There are two King codes on corporate governance. The one, more famous, is endorsed by the Institute of Directors and resonates in the Companies Act on good governance. The other, now infamous, emerges from the actions of Dave King whose attempts to diddle the taxman represent a textbook case on how an erstwhile JSE-listed company should not be governed.
The supine mea culpa issued by King, in agreeing to the settlement with the SA Revenue Service (Sars) at R707 million (additional to the R350m from the sale of attached assets), sharply contradicts the arrogance displayed during his decade-long battle. But it isn’t only this that makes his statement remarkable. It’s the implicit admission that Ben Nevis and King are effectively one and the same.
There could be implications, and there should be. Ben Nevis, a company registered in the British Virgin Islands and purportedly owned by a Guernsey-registered trust, was integral to King’s tax avoidance structure. It enabled him to contend that Ben Nevis and not he was the controlling shareholder of Specialised Outsourcing Limited (SOL). Exposure of the hoax opens a Pandora’s box of insider trading.
Shares in SOL, founded by King, were placed at 50c. Based on what the National Prosecuting Authority (NPA) described in 2010 as “alleged deliberate manipulation of financial statements, financial reports and recorded earnings… with a view to enhance the growth profile and share price of the company”, the share price peaked at R70 and subsequently fell out of bed.
SOL, of which King was chief executive, was not in the 1990s obliged by JSE rules to disclose directors’ dealings. So the extent of his offloading, in the guise of Ben Nevis, was not publicly known. The controlling shareholder had sold its 70 percent stake at a R1.2 billion profit, rapidly dispatched to King’s offshore accounts.
The NPA’s intended prosecution was instituted after a series of complaints by institutional investors in SOL. These included Old Mutual, Sanlam, Coronation and Southern Life. That the prosecution did not proceed reflects more on the NPA’s competence than on King’s innocence.
Of the charges that were to have been brought, none was for insider trading. Of the R12m in fines he must pay as part of the Sars settlement, none is for insider trading.
Yet in 2004, the directorate of market abuse at the Financial Services Board (FSB) had investigated SOL for insider trading and handed its files to the criminal investigation authorities. It said at the time: “The directorate could not consider the possibility of a civil action against any party with regard to SOL as the transactions which were investigated occurred before the Insider Trading Act came into operation.”
Insider trading was illegal under the 1973 Companies Act. Criminality aside, new legislation provides for civil proceedings where fines of up to four times the gains made from a trade may be levied. The FSB is empowered to pursue transgressors and to compensate those who might have been prejudiced by the offending transactions; in this case, the institutions invested in SOL on behalf of clients.
What counts in King’s favour is the argument that civil claims against him have been prescribed by the time limit during which they should have been brought. But from when does prescription run? From the time the insider trading took place, or from the time the regulator and the prejudiced institutions could identify the transgressor? If the latter, then the evidence is in King’s admission that he was Ben Nevis.
It’s easier to show insider trading in civil actions, on a balance of probabilities, than in criminal actions, where it must be proven beyond reasonable doubt. At least the balance of probabilities suggests that King committed insider trading on a grand scale, by selling securities on the basis of non-public information, severely to the detriment of investors not privy to it.
King’s newly found morality compensates Sars. It does not extend to others at the receiving end of financial damages in the collapse of SOL’s share price. Although the 1998 Insider Trading Act is not retrospective, it does allow the FSB directorate to investigate and prosecute alleged insider trading offences under the old Companies Act. Where actions are criminal, there’s no time constraint on prosecution.
Perhaps it would be a good idea for King not to put aside his cheque book just yet.
Allan Greenblo is the editorial director of Today’s Trustee (www.totrust.co.za), a quarterly magazine mainly for trustees of retirement funds.