A FORENSIC REPORT BY SAB&T
(based on information provided to the inspectors who conducted an investigation into the affairs of Corpcapital)
Commissioned by Webber Wentzel Bowens
On behalf of MrNJ Frangos
July 2007
Table of Contents
Page1 / Preamble / 3
2 / Introduction / 3-7
3 / Offshore Deal with Peter Moss / 8-13
4 / The Southgo/Corpgro Acquisition / 14-22
5 / The TPN/Corpcapital Acquisition / 22-29
6 / The Cytech Issue / 30-34
7 / The Merger / 35-38
8 / Dismantling Corpcapital – the end of the road / 39-42
9 / Graphic Highlights / 43-51
1.PREAMBLE
1.1The Corporate scandal of Corpcapital, depending which side you were on, had been played out in South Africa on many occasions during the past three years. This is due to the fact that the events which gave rise to the conceptualisation of the company…….and eventually to its demise contained all the ingredients of success, pride, vision, manipulation and deception.
1.2A number of investigations which had been aimed at uncovering the true events have either failed, due to the doubt cast on the evidence by Corpcapital, or where credible proof does exist, these facts were blatantly ignored…….so much so that even when a ministerial enquiry was commissioned, the inspectors involved made demands to the Minister which could easily be construed as impairing the independence and integrity of the process in its entirety. Either way the true facts did not emerge.
1.3The central issue of Cytech has been tainted by hyper-technical accounting arguments such that the reasonable person could become lost in the detail and lose sight of the issues at hand. Each of these arguments have the effect of diverting attention from the most important issue, that of fair presentation taking precedence over all else.
1.4A number of extremely well constructed reports and documents have since been prepared. The aim of this document is not to repeat the detail of any of these documents, rather it is intended to set out in easily understandable terms, clearly and concisely the sequence of events and allow the reader to draw their own conclusions.
1.5The mandate of the Minister to the inspectors investigating Corpcapital states “to investigate the affairs of the CorpCapital Group of Companies since the inception of the original entity in the CorpCapital Group”. Information pertinent to this mandatewas provided to the inspectors, and is analyzed in this report. While the central focus of the mandate was Cytech the pattern of conduct from the first transactions places in context why the Cytech issue became an inevitable consequence of other actions, and highlights areas where action should be taken and others which require further investigation and/or appropriate action .
2.INTRODUCTION
2.1In 1995, Mr Jeff Liebesman (‘Liebesman’) of W&A fame reappeared from the ashes on the South African business scene, in an attempt to resurrect himself as a credible businessman with integrity. He needed to do this due to the remaining financial obligations to those who bailed him out of the W&A debacle. In order to achieve this Liebesman needed the support of certain key players in the South African business circles, and surrounded himself with some of the top names in the country. The names in question included the likes of Eric Ellerine (‘Ellerine’) and Nic Frangos (‘Frangos’). amongst others, a move which would provide an element of credibility to his scheme
2.2In order to achieve the said resurrection and remove the long shadow cast upon his integrity however, Liebesman required certain tools, vehicles and allies and for a large part,the advantage that inside executives have over the South African investing public, something he had experienced first hand before. We believe he managed to achieve all of these key ingredients through the following:
2.2.1The tools to achieve the objectives of the plan
2.2.1.1A sophisticated and complex web of both onshore and offshore entities in order to hide the flow of funds through various, in most instances, untraceable and manipulative bookkeeping entries.
2.2.1.2 A financier to put the plan into action. Liebesman was indebted to certain people as a result of the cost to himself of the W&A debacle and needed a way to settle those debts. Peter Moss (“Moss”), who had identified a potential offshore vehicle, presented the ideal opportunity at the right time.
2.2.1.3 Liebesman required certain allies in the right places in order to achieve his objectives. This was provided by the likes of his long time friends, Benji Liebmann (‘Liebmann’) who defended him as his lawyer in the W&A debacle, Grolman, who according to available evidence, paid the cheque for the W&A secret settlement, Martin Sacks (‘Sacks’), and later Neil Lazarus (‘Lazarus’) who was the senior counsel for Liebesman in the W&A litigation, and became the defender-in-chief of Corpcapital during the later stages. This team is collectively referred to as the ‘executives’ throughout this report.
2.2.1.4A compliant and submissive board of directors. An inquiring board and alert directors had proved to be achilles heel at W&A where Liebesman ended up with insufficient board support. The lesson was to be learnt well and he was careful not to make the same mistake.
2.2.1.5Suborned Auditors who would glance over up the tell-tale signs. At W&A Trencor had litigated against Liebesman and the auditors, Kessel Feinstein.
2.2.2The vehicles
2.2.2.1The financial extent of the plan was such that it required certain vehicles through which it could be financed, through either, very wealthy people, the public and finally a financial institution. These were identified in the form of the following:
2.2.2.1.1Moss proved to be the first person who had access to a substantial but limited amount of offshore funds, some R42 million according to a sworn statement by Moss. These funds proved to be instrumental in setting the plan in motion, a plan which would eventually come back to haunt Moss.
2.2.2.1.2 The Consortium of wealthy people who was later to become the founders of Corpgro, provided the initial funds and credibility which would provide access to the public funds and capital markets.
2.2.2.1.3 Southgo a cash shell listed on the JSE, only to become Corpgro, TPN another cash shell to become Corpcapital and Fulcrum Bank, later Corpcapital Bank, a vehicle laden with cash, provided the ideal vehicles to put the plan into motion.
2.2.2.1.4Cytech, an offshore gambling casino, moved to centre stage in 2000 as the vehicle with which the executives artificially pumped up the profits of Corpcapital, a public company, in which their potential wealth was stored in the form of shares, share options, and other executive benefits.
2.2.3The misleading of the South African investing public. The South African investing public bought into the plan for a period on the strength of the following:
2.2.3.1The reputations of the members of the Consortium. If they backed the plan, who was the public to doubt it! The media even commented that with Ellerine sitting on one shoulder and Frangos on the other there would be proper controls of Liebesman.
2.2.3.2 The perception that independent checks and balances were in place by virtue of:
2.2.3.2.1Financial Statements audited by one of the most respected firms in South Africa
2.2.3.2.2Non-executive Board members who kept a close eye on the events unfolding within the Group
2.2.3.2.3The monitoring of corporate activities by the JSE, regulatory bodies, and the enforcement thereof.
2.2.3.2.4The fact that various enquiries and investigations into the dealings of Corpcapital and its executives revealed no or little evidence of wrongdoing or irregularities.
2.2.3.3A deeper analysis reveals that the elements of the plan present themselves almost opportunely, the “trick” was to make them all fit together like a puzzle, long enough to realize the financial benefit of the plan and then to unravel the puzzle, in a manner that would be almost impossible to piece together.
2.2.4The intimate knowledge of the executives of the difficulties faced by any investigation in making allegations and of proving them where complexity and sophistication were the norm, as well as how to fend off difficult questions.
2.3The broad elements of the scheme can be categorized as:
2.3.1The offshore element with Moss, which provided secret offshore funds
2.3.2The Southgo cash shell, later to become Corpgro, which provided a listed company, and access to millions of cheap shareswith a view to increasing their value mainly through influencing the price base on future earnings (i.e generating large amounts of goodwill)
2.3.3The TPN cash shell, later to become Corpcapital, which created a second public company,away from the enquiring eyes and minds of non executive directors of Corpgro and access to further cheap shares
2.3.4Reliance on a combination of non-disclosure and/or incomplete disclosure of their shareholding interests and trades in the company shares. Non-disclosure was a feature when it came to the materiality of transactions, such as Cytech where the bookkeeping entry accounted for 108% of Corpcapital’s profits in 2000.
2.3.5Access to an entity which had a very high net asset value and contained a large amount of cash, Fulcrum Bank, later to become Corpcapital bank.The bank provided the ‘real assets’ which would to an extent camouflage the fictitious assets created in Corpcapital.
2.3.6Cytech,the start up internet gaming, which through excessive valuations, provided the mechanism to inflate profits in Corpcapital
2.3.7The Merger, which disguised relevant financial comparisons, increased net asset values, and provided direct access to the horde of cash in the bank. Throughout the period in which the scheme took place shares were almost certainly disposed of for cash and inside information was probably unlawfully used to trade in the shares, and
2.3.8Substantial executive benefits were paid based on inflated results, and dividends were received in respect of their holdings,
2.3.9Ultimately, the dismantling, and subsequent liquidation of the company when it became obvious that the public no longer bought the story, and the creation of further opportunities for the executives to enrich themselves was an intricate part of the plan.While it is possible that not all of the elements have been identified it becomes clearer as the plan unfolded that each of the categories are inextricably linked and were an implicit part of the scheme.
3.OFFSHORE DEAL WITH PETER MOSS
3.1The initiating transaction is described in some detail because
3.1.1There are more hard facts available as a result of Moss’ later alienation from Liebesman and Liebmann and the first hand factual information provided by him
3.1.2It illustrates the pattern of behaviour which would be followed on all subsequent transactions
3.2Moss, a businessman, provided in 1995 the ideal opportunity for Liebesman to launch his plan. In the first instance, Moss identified an opportunity in Germany where he was consulting to the Krupp Group of Companies. As a result of his insights through his consulting work, Moss managed to negotiate the acquisition of two companies out of the Krupp Group, i.e. Werner and Pfleiderer Industrielle Backtechnik GmbH (“WPIB”) and Werner and Pfleiderer (SA) (Pty) Ltd (“WPSA”), the latter being a South African company.
3.3Structure of the acquisitions from Krupp
3.3.1It is the initial structure of Moss’ acquisition of the companies, which presented Liebesman with the window of opportunity to set the plan in motion. In this regard:
3.3.1.1The companies to be acquired comprised of cash resources of some R 42 million, most or all of which was injected by Krupp under German Law to cover commitments to employees of the company being sold following the sale of the company to Moss.
3.3.1.2Moss engaged the services of Liebmann to assist him structure the acquisition transactions in the most beneficial manner, as well as to assist him in procuring suitable financial management, since through his own admission, Moss lacked such expertise.
3.3.1.3Liebmann convinced Moss that Liebesman would be the ideal financial partner to assist him in running the companies and adding value to these companies.
3.3.1.4Liebesman was howevernotcheap, and in collaboration with Liebmann negotiated an initial 40% ownership stake of these companies for Liebesman at no consideration. This was later unilaterally amended by Liebmann to secure his own participation. The idea was that Liebesman would earn his 40% stake by means of adding value to the acquired business.
3.3.1.5The Liebesman relationship is documented in terms of an undertaking signed by Liebesman and an entity known as Global Capital (“Global”) on 25 October 1995, with further particulars set out in an agreement dated 11 December 1995. Global was a company in which Larry Nestad (“Nestad”) was chairman and Ellerine a director. It is not known in what capacity Liebesman signed on behalf of Global.It is assumed that he did so with the concurrence of Nestad and Ellerine, and that they were aware of the activities.
3.3.1.6The acquisition of WPIB was concluded through a company named Combined Bakery Holdings, (‘CBH’) according to Moss registered in the British Virgin Isles (‘BVI’), controlled by two offshore trusts, in turn each controlled by one of Moss, Liebesman.
3.3.1.7Details of the trusts controlling CBH are as follows:
3.3.1.7.1IBIT TRUST, a trust registered in Switzerland and controlled by Moss.
3.3.1.7.2Weldan Bakery Investment Trust (‘Welbake’), an offshore trust controlled by Liebesman.
3.3.1.8The business interests of WPSA (renamed Combake International (‘Combake’)), the South African company acquired from Krupp were sold to WPIB for an amount of R10.7m and then onsold to Combake GmbH, an independent company owned by the same parties.
3.3.1.9The structure of the CBH Group at 11 December 1995 was as follows:
3.3.1.10It was further agreed between the parties, in terms of the 11 December 2005 agreement that, as soon as practically possible and subsequent to the realization of certain fixed property owned by Combake, a ‘repayment’ of R 1 million would be made to the shareholders in the following ratios:
IBIT - R 800 000
Welbake - R 200 000
It can be reasonably assumed that the differential is to compensate Moss for relinquishing 40% of his companies. Notwithstanding this Liebesman, managed to benefit to the tune of R 200 000, even at this early stage in the scheme
3.3.1.11It is obvious from the documentation provided by Moss to the inspectors that this offshore structure was unlawful withregard to Liebmann and Liebesman. This is not relevant to the involvement to Moss who had by that stage had legally emigrated to Germany. The unlawful structures are in breach of exchange control regulations, stock exchange regulations, and the fiduciary duties of Liebesman and Liebmann to Corpgro. It is reasonable to assume that gains arising from these transactions were not disclosed to the tax authorities.
3.3.1.12The methodology that was used by Liebesman and Liebmann bore an uncanny resemblance to that used in the W&A debacle.
3.4WPIB and Combake – Post acquisition
3.4.1The initial structure was now in place and Liebmann together with Liebesman had almost complete operational control over WPIB and Combake. The challenge was to get their hands on the employee’s cash resources which were in effect trust monies, which was sitting in WPIB in Germany.
3.4.2On 1 April 1996, the minutes of a CBH Board meeting approved the acquisition of Combake SA(formerly WPSA) by WPIB from CBH for an amount of 7,5 million DM, approximately R 20 million at the prevailing exchange rate of DM1 to R2.69 on the day. The effect of this transaction was that almost half of the employees cash which was held in WPIB and injected by Krupp in compliance with their legal obligation, was now transferred directly under the control of the directors of CBH, Moss and Liebmann.
3.4.3Further transactions transferred the balance of the employee’s trust funds held by WPIB to entities controlled by Liebesman and Liebmann.
3.4.4At a later date Moss, having been abandoned by Liebesman and Liebmann, was forced to personally repay the funds removed in order to avoid prosecution in Germany. It appears through correspondence that Moss financed this from the disposal of his beneficial interests in Corpgro.
3.4.5Following pressure from LiebmannMoss agreed to the final shareholding in CBH being as follows:
- Peter Moss 43.75%
- Welbake 56.25%
3.4.6Correspondence suggests that the Welbake’s disproportionate share is due to this company holding a 12,5% interest for Liebmann. In effect, between Liebmann and Liebesman, they controlled a company which was funded by Moss in its entirety.
3.4.7A memorandum dated 16 July 1996 further makes it clear that the 12,5% referred to above is linked to an account called Weldan, administered by Schindlers in Lichtenstein, and links Liebesman and Liebmann to Schindlers, who were acting on their behalf. Schindlers was to feature in many future Corpcapital related transactions and it can be reasonably inferred that they acted on behalf of Liebesman and Liebmann in their offshore transactions.
3.5Combined Bakery Holdings Investments (‘CBHI’)
3.5.1Having secured control of an offshore structure as set out in 3.4 above as well as control of some R42 million, Liebesman and Liebmann had to find a way to utilize the funds, as well as a suitable vehicle with which to participate in a Consortium which would eventually acquire control of Southgo, later to become Corpgro.
3.5.2In order to achieve the above, and create a “clean” structure removed from the CBH/WPIB transactions, the following resolutions were passed by them in conjunction with Moss and the offshore administrators of the trusts and companies:
3.5.2.1To incorporate a new BVI company known as CBH Investments Limited (‘CBHI’).
3.5.2.2 IBIT, the Swiss trust controlled by Moss acquired a 47.32% stake in CBHI, settled partially by CBH, on behalf of Moss by CBH, in the amount of R 400 000. This resolution was dated 19 April 1996.
3.5.2.3 Welbake, the BVI trust controlled by Liebesman and Liebmann, acquired a 52.68% stake in CBHI, settled partially by CBH, on behalf of Moss by CBH, in the amount of R 400 000. This resolution was dated 1 July 1996.