Statement of Nicholas John Frangos in Connection with the Ministerial Inquiry Into The

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12/11/2018

STATEMENT OF NICHOLAS JOHN FRANGOS IN CONNECTION WITH THE MINISTERIAL INQUIRY INTO THE AFFAIRS OF THE CORPCAPITAL GROUP OF COMPANIES

TABLE OF CONTENTS

1.Introduction

2.My standards and values

3.The rise of corporate scandals

4.Systematic deception of the investing public

5.How I came to be involved with Corpcapital

6.Cytech

7.Remuneration

8.The Payne Inquiry

9.The Merger

10.Board functioning

11.Culture and value systems

12.Compliance with GAAP and the Companies Act

13.Disclosure Requirements

14.Dismantling of Corpcapital

15.Invasion of privacy

16.The Structure 1995-2003

17.My unanswered questions

1.Introduction

1.1The real Corpcapital issues, identified in my letter of resignation of 2December 2002 (“NF128”, pages 560-571), are in danger of becoming swamped under myriads of opinions, diversions and mountains of paper. The responses of Corpcapital, particularly in the media, have added to the confusion by diverting attention away from the issues of substance and principle and focussing on individual and personal issues. For many people it is tempting to consider the matter as an ugly spat between former friends, and indeed some journalists have written of it as such.

1.2However, the matter is a lot more serious. The issue for me is and always has been about principles. Specifically, it is about the protection of shareholders rights and the fiduciary duty of directors to a company and its shareholders. Each step I have taken has been taken with a view to fulfilling my legal obligations to shareholders and the company. Every decision that I have taken, particularly the ones that can be considered as defining decisions, have been referred to three groups of advisors with different backgrounds, including legal counsel. I have tried hard to avoid personal emotion, difficult though it has been, because everyone knows from their own experiences that decisions based on emotion are never correct.

1.3I commenced my business career in 1964, and until 1994 operated as an executive. From 1968 to 1972, I was a senior executive, and from 1972 onwards Chief Executive Officer. During this period I was involved extensively with publicly listed and private companies. Since 1995 I have been a non-executive director in a number of companies, Chairman of some, and CEO of Global Equities, my own investment firm. During the period that I have been in business there have been no corporate governance or fiduciary issues of consequence in any company that I have been involved with. Whenever there were business problems, they were in every case resolved speedily and constructively. I have never experienced an escalation in issues where the Board of Directors or individual members did not take the appropriate action. Looking back, I only have good memories. The experience at Corpcapital has been as unpleasant as it has been unique for me.

1.4I will refer to the three major entities in the Corpcapital Group as "Corpgro" or "Corpcapital”, (this company being the current Corpcapital Limited), "Old Corpcapital" and "Corpcapital Bank".

1.5Ever since the founding of the Corpcapital Group in 1996 the executives, under the leadership of Jeff Liebesman, ("Liebesman" or "the CEO") placed their personal interests above those of the company and shareholders. The mechanisms that they used included complex accounting deception, selective disclosure, the use of intricate structures, accommodating auditors, a compliant Board, and intimidation and isolation of any opposition which reared its head. The motive was greed and personal enrichment. In these circumstances any director voicing concerns risked the ire of a dominant and belligerent CEO, supported enthusiastically by executives who were beneficiaries of the system. I reached these conclusions as a result of hard facts that emerged during my enquiries and from my personal experiences and interactions with the executives and the Board of Directors.

1.6It was in this environment that my enquiries commenced into Cytech in October 2000. As the enquiries gathered pace it became evident that Cytech was the tip of an iceberg. Formal and informal meetings aimed at addressing the issues failed repeatedly. It became clear late in November 2002 that the system of checks and balances was not working and my attempts at reform had failed. On 2December2002, I resigned, with a comprehensive letter to the Chairman (“NF128”, pages 560-571) setting out my reasons for doing so, and setting in motion the chain of events that has culminated in this inquiry.

1.7The easiest and most convenient route for me to have taken would have been to have resigned and remained silent, as so many directors of other companies have done in similar circumstances. Taking into account the considerable expense, extensive time, lack of formal process and the passive behaviour of certain regulatory bodies that I have experienced, I am not surprised at the choice many directors make to just walk away. It is too easy to resign and simply wash one's hands of the problem – the emotional and financial cost of doing otherwise is extremely high.

1.8There is no Ombudsman or other independent person to whom a director can turn for help in situations such as the present – instead he is thrown back onto his own resources. Throughout this process I have had to devise my own way of doing things, informed by my understanding of my fiduciary duties, my conscience and my assessment of my own conduct and the conduct of others. I am grateful that finally there is an appropriate and independent forum within which my concerns can be fully and formally aired.

1.9My experiences in this matter have indicated to me that there are sequential stages that a director must follow. Firstly, there is an internal process, followed by me as a director of Corpcapital prior to my resignation on 2December 2002. During this internal process it is incumbent on the director to obtain all of the relevant information and apply his mind independently. If he believes that misconduct has occurred or is suspected, he must see to it that the matter is brought out into the open and rectified. The internal process is time consuming, complex, and inevitably political because it involves allegations about conduct.

1.10In the event that the internal process does not resolve the misconduct satisfactorily, the director should inform shareholders, who are the owners of the company. He can do so in a variety of ways, including calling a special meeting. During December 2002, Old Mutual, being the largest institutional shareholder of Corpcapital requested details of my letter of resignation from the company. The company refused to provide the information, as did the Chairman Eric Ellerine (“Ellerine”). Old Mutual then approached me (“NF130”, page573); (“NF131”, page 574); (“NF133”, pages 577-578), but I referred them to the JSE and their own legal counsel in order to determine how they could obtain the information from official company sources. The Annual General Meeting took place on 15 January 2003. I attach notes made by my proxy, MrsMariana Meyer (“NF134”, pages 579-585). Certain shareholders asked pointed questions which related to my letter of resignation, Cytech, and standards of integrity, amongst other things. At no stage of the meeting did the Chairman, or any of the other directors, provide direct answers. Instead they stated that all matters had been dealt with and portrayed the whole matter as a personal issue between myself and the executives. Ellerine stated that he believed that Corpcapital’s Board “… came well out of the AGM”. This is a sad indictment because the events at the AGM show a reluctance on his part and that of other directors to properly disclose and discuss the reasons for my resignation. Ellerine failed to provide explicit answers to explicit questions and this failure to make full disclosure to shareholders manifests a lack of transparency.

1.11As a result of the conduct of the Chairman and other directors at the AGM I publicised my letter of resignation in the media, this being the only way in which I could communicate the reasons for my resignation to the entire shareholder body.

1.12The third process is external. Here the complainant has a variety of options available. In the first place communication must take place with the JSE. In the Corpcapital case I spoke to Doug Doel (“Doel”) and asked him whether he wished the Stock Exchange to have a copy of my letter of resignation. He declined, even though he had been advised that the letter concerned fiduciary issues.

1.13After publication of my letter of resignation, Corpcapital responded immediately with a press statement rebuttal (“NF135”, page 586). As a result of there being two versions of events in the marketplace, I suggested an independent inquiry to determine which version was true. The Payne Inquiry (“NF145”, pages 622-640) was conducted and on its conclusion I rejected the findings because I did not, and still do not, believe they are justified by the evidence. I then decided after long and hard consultations that a way had to be found to independently determine whether or not Nigel Payne’s (“Payne”) conclusions were appropriate. This was done through the offices of my attorneys, Webber Wentzel Bowens, who appointed two independent teams to study the evidence given to Payne. Whereas Payne had taken three and a half weeks to reach his conclusions, the Webber Wentzel Bowens appointed teams each took approximately four months. Their findings (Abrahams and Collett Reports) were in disagreement with almost all of the Payne findings, but were consistent with each other, even though there had been no interface between the two groups. This persuaded me that Payne’s report (“NF145”, pages 622-640) was indeed a “whitewash”.

1.14I then deliberated the next step with my advisers, and on the advice of my legal counsel, decided to request a Ministerial Inquiry into Corpcapital under Section 258 (2) of the Companies Act. This is the logical end of the third and external phase of events.

1.15The balance of my statement will explore the issues in more detail and provide the support for the contentions set out above. The format which my statement will take is not strictly chronological. A separate chronology has been prepared, and should be read in conjunction with this statement. I have rather approached my statement on the basis of identifying key themes, which tie back broadly to the terms of reference of this inquiry. However, at the outset I wish to place my statement in the context of the values which informed my approach to my fiduciary conduct and which have guided my conduct in this matter, both before and after my resignation. I also wish to show how the events at Corpcapital and the mechanisms used are typical of corporate scandals that have occurred internationally.

2.My standards and values

• Integrity underpins everything

• Interactions depend on the “true north” of the CEO

• Fiduciary duties are the benchmark to determine conduct

• Legal obligations are triggered when there is misconduct

• What fiduciaries do is more important than who they are

• Corporate governance is in trouble

• There is an urgent need for reform and process

2.1Integrity

I believe that the fundamental core value which underpins all corporate conduct is integrity. For me, integrity means, in any circumstance, knowing the difference between right and wrong, taking appropriate action in respect of wrongdoing, and being willing to speak out regardless of the consequences. Integrity must be weighed in the context of human frailty. The fact that we all are human and have weaknesses, and sometimes do not act in accordance with the principles and values that we espouse, in no way undermines the validity of the values and principles.

2.2Fiduciary Interactions

2.2.1Fiduciary matters in the corporate world start with an obvious truth: shareholders own companies. They appoint directors to represent their interests and to be accountable to them for their management of their funds. The Board appoints a Chief Executive Officer (“CEO") to run the company and to employ officers to assist him in doing so. Where the interests of shareholders, directors, and the CEO are aligned, they provide a powerful set of checks and balances. When they are not, these checks and balances disintegrate. Successful interactions depend on mutual trust, mutual respect, and open communication with the unfettered exchange of information. The success or otherwise of these interactions is largely dependent on the culture and values which are jointly evolved by the Board of Directors and the CEO. The CEO is accountable for cascading appropriate values and culture throughout the organisation. When we view the best organisations in history, such as GM under the stewardship of Alfred Sloane, IBM under Thomas Watson Jnr., and many others, we see CEO’s who are committed to establishing the best standards of behaviour throughout their companies.

2.2.2Fiduciary duty flows from the management of shareholders funds in trust, and directs all conduct of directors and officers of the company in their interactions, ensuring fidelity and commitment by those entrusted with managing the wealth of others. I believe this duty is unyielding and immutable.

2.2.3On the other hand, the company and its shareholders are not entitled to only good outcomes on business risks. They are entitled to directors and officers who make decisions independently, on the merits and with appropriate information.

2.3Breaches of fiduciary duty

When a breach of fiduciary duty or misconduct occurs, I believe that directors and officers must enquire into the actions, and where appropriate, expose the facts so that remedial action can be taken. In this regard there is a hierarchy of authorities who must be involved. These include committees of the Board, the Board itself, the shareholders, regulators, or even the state acting as the ultimate custodian of company law. Where the issues are not appropriately dealt with at one level there is no option but to escalate the issue to the next level. My advice from legal counsel, conforming with my own view, is that the responsibility of a director runs from cradle to grave, from the uncovering of misconduct until it is resolved in the best interests of the company and its shareholders.

2.4The fundamentals

I believe that directors' duties have to do with loyalty, (in the sense of avoiding conflicts of interest), care (in the sense of independent judgement based on full information), and good faith. With regard to the issue of director loyalty, I believe that the company and its shareholders are entitled to a Board that is a neutral decision maker, capable of making a decision objectively and on the merits, without any extraneous influences. Difficulties arise when some of the directors are conflicted. Unless the strictest tests of loyalty are applied in such circumstances there is a danger that the minority of conflicted directors may infect the entire Board’s decision. This then vitiates the majority’s ability to act as a neutral decision-making body. When the executive directors on the Board pursue their own agenda it is incumbent on the non-executive directors to assume a particularly active role in assessing the matter under consideration with a “critical eye” so as to ensure that the interests of the company and its shareholders, and not the interests of the conflicted directors, are being advanced. In this sense, the non-executive directors become the last best hope for the company and its shareholders that proper governance will be maintained.

2.5Are credentials relevant?

2.5.1I was particularly interested in cases in the United States where non-executive directors were not able to escape liability for breaching their duty of care simply because they could boast a resume of impressive credentials or vast experience on boards that they had served. US courts have rejected this fact as a viable defence. No matter their vast experience and sophistication, these presumably talented and experienced directors were held personally liable because they failed to become adequately informed. In short, a good resume is simply an inadequate substitute for doing the required homework for each Board decision.

2.5.2I was constantly forced to remember this because the Board of Corpcapital counted among its members people who, we are told repeatedly by Corpcapital and Payne, have impeccable credentials. One does not take actions lightly which put one on the opposite side to such people. I was unfortunately forced to conclude that in the situations that I encountered, Board oversight was not at the level that shareholders were entitled to expect, and this contributed to the unprincipled conduct of the executives that I refer to below.

2.6The relevance of corporate governance

2.6.1The executives of Corpcapital have characterised the arena of my inquiry as corporate governance. This is an incomplete interpretation – the issues have to do not only with corporate governance but also with fiduciary duties. In my opinion many aspects of corporate governance, as currently understood and practised, far from improving the behaviour of those running companies, may make things worse.

2.6.2Corporate governance, as commonly understood, means regulation, and regulation breeds more regulation, feeding the culture that all behaviour is acceptable provided it is technically within the rules. Frequently, corporate governance means ticking the right box in the Annual Report. In my opinion many people in the business community have lost sight of what is right and what is wrong. Instead, we have spin and perception. There does not appear to be anywhere a clear code emerging of “personal governance” where personal integrity becomes the ultimate safeguard.