THE
CORPORATE
            CODES

CORPCAPITAL – A HISTORY OF EVENTS AND THEIR SIGNIFICANCE

Why does Corpcapital still matter? And for whom? It matters because the evidence suggests that serious irregularities took place at Corpcapital, and that Jeff Liebesman, the CEO, and certain executives benefited enormously while shareholders were prejudiced. Corpcapital matters because the methods employed by those responsible should not stand as the yardstick in the defence of corporate irregularities. It matters because it highlights the weaknesses in the system at many levels. It matters to those who have an interest in the rule of law, to those who are advocates of good corporate governance, and especially to those who would like to see a society of consequences, one that has the capability of self-correction. It matters to directors everywhere because the next Corpcapital may be just around the corner.
The website www.corporatecodes.co.za publishes the facts which have so far emerged, including all the evidence furnished to the state’s investigation of Corpcapital. It is there as a permanent reference site on all relevant issues.

The Corpcapital saga began clandestinely in 1996 with the purchase of a cash shell, Southgo Ltd, from Brett Kebble, by secret offshore entities. The transaction was godfathered by Eric Ellerine to give Jeff Liebesman a second chance – (Liebesman was still embroiled in fraud allegations in the aftermath of the W&A debacle). Southgo was quickly transformed into Corpgro and ultimately, through a series of complex transactions, into Corpcapital. Liebesman joined by a close circle of friends — his W&A legal counsel, lawyer, Benji Liebmann, his advocate, Neil Lazarus, and by Errol Grolman and Martin Sacks. Corpcapital was liquidated in 2007, but, like a phoenix rising from the ashes, the company continues today in a new guise through a novel mirror listing, run by Liebesman’s closest associate, Liebmann, with the mastermind nowhere to be seen.

The Liebesman plan was to acquire companies, generate fast growth, and rapidly increase the price at which the Corpgro shares traded. But the true ownership and control was to be hidden from public view in a series of secret offshore companies set up by Liebesman and Liebmann in Caribbean tax havens to hide the extent of their real involvement, leaving the holders of the shares free to trade without restriction. This emerged from direct evidence to the state’s investigation from one of the participants, Peter Moss. There was no disclosure to the board of directors or shareholders of true share ownership. Worse was to follow. When the companies later failed to perform to Liebesman’s promises to the market he turned to what I view as creative accounting. Regular accounting changes made comparisons of trading results difficult.

When Corpgro listed, the share was quoted on the JSE at 44c on the first day and the offshore companies secret investment had a market value of R185 million, an investment that was to become worth an estimated R3 billion as the share price rose to a peak of 770c.
The Southgo model was repeated in 1998 with the acquisitions of cash shell TPN, renamed Corpcapital, and a cash-flush secondary bank, Fulcrum, to be renamed Corpcapital Bank. The structure was in place with access to the cash needed to pay handsome bonuses and salaries to Liebesman and his associates.

In 2000, Corpcapital, then a subsidiary of Corpgro, faced disaster with falling earnings. An unknown offshore entity called Cytech, in which Corpcapital had a 47.5% interest, was revalued unilaterally by the executives and the revaluation surplus taken as revenue to bolster Corpcapital’s profits. This avoided a catastrophe at Corpcapital. Cytech’s value soared from zero to almost R500 million in its first two years and then down to almost nothing in the next two. The executives were paid handsome bonuses and other benefits on the back of the Cytech facade. The mechanism could be argued to be a mirror image of the methods used at Enron.

A merger of three entities, Corpgro, Corpcapital and Corpcapital Bank, in 2001 made it difficult to track performance and make comparisons. For a while this bought time. The merger was massively influenced, unbeknown to investors, by the revaluations of Cytech in 2000, which contributed over 60% of Corpcapital’s profits, Corpcapital being the company which housed the shares and options of the executives. Until then Corpcapital appeared to be vindicating Liebesman’s return to the corporate stage. Reported profits grew and the market had responded positively. Then Liebesman became mired in controversy in a challenge by a minority shareholder over the integrity of the swap ratios used for the merger. The investing public lost confidence and the share price plummeted.

At mid-term in 2002, the accounting policy was changed, in my view, to disguise the inevitable collapse of the contrived valuations of Cytech, and a consequent major decline in earnings. I objected and began my own investigation of the matter, much to the consternation of Liebesman, who placed every obstacle in the way and provided paltry information to me. Unable to obtain proper board action on my complaints I resigned in December 2002 amidst heightened media interest. This triggered further controversy and led to a series of investigations. The markets, already suspicious of Liebesman, lost confidence and the share price spiralled downwards never to recover again. The executives, with Neil Lazarus as the company spokesperson, lost no time in attacking me personally to undermine my credibility and deflect attention from the real issues. After pressure from the media and shareholders the board appointed its own investigator, Nigel Payne, who cleared the executives in what I consider to be a “whitewash”, with Payne in my view flaunting accepted procedures of investigation. Preliminary evidence came to the fore that my privacy had been invaded by a private investigations company in an apparent effort to find dirt and stop me in my tracks. This matter, and the terms of the settlement between me, Corpcapital, the private investigations company, and others is covered on the website.

Under siege from the media, sagging confidence in the market and a collapsing share price the executives persuaded the board to dismantle the company early in 2003, having laid the base during the previous year. The differential between the falling market capitalization and net asset value seems to have been a tempting challenge to release value. Astonishingly, the board authorized Liebesman and the executives to execute the process of selling the assets. The executives were to receive enormous bonuses for dismantling the edifice in the guise of “realising value for shareholders”.

With no resolution of the issues I authorized my attorneys, Webber Wentzel Bowens to appoint two independent forensic investigators, Brian Abrahams and Collett &Collett/ SAB&T, to examine the evidence and comment. In a landmark study the results confirmed my suspicions, and a submission was made to the Minister of Trade and Industry to investigate Corpcapital in terms of the Companies Act. The Minister appointed and mandated inspectors to commence with an investigation under section 258(2). The mandate called for an investigation of the Corpcapital group of companies from inception, and specifically raised the need to examine the possibility of fraud.
Corpcapital’s executives responded defiantly to the exposure, using attacks on me as, in my opinion, a smokescreen to hide the real issues from analysts and the media. The stakes rose dramatically. They also used “experts” extensively, but failed to give them a free hand, with a focus only on hyper-technical accounting issues to shift the focus.
The “whitewash” of the events by accountant Nigel Payne, employed and paid for by Corpcapital, was, in hindsight, predictable. The findings of the state’s investigation by Advocate John Myburgh SC and accounting Professor Keith Prinsloo were more difficult to explain because the inspectors decided to clear Corpcapital while, it seems to me, ignoring large tracts of material direct evidence. The Minister of Trade and Industry, who mandated the investigation, appears to have been less than impressed and distanced himself publicly from certain sections of the inspectors report, an unprecedented step. The Minister stated that certain chapters and sections of the report fell outside of the ambit of his mandate (the character attacks), and in regard to Cytech he would have preferred to have my opinion on the reports of certain Corpcapital experts, where Myburgh had not permitted the right of rebuttal.

After the release of the inspectors report my attorneys, WWB, briefed and mandated six separate and independent forensic investigations of the evidence examined by the inspectors. The findings? An emphatic confirmation that there was substance to my allegations, that serial irregularities appear to have taken place, and that the executives had benefited hugely at the expense of shareholders, conclusions which differed materially from those of the state investigation. A final submission containing recommendations was made to the Minister of

Trade and Industry by WWB acting on my behalf.
The Corpcapital saga raises many questions. One of the most important is: What should directors and corporate officers do when they encounter irregularities? That they are bound to act by their fiduciary duties is unarguable. But what do these duties require? Directors are legally obliged to report the matters to the board. The board must take whatever steps are necessary to represent and protect the best interests of shareholders. Where serious misconduct is suspected, that means an investigation whose integrity cannot be questioned. The purpose is to reveal the facts. Then the board must act on the findings. Such action must address the basic problem and remedy it. What to do when the board does not act on a complaint? For those interested in where this roadmap may eventually lead its path and effectiveness is carefully traced on the website.

Nic Frangos
Johannesburg July 2008