A two-pronged strategy to divert focus
Lazarus and Liebmann, lawyers who had defended Liebesman in the past, initiated a two-pronged strategy. The first was directed at Frangos in a highly-aggressive personal attack apparently aimed at discrediting him. When your case is vulnerable, attack the witness. This tactic is alien to most business persons, who prefer to focus on the issues in a transparent manner rather than the person. Here are some examples from the Corpcapital spokesperson;

Business Day (20.01.03) – Frangos was now trying to justify his departure under the pretext of being a champion of corporate governance,
Classic Business (20.01.03) – and our view is that it’s Mr Frangos who is in breach of his fiduciary duties by acting in the manner in which he has because the duty which he owes is to act in the company’s best interests and we don’t believe that he’s done that.
The Star (21.01.03) – Frangos’s allegations of impropriety were most likely a question of sour grapes.
Business Day (28.01.03) – The investigation (Payne) will not merely limit itself to financial management or Frangos’s specific allegations, but will range widely covering all allegations arising from Frangos’s letter.
Payne also has no connection with anyone at Corpcapital. He is independent and eminently qualified.
Business Day (15.09.03) – In the affidavit Lazarus attached to his application, he now admits that he knew Payne long before his appointment as an independent investigator and that he first met him in 1999 and subsequently again in 2001. Later, Payne was invited to attend Corpcapital promotional functions and apparently attended one or two such functions.
Business Day (18.02.03) – Asked whether the company intended to sue Frangos for defamation, board member, Neil Lazarus said, I would really like to sue him to the International Court of Justice and back again. What he said was unfounded and untrue.
Classic Business (13.03.03) – Mr Frangos maintains that his rights have been violated. Well, unfortunately he has elected to point his gun at the wrong target.
Moneyweb (13.03.03) – This is ridiculous, Lazarus said. There are board minutes to prove the company took the deliberate decision to play the ball and not the man
Business Day (08.04.03) – but also because of the battering Corpcapital’s reputation took as a result of Frangos’s accusations.
The Star (17.09.03) – Wrongfully, the company has been brought to its knees, director, Neil Lazarus said yesterday. Lazarus said the damage caused by Frangos’s vendetta not only cost the company its future but jobs too.
Business Day (26.01.04) – Executive director, Neil Lazarus (at the AGM) denied vehemently bonuses paid to directors were ever influenced by the Cytech valuation except in 2000. (note 2000 was the seminal year)
Business Day (30.08.04) – This is absolutely outrageous said Corpcapital director Neil Lazarus. I am enraged. How dare anyone suggest that I ordered a survey of telephone calls made by or to persons unconnected with the firm? Lazarus is emphatic in his denial. So is Goldblatt. But the recording of the calls did take place. So, if not ordered by Corpcapital, then by whom, and for what purpose?
The Citizen (30.11.06) – Lazarus said that after destroying a once-healthy business, Frangos should be on his knees begging for forgiveness. Instead he was trying to trash a process which he instigated.

Lazarus’s comment to Moneyweb on 13 March 2003 is interesting and was repeated on several occasions. In a curious move, it appears that the board of Corpcapital had taken an express decision to play the ball and not the man and disseminated a circular to all members of staff urging them to abide by this instruction, surely an ethos which is not only self-evident, but is routinely practiced by companies with strong ethical cultures. What board of directors would need to go to such lengths to demonstrate that it did not conduct personal vendettas?

The second approach was subtle and ingenious. Mount a detailed hyper-technical accounting defence to confuse the issues and to deflect attention away from the core issues. This defense was supported by expert evidence by practitioners with impeccable credentials. No-one was to know how they were briefed. It is possible to give almost anything credibility if limits are placed on information and the scope of investigation is narrow. As the saying goes garbage in garbage out. On the other side it is common cause that little can escape detection if there is full disclosure, the provision of full information, high integrity and total transparency. See the following section for more detail.

Corpcapital used experts extensively and recruited persons with impeccable credentials to their cause. In every case the scope of inquiry was limited and focused on minor hyper-technical issues rather than the macro issues of principle. Without being critical of the experts, it seems that more benefit would have been gained, and an answer closer to the truth obtained, had the Corpcapital experts been let loose to examine all of the evidence, as was the case with Abrahams, Collett, SAB&T and Stride, experts used by Frangos. Specifically, they should have been asked by a board acting in the interests of shareholders to express opinions on any matters which related to the allegations of fraud, given access to any additional documentation they might have required, and provided with a free hand as the circumstances undoubtedly warranted. This, approach however clearly would not have suited the executives, who were essentially running the show.

The cover-up by the executives was to wind its way through a succession of investigations, first during the internal Frangos investigation, then an investigation by a Corpcapital appointee, Nigel Payne, and, finally, a state investigation headed by Myburgh. It had some notable successes. It was no surprise that Payne cleared Corpcapital. He enjoyed a close relationship with many of the executives, and was appointed and paid for by the board. Myburgh’s findings were not so easy to explain. The Stride and SAB&T reports show that important direct evidence appeared to have been ignored or not understood, and the reports also highlight shortcomings in the procedure. The WWB and Collett reports point to inconsistencies and possible perceptions of bias. Readers are encouraged to study the course and evidence of the Myburgh investigation in detail to form their own opinions.

A lack of required checks and balances
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 two years. 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. When it came to the crucial valuation in 2000 Hamburger claims he was instructed to obtain an external valuation, but he was put off by the high fees of PwC in London, and by Peter Katzenellenbogen of Fisher Hoffman who advised against the external valuation. Apparently, Hamburger felt that it was sufficient to interact extensively with other objective and technically proficient executive managers of Corpcapital such as Liebesman, Sacks and Liebmann.

Attempts to settle by Lazarus
During May and June 2003 Frangos met with Lazarus on three occasions. The discussions broke down over irreconcilable differences on points of principle. Lazarus sought a settlement of all issues; of Frangos’s allegations of corporate misconduct and the action Frangos had brought against Lazarus and others for, Frangos alleged, unlawfully invading his privacy. Frangos was not willing to enter discussions on settling the allegations of misconduct against Liebesman and the executives relating to Cytech, it being his position that he had no authority or mandate from shareholders to do so. The issue was theirs, not his. However, Frangos was willing to discuss the invasion of privacy matter, his view being that the matter was personal and a deplorable sideshow obviously aimed at obtaining dirt on him by the perpetrators. The contemporaneous notes of Frangos of the three meetings can be viewed on the website, Notes on meetings between Frangos and Lazarus.


A lengthy sequence
The controversy over Cytech has resulted in a number of investigations into the company, culminating in the state’s section 258(2) investigation, which commenced on 19 August 2003.

The Frangos internal investigation of Cytech, April to December 2002
Frangos first raised his concerns internally in April 2002 after a sudden change in accounting policy had the result of obscuring a dramatic fall in the valuation of Cytech. Frangos documented his concerns to the board, see Frangos letter to Liebesman 220402 re Interim Results.


The chart shows that mark-to-market accounting was used when the valuations of Cytech increased astronomically, and was abandoned in February 2002 when they inevitably declined. Was this a “happy coincidence” for the executives, a question asked by Abrahams in his first report of June 2003?

During his probing for the facts Frangos was provided with minimal information, and considerable delays. The information eventually provided consisted of 18 pages, and took three months to acquire. See Information submitted by Hamburger to Frangos in 2002 . In contrast Corpcapital provided at least five lever arch files of Cytech-related information to the section 258 inspectors. It seemed that a state investigation, fortified by powerful legislation for withholding information, was able to achieve something that a lone director, supported by stock exchange regulations and the Companies Act could not. This formidable gap in evidence, and the obstacles placed in the way of the provision of requested information, did not seem to trouble the board of directors.

Section 22.4 of Schedule 22 of the JSE Listing Requirements states:

“Supply of information
22.4 The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties.
22.4.1 Management has an obligation to provide the board with appropriate and timely information, but information volunteered by management is unlikely to be enough in all circumstances, and directors should make further enquiries where necessary. The chairman should ensure that all directors are properly briefed on issues arising at board meetings.
22.4.2 Directors should have unrestricted access to all company information, records, documents and property.
22.4.3 The board should receive information that goes beyond assessing the quantitative performance of the company, and look at other performance factors such as customer satisfaction, market share, environmental performance and other quantitative issues.”

On 29 June 2002 Frangos presented his conclusions to the chairman of the board, Ellerine, and the chairman of the audit committee, Wixley. See Frangos internal report to the board on Cytech 290602 . The conclusions suggested that the financial results of Corpcapital had been manipulated, and Frangos’s report gave details of the practices used for the accounting of Cytech. Both Ellerine and Wixley confirmed that they were not previously aware of the issue.

After asking Frangos’s opinion on what to do, Ellerine failed to implement one of his central recommendations, to investigate the actions of the CEO and executives. In Frangos’s view an opportunity was lost to deal decisively with the matter at the outset and avoid the long road which lay ahead. Frangos further tabled the position later in the year, see Abrahams Exhibit 15 – memo to board re Cytech 141002.

No investigation by the company was conducted while Frangos was a director, and none since, at least none that has been made public. See Media articles on Cytech .

The resignation of Frangos, 2 December 2002
Liebesman’s strategy was to isolate Frangos from the board, and in this respect he appeared to have the support of Ellerine. Against the wave of aggression and animosity generated by Liebesman, Frangos had sought external legal advice. On 24 July 2002 Frangos appointed John Bellew of WWB to advise him on legal aspects relating to his fiduciary duties and the roadmap, given the difficulties that had arisen. See WWB legal notes on fiduciary duties . This resulted in an extraordinary showdown over the right of directors to seek external advice, when Liebmann and the executives challenged the right of Frangos to seek such advice. Ultimately, the directors were forced to concede that such advice was a constitutional right. That the executives were permitted to even contest it for so long is a quite amazing. No doubt, the two lawyers on Corpcapital’s board felt uneasy that a member of their profession (and not disclosed to them) was in possession of the facts relating to what was really going on at Corpcapital. See External legal advice dispute .

After failing to receive satisfactory answers to his allegations of misconduct, and following a hostile response from the company’s executives, Frangos resigned on 2 December 2002, and went public with his letter of resignation on 15 January 2003 after it became clear that the board would not provide comprehensive explanations to shareholders. The letter of resignation can be viewed on this website, see Frangos Letter of resignation 021202 .

The pattern for a personal attack was set for the first time in a public forum, the AGM held on 15 January 2003, when the board attempted to undermine Frangos’s credibility. The directors apparently believed that playing the man and not the ball would shift the focus of attention from Cytech to Frangos, who in turn could find no other explanation for the way in which the board reacted to a perfectly legitimate challenge – a challenge that should have been responded to properly and on the facts. See Notes on AGM 2003 .

After the evasive way in which the board dealt with the matter, Frangos released his letter of resignation to shareholders via the media. See Media coverage on resignation .

The Corpcapital executives made much of Frangos holding discussions with shareholders and releasing his letter of resignation. Warren Buffet, something of an expert in such matters, refers to such circumstances, “Directors should behave as if there is a single absentee owner, whose long-term interests they should try to further in all proper ways”. Thus, the Board is the ultimate check and balance, and its true north is the interests of the “absentee owner”. Buffet goes further – “if able but greedy management over-reach and try to dip too deeply into the shareholders pockets, Directors must slap their hands”. He also believes that a Director who sees something he doesn’t like should attempt to persuade the other Directors of his view. If he is successful, the Board will have the muscle to make the appropriate change. If he is not successful, he should feel free to make his views known to the absentee owner.

On 19 January 2003 the board issued a two page media statement, interestingly prepared by the executives Liebmann and Lazarus, affirming, if proof were ever needed, who really called the shots in the company. The statement was in Frangos’s view misleading and contained material inaccuracies. Lazarus, an executive director, took over as spokesperson for the company, a role previously held by Liebesman, who was not to be heard of again.

Experienced investigator Peter Schoombee captured the Liebmann/Lazarus approach in Corpcapital’s paid press advertisement to counter the Frangos resignation letter;

A striking feature of this document is its pejorative approach. Rather than focusing on the issues, the Corpcapital board elects to attack the integrity of the person who raised those issues. The phrase the “statement is incorrect” rings like a refrain throughout the document. In that context, the word “incorrect” Is used pejoratively nine times. The words “false”, “misleading”, “unfounded” and “not true” are used in the same context.

This document does not read like a sober corporate attempt to resolve a dispute – it reads like a courtroom attack by an experienced lawyer, harnessing his skills to destroy the credibility of the chief witness.

In doing so, the document attempts to move the spotlight from the serious issues raised by Frangos and place the spotlight, instead, on Frangos’ character. Ironically, this statement by the Board of Directors confirms much of what Frangos says about the corporate culture in Corpcapital.

Every intervention was now managed by Lazarus, an advocate, with no further comments from the CEO or the chairman, Ellerine.

Perhaps for the first time in corporate affairs in South Africa both the chairman and the CEO of a public company moved out of public sight in the midst of a crisis.

Public pressure continued to build on the board.

Invasion of privacy, January 2003
Shortly after the resignation of Frangos, on 20 January 2003 a “case” was registered in the case control register of AIN, a private investigation agency. In this document, under the monthly serial number number 15 (not a date), it is recorded in the third column that the name and address of the complainant and his telephone numbers are Corpcapital Bank, Rosebank, H/Q, contact: Neil Lazarus, Tel: 011 2830000, fax: 011 830088. The “nature of complaint” is denoted as ”profile”. The investigator/s are denoted as “Warren/Rassie/Louw” which refers to Mr Warren Goldblatt, Mr Hercules Erasmus and Mr Louw Wepener respectively. Eramsus and Wepener were, at the time, employees and investigatorsof AIN. The person to be investigated was Frangos, and a profile compiled and submitted to the client.

Some three years later, Mrs Karina Prinsloo, an ex ABSA bank employee, stated in evidence before the Pretoria High Court in May 2006, in an action brought by Frangos against various parties, that she unlawfully accessed the bank account of Mr Frangos on 27 January 2003. She was paid a “bribe” to do this by Wayne Slabbert, a policeman at the Norwood police station, obviously acting on behalf of third parties as part of a “cut-out” system whose objectives it was to create as many links as possible to avoid detection. Mr Gert Smit of the forensic department at ABSA explained in his evidence how the computer system identified that the account of Mr Frangos had been unlawfully accessed on 27 January 2003 at 07h26:20, and on two other occasions.

Further evidence revealed that the private tax information of Frangos was unlawfully accessed at the South African Revenue Service. The same thing happened with his Vodacom cell phone status, and Home Affairs information, such as passport details. The purpose of the investigation can only have been to obtain information which could be used against Frangos to stop him in his tracks.

The evidence confirms that an investigation was conducted by AIN, and that an unlawful access to bank information took place in pursuance of the profile. The sinister business of AIN included the “profiling” of an individual on the instruction of a client. The profiling would include the garnering of information relating to the individual from the South African Police Services, the Department of Home Affairs, Telkom, the South African Revenue Service, major banks, cell phones, pension funds and insurance companies.

This raises the question of who instructed AIN to conduct the investigation. Warren Goldblatt, CEO of AIN at first entered a plea of denial. This was followed shortly before the trial took place with an amended plea in which he stated that he had received an instruction from Liebesman in the presence of Grolman to run a profile on Frangos. Liebesman denied that he had given such an instruction. See The Star 100506 –  Corpcapital authorized probing into Frangos.

At the end of the third week of the trial settlement discussions took place and the matter was settled. The settlement was made an order of court. AIN accepted that it invaded Frangos’s privacy (which it alleges it did on the instructions of Liebesman in the presence of Grolman, which Liebesman denied). Corpcapital accepted that an investigation had taken place, but denied that either the board nor Lazarus had authorized any person to give such instructions. Lazarus had a close relationship with AIN through, first, his late brother Mr Gary Lazarus who was one of the co-founders of AIN and, second, his friendship with Goldblatt in consequence of Lazarus acting as the de facto executor of his late brother’s estate. See Settlement of litigation.

Distasteful as these events were, Frangos continues to believe that they were not isolated, but were part of a campaign to discredit and embarrass Frangos, a campaign of no boundaries.

The Payne investigation, commissioned by Corpcapital, January 2003
In the midst of unprecedented media pressure, Corpcapital’s board, by now under huge pressure from shareholders, and Old Mutual in particular, responded by announcing the appointment of an investigation to be conducted by an “independent” accountant, Nigel Payne, in February 2003. Remarkably, Payne concluded his investigation in three weeks and submitted a report comprising a scant 18 pages. He reported that he found no irregularities in the accounting treatment and management methods applied to Cytech. Corpcapital and its executives were, in Payne’s opinion, guiltless on any charges of misconduct.

Inexplicably, in one of the most astounding features in any investigation Payne had not dealt with the central facet of his mandate, Cytech in 2000. Brian Abrahams, an accounting expert of considerable repute, pointed this out in his report. See Abrahams report June 2003 . Myburgh in his report concurred with Abrahams. The board of directors of Corpcapital made no reference to this major omission, which in itself should have discredited the report, and simply accepted the report, almost as if this was the desired end result.
In a further material oversight Payne did not interview Kelley Starke, CEO of black-empowerment company Kensani, in connection with the merger even after she had volunteered to make herself available. Payne delivered his findings, offered no explanations or evidence in support of his conclusions, and walked away.

The appointment of Payne had been accompanied by intense media attention. Frangos initially saw the Payne investigation as the means to attain an independent assessment of the facts at Corpcapital, and for this reason was disposed to co-operate with Payne in the investigation. However, given the hostility and tactics employed by Liebesman and the executives, Frangos was insisted, in meetings with Payne, that he was assured of the integrity and independence of the investigation. These meetings took place in the presence of two witnesses appointed by Frangos who documented the discussions. Payne gave the necessary assurances to Frangos, and these formed the basis on which Frangos co-operated in the investigation. In the end, however, Payne reneged on the undertakings he gave to Frangos, including promises that he would permit the right of rebuttal, an important process to ensure that all of the evidence was properly tested, and was not manufactured for the occasion. In fact Frangos received no information from Payne on any evidence furnished by Corpcapital, nor did Payne explain in his report how he tested the veracity of the evidence, breaches of proper investigative procedure of the highest order.

Payne also undertook to release the report to both parties simultaneously, an undertaking which Frangos insisted on to ensure that the final report was not manipulated between any drafts and the final report. See Frangos letter to Nigel Payne 240203, and Record of meetings between Frangos and Payne. In the event, Payne furnished the report to the executives clandestinely on Saturday 15 February, providing them with sufficient time to prepare for the media and whatever else was required. Frangos was advised by a member of the media that the report was to be released by Corpcapital at a media conference called by Corpcapital at their premises at 15h30 on Monday 17 February 2003. The call to Frangos came two hours before the meeting. It takes no great leap of imagination to understand why events unfolded in the way that they did.

Payne also failed to demonstrate, in Frangos’s view, independence, a key assurance that he gave to Frangos. Contrary to this assurance he failed to disclose that he had a personal relationship with some of the key executives at Corpcapital.

Frangos called the report a “whitewash” when Payne failed to meet proper standards of investigative procedure and it became evident that the integrity of the process had been compromised.

The Payne episode underscores the importance of the fiduciary duty that boards have to shareholders to act at all times in good faith and in their interests, and what happens when they do not. Allegations by a directors that the CEO has engaged in impropriety are serious because, if true, would mean that shareholders and the market have been prejudiced, and fiduciary duties have been breached. In such circumstances the board must act with decisiveness and with great circumspection. Today, Payne continues as an advisor on corporate governance and even lectures on the subject. The Payne report February 2003 and related correspondence can be viewed on the website.

The Abrahams and Collett investigations to determine whether the proper facts had been investigated by Payne, February to June 2003
The board of directors and Payne had failed to properly investigate Cytech and the conduct of Liebesman and the executives. This posed a question, had Frangos completed his fiduciary obligations? Were there further steps in due process which needed to be taken? The Legal advice to Frangos was that there were. Specifically, there was a legal framework in place to deal with this set of circumstances. The advice to Frangos was to take the matter to the Minister of Trade and Industry, the custodian of the Companies Act. The Minister had formidable powers in terms of the Companies Act to investigate breaches of the requirements of the Companies Act. Specifically, section 257 through sections 263 enabled the Minister to mandate inspectors to conduct an investigation by the state.

This was an extremely serious step which could have wide and important consequences for the various parties. Before acting on the advice Frangos wished to independently verify his own suspicions and preliminary conclusions. The aggressive and threatening tactics adopted by the executives had convinced him that any further action on his part needed to be backed by the most convincing and persuasive independent evidence. In February 2003, at the conclusion of the Payne investigation, and after intense consultations with his advisors, Frangos mandated two separate and independent investigations through his attorneys WWB. His objective was to independently re-test the evidence before deciding whether or not to take further steps. It was recognized that the saga was about to enter a new, and potentially decisive phase.

Brian Abrahams, an experienced public accountant and auditor, with excellent investigative credentials, and the accounting and forensic firm Collett and Collett/SAB&T (Collett) commenced their investigations. Frangos had no prior dealings with either, both having been recommended independently. Neither Abrahams nor Collett was advised of the brief to the other, and each operated completely independently of the other to ensure a proper check and balance of the respective findings, with WWB as the watchdog. It was only after the reports had been submitted that the two investigators met. The mandates were broad in scope, leaving it to the investigators to traverse any other relevant areas, and unlimited as to time. All available information was made available to the investigators. The investigators were permitted and encouraged to engage with any third parties of their choice.

The investigations took some four months to complete, and the two reports comprised some 1,000 pages of findings backed by evidence. It would be difficult to find better examples of dedicated and worthwhile investigative procedures. Universities and business schools have shown considerable interest in these reports.

The Abrahams and Collett reports both independently reported that there was substance to the allegations concerning the Cytech valuations and the conduct of the executives. The two investigations were conducted at a personal cost to Frangos of some R2.5 million. The Abrahams and Collett reports can be viewed on this website. See Abrahams June 2003 report, and Abrahams Executive summary – findings, and Collett June 2003 report.

On the subject of disclosure to shareholders Abrahams had this to say, “Corpcapital (OLD), Corpgro and Corpcapital did not make appropriate disclosures and/or comply with the requirements of Schedule 4 of the Companies Act with respect to Cytech in the 2000 and/or 2001 years. In his opinion, in the absence of disclosure in the afs of Corpcapital (OLD), Corpgro and Corpcapital in 2000 and 2001, of the information required by AC 100, AC 110 and AC 125 in respect of Cytech, the afs were not appropriately described as having been prepared in accordance with GAAP”. A lack of proper disclosure essentially means that the financial results were misrepresented. And, misrepresentation is an integral facet in a fraud investigation.

With regard to the accounting method, based on the information he had available at the time, Abrahams stated, “In my opinion, Cytech should have been classified as an “associate” in terms of AC 110 and it should have been accounted for and disclosed in terms of AC 110.”Abrahams believed that Cytech should have been accounted for using the equity method, not the mark-to-market method, a profound distinction which had a huge bearing on the profits of Corpcapital. Had the equity method been used Corpcapital would have shown a dramatic decline in profits in 2000 rather than the rosy picture reported by the executives.

In relation to the Payne investigation on Cytech, Abrahams stated, “In particular he does not deal with its revaluation in 2000 and its impact on the reported profits and bonuses/restraints and the need for disclosure of key assumptions in the revaluation of an unlisted on-line gaming operation. He also does not deal fully with the change in accounting treatment in 2002.” These were two of the most crucial issues that were ignored by Payne.

Collett concurs on non-disclosure and reported, inter alia, “The Netainment-investment (Cytech) was not adequately disclosed in the F/S and/or in accordance with GAAP and/or the provisions of the Companies Act. The above inadequate disclosure and non-compliance resulted in the F/S not achieving fair presentation.” Thus, two forensic investigations, independently of each other had reached the same conclusion.

In regard to Payne Collett said, “We do not concur with the findings of Payne on material matters.”
It is instructive to compare the manner in which the Payne investigation was conducted (at the behest of the company) to that of the two separate investigations by Abrahams and Collett (mandated by a non-executive director and overseen by a corporate law firm) which are likely to stand the test of time as benchmarks for excellence in forensic investigations;

  • The Payne investigation took three weeks, the Abrahams and Collett investigations 16 weeks
  • Payne conducted a selective investigation, Abrahams and Collett had an unrestricted mandate
  • Payne’s report is covered in 18 pages, the Abrahams and Collett reports are some 1000 pages
  • Payne does not support any of his findings with evidence, Abrahams and Collett support every finding and conclusion with evidence and case studies from GAAP and the Companies Act.
  • There are no checks and balances to the Payne report, Abrahams and Collett was unaware of the mandates given to the other by WWB, and investigations were conducted totally independently.
  • Payne consulted with no third parties, Abrahams and Collett were mandated to do so and in fact did so.

All three reports can be viewed on the website, Payne report February 2003 (Ms Word 102kb), Abrahams report June 2003, and Collett report June 2003.


The process
After a comprehensive review of the Abrahams and Collett reports, and on the recommendations of his legal counsel, Frangos authorized attorneys WWB to submit a request to the Minister of Trade and Industry to investigate Corpcapital in terms of then Companies Act. See WWB submission to the Minister recommending an investigation 100603. On 19 August 2003 the Minister, Alec Irwin, appointed inspectors, Advocate John Myburgh SC and Professor Keith Prinsloo, to investigate Corpcapital under his mandate. See Minister’s mandate letter 190803. The investigation commenced immediately for a designated four month period. See Business Day 250803 – Inspectors must delve deep if probe of Corpcapital is to be meaningful.

Company law investigations empower inspectors to summon witnesses to appear and provide all the relevant information under oath. If witnesses fail to meet these requirements, including providing false evidence, they are deemed guilty of an offence and face prosecution. See Summons to appear before inspectors .

Evidence was presented to the inspectors by all relevant parties in the form of written submissions and recorded oral evidence. The WWB submission was supported by the Abrahams report June 2003 and the Collett report June 2003. In September 2003 WWB furnished a report by Frangos to the inspectors; see Frangos initial statement to Myburgh. This was accompanied by a chart which summarized the allegations made by Frangos, see Seven methods of systematic deception.

Pandora’s box is opened
By far the biggest surprise was the volume of information submitted to the inspectors by Corpcapital on Cytech, some five lever-arch files. The dramatic shift in Corpcapital’s position from the information provided to Frangos during his internal investigation did not seem to make an impression on the inspectors. During the Frangos investigation, faced with JSE requirements the executives provided only 18 pages on Cytech, but faced with criminal action for failure to provide all information to the s258 investigation, out came a flood of documents.

Early in the investigation Kelley Starke, the CEO of black women’s empowerment group Kensani gave evidence. See Statement of Kelley Starke to Myburgh. This had been preceded earlier in the year by substantial media interest. See Media coverage of Starke matter.

Martin Westcott, the CEO of PE Consulting, was called on to provide evidence on the Liebesman/Old Mutual matter where Frangos had contended that Liebesman had lied on a material matter to Corpcapital’s largest institutional shareholder, a major issue reflecting on the credibility of Liebesman. Old Mutual had written to Liebesman questioning the bonus schemes for Liebesman and the executives. Liebesman provided false information in response. See Statement of Martin Westcott to Myburgh. The section 258 investigation found that Liebesman had lied.

Collett analyzed the information given by Corpcapital and submitted a second report, see Collett report November 2003 . This report analyzed in detail the Cytech information available and spotlighted a further possible fraud in respect of Aqua Online. It dealt with director and related-party activities, providing specific information of suspect trading, which included the wives of certain directors. The report elicited an immediate response from Corpcapital, which requested an extension to gain time until mid-February 2004 to furnish a response.

The investigation is extended
In December 2003 the inspectors, following representations by Corpcapital, asked the Minister for an extension on a request from Corpcapital and it was granted by the Minister. In the light of these facts and the serious issues raised by the November 2003 Collett reports, it was inexplicable and totally unacceptable that the inspectors, in their final report, did not even deal with the Collett report of November 2003. Collett furnished a further report in February 2004 focusing on the 2003 annual financial results, the A2 banking crisis, the merger swap ratios and various sales in terms of the dismantling. See Collett response to Cytech evidence 170407. This was similarly not dealt with by Myburgh.

On 3 March 2004 the inspectors furnished “possible adverse findings” to the relevant parties. The parties were invited to respond. The intention was to permit the parties to comment in rebuttal on preliminary findings so that the findings could either be amended if appropriate or confirmed. Later WWB conducted an in-depth analysis of the possible adverse findings of all parties and compared it to the final findings. It made fascinating reading, and will be referred to later.

During the investigation Corpcapital filed statements from executives Jade Hamburger, Mark Matisson, and Kevin Joselowitz on Cytech. Hamburger provided a history of Cytech. The most interesting aspect was that he confirmed that Cytech was not audited and that the executives valued it without checks and balances. Yet, amazingly, he tried to justify these egregious lapses by contending that the internal checks were sufficient. It will not be contested that it is not for executives to overturn essential governance practices, nor to state that in their opinion their assessments were sufficient. If this were the case boards of directors and auditors would not be needed.
Since Hamburger’s statement must have been approved by the executives and board it gives an insight into the value system of the company and executives. Rules and conventions applied to others, not to them. Joselowitz, a member of the corporate finance team at Corpcapital, submitted a statement setting out the history and evolution of Cytech as he was advised by the executives. See Hamburger statement, Matisson statement, and Joselowitz statement on evolution of Cytech’s structure.

The Corpcapital experts
Corpcapital also deposed statements from accounting experts Garth Coppin, Ernst & Young, and Peter Wilmot, formerly of Deloitte & Touche. See Coppin Report & Wilmot Report. There is little doubt that the Corpcapital experts were recruited to provide a response to Abrahams and Collett and the serious allegations. The value of these reports was a function of their limited scope and added little to the real debate. Abrahams studied the evidence of Corpcapital’s expert witnesses and found no reason to change his opinions. See Abrahams response to Hamburger, and Abrahams response to Coppin. Frangos also submitted a response. See Frangos response to Hamburger and Frangos response to Coppin.

Frangos was not aware at the time that additional statements had been commissioned from other experts by Corpcapital, apparently to counter “possible adverse findings” on Cytech. What these findings were or how much they changed the final report is not known other than to the inspectors and Corpcapital. Frangos and his experts studied them all, after having been provided with them on request from the Department of Trade and Industry. They are referred to extensively in the final Myburgh report, even though Myburgh denied to the Minister that they were of any import. See Corpcapital experts.

Collett was mandated by WWB to investigate further matters and the report was furnished to the inspectors. The issues investigated included;

  • Review of the 2003 Annual Report and Financial Statements of Corpcapital Ltd
  • Termination of banking activities and relinquishing of banking licence
  • Analysis of the net asset values of the various related entities as at 31/08/2001 and swap ratios
  • The gain for Corpgro and Corpcapital shareholders
  • Analysis of directors’ remuneration
  • Corpbuild sale to Iliad
  • Other important observations
  • Impact of the above on Cytech valuations and Corporate Governance
  • The impact on the investing public of South Africa
  • Conclusions and recommendations

See Collett report February 2004.

The Myburgh report, was completed early in May 2004. However, as if to prove that nothing was what it seemed at Corpcapital, there were many surprises in store before the report was released by the Minister in November 2006 with significant disclaimers.
The right of rebuttal

At the outset of the Myburgh investigation, and following the unsatisfactory experience with Payne, Frangos instructed his legal counsel to obtain an unequivocal undertaking from the inspectors that there would be full rights of rebuttal in order to ensure that the veracity of all material evidence was properly tested. It was, in his view, an issue of the utmost importance. Two lawyers from the law firm WWB, John Bellew and Michelle Geissler, met with Myburgh on 9 September 2002. They subsequently confirmed that the matter had been discussed with Myburgh and they had been given the undertaking by him. Later, both filed affidavits confirming the undertaking. See WWB rebuttal affidavits.

A breach of confidentiality by Myburgh
Early in March 2004 and during the Myburgh investigation Corpcapital was provided with confidential material by Myburgh regarding some of his preliminary findings against Frangos. Whether or not this event was proper is another issue. Corpcapital had been provided with an insight into the outcome of the report, relating to the findings against both parties before it had been completed and delivered to the Minister.

Confronted by WWB with the breach, Myburgh admitted to furnishing the information to Corpcapital. Initially he stated his readiness to put matters right by a media release, but changed his mind the following day. The matter was discovered when Corpcapital used the confidential information in the media in more attempts to discredit Frangos. The two journalists involved confirmed to Frangos that they had received the information from Corpcapital. If further proof was needed that Corpcapital were playing the man and not the ball here it was.

The attempt to discredit Frangos
Investigations into corporate accounting fraud have serious consequences for offenders. Those accused of misconduct operate at senior and top levels of business, because it is only there that the results can be tampered with. They are fully integrated into the best of social circles. This is a differentiating factor with common criminals, who have little or no social status. It comes as no surprise therefore that almost every corporate scandal is accompanied by massive and vicious attacks on the person who has reported the irregularities. Business history is littered with such cases going back to the personal attack on Ralph Nader by a major car manufacturer in the 1960’s when he questioned their practices. The consequences for those engaged in misconduct is serious and potentially life changing. The matter is often complicated further by board members who find themselves in a compromised situation, out of friendship and sometimes even complicity, and are paralysed into inaction. The retaliation can be vindictive and extreme.

A tell-tale sign which indicates wilful intent is that the attacks are permitted to become personal and vindictive. If the reports were from a maverick director there are ethical methods available to the company to deal with the director. Under law in South Africa executives and directors who purport to be falsely accused of misconduct have a powerful set of weapons at their disposal. They are protected by section 220 of the Companies Act which provides them with a method to oust a director. But there is a sting in the tail. To do so they have to take their case to shareholders and the accused director is permitted an opportunity to defend himself/herself. The executives at Corpcapital did not go this route. They also have many legal remedies, including suing for defamation, which also did not happen, in spite of threats from Lazarus.

The personal attack which Frangos feels was launched by Corpcapital intensified with the section 258 investigation, proportionately as the stakes increased. Such personal attacks ordinarily would have alerted an investigator and invited the question as to why it was necessary to resort to such abusive tactics which patently went nowhere in answering the key issue of whether or not there was a fraud. Unaccountably, Myburgh not only accepted the evidence, with no supporting facts, but also gave it some credence. This disposition provided comfort to the directors of Corpcapital and added fuel to their campaign.

The inspectors seek indemnity and delay the release of the report to the Minister
The Myburgh report was withheld from the Minister by the inspectors “after the inspectors had, on their insistence, been provided with an indemnity against any possible claims against them flowing from anything done in the bone fide performance of their duties in terms of their terms of reference” (taken verbatim from the Minister’s affidavit to the Corpcapital application, see below). This feature of Myburgh’s approach appears to tell much about his state of mind. It seems that the inspectors were concerned that one or other of the parties might consider legal action for defamation. Since the inspectors had, unwisely, permitted a character attack against Frangos, it can only be assumed that a response by Frangos was the subject of their concerns. Equally concerning is that an inspector was able to take some four months to respond to the perfectly normal questions that the minister was entitled to ask. See Minister’s letter to Myburgh 240305. More so that the inspectors withheld the report for four months until the indemnity issue was resolved. Such incidents inevitably raise serious questions about the integrity of the investigation.

The Minister eventually acceded to the request of the inspectors for an indemnity. In his appeal against the court judgment in 2006 (covered below) the Minister reported the indemnity issue as a “dispute whether the inspectors should be indemnified (there is no reason in law, as seems to be the approach of the learned judge, why the Minister should have indemnified the inspectors).” If indeed there was a dispute within the Minister’s department it is understandable. Why did the inspectors not request an indemnity at the outset of the investigation? If Myburgh was not prepared to stand by his findings, why should the Minister? In the event the Minister distanced himself from large tracts of the Myburgh report.

On 27 July 2004 the report was delivered to the Department of Trade and Industry, a delay of four months since completion. The Minister began to consider the content of the report, believing at the time that he was empowered to do so in terms of the legislation.

Interesting new developments as the report is considered by the Minister: the disclosure of four new expert reports which Frangos were not given the opportunity to rebut.
During August 2004 there was media comment on allegations of an alleged invasion of privacy by Corpcapital against certain journalists, Kelley Starke (who had objected to the basis of the merger) and AMB (the advisors to Kensani) during the 2001 merger. See Financial Mail 270804 – Phone funnies, and Finance Week 240903 – The diary of Neil Lazarus. At about the same time Corpcapital spokesperson Lazarus, in an interesting new development, complained in the media about the length of time that it was taking the Minister to release the report and threatened to go to court to compel the Minister to release the Myburgh report. The effect was to divert the attention of the media away from the allegations by Techmann of an invasion of privacy.

Lazarus also claimed that four new experts had cleared Corpcapital on the Cytech issue. This came as a surprise to Frangos and was the first time that this issue had been aired publicly. Clearly, Lazarus considered these reports to be significant and his intention appeared to be to convince readers that Corpcapital had been cleared of misconduct, anticipating the findings of Myburgh report, which in certain material respects they were already aware of because they were given the information by Myburgh. There was, however, a problem with this approach. Frangos had been given an undertaking by Myburgh that all material evidence would be furnished to him for comment, he would have a right of rebuttal. He had not seen these reports. A new chapter opened to determine the content of these reports and whether or not it had influenced the inspectors in their findings. See Business day 200904 – A case of calling market early.

When questioned by the Minister as to why these reports were not given to Frangos for comment, Myburgh said that any response by Frangos to the reports would not have changed the conclusions of the inspectors. However, an investigator cannot assume an ability to predict counter evidence, especially after he had decided to deny the witness the opportunity of commenting on evidence which seems to have been material in the final report. Myburgh, having told the Minister that the reports were of no import the reports are nonetheless extensively referred to in the Myburgh report. The proper testing of evidence requires the right of rebuttal. The Minister refers to this matter in his press statement and supports the principle of proper testing of evidence. This decision by Myburgh not to afford Frangos the opportunity to rebut the new expert reports remains one of the most intriguing questions regarding the integrity of the procedure followed.