Bruce Cameron wrote the first reports that all was not well in J Arthur Brown’s business empire, Fidentia. As Brown’s High Court trial draws to a close, Cameron takes a look at what happened to the missing millions
When Fidentia was placed under curatorship on February 1, 2007 the Financial Services Board (FSB) claimed the cupboard was literally bare with not enough cash in the bank to pay the R19 million in monthly salaries due to staff, or the monthly stipends of about R10m to the orphans and widows of the Living Hands Umbrella Trust.
And up to a possible R1.6 billion in questionable investments made with money from mainly Living Hands (R1.4bn), and the Transport Education Training Authority (Teta) (R200m) were fast losing value by the time the curatorship was appointed.
Apart from the salary and stipend payments, there was also no money for staff pension fund contributions or to pay tax due to Sars.
The situation was desperate as Fidentia had not managed to obtain control of the R30bn of the Fidentia Ayanda (formerly Mcubed) portfolio of unit trust funds and institutional investments that was being managed by Advantage Asset Managers under the control of Absa custodians.
To get cash in the bank to meet immediate cash flow needs, office equipment bought with investor money was pledged to Standard Bank to raise R4.5m; and Fidentia was trying to get Absa to lend it money against a property portfolio which had been put together with investor money but was owned in the names of various Fidentia companies and trusts.
This is according to the mountains of legal documents that make up the records of numerous court cases around the collapse of Fidentia and the criminal charges and civil claims involving Fidentia’s former chief executive, J Arthur Brown and his associates, including criminally convicted auditor Graham Maddock and Steven Goodwin, who facilitated the first major investment.
The various papers contain numerous allegations of criminal activity by Fidentia and Brown, which led to the parlous state of the Fidentia companies by the time the High Court agreed to the FSB’s application for curatorship.
And now the prospect is that Brown may never face any charges for theft and misappropriation of the cash because the State agreed to accept admissions on lesser misdeeds from Brown than the original criminal charges.
This means that the allegations contained in these numerous court documents may never be tested to say whether Brown was guilty or not of what has been described in court documents as the biggest single corporate fraud in South African history.
In an e-mail response this week, Brown firmly denied that the cash resources had dried up by the time of curatorship and disputed many of the claims made by the FSB and the curators of his former Fidentia business empire.
Trial judge Anton Veldhuizen has already hinted that Brown, who has already served an effective nine months in jail as an awaiting trial prisoner, may, when he hands down sentence, only face a fine for admitting that he and Fidentia Asset Management had not stuck to investment mandates.
The judge said this week that had he known about these allegations of theft and mis-appropriation made against Brown by the FSB chief financial officer Dawood Seedat, he may not have accepted the admission and the dropping of the other charges against Brown.
Seedat, who led the FSB inspection of Fidentia in 2006 that resulted in the curatorship, was giving evidence in aggravation of sentence, The judge castigated the State prosecution team for agreeing to proceed on Brown’s admissions that he did not stick to investment mandates.
The allegations of theft and misappropriation against Brown led to his successful sequestration, with the Fidentia curators claiming he owed R38m, which the court found he wrongfully removed via the Fidentia companies and that rightfully belonged to investors, such as the widows and orphans of the Living Hands Umbrella Trust.
The billion-dollar question is: what happened to the money, as Brown now admits he fraudulently put it in investments that were not authorised in the investment mandates which are intended to ensure the protection of consumers’ assets.
The court documents paint a picture of allegations of appalling abuse of those assets after they were placed in vehicles other than where they were supposed to be.
Fidentia, which had virtually no start-up capital of its own, paid R380.7m in a shopping spree for companies ranging from those providing financial services such as Mantadia (Matco), which became Living Hands, to computer software companies, like Software Futures.
Prior to the curatorship, Brown claimed to Independent Newspapers publication Personal Finance that Fidentia was funded by private equity investors and denied the money used came from money held by Fidentia Asset Management.
He refused to name the private equity investors.
Most of the purchases made by Fidentia were paid for with money invested via Fidentia Asset Management.
The R200m from Teta appears to have been used as the initial seed money by the Fidentia group of companies.
In one of the civil cases involving Fidentia, Judge James Yekiso in the Cape Town High Court found that once Fidentia Asset Management received funds from investors for the purpose of investment, “the funds so received constitute trust property” and as such “enjoy protection from creditors”. The money of the investors, the judge said, should be held in the names of the investors or a nominee company.
“A registered financial services company, such as Fidentia Asset Management at the time the funds were invested with it, may not cause such funds (trust property) to be invested otherwise than in a manner directed in any instrument regulating the investment of such funds.”
Judge Yekiso said investor money forwarded to Fidentia Holdings and the Fidentia company, Bramber, “did not enjoy the protection afforded to investors” and “whatever equity (in other companies) or fixed property that may have been acquired out of such funds was not acquired in the name of the investors concerned”.
In other words, no person or institution owed money by a Fidentia company could lay claim to the money of the investors if held in trust. This is the reason trust funds cannot be “encumbered” assets – the assets cannot be used as security to borrow money.
Some of the assets bought by Fidentia were used to borrow money, which would also not have been allowed in terms of the mandates.
The admission of guilt by Brown did not deal with what he and his companies did with the money that should have been held by Fidentia Asset Management in trust and invested according to investment mandates.
And Judge Veldhuizen has made it clear that the admission by Brown is all he will take into consideration when handing down sentence.
The small glimpse he received from Seedat of what happened to the money after it was fraudulently invested outside the mandates caused the judge to castigate the State prosecutors. He accused the State of mismanaging the case, saying Seedat should have been the first witness in Brown’s criminal trial, and if he had been, “I may well have forced the State to proceed with the prosecution”.
Brown conceded in his admission that by investing in “higher risk” assets, there could have been “potential prejudice (harm)”.
Court documents from the initial curatorship application and civil and criminal trials and actions paint a picture of the assets of the investors being invested in numerous high-risk, loss-making businesses, or in businesses which held trust assets of investors that would then be used to:
l Purchase other assets, including other companies or properties in the names of various Fidentia entities and even in the name of various Brown family trusts – something which Brown denies.
l Pay investment returns to two of the entities, Antheru Trust and Evertrade Medical Waste, from the capital of other investors. These were the only two investors that were paid actual investment returns, with Antheru receiving a return of about 19 percent a year on the R44m it invested.
l Fund the loss-making operations of some of the companies purchased.
l Fund the day-to-day management of the Fidentia group of companies, including extraordinary salaries and bonuses paid to Brown and other Fidentia executives. This included a R3.3m purchase of luxury motors vehicles and the payment of Brown’s credit card account.
l Pay for high-profile Fidentia sponsorships such as a stake in Boland Rugby, ownership of soccer team Manning Rangers and the “Fidentia choir”. Brown has consistently claimed that the assets bought had improved in value and that investors faced no losses – but the court documents claim otherwise.
The liquidators’ reports say that as at December 31, 2006 – a month before curatorship – the liabilities of Fidentia Asset Management were:
l Teta: An initial R200m invested without investment gains attributed by Fidentia was R185m after a capital repayment of R15m. Fidentia claimed an investment gain that increased the liability to Teta to R242.7m.
l Antheru Trust: An initial R44.8m invested without investment gains attributed by Fidentia was R9.2m after a capital repayment of R35.5m.
l Balltron (a direct marketing organisation): An initial R38.5m was invested and there were no capital repayments. Fidentia claimed an investment gain that increased the liability to Balltron to R33.7m.
l Living Hands Umbrella Trust: An initial R1.5bn invested without investment gains attributed by Fidentia was R1.1bn after a capital repayment of R333m. Fidentia claimed an investment gain increased the liability to Living Hands to R1bn. In total, with investment gains, Fidentia Asset Management owed investors almost R1.6bn by December 2006.
However, in the books of Fidentia Asset Management, the various investors had virtually no assets in their names or in the name of a nominee company. The assets held by the various Fidentia and Brown structures and companies were valued by Fidentia in its last investor liability statement in November 2006 at almost R1.4bn.
This was made up by:
l Money market: R10.9m was invested in the money market;
l Other money market instruments: R812m was claimed to be invested in so-called swop instruments involving properties. The FSB inspectors and curators claim the swop instruments were based on fictitious transactions aimed to give the appearance of cash liquidity and an enhanced value of the properties. Fidentia further claimed a profit share for this alleged sham transaction.
l R570.9m in the private equity portfolio made up by various companies bought by Fidentia. The private equity portfolio was valued based on Fidentia’s own input of financial information that was not independently verified.
But even based on this valuation model, the portfolio was fast losing value as the FSB inspection, which led to the curatorship, reached finality.
The portfolio was valued by Bramber, a Fidentia entity, at R705m in October 2006 and was reduced to R571m by November 2006. Fidentia paid R360m for the assets in the portfolio. The curators say the value of the private equity portfolio when they were appointed was R256m.
The main reason for the declining values was that the assets were not generating cash and, in many cases, were soaking up cash to keep them operational. The cash was being mainly provided from investors’ capital. A number of the properties claimed to be held by Fidentia included properties which were in the name of various Brown family trusts.
An example was the Facets gym at Century City that was bought with investor funds and registered in the name of a Brown family trust. The property was occupied and controlled by Brown’s then wife, Susan, who is now in Australia. No rent was paid for the property and investor funds were used to cover trading losses.
The FSB inspectors’ report found that R406m was unaccounted for. In other words, this was money that was owed to investors from the various investments made with their money that could not be found.
And it appears from evidence given by Seedat this week that the money owed to investors may have exceeded assets for many years.
In his evidence, Seedat referred to qualified reports from auditors Greenwoods that stated they could not assess the extent of the liabilities, and had unanswered questions on the valuations of assets.
Whether all of this, or part of this money, will remain lost to investors, cannot be established as yet. Money used to pay for such things as sponsorships promoting Fidentia, such as the R9m paid for a 50 percent stake in Boland Rugby, and to support the cashflow of loss-making businesses, may probably never be recovered – as with the huge bonuses paid to executives, including Brown.
Some of these loss-making businesses, such as Vilayet, the restaurant concession in the Kruger National Park, for which R15m was paid, simply closed its doors before curatorship; and the R32m paid for shares in the medical aid administrator Definity Medical Fund, which also was closed down by Fidentia.
There is also the R12m paid to legal firm Bowman Gilfillan, which helped Fidentia delay the curatorship while aware of some of the problems at the companies, that will probably not be repaid.
There is also the money used in a bribe to get the Teta money invested with Fidentia Asset Management that will probably never be fully recovered.
And then there is the case of the R11m Sunset Beach home that Brown bought in the name of a family trust (although claiming it remained an investor asset) – and then demolished the building, leaving a still desolate beachfront plot in the upmarket suburb.
This is apart from the actual high costs of curatorship and the extended legal battles under way to recover money.
One such example is action being taken against Melvin Cunningham, the former owner of the loyalty programme, Infinity, who sold the company to Fidentia for R160m.
The curators claim in court papers that Cunningham did not declare the proper financial position of Infinity to Fidentia. Cunningham also faces a criminal trial on fraud charges involving R25m arising from the deal.
It is a story that will still unwind over many years, whether or not Brown and his associates are properly called to account for themselves and their actions.
Brown says this report is “riddled with incorrect facts and innuendo”, and “you print your misstatement at your own peril”.
l Cameron is associate editor at Personal Finance, which appears in Weekend Argus on Saturdays.