha, of course, was priced at an eye-rolling R39 per share, meaning that the PIC’s large loan to Survé’s old company would be turned into a small slice of his new company.
However, by December 2017, the AYO deal, Survé’s status as a Politically Exposed Person (PEP) and Matjila’s allegedly cavalier management style had begun to fray nerves at the PIC.
At a meeting on 6 December 2017 the PIC’s portfolio management committee resolved not to accept Survé’s proposal to invest in Sagarmatha and swap debt for shares in the new entity.
The committee was alive to the perception that more PIC money was going to be used to extinguish Survé’s borrowings – and insisted that the debt be settled in cash and not be dependent on the PIC investing in Sagarmatha.
Ignorant or wilful?
On 13 December 2017, Matjila signed the share swap contract, directly flouting the PIC committee’s resolution.
He committed the PIC (on behalf of the pension fund) to sell its shares and claims against Survé’s SIM in exchange for shares in Sagarmatha when it listed.
Once again this contract was drawn up by lawyers acting not for the PIC but for Sagarmatha (in this case TGR attorneys).
When he was confronted about this at the PIC commission hearing in July 2019, Matjila said he was absent from the 6 December committee meeting.
He claimed not to be aware of the committee resolutions when he signed the Sagarmatha contract a week later and did not recall receiving an email that another witness testified had been sent expressly informing him of the committee’s decisions.
Commissioner Gill Marcus challenged Matjila as to why the contract was not reviewed by lawyers acting for the PIC. He admitted this was not in keeping with PIC processes, claiming, “Well, there are instances where I do override processes when it’s necessary.”
He told Marcus: “In my view, it never required the internal process because it was simple and straightforward that we are making a commitment that is subject to so many conditions, so it was not putting the PIC at risk at all, in my view.”
Predictably, that is not how it turned out.
Independent’s bare cupboard
The PIC decided earlier this year that enough was enough and on 12 September issued a letter of demand against SIM for the repayment of R609-million due as of 30 June 2019.
It also prepared to claim SIM’s 55% share in INMSA that the PIC believed it held as security for the debt.
In response, lawyers for INMSA wrote back stating that, according to the contract Matjila had signed on 13 December 2017, the PIC had sold its shares and claims against SIM in exchange for shares in Sagarmatha.
Accordingly, they argued, the PIC had no claim on the shares that formed part of the security under the original 2013 loan for the purchase of Independent.
The 13 December 2017 contract also had no deadline for the listing of Sagarmatha – which was scheduled for April 2018 but was aborted after the JSE withdrew its approval – meaning the contract arguably remains valid on that ground.
To challenge the contract, the PIC will be forced to argue that Matjila acted outside his authority when he signed.
amaBhungane also understands that the PIC has received legal advice that a further R285-million advanced in 2013 (which is interest-bearing) may not be recoverable.
The loan was converted to preference shares due to be redeemed in August 2021, but the PIC’s lawyers point out the debt ranks below other claims and is not likely to be recovered at all.
amaBhungane approached Matjila, Survé and Abdulla for comment via WhatsApp. The latter two did not respond.
Lawyers acting for Matjila’s replied, telling us: “Our client has responded in detail to the queries raised by you in his statement and extensive oral evidence before The Commission of Inquiry into Allegations of Impropriety Regarding the Public Investment Corporation.”
They said Matjila would allow that process to run its course.
They emphasised Matjila had not had sight of the court papers lodged by Survé and Abdulla “and cannot comment thereon…
“The above notwithstanding, considering the extensive nature of your query and the limited time afforded to our client to respond, our client reserves the right to reply and/or respond to any publication in any manner deemed appropriate.” DM