The fourth step: Formation of Netainment (which became Cytech)

A complex offshore structure had been set up for Cytech. See Complex Cytech structure and related entities , and Structural evolution of Cytech, Collet SAB&T forensic report . See also Letter of Intent to set up Cytech 290798 .

In 1999 the share price of Corpcapital declined from 170 cents to 70 cents. Worse, acquisitions were not producing the desired bottom line and the 2000 profit outlook appeared to be disastrous. This was not welcome news to Liebesman and the executives. A loss would prejudice the future of the group and the well-being of the executives, whose fortunes were closely tied to the success of Corpcapital. Creative and aggressive accounting came to the rescue. Cytech would be revalued and the revaluation surplus taken into Corpcapital as profit by way of a year-end bookkeeping entry adjustment. The technique had many of the hallmarks of the Enron corporate scandal.

Through these mechanisms Cytech was dramatically revalued upwards and the increase in valuation recognized as profit in the income statement of Corpcapital, converting a significant decline in earnings into huge reported profits. Readers are invited to visit the Corpcapital Limited 2000 Annual Report  to assess the level of disclosure of this seminal issue. Liebesman, Liebmann, and Sacks, as directors of Corpcapital, were directly engaged in the setting up of Cytech, as well as the valuations and accounting methods.

In 2001 the same aggressive accounting methods were applied. This was the year of the merger of Corpgro, Corpcapital and Corpcapital Bank to form Corpcapital. The merger accounts provided a confusing picture, and no disclosure on the history of the group’s star, Cytech. See Corpcapital Limited 2001 Annual Report . Fancy and unrealistic valuations cannot be sustained forever, however. What mark-to-market gives to profits on the upwards revaluation it takes away on the downward revaluation. Faced with this sobering reality the executives proposed a change in accounting policy, one that would disguise any downward revaluations. In 2002, Cytech was revalued downwards dramatically by more than R100 million. See Corpcapital Limited 2002 Annual Report .

In the period 1999 and 2000 the executives were paid some R60 million in compensation (salaries, bonuses, and sign-on fees) largely on the back of the Cytech valuations which had boosted Corpcapital’s profits. The executive compensation took the form of performance bonuses and signing-on fees. Lazarus, who joined the company at that time, and was to play a major role as the drama unfolded, was a major beneficiary, having been paid R8.25 million to join Corpcapital. See Corpcapital executive benefits 1999-2001 .

A change in accounting policy raises questions
As 2002 dawned it appears to have become obvious that what now seems to have been a facade of astronomic valuations could no longer be sustained and the accounting policy was changed to disguise the downward impact of revaluations in the interim profits announcement. The change appeared in the small print as a “change in the classification of assets”, a foreign language to normal investors who were not even given an explanation as to what it meant or even more importantly the effect on profits. However, the change had massive effects and saved Corpcapital from disaster. See Corpcapital Interim results February 2002 . Later, Collett completed an analysis of re-calculating the impact of accounting irregularities in the accounts. See Collett forensic report 1, reconstruction of Corpcapital FS after Cytech adj .

The fifth step: The A2 banking crisis creates an opportunity
Early in 2001 one of the A2 banks, Saambou, experienced severe liquidity problems. The Reserve Bank initially said that there was no systemic risk to the banking sector arising from the Saambou problem, and that it would therefore not intervene. The signal was clear. The Reserve Bank would not stand behind A2 Banks and prop them up, unless the system was threatened. Co-incidentally, many of the A2 Banks were not performing, while others saw this as an opportunity to return their banking licenses, having gained from the cash injection of a listing.

A crisis developed nonetheless and affected BOE where clients began withdrawing funds. An undertaking was then given by the Reserve Bank and the Minister of Finance to underwrite BOE’s position. Many A2 banks, including Corpcapital Bank, saw an opportunity and handed back their banking licences. In the case of Corpcapital it was fortuitous because it enabled the group to move into an unregulated environment while retaining the cash from the banking division, formerly Corpcapital Bank, within the new merged group. One action remained. How to get the money into an entity where it could be used without any restrictions?

The following is extracted from the Collett SAB&T report February 2004 ;

4.1 When the decision was made to discontinue the banking activities of the Group and to relinquish its banking license on 8 May 2002, the logical conclusion would have been to liquidate the assets of the bank for the purposes of distributing cash to the shareholders. The banking business for all practical purpose had relatively little going concern value compared to its net cash value.
4.2 It appears that the reasons provided for the relinquishment of the banking license, being the crisis in the A2 banking sector played into the hands of the executives. This is due to the fact that the cash balances in the bank, were not relinquished together with the license. This had the effect that the executives controlled all the banks’ cash upon termination of the banking activities of the group.
4.3 The decision to terminate the banking activities came within six months of the go ahead being received to acquire control of the bank from the Minister. The decision to terminate banking activities should be viewed against the background that Corpcapital waited almost two years in order to acquire control of the bank.
4.4 The decision to hand back the license was within the discretion of the executives of Old Corpcapital and/or Corpgro. Alternatively, they exercised significant influence on such a decision and it is obvious that some of Old Corpcapital’s executives would have been aware of any future plans to do so. In fact, it is not impossible that the plot to dispose of the banking license could have been conceived some time before the announcement and the eventual distribution of capital to shareholders.
4.5 It is not at all inconceivable that the eventual plan to relinquish the banking license was planned as early as the date that the application to acquire the bank was made. It is also possible that the eventual distribution of capital may have been uppermost in some executives’ minds at the time of handing the bank license back and/or the merger on 1 September 2001.

The sixth step: 2001 merger of Corpgro, Corpcapital and Corpcapital Bank
The merger of three entities to form a single entity, Corpcapital (new), took place in 2001. The three entities were Corpgro (formed out of the cash shell Southgo Ltd in 1996) , Corpcapital (old) (formed out of the cash shell TPN Ltd in 1997, and in which Cytech was later housed), and Corpcapital Bank (formerly Fulcrum Science & Technology Bank Ltd).

The contrived Cytech valuations at 31 August 2000 materially influenced the swap ratios for the merger in favour of shareholders of Corpcapital(old), the merged group was also called Corpcapital (Corpcapital (new) in this context to differentiate between the two). The Abrahams investigation had determined that Fisher Hoffman, the auditors of Corpcapital had not conducted an audit of Cytech, nor did it conduct a detailed valuation of Cytech in clear violation of its obligations as Gatekeeper to the board and shareholders. During the state’s investigation Fisher Hoffman, having previously attempted to cover its tracks, admitted that it had failed to conduct an audit of Cytech and that it had not conducted a valuation of Cytech, notwithstanding its direct knowledge of the massive impact of Cytech in 2000. One might legitimately ask: What were they thinking about? Their senior partner Peter Katzenellenbogen, was involved in detail with Liebesman in every transaction, providing corporate finance services and advice. The SEC in the United States had much to say about Anderson Consulting in near identical circumstances during the Enron disaster.

The terms of the merger excited considerable opposition from black empowerment group, Kensani, a minority shareholder. Its board believed that Kensani was being asked to swap equity in the bank, which was backed by substantial liquid assets (cash), for valuations in Corpcapital that were based on the notional profits of underlying businesses that had no direct income, high valuations, and unrealistic expectations.

The public controversy over the merger swap ratios resulted in a loss of market confidence in the CEO, Liebesman, with little likelihood of the market believing him again. Negative media coverage of the merger and the dispute between Liebesman and Kensani reflected badly on Corpcapital and triggered plans by the executives to dismantle the company, thereby taking advantage of the gap between Corpcapital’s net asset value and its market capitalization, as reflected in the declining share price.

The merged Corpcapital (new) share price fell from an average of 235 cents in mid-2001 to 160 cents during the adverse publicity in September, a decline of almost a third, but the net asset value was recorded at over 300 cents. In 2002 the share price fell further to 88 cents. The numbers were possibly too enticing for the executives to resist.
The pattern was set for the next chapter, the dismantling of the company.

The seventh step: The dismantling of the company after the market lost confidence in Corpcapital
In 2002, the year following the merger, Corpcapital (new) experienced a disastrous year with a substantial decline in headline earnings from 71.5 cents per share in 2001 (as reflected in the Corpcapital Financial Statements for the year to 31 August 2001) to 36.5 cents per share.

The result would have been catastrophic had Corpcapital not changed its accounting policy in its interim results, 28 February 2002, a move which disguised a huge downwards revaluation of Cytech. This impact alone was some 25 cents per share, and at least double if the true value of Cytech had been recorded. See Corpcapital Interim Results, February 2002 . Amazingly, over the initial four-year life of Cytech the investing public was almost totally oblivious to its rise and fall, or to the drama taking place behind the scenes.

The negative publicity concerning the disclosure of executive remuneration in the Annual Financial Statements of 2002 was the final nail in the coffin and, by November, the share price had slithered to 88 cents (this from a high of some 700 cents per share at its zenith), valuing the company at less than R400 million. The NTAV, (net tangible asset value), of the group was valued at 306 cents, some R1.35 billion, at the conclusion of the merger in September 2001, after the combined entities had been valued at a colossal R1.661billion during the merger valuations. The writing was on the wall.

Corpcapital was at this stage already beset by other major problems. In November 2002 the executives presented a document entitled “The Way Forward” which outlined the serious problems that had confronted the company for some time. The purpose of the document appears to be to prepare the way for a dismantling. Could it be that the huge disparity between the market capitalization of the company on the JSE and it net asset value was just too much of a temptation for the executives, who had much of their wealth locked up in a rapidly declining share price in Corpcapital? See The Way Forward document .

In describing the problems besetting Corpcapital the document stated, in the words of the Corpcapital executives (Frangos’s explanations in parentheses where necessary);

3.11 Over an extended period Corpcapital has suffered constant poor publicity. Notably this has coincided with its foray into financial services:
– The Fulcrum minority’s dispute.
– The Ministerial Delay. (In approving the purchase of the bank)
– The Merger squabbles. (The Kensani issue)
– The Fitch IBCA rating. (A2 banks had been downgraded)
– The Bank license.
Compositely these have created investor negativity.
3.12 Corpcapital’s profits and growth depend significantly on the performance of investments and the ability to make and exit investments opportunely and dependably. This is inherently “lumpy” as opposed to “annuity” in nature. Our annuity and fee driven initiatives through the Bank have not succeeded as hoped. (Messages markedly different from those given to shareholders)
3.13 Corpcapital suffers distrust in certain market quarters. These commentators question the voracity of our accounting treatments, NTAV and earnings. They do not have a valid or articulate basis but they have a loud voice.
3.14 There is investor concern about the readability at fair value of assets in prevailing markets. (A statement that indicates that investor concerns were more important to them than addressing the issues and operating more transparently)
3.15 There is investor concern that shareholders will not see the NTAV in their own hands. This is the underlying reason for Investment Trusts typically trading at discounts to NTAV.
3.16 Current results may instil concern that NTAV will diminish in the hands of management – particularly in current difficult economic conditions.
3.17 The small bank crisis has created investor concern for our liquidity and consequently concern that assets will be realized below accounting value.
3.18 There are several “issues” which have affected credibility and created negative perceptions in various communities. Together these have a lasting and wide effect. They include:

  • Disclosure of director’s remuneration when there were no appropriate public comparatives. (It is a mystery as to why this would concern the executives, unless they had something to hide from shareholders)
  • Retrenched and fired senior Bank executives bad-mouthing (eg Neil Philips). (Philips was a former senior executive in Corpcapital )
  • Perceived litigious aggression emanating from Corporate Finance reflecting on group (eg The Personal Concept). (The aggressive litigious nature of the Corpcapital executives had by then become well known)
  • Perceived absence of work for Corporate Finance sufficient to justify perceived overpayment to acquire them.
    Institutions’ criticism that core competence was distracted to Bank-centric business model.
  • Concerns that non-executives are conflicted (in specific transactions and generally). (Presumably, the executives were referring to Ellerine, who had many related shareholdings)
  • The group is top-heavy. “The head is too big for the body”.
  • The group is over-governanced given its size and scope. (The executives do not seem to grasp the distinction between over-governance and well-governed)

Staff losses and retrenchments (not directly related to the Bank license) create negative assessment of management (Trading, Structured Finance, Retail Financial Products).

A disadvantage was about to be converted into an advantage. In an astounding move the board agreed to and gave control of the dismantling to the executives. It is difficult to understand the logic of the board members, who must have been aware that there were better independent and transparent methods available to maximize shareholder benefits in a sale of assets, especially with a company embroiled in controversy. And surely they knew that they would come in for criticism for giving this responsibility to executives, who were themselves under investigation at the time amid allegations of misconduct. The board, about whom there were already questions being asked, will claim that they set up a board committee to oversee the dismantling, but in reality the die was cast. Liebesman and his team, having constructed a complex and controversial group, were now about to dismember it piece by piece with massive gains for themselves.

At the AGM on 15 January 2003 a shareholder had questioned the board about its possible intent to dismantle the company. The board hotly denied that this was being planned. However, within a week of being cleared by Nigel Payne in February 2003 following his investigation (referred to below), the board commenced the sale of its first asset on the road to a full dismantling of the company. Lazarus advised the market that the process would be expedited and Corpcapital liquidated in a short period, creating the expectation of a final settlement to shareholders soon. But once again, truth was stranger than fiction and there were more twists to come. See Notes on AGM 2003 , Notes on AGM 2004 , and Notes on AGM 2005.

Section 228 of the Companies Act, supported by Section 10 of the JSE Listing Requirements, deals with the procedure to be followed on the sale of assets. It clearly does not contemplate the situation where a board of directors decides to dismantle the entire company piece by piece over a short period, because it is so unusual, perhaps even unique. See Sale of assets, opinion by WWB .

Corpcapital did not consult shareholders on this major shift in policy from an ongoing operation to totally dismembering the company. When the directors were questioned as to why they did not consult shareholders they claimed that they were not obliged to do so in terms of section 228 of the Act. Nor, however, were they prevented or discouraged from doing so. The Act does not discourage providing more disclosure where appropriate. In fact Section 299 of the Companies Act explicitly encourages disclosure of “material” matters. Once again knowledge of the fuzzy boundaries of the law had come to the rescue with a team having intimate knowledge of the law.

See media reports on the dismantling of Corpcapital.

The dismantling was accompanied by a raft of litigation, some of which continues to this day.

The disposal of assets and its impact on shareholder interests
Having given the responsibility for the sale of assets to Liebesman and the executives the non-executive directors were once again at the mercy of executives who appeared to be skilled at furthering their own interests in the guise of acting in the best interests of shareholders. The net realization of assets by 2004 was some R800 million, a far cry from the merger valuations and despite booming market which had by then intervened. On the valuations of the executives themselves the net asset value of the group in 2001 was R1.7 billion. Three years later in boom conditions one could have expected the value to have doubled. But to a market which had long since lost interest, the misleading explanations, intended or not, given by spokesperson Lazarus went unchecked.

Since then, many of the companies disposed of have shown explosive growth. Madison the property-management company of various listed property stocks including Redefine (sold to the strong management team of Mark Wainer and Wolf Cessman) has become a giant in the property industry, Corpbuild (sold to Illiad Ltd, and whose share price multiplied by ten times in a short period after the transaction), and Java Capital formerly the corporate finance arm of Corpcapital (sold to management) are examples. The inference is obvious. Either, the companies were sold too cheaply by persons trusted by the board or a radical transformation quickly took place after they were sold. Frangos questions whether the interests of shareholders had been served and best prices achieved by the disposal process, an auction by an impartial third party being a more accepted and transparent method. The acid test once again is revealing. Who benefited most by the dismantling? In what way did they do so? And, to what extent did they benefit? This analysis shows that it was once again the distant shareholder who came last in the queue.

Frangos finds it difficult to accept the Corpcapital directors’ explanation that shareholders have been well served in the dismantling on the basis of the facts. Their argument, based on NAV growth since inception, is the least relevant and most disingenuous argument, and disguises the real comparisons and issues. It is also the only argument, poor that it is, that provides some basis. The argument holds for only the smallest group of shareholders, mainly founders, who were present at inception. Shareholders buying later at the 700 cents high and encouraged to hold on by the rosy picture presented may also not be persuaded that they had been treated fairly if they sold at 88cents, the ruling price late in 2002, and immediately prior to the dismantling. The shareholders of Kensani, who paid more than R50 million for their shareholding in Fulcrum and had their shares in the bank converted into Corpcapital via false swap ratios, certainly would not agree with any suggestion of fairness. They lost almost half of their original investment when they sold out. Value destruction by Liebesman was a feature at W&A and at Corpcapital, though perhaps better disguised with experience.

See Sales of assets, opinion by WWB in the index.

The benefits to Liebesman and the executives
Forensic investigations by accounting experts SAB&T and Charles Stride have calculated the substantial benefits to Liebesman and the executives arising from the various schemes which will be dealt with in detail on this website. While the benefits to the executives were substantial and compounding each year, the effects on other shareholders were a function of wildly volatile share fluctuations and of a market acting on inaccurate information. See SAB&T forensic report 210807 and Report of C A Stride 071207.

The valuations and accounting of Cytech were conducted solely by management, who then benefited from their own valuations by way of significant performance bonuses and other benefits in Corpcapital. These benefits, which included “sign-on” fees, amounted to some R60 million over a two year period. The major portion of management’s shares and share options were housed in Corpcapital, the entity which benefited from the Cytech revaluations. This raises the obvious question of a conflict of interest and how this was managed. See Corpcapital executive benefits 1999-2001.

Throughout these major adjustments the investing public was none the wiser because there was no disclosure. However, the valuations had a profound effect on the fortunes of Corpcapital and especially of the executives, who were the main beneficiaries of their own valuations, an epic conflict of interest which continued unchecked. The facts strongly suggest that this was a company where Liebesman, supported by the executives, exerted undue influence and the board provided inadequate checks and balances.

Cytech slips quietly away
The final footnote on Cytech was written on 10 September 2004 in an announcement by Corpcapital. Corpcapital sold all of its interests in Cytech, related companies, and Aqua Online, in which Ellerine’s daughter had been a director, to another company in the tax haven of Belize ostensibly owned by its partners Sean Rose and Tal Harpaz. The purchase price for Cytech and affiliates was $2.7 million, equating to exactly the written down book value. No investigation has taken place to determine the authenticity of the sale and how shareholders interests were safeguarded. To this day the board has not conducted an in-depth probe into Cytech. See SENS disposal of equity in Netainment NV Cyber Finance 090904 . Corpcapital executives, and Lazarus in particular, sensitive in the extreme to criticism, appear to have maintained close links to the controversial and disposed of Cytech. Lazarus is on record as expressing the opinion that Cytech was not overvalued by Corpcapital because it was now, post sale, producing excellent profits. The obvious questions? How does he know? It is true, why were they so eager to sell it for a knock-down price?

The change in accounting policy, hidden in the fine print of the 2002 Interim Financial Statements, triggered an investigation by non-executive director and joint founder, Nic Frangos which commenced in April 2002. For obvious reasons the investigation caused consternation among Liebesman and his executives all of whom had much to lose from discovery and the public disclosure that would result. There was also the threat of possible criminal prosecution if the allegations were substantiated. Liebesman immediately placed obstacles in the way of the investigation what Frangos regards as and a cover-up was implemented and intensified. The executives provided scant information in a desperate effort to keep the lid on the real facts. See Information submitted by Hamburger to Frangos in 2002 .

The allegations of fraud which resulted from the Frangos internal investigation became the subject of many probes. Amazingly, the board did not itself conduct an investigation when presented with prima-facie evidence of wrongdoing in the form of a written report by Frangos dated 29 June 2002. See Frangos internal report to the board on Cytech 290602 . Instead, and under pressure from shareholders, the board appointed and paid for Nigel Payne, an auditor and member of the King Commission, to conduct a brief investigation.

Successive investigations were unable to penetrate the formidable barriers erected by the executives and their proxies. The Payne Report February 2003 was a predictable “whitewash”. In response, and under attack from Lazarus, Frangos commissioned independent expert analysis through his lawyers, WWB. The experts, Brian Abrahams and Collett & Collett SAB&T confirmed that the allegations of Frangos had substance. Frangos, through his lawyers, WWB, then filed a submission with the Minister of Trade and Industry, which included Abrahams report June 2003 and Collett SAB&T report June 2003. See WWB submission to the Minister recommending an investigation 100603 . The Abrahams and Collett Reports are extensive and amongst the best and most thorough corporate investigations conducted. The Companies act does not require more than a suspected irregularity in order to act. Frangos went considerably further in furnishing supporting evidence. The Minister of Trade and Industry authorized an investigation in terms of section 258(2) of the Companies Act, appointing Advocate John Myburgh SC, who also has chambers at Group 621 of the Advocate Chambers, to head the investigation, which will be referred to as the Myburgh Investigation, and the Myburgh Report. See Minister’s mandate letter 190803 which explicitly mandates the inspectors to consider and rule on the possibility of fraud. During this investigation further direct evidence submitted by Moss and others painted a picture of serial misconduct going back to the inception of the Corpcapital group of companies in 1996, initiated by Liebesman and Liebmann. Cytech was merely the tip of the iceberg. The benefits involved to Liebesman and the executives? Somewhere between R1 billion and R4 billion, numbers which make the scandals in the public sector pale into insignificance.

The Myburgh report was released by the Minister in November 2006. Frangos and his legal team WWB studied the content of the report. In an ironical and unpredictable twist the state’s investigation headed by Myburgh cleared Corpcapital of fraud. Once again, Lazarus lost no time in further personal attacks on Frangos. Analysis of the Myburgh findings and evidence by highly-qualified forensic experts brought in by Frangos through his lawyers WWB produced some astounding facts. Myburgh appeared to have ignored some of the most material evidence, many of his key conclusions were not supported by the factual evidence, and some of these conclusions were even inconsistent with the evidence. It was the view of Frangos and his advisors that no reasonable person could have come to the conclusions which Myburgh did on the evidence presented to him. This ensured that the saga would not end where it should have, with a proper investigation of Corpcapital. See the following reports, Report of C A Stride 071207 , SAB&T Ubuntu forensic report 210807 , Abrahams response to Myburgh report and Corpcapital experts 050607, Collett SAB&T response to Cytech evidence 170407, WWB report on procedural fairness 231107.

WWB, acting for Frangos, mandated Abrahams, Collett, SAB&T, Charles Stride, and a team of lawyers at WWB to independently analyze the entire Myburgh report and all of the evidence thereto, and to report back with their conclusions and findings. No time limits were set, and the teams were encouraged to seek third party opinion. The teams took twelve months to complete their work. As in the previous Payne saga the teams were not given access to each other to safeguard the integrity of their opinions. The result was not surprising. There was a broad consensus that it appeared that Myburgh had not conducted a proper investigation. Further, past opinions given by Abrahams and Collett, which had led to the action taken by Frangos, were re-affirmed, and some of the actions of Liebesman and the executives labeled fraudulent. The results were submitted by WWB to the custodian of the Companies Act, the Minister of Trade and Industry with strong recommendations for further action by the relevant authorities. That is where the matter now rests. See WWB submission to the Minister 261107.


The culture of the executives
Professor D Quinn Mills, a professor at the Harvard Business School defines the problem, “There is a fundamental clash which has developed in recent times between executives and investors. The crisis is about power as well as about money, the basic cause of the scandals is that CEO’s use their enormous power to enrich themselves at the expense of investors. Shareholders are supposed to own companies, and executives are supposed to be their agents in running them. In reality, executives use their power to make fortunes and use the fortunes to expand their power. The root of the problem is greed and a lack of integrity.”

The Corpcapital team consisted of substantially the same individuals who were involved, in one way or another, at W&A. The persons were Liebesman, Liebmann, Grolman, and Lazarus, who had been assisted in the litigation by advocate David Leibowitz, who also later joined Corpcapital (Leibowitz has now returned to the Bar). The group was joined by Sacks from the start, who had developed a particularly close relationship with Liebesman and showed unflagging loyalty. He was richly rewarded for these traits. In 1998 Sacks was a key driver in the formation of Cytech.

The team was closely knit and loyal. Their characteristics were a dogged ferocity with an innately combative nature and a win-at-all-costs strategy. They waged a relentless campaign orchestrated by Liebmann and Lazarus in an attempt to explain away the irregularities. To reach his goals Liebesman had learnt a long time back to embrace any tactic, however destructive. He was never willing to acknowledge the facts when they did not produce his intended end result. It was not by accident that he had experienced many narrow escapes from business disaster. These characteristics, taken together with the inherent difficulty of investigating complex and sophisticated fraud made the saga appear on many occasions to be mission impossible. The personal nature in which Liebmann and Lazarus attacked the persona of the reporting director in every arena ensured only one of two outcomes. Either Frangos would be subdued and humiliated, as so many had been before, or the saga would go to the wire.

The executives had a further weapon, to enlist the support of persons with “impeccable credentials” in the belief that words from these sources would buttress their case and lend it credibility.

It was into this vortex that the Frangos investigation of Cytech took place, providing a convenient distraction from the real problems faced by the company, and giving the Corpcapital spokesperson, Lazarus, someone to focus on and to blame for Corpcapital’s woes. The tactic of playing the man and not the ball was not lost to an alert media or to the business community. The proper alternative, to answer the allegations in an open and transparent way did not appear to be an option.

At W&A Liebesman had become isolated. He did not enjoy the support of the board members, and his executive team was split in loyalty. He did not make the same mistake at Corpcapital. See Media coverage of the executives .In particular, his close personal and business friendship with Ellerine appears to have served him well when the going became tough and allegations of criminality surfaced.

The Corpcapital defence strategy
It soon became apparent that Corpcapital had formulated a two-pronged defence. The one defence was to discredit Frangos in every possible way and in every forum, a strategy of playing the man and not the ball. Such techniques are common when other defences are flimsy. It did not escape the well-informed business community that the character and motive of any witness was irrelevant to the determination of whether or not a fraud had taken place. Most people saw it for what it was. The second defence was a hyper-technical accounting defence of the methods used, a technique which was likely to have some success because of the complexity and sophistication of the issues. See Business Day 130904 Are SA’s corporate big fish too clever for the scorpions to sting?

The defining moment came when the board, led by Ellerine, decided to back Liebesman and placed two lawyers, both executives, in charge of the defense, Lazarus and Liebmann. These two lawyers had demonstrated in the past that no lengths would be spared in defending the executives from the allegations. It was this fateful decision by a board led by Ellerine, more than any other, which cast the die ensuring that the saga would go all the way to the wire. For whatever reason, there was no appetite for the board to investigate the allegations properly. The only other alternative was that Frangos would be subdued and withdraw under the heavy artillery. Lazarus and Liebmann had been involved in this scenario on many occasions in the past and probably assumed that it could again succeed.

What emerged during the merger in 2001 from Kensani CEO Kelley Starke during a media interview was that the executives of Corpcapital had employed “guerrilla tactics” and bullying in an attempt to intimidate her, after she had objected to the merger swap ratios. Starke was neither the first nor the last to encounter the vindictiveness of the executives. According to Starke the Corpcapital executives even attempted to buy control of Kensani behind the scenes in a move aimed at removing her as managing director so as to end her opposition to the merger. This, while Ellerine was also a significant shareholder and director of Kensani as well as of Fulcrum Bank. See Statement of Kelley Starke to Myburgh , and Merger 2001 media coverage.

The manner in which Moss, a founder and the largest shareholder in the consortium which formed Corpgro, the progenitor of Corpcapital, was summarily dealt with by Liebmann when they fell out in 1997 is revealing. Liebmann’s letter is an indication of how he dealt with such matters, cold, calculating, and ruthless. See Letter from Liebmann to Moss 171197.

Brian Puttergil, the vendor of the outdoor business to Corpcapital also had a similar experience.

The board is suborned
“Go back to all those corporate scandals, and it all comes down to a board that missed warning signals,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

On 29 June 2002 Ellerine, the chairman of the board, and the chairman of the audit committee, Wixley, were presented with a serious document on the conduct of Liebesman and the executives in a meeting called by Frangos, see Frangos internal report to the board on Cytech 290602  on the website index. The complaint had come from a non-executive director. Ordinarily, it could be expected that the board would take immediate actions to protect the interests of shareholders pending a proper investigation by an independent authority appointed by the board to achieve total transparency and integrity. That is what fiduciary duties require. No such actions happened, and it raises the question as to why?

Ellerine’s relationship with Liebesman goes back far, see Jeff Liebesman, and Finance Week 040403 – Liebesman must admit all. According to the sworn testimony of Kas Herman, the senior partner at the time of Kessel Feinstein, the W&A auditors, Ellerine was the central figure in the secret settlement of the W&A debacle.

It is clear that Ellerine, as chairman of the company, and a major shareholder in all of the related entities, held the cards, and had great influence. Assessing the information at his disposal from the report submitted by Frangos in June 2002 with a critical eye, as required by his fiduciary duties, was particularly important because the decision on the table involved a transaction where his interested executive director colleagues were conflicted and there were serious allegations made against them. The shareholder trust duty turned crucially on the ability of the chairman to be an informed, neutral and independent decision maker. In a situation when the inside executive directors on the board will personally and materially benefit from the issue brought forward, or they are alleged to have engaged in misconduct, or a combination of the two, it is incumbent upon the non-executive directors to assume a particularly active role in assessing the information provided with “a critical eye” so as to ensure that the interests of the company and its shareholders – and not the personal financial interests of the conflicted directors – are being advanced. The non-executive directors in such instances, and Ellerine and Wixley in particular in this situation, are in effect the last best hope for the company and its shareholders that proper governance will be maintained. Shareholders were entitled to expect more from Ellerine, and the longevity of the matter in no small way turned on the crucial decisions that were made by him at the start to back Liebesman and give the executives maximum room to manoeuvre. There can be little doubt that in any comparable situation a strong and independent chairman would have removed Liebesman and the entire executive team and replaced them in order to further the interests of shareholders and protect the integrity of the company.

Wixley came on the scene later, his appointment to the board coinciding with the conclusion of the 2001 merger. He had no direct knowledge of or involvement with Cytech. Nonetheless, he was duty-bound as chairman of the audit committee to take action once the Cytech allegations of fraud had been reported to him. For unknown reasons Wixley decided that supporting the executives was the best line to adopt. In a remarkable decision Wixley placed an executive, Sacks, in charge of the independent valuation of Cytech by PwC, insisted upon by Frangos in October 2002. Wixley’s appointment of PwC’s Peter Goldhawk, who had represented Corpcapital Bank during the merger and was hardly impartial, to conduct a valuation of Cytech ensured the desired result for the executives. The circumstances and process implemented by Goldhawk represented everything that Gatekeepers should avoid.

Wim Trengove, a highly-respected advocate, was the sole non-executive director at Corpcapital in 2000 when the irregularities relating to Cytech took place. Corpcapital was his first taste of corporate life from the inside. The fact that the executives probably did not apprise him of material facts is something that could have happened to any non-executive director. Directors are entitled to expect full candour and disclosure from their colleagues.

The remainder of the board comprised executives, all of whom benefited financially from what happened to Cytech and were conflicted. They should have been sidelined pending an investigation, but this did not happen.

Should the board have acted differently?

  • In April 2002 and then on 29 June 2002 the board members were officially advised of the serious allegations of misconduct by Frangos in writing.
  • Frangos had numerous discussions with chairman Ellerine on the matter.
  • His resignation letter on 2 December 2002 set out his concerns in vivid detail.
  • Further evidence was furnished by Frangos to investigator Nigel Payne and was provided to Corpcapital.
  • The Abrahams and Collett reports, which persuasively rebutted the Payne report were given to the board.
  • The board was aware that there were allegations of an invasion of the privacy of Frangos and certain executives had been cited as defendants, along with the company.

The submission to the Minister by WWB requesting an investigation was seen by the board

From this it can be said that the warning lights were on in every room. Each and every director was required to apply his mind independently and with skill and care so as to determine the facts for himself. There is little evidence that they did so. This suggests that the board members, or least the majority of the directors, were acting in concert in a sustained attack on the credibility of Frangos to deflect attention away from the principal issues. If the board members were truly independent and believed the version of the executives that Frangos had no grounds to complain and was causing problems they had the perfect remedy, section 220 of the Companies Act, which contained machinery to remove a director. They did not do so. Perhaps it was that Section 220 has a sting in the tail. The accused director must be given an opportunity to defend himself, and it is a public forum. Not appealing circumstances to Corpcapital.

In 2005 Ellerine and Lazarus resigned from the board. Wixley took over as chairman. Having announced the imminent and urgent dismantling of the company in 2003, a novel “mirror listing” took place and New Corpcapital was born, taking over the residual unsold assets of Corpcapital. See Business Day 300505  “New Corpcapital formation, and Finance Week 080605 New Corpcapital formation – (new) old Corpcapital lives on. New Corpcapital is still alive and well as this report goes onto the internet in 2008, with the board having appointed Liebmann as the sole executive custodian.

In the year ended 31 August 2007 Wixley proposed paying himself R350 000 as a non-executive chairman for his stewardship, one might ask of what? Urged by shareholder Flagstaff to cut the figure at least in half, Wixley readily agreed. In the meantime Liebmann, the sole captain of a deserted ship was paid R1.8 million. The fact that a shareholder had made the demand and the fact that it was immediately accepted is telling. Even in its death throes Corpcapital was providing surprises. See Financial Mail 110708 Corpcapital The drama continues. In response to a question by the journalist as to why the company was spending shareholders money on legal claims Liebmann, the sole executive of the company, answered, Firstly, it’s a question of costs, and also, if [Mpahlwa] were to succeed there could be an argument that the inquiry should be re-opened. The Mpahlwa referred to is the Minister of Trade and Industry, and the inquiry referred to was the section 258(2) investigation. From the horses mouth, an admission as to the real reason why the company was being kept afloat. Is this a legitimate use of shareholder funds? Time will tell.

The auditors seem to have been compromised
“During the past decade America’s top accounting firms have abandoned investors and instead supported their corporate clients in deception. Accountants have ignored accounting irregularities, helped conceal irregularities, and made favourable interpretations for clients at the borderline on accounting issues,” Professor D. Quinn Mills, Professor of Business Administration at Harvard Business School.

Auditor independence, the ability of external auditors to provide an unbiased assessment of the companies’ financial statements for investors, is the axis around which the role of auditors revolves. The auditors of Corpcapital and Cytech were Fisher Hoffman, and the involved partner was Peter Katzenellenbogen, later to leave under the cloud of “insider trading” in a settlement. See Moneyweb 201206 – Peter Katzenellenbogen insider trading.

Inexplicably, and contrary to its obligations under the Companies Act, and the assertions of the directors of Corpcapital, Fisher Hoffman did not conduct an audit of Cytech in 2000, nor an independent valuation. The audit firm did not penetrate the veil of the valuations of Cytech conducted by management, even though it knew that Cytech was material and that management was conflicted. Fisher Hoffman simply accepted management’s valuations and later claimed that it had conducted a “review”. The distinction between a “full and comprehensive audit” of a key investment, as required by law, compared to a “review” is fundamental and profound. Fisher Hoffman was the auditor for both Corpcapital and Cytech, conducted corporate finance functions for both, with the senior partner Peter Katzenellenbogen being an active player at all times.

The auditors failed in their role as gatekeepers for shareholders and the investing public. Under pressure later during the state’s investigation, Fisher Hoffman claimed to have conducted an audit for the 18 months to September 2001, a rather obvious afterthought, and one which does not address the 2000 omission. Had Fisher Hoffman acted in accordance with its responsibilities and the law the Corpcapital saga might never have happened. Auditors are supposed to be independent, and when they sign the accounts investors are entitled to expect that they have conformed to their responsibilities. Investors would expect that the reported profits were produced in the normal course of the company’s business and were sustainable, since there were no qualifying notes explaining extraordinary issues. No declaration was made of any special circumstances, or of Cytech, and of the materiality of profits which emanated from the accounting methods used to value Cytech.

The directors of Corpcapital later claimed in the media and to the inspectors in the Myburgh investigation that KPMG had conducted an independent valuation in March 2001. Anyone hearing this would be entitled to accept it at face value and the obvious inference that Corpcapital wanted to be drawn, namely that an independent Gatekeeper had applied its mind and approved the valuation. However, when the inspectors interviewed the two involved accountants from KPMG, Messrs Spies and Carrera, they denied that they had conducted a valuation. The two auditors confirmed that no such valuation was conducted as claimed. The only conclusion is that the directors of Corpcapital had not been truthful in their sworn testimony. Ordinarily, such a variation in versions on a key issue would have triggered a serious response in respect of credibility from the inspectors. Witnesses who provide false evidence are normally subjected to more scrutiny, generally ensuring that any future evidence is tested independently. This does not appear to have happened.
Kas Herman, senior partner of Kessel Feinstein during the W&A litigation, provided files to the Myburgh investigation into Corpcapital giving an insight to matters relating to W&A. Kessel Feinstein, the auditors, were jointly sued with Liebesman. See Kas Herman evidence .

Inaction by the JSE
The Johannesburg Stock Exchange, JSE, is licensed by the State as an exchange under the Securities Services Act, 2004 and is Africa’s premier exchange. In everything it does, according to its own profile, the JSE strives to be a responsible corporate citizen. The JSE sets out rules and directives to regulate fair and efficient markets, which are binding on members and their employees. Listings are granted subject to compliance with the Listings Requirements and new applicants and their directors must comply with the Listings Requirements. The JSE has formidable powers to deal with non-compliance or allegations of irregularities. For example, where the JSE finds that an applicant issuer or any of an applicant issuer’s director(s) has contravened or failed to adhere to the provisions of the Listings Requirements, the JSE may, amongst its many powers disqualify an applicant issuer’s director from holding the office of a director of a listed company for any period of time.

Certain important files relating to Corpcapital, the WWB submission to the Minister and the Abrahams and Collett reports, were provided to the JSE by WWB, lawyers acting for Frangos. This was done formally to ensure that the JSE was aware that the same documents were to be provided to the Minister of Trade and Industry with a recommendation for a Companies Act investigation. The JSE did not report back to WWB on what action, if any, was taken. Subsequently, significant breaches of JSE regulations were documented by Charles Stride in his forensic report. See Report of CA Stride 071207.

While the JSE compares favourably with the world’s best run bourses its investigation unit is not known for its ability to pierce the veil of deception. The dearth of prosecutions for insider trading and corporate fraud is a consequence.