Opinionista Andile Lungisa 13 December 2017

The Steinhoff Debacle – the biggest fraud in SA history

Tom Eaton (The Times 11/12/17) comments aptly on the manner in which the corporate elite has responded to the Steinhoff debacle. Losses amounting to more than R100-billion, exceeding, in 48 hours, the amounts the Guptas are accused of looting over a decade. Apart from qualifying as the biggest fraud in South African corporate history, the scandal sheds unflattering light not only on the morals of the corporate elite, but also their reputed financial wizardry to which their enormous wealth is so regularly attributed.

Pointing to the use of the euphemism “accounting irregularity” to describe the actions of the Steinhoff Mafia sitting atop this multinational empire, Eaton opines “… many South Africans are demanding that stronger language be used, pointing out that the middle class and the media, always so quick to unload both barrels at state corruption, tend to go easy on dirty corporates. White crooks, they claim, make ‘mistakes’, while black ones are corrupt thieves.”

Condemning the tendency to create a false juxtaposition between state and private sector fraud – treating the latter as a kind of victimless crime – Eaton reminds his readers that the worst damage has been suffered not by Steinhoff’s biggest shareholder Christo Wiese. He has suffered the “indignity” of being relegated from the premier league of dollar millionaires to the ABC Motsepe League of mere millionaires. Nor, similarly, the fall guy – former CEO Markus Jooste – who can now look forward to spending more time at various race courses with his horses around the world after resigning following making some “big mistakes”.

The biggest victims are government employees – the 1.2-million who contribute towards the Government Employees Pension Fund keeping 400,000 pensions afloat – who had no say in the Steinhoff investment, and who are now poorer by R12-billion. Should Steinhoff go bankrupt, which is not ruled out, 130,000 jobs across the world are threatened.

The hypocrisy of many in the corporate elite is breathtaking. Oblivious of or uninterested in the facts, Jooste’s corporate friends have moved instinctively to protect their own, putting themselves forward as character witnesses, admirers of his business acumen and personal integrity in spite of the overwhelming evidence of criminality.

Sygnia Group CEO Magda Wierzycka, however, may be the exception. Pulling no punches, she sets out in detail what her perusal of Steinhoff’s financials revealed on first examination:

The failure of Steinhoff has shocked even the most seasoned asset managers. It is the biggest corporate failure on the JSE. Allegations of earnings manipulations, uncontrolled acquisition sprees and tax fraud are just the tip of the iceberg.

Off-balance sheet companies were set up to hide losses, executives collaborated with each other to defraud investors, and debt was taken on at a massive pace. The warning signs were all there. The most obvious of those was the cynical move by shareholders in PSG to, in a sleight of hand, swap their shareholding in PSG shares in South Africa for a suddenly-Frankfurt-listed Steinhoff, thereby externalising their wealth without the need for foreign exchange controls approvals.

This alone should have been a strong indicator that one is not dealing with pillars of society. Many names are implicated. Many more will follow…”

Wierzycka adds later:

When I looked at the financials of Steinhoff (not my day-job, by the way) I had another Net1 moment – it took me exactly half an hour to figure out that the structure was obfuscated, that financial items made no sense, that the acquisition spree was not underpinned by any logic and too frenzied to be well thought out, and that debt levels were out of control.

I am a vocal critic of many things. This time I am going to push the envelope by testing the liability clause that most asset managers include in their management agreements, that of “gross negligence”.

Most managers think of the clause as dealing with their operational risks and administrative failures. Unlucky for them, gross negligence also covers negligence as far as management of portfolios is concerned.

Management includes research. I firmly believe that the blind faith in the Midas touch of Christo Wiese made many oblivious to the obvious.” (Fin24 07/12/2017)

Nor should we be under any illusions that Jooste acted alone. This failure of corporate governance of gargantuan proportions happened right under the noses of the veritable who’s who in big business in SA. Sunday Times Business (10/12/17) editor Ron Derby reveals, “On Steinhoff’s board of erstwhile gentlemen and a paltry two women [all white] five chartered accountants, and on the most hallowed of seats, well up until a few weeks ago, sat three former chief executive officers of three major corporations. Among the people leading the company along with retail legend Christo Wiese and his 36-year-old son Jacob are heavy hitters such as Steve Booysen, former CEO of Absa, and Johan van Zyl, the former head of Sanlam, who has been credited with inspiring its comeback story over the past decade. For good measure, in its executive management team, Sean Summers, former Pick n Pay CEO, is listed as a retail executive. That’s quite an impressive bunch of CVs that would on any given day pass any credibility test. Yet these very same people have somehow been duped, missing fraud that amounts to billions, for which former CEO Markus Jooste has taken ultimate responsibility… there’s a much bigger problem of governance beyond the corridors of government departments.”

It stretches credulity to attribute the failures on the part of this corporate leadership to mere incompetence. What is at play here is at best criminal negligence, at worst a criminal conspiracy where all these heavyweights were sworn to a Mafia-like oath of secrecy completely indifferent to the impact on the country’s reputation as the seat of governance rectitude in the form of King IV so strenuously and yet so hypocritically being claimed in the attempt to expose malfeasance in the state and parastatal sector.

In an honest mea culpa over the incestuous relationship between the different stakeholders in this elite mutual admiration society, Derby goes on to confess: “How can one honestly explain why the chief executive of what’s essentially a Steinhoff subsidiary, the JSE-listed STAR, which houses Pepkor, was the chief financial officer of the parent in Germany? When you think about it, it makes absolutely no sense, but investors and stakeholders like myself in the financial press let it be, believing the retailing geniuses residing in the nexus of Wiese and his now disgraced protégé, Jooste, knew what they were doing.

Were there such an arrangement in the public space one can only imagine the mount of column inches that would have been dedicated to this rather obvious conflict of interest.”

The Financial Times of London cautions that the border between accounting scandal and fraud is marked only by the bars of jail. What’s more, it’s not yet clear on which side Steinhoff falls.

This scandal comes shortly on the heels of Naspers’s corrupt dealings in the MultiChoice matter, and the corporate governance at technology firm EOH which could lead to its collapse. But this should really not be surprising. African bank’s collapse a few years ago allegedly surprised everyone on the Abil board. Seriously?

Nor can we be confident that a solution can emerge from within the ranks of such a highly compromised elite. Economist Iraj Abedian for example has pointed out that the kind of conflicts Derby has laid his finger on are now accepted practice in the auditing space. He has called for the abolition of the practice of auditing firms providing both an advisory and auditing service to the same client. It creates a perverse incentive for the very same corruption that external auditing is supposedly employed to combat – it effectively turns auditing firm into advisers on how to cook the books. SA’s KPMG (SA) has done exactly that in response to the crisis it is embroiled in by appointing someone from their advisory division to head the SA subsidiary following the golden handshakes with which the previous team of executives departed.

The corporate elite is congenitally corrupt and has continued these practices in a seamless transition from apartheid to the democratic era. The predecessors of the present corporate elite have vast experience in hiding more than what could become the most infamous euphemism of modern times, “corporate irregularity”. Hennie van Vuuren’s book Apartheid, Guns and Profits demonstrated that they were prepared to go to considerable lengths to protect their profits, colluding with the apartheid regime in sanctions busting while posturing as opponents of apartheid.

Such is the callous, even insolent contempt for democracy of the overwhelmingly white corporate elite that the post-apartheid order was welcomed for example by Tiger Brands by collusion in the bread price – the staple of the poor – from virtually immediately after the last vote was cast in the historic elections of 1994.

Wiese, apparently an old hand at this, was caught at Heathrow Airport, London, entering the UK, with millions of pound sterling in a brief case, triggering charges in a case that has yet to be concluded.

Steinhoff’s aggressive acquisition spree that contributed to the 90% crash in its share price was made possible by, among others, the relaxation of exchange control regulations allowing for the amount that can be taken out of the country by any individual over 18 without a tax declaration to be R1-million per annum. With no legal obligation to invest, loyal only to their profit margins and bank balances, the corporate elite is sitting on a cash pile of R1.5-trillion in what amounts to an investment strike when unemployment and poverty have reached record levels. Nothing demonstrates this disloyalty to the country than at a time when the country’s economic performance is at its worst since 1994, due in no small part to this greedy corporate elite.

Economist Dawie Roodt has advised South Africans to take their money out of the country amid looming downgrades which would send the economy into another recession. (Businesstech 6/11/17)

If radical economic transformation is to have any meaning it must have, as its objective, not the substitution of a black elite for a white one, but the dismantling of the entire architecture of privilege, opacity, and lack of accountability that protects what constitutes an economic dictatorship, to lay the basis of the complete democratisation of the economy. A good start would be to prosecute the Steinhoff gangsters under the Companies Act. DM

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