Corpcapital files an application to compel the Minister to release the report
On 16 September 2004 Corpcapital filed an application in the High Court of Pretoria to compel the Minister to release the report. Corpcapital contended that, on a strict legal interpretation of the relevant sections of the Companies Act, the Minister did not have the power to consider the report, nor to intervene in any way. Therefore he should release the report forthwith without applying his mind to it. By now Corpcapital knew the contents of the report, and that it would be cleared with a mere slap on the wrist. It was clearly anxious to bury the matter. The application was opposed by the Minister who clearly had a different view. Frangos joined the action on the advice of his legal team.

The court papers revealed some intriguing happenings that had occurred behind the scenes.

In his court papers Frangos expressed the view that the investigation had not been conducted properly and fairly. Amongst other matters he referred to the undertaking which Myburgh had given on the right of rebuttal, and described the circumstances in which Myburgh had reneged on the undertaking. Frangos’s concerns regarding the investigation are extensively covered in communications between his attorneys, WWB, and the inspectors, as well as with the Minister. See WWB communications on rebuttal .

Behind the scenes, Corpcapital discussed the rebuttal issue with the inspectors
In February 2006 it came to light in court papers that, a year earlier, on 26 January 2005 Corpcapital, through its attorneys, had intervened to persuade the inspectors to attest to a supporting affidavit on the facts relating to the undertaking on the right of rebuttal which Myburgh had given to lawyers representing Frangos. Myburgh forwarded the Corpcapital letter to the State Attorney, making it clear that “It would be entirely inappropriate for an inspector appointed by the Minister of Trade and Industry to do anything on behalf of the company under investigation. The only capacity in which I can act is that of an inspector.” Instead, and to achieve the same result requested by Corpcapital, Myburgh requested the Minister to instruct the inspectors to file a supplementary report “dealing with the allegation of an undertaking by Mr Frangos so that the matter could be argued in court.” None of this correspondence was furnished to Frangos or his lawyers, whereas the practice at the time was that the lawyers of each party furnished communications to each other as a courtesy.

On 1 February 2005 the State Attorney advised the inspectors that the Minister could not accede to their request to file a supplementary report because he had not had an opportunity to consider the report. On 24 March 2005 the Minister advised the inspectors that he had considered the report. Despite the advice by the Minister to the inspectors, no further request was made to file a supplementary report by the inspectors.

In a surprising new development, on 29 July 2005, the inspectors provided an affidavit to Corpcapital accompanied by two letters written by the inspectors in an apparent volte face from their previous position. The inspectors denied that they had given the undertaking on the right of rebuttal to Frangos. The affidavits of the inspectors confirmed the contents of the letters. This development came as a surprise in the light of Myburgh’s comments earlier to Corpcapital and the State Attorney. See Undisclosed communication between Myburgh and Corpcapital .

The Minister takes an initiative in an effort to break the legal logjam
On 24 March 2005 the Minister, in an apparent effort to break the legal logjam, wrote to the inspectors and asked them to answer three pertinent questions:

  • Whether it would have caused any harm to any person had the reports or evidence of the experts referred to above been made available to Mr Frangos for comments;
  • Whether or not in your view the inspectors could perhaps have come to a different conclusion, or bearing in mind, that you were unable to make any findings on certain issues (see., eg., report, chapter VII, section 4, p. 31, para 29), to a more definite conclusion had the relevant expert reports or evidence been made available to Mr Frangos and had he in some way or another responded thereto and, should you be of the view that it would not have made any difference, why you are of that view; and
  • Should you be of the view that it could have made a difference to your conclusions, whether the investigation should be re-opened or referred back to the inspectors to hear further evidence in this regard and to re-consider their report in view of such further evidence.

In essence the Minister was suggesting a method to deal with the deadlock brought about by Corpcapital going public with new information about experts that they had commissioned.

Myburgh eventually responds to the Minister
Myburgh answered the Minister’s letter on 29 July 2005 after a delay of some four months. He first gave an explanation of the procedure that the inspectors had followed, in an apparent attempt to justify the process, and then only dealt with the Minister’s questions:

  • It would not have caused harm to any person if the new expert reports had been made available to Mr Frangos for comment or rebuttal.
  • In our opinion, we would have not come to a different conclusion if we had obtained further representations by Mr Frangos’s experts (in response to the new expert reports). The differing views of the Cytech valuation by the Corpcapital experts and the Frangos experts had been fully ventilated before us, both in writing and orally, and in the case of Messrs Abrahams, Collett, and Adams, on two occasions.

We are of the view that the investigation should not be re-opened. On the facts that we have placed before you, you should be satisfied that the investigation was thorough and the report consisting of six bound volumes, comprehensive. To re-open the investigation now would be to shut the door after the mouse had bolted. (The word “mouse” appears to be a slip)

None of the reasons advanced by Myburgh appear to be convincing. Myburgh must have attached at least some significance to the expert reports because they are extensively referred to in his final report. Myburgh did not reject the evidence and through pure logic, appears to have accepted their point of view and dismissed the conclusions of the expert reports presented by Frangos. The inadequacy of Myburgh’s reasons remain a striking feature of what Frangos and his advisors believe to be the procedurally flawed process followed by Myburgh. Myburgh, who had previously requested the Minister to instruct him to file a supplementary report on the undertaking he made on rebuttal rights, now appeared to be at pains to ensure that the investigation terminated by the furnishing of his final report. Myburgh’s letter consisted of 22 pages, of which one page only dealt with Myburgh’s response to the Minister’s three questions, the purpose of the letter from the Minister. The bulk of Myburgh’s letter was devoted to an explanation and defence of the procedure which had been used for the investigation.

Myburgh asserted that the inspectors had followed a proper procedure because they were entitled to set the rules themselves. These rules included the right to attenuate the concept of fairness, and he referred to “the meagre rights that a witness enjoys in the course of an investigation”. He appeared to be referring to two matters; namely his decision to deny Frangos the right to comment on evidence Corpcapital had received from “experts” on Cytech and the manner in which he had permitted the character attack by Corpcapital, and by implication given credence to it.

The concept of fairness is central to the legal principle of audi alteram partem. Audi alteram partem (or audiatur et altera pars) is a Latin phrase that means, literally, hear the other side, and is generally interpreted in English as hear both sides. It stands for the principle that both sides should be heard on all material evidence to ensure that evidence is properly tested. In his court papers the Minister, clearly concerned over the stance taken by Myburgh, stated his view that, regardless of whether or not an undertaking was given by Myburgh, Frangos was in any event entitled to the full rights of fairness by law. It is clear to all who have followed the saga that it had by now assumed national proportions and the public interest was a central feature. There was much at stake. Given these specific circumstances it is difficult to understand the logic presented by Myburgh to diminish the principles of fairness. Not even the courts have this level of power. It is surprising that a party who is clearly in a position to test the veracity of evidence (such as an involved director, Frangos in this case) is denied the opportunity of dealing with four expert reports presented on behalf of the company under investigation, Corpcapital.

The judgment in the Corpcapital court application, and the appeal by the Minister against the judgment
The release of the Myburgh report to the Minister of Trade and Industry had been delayed by the inspectors who insisted on an indemnity from the Minister against possible claims. It was eventually released by the inspectors on 27 July 2004. There was a further delay because the Minister wished to consider the report and because due process resulted from an opposed court application by Corpcapital. The application was heard on the 3rd and 4th May 2006. The Minister argued:

  • That Corpcapital’s contention that he did not have power to intervene in the investigation was legally not correct.
  • That he is authorized “to determine whether the investigation had taken place in the manner directed by him/her and whether the circumstances which in his/her view required investigation have indeed been investigated”
  • That he is authorized “to determine whether the report ought to be printed and published”
  • That the Minister “is by necessary implication empowered to refer the matter back to the inspectors for further investigation and consideration and to report afresh thereon.”
  • That it could never have been the intention of the legislature that the Minister “is bound to blindly release the report without first considering its contents and applying his/her mind to all issues he/she is duty bound to consider.”
  • That he was required to consider the report in order to determine whether to instruct the inspectors to provide the reports requested by Frangos “to afford Mr Frangos a fair opportunity to make representations or to present evidence in response to such reports.”

On 22 August 2006 the court ruled against the Minister on a strict legal interpretation of the Act, instructing him to release the report forthwith. The court found that the Minister did not have the power to intervene in the investigation. English Law differs materially on this matter. It provides the Secretary of State with the power to intervene, to satisfy himself that the mandate has been complied with, that procedural fairness has taken place, to request further information, further investigation and, if necessary, to re-open the investigation.

Subsequently, the Minister applied for leave to appeal against the judgment.

Frangos decided not to join the Minister in an appeal. Had he done so it would have held up the release of the report until the Supreme Court of Appeal had made a ruling and caused further delays in his objective of bringing out the facts.

On Friday, 1 June 2007, Judge Prinsloo granted the Minister leave to appeal to the Supreme Court. In granting the appeal, Judge Prinsloo stated that the interpretation of Sections 257 to262 of the Companies Act 61 of 1973 is a matter of public interest and that, therefore, the Appeal Court should have the opportunity to re-consider his judgment (see The Minister’s Appeal in the main index for further information).

The s258 report by the inspectors is released by the Minister with historic disclaimers
The Minister of Trade and Industry decided to release the Myburgh report in November 2006. The release of the report was accompanied by a press statement by the Minister which contained unprecedented and significant disclaimers on the two most fundamental facets of the report, Cytech, and the attack by the directors on the persona of Frangos by the Corpcapital directors.

The Minister, on releasing the report, said “that it would appear that certain expert reports or evidence received from persons appointed by Corpcapital were not made available to Mr Frangos so as to afford him an opportunity to respond thereto, and that, before releasing the report I would have preferred to have had the benefit of Mr Frangos’s views on those reports and evidence.”

The Minister also said that sections of the report, namely Chapters II, IV, V and Sections 5, 10, 11 and 12 of Chapter VI, fell outside of the ambit of the Inspector’s mandate. These sections deal with a personal attack on Frangos’s integrity by the directors of Corpcapital, actions from which the Minister has distanced himself. See Minister’s press statement 21 November 2006.

These two comments by the Minister supported Frangos’ concern that the Myburgh report failed to follow due process in material respects. Large portions of the Myburgh report dealt with the personal attack on Frangos’ integrity which the Minister clearly viewed to have been outside the ambit of the inspectors’ mandate. The striking question which arose from this is: Why did Myburgh permit such an attack on Frangos’ integrity, which according to the Minister, exceeded his mandate. This approach clearly added nothing to the determination of the issues contained in the Minister’s mandate (see the Minister’s terms of reference contained in the mandate)?
During the investigation a number of circumstances occurred that appeared to place question marks against the integrity and impartiality of the process. They are well documented and were brought to the attention of the inspectors and the Minister.


The challenge of complexity and sophistication
Corporate accounting fraud investigations are extraordinarily difficult because of their complexity and sophistication. In the United States they have only been successful where exceptional measures are taken and a large team of dedicated experts in specialized and diverse fields has worked together in a complementary fashion, in a single-minded way and in close communication with relevant third parties. Matching skills to the task demands and with a complementary team, and a fearless leader, is the secret to the success of the SEC and Justice Department in the United States. Such is the arduous and demanding task.

The Corpcapital challenge quickly became complex when the executives launched their two-pronged defence. First, the two-man team of inspectors was flooded with information, enough to keep a dozen inspectors busy. The complexity of the material, particularly of a hyper-technical accounting nature and supported by any number of expert opinions, exponentially increased the workload and degree of difficulty. Simultaneously, Corpcapital launched a ferocious attack on Frangos with the purpose of deflecting time and effort. The internal Corpcapital team was led by an advocate and a lawyer, both of whom had cut their teeth defending Liebesman and the auditors in the W&A debacle.

The other side of the equation was a super-confident Myburgh. He had been an inspector before, in the Rand Commission and the Regal section 417 investigation, which some five years later remains unresolved. Reports on such cases as Regal, where prosecution was recommended, are intended to provide the backbone of the case for the prosecutors. Faced with these formidable challenges, and in a high-profile case, Myburgh does not appear to have entertained any doubts that he and Professor Keith Prinsloo were up to the task, without the assistance of any additional resources or skills.

Retaliation by the executives
The degree of vindictiveness of retaliation and the severity of the attack appear to be a function of the seriousness of the charges. In the case of Corpcapital they were most serious, and could result not only in unwelcome censure by the business community but also potential prosecution. The executives, with Lazarus as their spokesperson, wasted little time in attacking the character and motives of Frangos.

On 19 June 2008 Business Day ran an editorial headed “Transparent Justice” which spoke about counter attacks in the judicial arena, “It is the oldest trick in the book – when in a pickle, turn the tables on your accusers by accusing them of a range of dastardly acts, then lie low while your apologists do their utmost to keep the straw man you have created in the limelight and the original issue becomes obscured.” The quotation may very well also have been said of the Corpcapital attacks on Frangos.

It should have come as no surprise to Myburgh that all of the executives and directors sang from the same hymn sheet because one way or another, directly or indirectly, all were in Frangos’s view implicated in varying degrees.

The character and motives of a director or corporate officer who reports irregularities has no bearing on the allegations made. The one has nothing to do with the other. The Minister of Trade and Industry, who set the investigation mandate, understood this when he distanced himself from the character attack. The Minister stated in his press statement of 21 November 2006; “I wish, however, to do so (release the report) subject to the following reservations, namely that the matters dealt with in Chapters II, IV, V and Sections 5, 10, 11 and 12 of Chapter VI fall in my opinion outside the ambit of the Inspector’s mandate.” The Minister clearly was of the opinion, as the ruling authority, that such personal attacks had nothing to with the main issues that he mandated, namely, to investigate the actions and conduct of the executives since inception to determine whether they were fraudulent.

The executives and directors of Corpcapital furnished no direct or factual evidence to Myburgh to back up their personal attacks, but this made no difference to Myburgh, who gave credence to the attacks in his report. Frangos, through his lawyers, objected and was advised to respond even though, in the opinion of his legal advisors, the issue was outside of the mandate of the inspectors. The response of Frangos contained direct and factual counter evidence which seemed to make little difference to Myburgh.

From 1996 to 2002 it appears that the executives and directors of Corpcapital were at ease with the presence of Frangos as a director, and even as chairman of one of the entities, Corpgro. There is little doubt that his opposition to the conduct of the executives relating to Cytech in 2002 and their retaliation were more than co-incidental. Suddenly, Frangos was a person of questionable character, according to the Liebesman team, who had to be attacked on all scores whilst during the preceding six years, his presence on the boards was welcomed. This approach is simply not plausible.

It is highly unlikely that the reservations of the Minister about the Myburgh report would act as a restraint on Liebesman and the executives, who were expected to maintain their personal attack, since the pattern had been established. It was therefore decided by Frangos and his advisors to release the Myburgh report in full on this website. It would allow a full examination to take place of the nature of the vicious attack and how it influenced the inspectors, side issues which were permitted to become mainstream elements of the report. It also demonstrates how the inspectors allowed themselves to be deflected, since it occupies such vast tracts of the report. The Myburgh report is also published in the hope that future directors and corporate officers who do their duty will not have to endure such personal retaliation and vindictiveness.

In order to for those who would like to study this issue in detail the principal documents are contained on this website.

Analysis of the evidence and the Myburgh report
Any analysis of the Myburgh report must start with the mandate of the Minister to the inspectors. What was it that they were asked to do? And did they comply with the mandate? The mandate was broad and required a full investigation of the Corpcapital group of companies from inception. It also referred to the possibility of fraud, to report on “the manner in which Cytech was valued by the executives of the Corpcapital group and whether such values were unjustifiably inflated to boost profits artificially and possibly fraudulently, such profits in turn being used as the basis to pay bonuses and restraint of trade payments.”

The report of the inspectors was released to Corpcapital and Frangos in November 2006. See Myburgh report on Cytech. Once again, a significant point was reached. As with the Payne investigation it was essential to study and analyze the content of the Myburgh report. Whereas all the costs of Corpcapital were borne by their insurance company, AIG, under director indemnity, this was not the case with Frangos who personally paid for any advice.

In order for Frangos to analyze the Myburgh report it was obvious that many experts were required to act as a check and balance, that additional experts of repute were required, and that the mandates should be broad, with no time limitation. Abrahams and Collett had conducted the analysis of the Payne report. They were both re-appointed, and new investigators SAB&T, Charles Stride, and WWB themselves appointed to study and make submissions on the Myburgh report.

WWB, acting for Frangos, immediately made the appointments. The evidence before the experts was the same as that before the inspectors. Once again, nothing was withheld. The experts were all recognized in the field of forensic investigations of complex corporate matters, amongst the best the country has to offer;

Investigating the possibility of fraud was, inter alia, a specific requirement of the Minister. For this reason it was also an integral part of the mandate of the experts appointed by WWB to analyze and report on the Myburgh investigation and the evidence thereto. The findings of the investigators represent their opinion, and have not been tested in a court of law. The investigations and analyses took a year to complete at a personal cost to Frangos of more than R2 million. The investigations were conducted independently of each other, and their conclusions are of great import.

The Report of CA Stride 071207 highlights a pattern of unlawful behaviour by certain Corpcapital executives which involved offshore acquisitions of JSE-listed cash shells (which subsequently became key entities in the Corpcapital Group) by offshore trusts established by or at the instance of certain executives — for their benefit and in probable contravention of South African exchange-control laws. A likely consequence of this was that the shareholdings of these directors in the Corpcapital entities was misrepresented and understated to the investing public. Accordingly, the extent of the conflicts of interests of these directors (for example in relation to the swap ratios at the time of the merger of the three Corpcapital entities, and in their need to show the Cytech revaluations as earnings in the income statement) was defined, and not appreciated by the inspectors. The allegations contained in the Stride report have not been tested in court, but represent the opinion of a respected expert in forensic accounting.

The Stride Report deals extensively with the crucial contradiction in evidence given by the executives to the inspectors relating to the reason why Cytech was formed. Stride highlights the fact that the application made by Corpcapital to the South African Reserve Bank for the establishment of Cytech shows a clear long-term intention, in direct contradiction of the evidence laid before (and accepted by) the inspectors that Cytech was held “available for sale in the short term”. This evidence was pivotal in Corpcapital’s attempts to justify the accounting methods as part of its rebuttal of the allegations of fraud. The “intent” has great bearing on the accounting treatment that the executives were entitled to use.

The conclusion must be either that the version given to the SARB or that the version given to the inspectors is false. If the version given to the SARB was false, permission to establish and fund Cytech was fraudulently obtained. If the version given to the SARB was correct, then the version given to the inspectors to justify an otherwise unjustifiable accounting treatment applied to Cytech was false. In either case, the executive directors of Corpcapital appear to have misled the public bodies concerned in material respects and with material consequences.

A forensic report dated 21 August 2007 by SAB&T, the SAB&T Ubuntu forensic report 210807, on the Corpcapital scheme of Liebesman and certain executives draws similar conclusions and highlights similar inconsistencies as does the Stride Report in relation to the establishment of Cytech (i.e. different versions given to the SARB and to the inspectors as regards the intention of Corpcapital with respect to Cytech). This report traces the evolution of the Corpcapital group from inception and analyses the implications for shareholders of key events and structures set up for specific purposes. A repetitive pattern of conflicted behaviour by Liebesman emerges, showing how he consistently preferred his own interests to those of the shareholders. The extent of the enrichment is calculated and set out. This report has also not been tested in court, but represents the views of experts in the field.

An analysis dated 5 June 2007 by Abrahams, the Abrahams response to Myburgh report and Corpcapital experts 050607, on the report of the inspectors relating to Cytech and the Corpcapital experts (whose reports the inspectors refused to make available to Frangos for comment) focuses on accounting issues and demonstrates that fair presentation, the overriding requirement of the Companies Act, was not achieved in 2000, 2001 and 2002. He concludes that shareholders and the investing public could not have been able to determine that Corpcapital’s profits in 2000 were the result of a year end book-keeping entry, nor that the results were not sustainable. Abrahams points to the inconsistency on disclosure where Strauss of Investec, the only independent party approached by the inspectors, stated that without personal information provided to him by the executives he could never have understood the significance of Cytech from the reported results. This facet is crucial to establish whether Corpcapital had complied with the legal requirements of proper disclosure, the acid test being that a normal investor would be able to make an intelligent economic decision based on the information provided. Strauss’ evidence, himself an expert, was that an investor could not have obtained the true situation from the information provided by Corpcapital. The requirement of fair presentation had not been met.

Abrahams also analyzes the reports of the Corpcapital experts showing that their opinions were narrowly focused, and limited to hyper-technical accounting issues, which was an obvious consequence of narrow mandates. He concluded that these reports added little to the effectiveness of the Corpcapital defense in the inspection. Abrahams report has not been tested in court. It contains, however, the views of a respected expert in the field.

A report dated June 2007 on certain Cytech related issues by Collett & Collett SAB&T, Collett SAB&T response to Cytech evidence 170407 shows that the obscure accounting escape hatch used by the executives to justify the accounting approach (that the investment was “held exclusively for sale in the short term”) was made ex post facto, and that there is no evidence that such an important policy was endorsed by the board of Corpcapital or even discussed with members of the board. He points out that the evidence contradicts earlier testimony by the executives, and that the veracity of this evidence does not appear to have been tested by the inspectors.
In a report dated June 2007 by Collett, on the digression into character and motive by the inspectors, Collett found that the inspectors did not apply the same standards to both sides and were biased.

A legal analysis and submission by WWB on the s258 investigation and its procedures, WWB report on procedural fairness 231107 (Ms Word 297kb) comments on the procedures used by the inspectors and covers in detail the crucial issue of whether or not procedural fairness was followed by the inspectors. The references to case law by the inspectors after the fact in their letter to the Minister of 29 July 2005 are challenged with respect to interpretation and applicability. In addition, this report also shows that it was the executives who drove the defense of Corpcapital, which included the aggressive personal attack on Frangos. WWB submits that the extent of the procedural breaches by the inspectors as well as their treatment of adverse findings against Corpcapital and Frangos, formed a reasonable suspicion that the inspectors were biased against Frangos. It seems that South Africa has a distance to go in conducting proper investigations of important and complex matters.

The reports are furnished to the Minister of Trade and Industry
The forensic reports had all, once again, supported the allegations made by Frangos. It was apparent that due process required a submission of all of the relevant material to the Minister, the custodian of the Companies Act. The submission was prepared by WWB and furnished to the Minister of Trade and Industry with a recommendation to pass the information to the relevant prosecuting authorities. See WWB submission to the Minister 26 November 2007.

In his submission to the Minister Bellew of WWB then says: “The overall result of the inspection is a clear message to all directors that the machinery of the Companies Act is ineffective and that the personal cost to a director of discharging his fiduciary duties is excessively high. It is much simpler just to resign and keep quiet. It is submitted that this situation is intolerable for the Minister and the DTI as custodians of the Companies Act. Fortunately, all is not lost. It is submitted that notwithstanding the absence of any recommendations by the inspectors, the attached expert reports supply ample grounds for the Minister to take further action and to recommend further steps against either Corpcapital or its directors and representatives.”

The principal findings of the forensic investigators on the Myburgh report
The WWB submission to the Minister 26 November 2007 commented on the Myburgh report;

The inspectors failed in their primary task because:

  • they ignored key evidence and did not appreciate the significance of events leading up to the formation of the Corpcapital Group, namely the formation by key executives of offshore trusts which acquired significant shareholdings in the listed cash shells that became part of the Corpcapital Group, and which remained undisclosed to the investing public;
  • they failed to understand how these shareholdings could have influenced behaviour of the executives both in relation to conflicts of interest (for example in relation to the establishment of the merger ratios) and in the way that they treated non-executive directors and in the way they valued and accounted for Cytech in order to keep showing profits and growth;
  • they failed to pick up the inconsistencies with respect to the intention of Corpcapital vis-a-vis Cytech expressed to the SARB on the one hand and to the inspectors on the other;
  • they failed, as a result of this inconsistency, (and despite their own findings that cast doubt on the credibility of certain Corpcapital witnesses) to treat evidence given to them by Corpcapital representatives with circumspection;
  • they allowed themselves to be side-tracked from the main issues by an attack on Frangos’s character and motives, without interrogating that evidence appropriately or giving Frangos a fair opportunity to rebut it;
  • the internal procedures they established were inadequate and not upheld; and
  • in the reasonable apprehension of Frangos they were biased against him and pre-disposed to disregard his evidence and that of his experts in favour of that submitted by Corpcapital and their experts.

The reports of the six studies of the Myburgh report commissioned by WWB, the new evidence which related to it, and the findings have convinced Frangos and his advisors that a proper investigation was not conducted. The reasons are fully contained in the reports referred to. The following brief summary is not exhaustive and covers only conclusions on some of the more important issues. Readers will gain a useful insight into the saga by studying the reports in detail.

1. In the opinion of Stride and SAB&T the first fraud related to the offshore activities of Liebesman, Liebmann and Grolman in setting up Corpgro in 1996, and is fully supported in the evidence of Moss. The inspectors appeared to have ignored this pivotal evidence which showed that the scheme set up Liebesman was of a serial nature, premeditated, and unlawful. The evidence of Moss was not referred to by Myburgh in his report.
See Report of C A Stride 071207 pages 4 to 21, and SAB&T Ubuntu forensic report 210807 pages 9 to 25.
2. According to Stride and SAB&T the same scheme took place when Corpcapital was set up in 1997 out of the cash shell TPN and contained similarly unlawful facets. The evidence and pointers on this matter provided in the Collett report of November 2003 were not referred to by the inspectors in their report.
See Report of C A Stride 071207  pages 22 to 24, and SAB&T Ubuntu forensic report 210807 pages 25 to 32.
3. Significant information was provided to the inspectors in the November 2003 Collett report indicating that a possible fraud had taken place at Aqua Online. This evidence was not referred to by the inspectors in their report. In addition Collett requested additional information, which was not actioned by the inspectors, without explanation. See Collett – Documents considered essential to complete investigation.
See Collett SAB&T report November 2003, page 16, Bundle A AA, Bundle B Financial Statements, Bundle C G1, Bundle C J3, J3.1, N1 and N2, and Bundle D, and WWB submission to the Minister 26 November 2007, page 15 to 20.
4. There is a suspicion that the requirements of the Banks Act were not complied with in the relationship between Corpcapital and Corpcapital Bank. There is nothing to suggest that this matter was investigated by Myburgh.
See SAB&T Ubuntu forensic report 210807 pages 41 to 44, and Collett SAB&T report February 2004 page 6.
5. Stride, Collett, and SAB&T find that the executives gave Myburgh contradictory evidence on the nature of the investment in Cytech which impacted directly on the accounting method used. This method allowed the executives to value Cytech, without any checks and balances, at an astronomic figure and take notional profits into Corpcapital which converted a significant loss into a massive profit. The evidence was provably false, but was not challenged by Myburgh.
See WWB submission to the Minister 26 November 2007 2 to 12, Report of C A Stride 071207 pages 27 to 39, Collett SAB&T response to Cytech evidence 170407 pages 8 to 11, Letter of intent to set up Cytech 290798, and Reserve Bank application by Corpcapital.
6. On several issues Myburgh finds that Liebesman, the executives, and certain directors provided false evidence under oath. In particular, Myburgh finds that Liebesman was untruthful to Old Mutual in four respects. Such occurrences demand that all evidence from these sources be thoroughly tested and fully corroborated by independent third party sources. This did not happen and Myburgh accepted almost all evidence on key issues such as Cytech from the sources at face value. See Statement of Martin Westcott to Myburgh, Notes of meeting between Westcott and Liebmann 110203, Notes of meeting between Westcott and Liebmann 050203 and WWB report on procedural fairness 231107, page 60.
7. Myburgh gave an undertaking to Frangos at the outset of the investigation, in the presence of two lawyers from WWB, that Frangos would be given the right to comment on and review all material evidence from Corpcapital. Myburgh reneged on this agreement. The WWB submission to the Minister 26 November 2007 pages 33 to 34, WWB report on procedural fairness 231107 pages 5 to 10, and WWB rebuttal affidavits.
8. Myburgh agrees with Abrahams that Payne failed to conduct an analysis of Cytech in 2000, the most important issue in his mandate, but nevertheless finds that Payne conducted a fair investigation. See Abrahams review of evidence – Payne report page 46 clause 9.3.7, and Report of CA Stride 071207.
9. Myburgh finds that the executives contravened exchange control regulations on certain issues, missing out other more important areas where direct evidence existed, such as the Moss evidence and TPN. See 1 and 2 above, and the Report of CA Stride.
10. There is no evidence that the inspectors investigated the underlying companies in the Corpcapital group, with the exception of Cytech and its affiliates, as they were mandated to do by the Minister. This oversight is hard to explain. Corpcapital was an investment holding company and it is obvious that any possible fraudulent actions would have taken place in underlying companies.
11. A submission by WWB finds inconsistencies in the report and the possibility of a suspicion of bias. Procedural fairness appears not to have been followed in several important and material respects.
See WWB report on procedural fairness 231107.

The result, according to Stride and other experts, was that;
– A proper investigation was not undertaken.
– The mandate of the Minister of Trade and Industry was not fulfilled.
– Incorrect conclusions were arrived at.

The inspector’s findings were flawed and crucial evidence appears to have been ignored
It is reasonable to assume that Prinsloo was given the task of analyzing Cytech and all related accounting issues. From the report it is obvious that he soon became entangled in hyper-technical accounting issues and seems to have lost sight of some of the principal issues. For his part, Myburgh appears to have been distracted in a major way by the character attack. The essential link between the contradiction in evidence (the contradictory evidence on the “held available for sale” issue furnished by the executives to Myburgh), as outlined above, and misrepresentation, an important leg in fraud investigations, was totally absent in the final report. Major and decisive evidence, such as that provided by Moss appears to have been overlooked. The Moss direct evidence appeared to demonstrate that fraud may have been present from inception. The result was that Corpcapital was cleared of fraud, often in the negative. The refrain “We are unable to find that”. is littered throughout the report. The defense of the process presented to the Minister by Myburgh is arguable in almost every respect, not the least in the manner in which case law has been selectively applied.

The fundamental question of the ownership of Cytech still seems to be open. Earlier on the website the authenticity of share certificates was tabled. The early records of Cytech, a company which played a huge role for Corpcapital, are surprisingly disorganized for executives who claimed to follow proper procedures. The draft shareholders agreement was never signed. Similarly, no written restraint of trade agreements with management were concluded. No written purchase agreement for the acquisition of the shares in Netainment, CFI and Global was prepared and there is also no written record or notes of any oral agreement with regard to these matters. Readers will no doubt have by now come to their own conclusions.

How Cytech featured in the investigation
During the section 258 investigation of Corpcapital the inspectors were required, inter alia, to investigate the allegations of fraud concerning Cytech contained in the mandate of the Minister of Trade and Industry. To do so it was necessary, inter alia, to establish whether or not the executives abused the accounting rules, whether there was proper disclosure, and whether the technical requirements of GAAP and the Companies Act were complied with. As stated in the earlier section headed “legal benchmarks” any of the above on their own are sufficient to establish a prima facie basis of whether or not the practices of the executives were legitimate or not. If it is found that it was not legitimate to employ the accounting method used, or that the lack of disclosure misrepresented the real position to the market, then breaches of the technical requirements are academic, even though such breaches were in themselves important.

The Corpcapital strategy focused attention on the third element, namely technical compliance. This strategy was designed to deflect attention away from the more important basic principle of appropriateness of the method and disclosure. It was supported by reams of paper and the opinions of at least ten experts. Hard to ignore? Decide for yourself. See Accounting terms and definitions, Abrahams response to Myburgh report and Corpcapital experts 050607, Konar report, Knight report, Armitage report December 2003, Armitage report March 2004, Cohen report, Meyersfeld report and Everingham report .

A smoking gun was delivered on a platter to the inspectors during the investigation when the executives falsely stated that Cytech was “held available for sale in the near term.” This contradictory evidence was also dealt with in the section “legal benchmarks” and should have speedily brought the investigation to an earlier conclusion. However, inexplicably, this highly crucial contradictory evidence seems to have been ignored by the inspectors and will be dealt with in more detail below.

A brief discussion of the accounting methods and technical requirements
The equity accounting method is generally recommended in accounting for subsidiary and associate companies, such as Cytech, over which the holding company exerts significant influence. It is a method whereby the investment (Cytech in this case) is initially recorded in Corpcapital’s Balance Sheet at cost (the price at which the asset was bought), and the valuation of the asset in the Balance Sheet is adjusted each year for the change in Corpcapital’s share of the net assets of Cytech. Corpcapital’s income statement would reflect only its share of the profits of Cytech. It is a conservative method and is in the widest use. The equity method was not used for Cytech, apparently because it could not deliver the bottom line desired by Liebesman. The equity accounting method is not prone to financial engineering or creative accounting.

Professor D Quinn Mills states, “It is possible to mislead so readily with financial statements because, despite the implication in public discussion that accounting is a fairly precise discipline, it is in fact a sequence of judgments. There is much less precision that the notion of audits suggests to most investors. Because of the complexity of business, broad latitude is granted by accounting rules. They are not the rigid set of specifications, they are ordinarily portrayed to be. Instead they have the flexibility needed to accommodate a changing business environment, while always seeking first to inform and thereby protect the investor. But the purpose of latitude is to provide as much information to the investors as possible – not to provide as little as possible or, even worse, to mislead. Accounting standards are rule based, such that companies can engage in hyper-technical compliance with GAAP while still misleading investors. The guidelines as a whole are not so much flawed as that they are improperly interpreted and applied, most often to suit pre-determined agendas.”

GAAP permits a variation to the use of the equity method, but only in certain defined conditions. It must be shown that the entity is both a joint venture and was bought and held explicitly for the purpose of “sale in the short term”. Even then, there are other technical requirements which must be complied with, any one of which may represent a non-compliance barrier, and rule out use of the method. The conditions are put there to prevent abuse, and overcoming all of these hurdles is difficult. Alert Gatekeepers, the auditors in particular, are placed in an important fiduciary role precisely to ensure compliance with accounting rules.

To make a case for mark-to-market accounting, the method used by Enron, in the circumstances prevailing at Cytech required logic from the outer reaches of the accounting universe, and receptive ears from the Gatekeeper, Fisher Hoffman. The following excerpt outlines the dangers of mark-to-market accounting; “It wasn’t until the 1980s that the practice (mark-to-market accounting) spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals. As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available), so assets were being ‘marked to model’ using estimated valuations derived from financial modelling, and sometimes marked to fantasies. See Enron and the Enron scandal – Wikipedia.

At Cytech there was no market to mark to. Frangos believes that the Corpcapital saga has many similarities with one of the largest corporate fraud scandals unearthed in the United States, Enron.

In 1999, Enron launched EnronOnline, an Internet-based trading operation, which was used by virtually every energy company in the U.S. President and chief operating officer Jeffrey Skilling began advocating a novel idea: the company didn’t really need any “assets.” By pushing the company’s aggressive investment strategy, he helped make Enron the biggest wholesaler of gas and electricity, with $27 billion traded in a quarter. The firm’s figures, however, had to be accepted at face value. Under Skilling, Enron adopted mark to market accounting, in which anticipated future profits from any deal were tabulated as if real today. Thus, Enron could record gains from what over time might turn out losses, as the company’s fiscal health became secondary to manipulating its stock price on Wall Street during the Tech boom. But when a company’s success is measured by agreeable financial statements emerging from a black box, a term Skilling himself admitted, actual balance sheets prove inconvenient. Indeed, Enron’s unscrupulous actions were often gambles to keep the deception going and so push up the stock price, which was posted daily in the company elevator. An advancing number meant a continued infusion of investor capital on which debt-ridden Enron in large part subsisted. Its fall would collapse the house of cards. Under pressure to maintain the illusion, Skilling verbally attacked Wall Street Analyst Richard Grubman[3], who questioned Enron’s unusual accounting practice during a recorded conference call. When Grubman complained that Enron was the only company that could not release a balance sheet along with its earnings statements, Skilling replied “Well, thank you very much, we appreciate that . . . asshole.” Though the comment was met with dismay and astonishment by press and public, it became an inside joke among many Enron employees, mocking Grubman for his perceived meddling rather than Skilling’s lack of tact.