The South African corporate brigade must pray for the black economic empowerment (BEE) shareholders in the collapsed African Bank Limited (Abil) to lose their matter against the company’s directors and auditors. A win for the BEE investors will amount to an exposure of unhealthy alliances that borders on systemic fraud on Gwen Lane.
The Abil BEE investors are making hair raising allegations against the directors and auditors (Deloitte). If there is an element of truth in these allegations, the next questions become:
Why was the R40 billion matter left to an outsider, a minnow for that matter, to advance?
What else happens on One Exchange Square and is swept under the carpet in full view of insiders, as made by different parties who are supposed to balance out one another’s flaws?
It is such considerations which have led some observers to label Wall Street as an organisation that runs with a huge scam, made of unholy alliances between key stakeholders; company managers, regulators, auditors, institutional investors, investment managers, corporate advisors and bankers.
It is partly such concerns, post Enron and after the 2007/08 financial crisis, which have driven governments across the globe to push for tighter market regulations and corporate governance principles. South Africa has a new Companies Act partly designed to punish directors in their personal capacity if found to have been reckless. The Abil matter may prove the first application test for the new laws and regulations.
Abil exploded in 2014 amidst the bursting of the micro-lending bubble. The pain was felt across the financial sector but Abil was almost obliterated. The banking operation which featured a furniture retailing business, Ellerine, suffered massive write downs one after the other which caused the stock market to condemn the operation in July 2014. A massive skid of the Abil stock caused the JSE to suspend Abil. And then the South African Reserve Bank placed African Bank under curatorship whilst Ellerine was pushed into administration. Abil equity has been wiped out to the dismay of BEE shareholders who are now crying foul and are seeking legal recourse.
Abil BEE shareholders had exposure onto the banking operation via two entities. There was Hlumisa which held Abil shares valued at about R729m in 2013, before value destruction set in. There was also Eyomhlaba which held shares valued at about R1.3bn in 2013. These entities were shaped as retail based BEE initiatives and had about 14 000 subscribers.
The Abil BEE investors have resolved to sue for their loss. They are pointing a finger at the alleged recklessness of key stakeholders, mainly directors and auditors. Summons has been issued against 9 Abil directors. These are Mutle Mogase (who was Abil chairperson), Leonidas Kirkinis (who wassd CEO), Nithiananthan Nallia, Mojankunyane Gumbi, Morris Mthombeni, Nomaliso Langa-Roys, Nicholas Adams, Samuel Sithole, Antonio Fourie and Robert Symmonds. The summons extends to Abil’s auditors Deloitte.
The summons alleges that Abil shareholders suffered loss due to recklessness on the part of directors and the auditors. They charged that there was failure
- Failure to make prudent provision for the losses due to bad business decisions
- Failure to manage reasonable foreseeable risk arising from the state of the global economy
- By advancing to Ellerines Holdings an amount of R1.4bn; without making provision for security and under circumstances where there was no reasonable prospect of repayment.
- Issued misleading financial statements
- Approved illegal financial assistance
They charge that as a result of the directors deliberately breached their fiduciary duties causing destruction of shareholder value.
On the auditors charge list; the summons allege that the auditors made a false statements when they certified Abil’s financial results for the 2013 and 2014 financial years. This refers in particular to the Auditors statement that: “In our opinion, the financial statements present fairly, in all material respect the financial position of African Bank Limited…”
The aforesaid statements were false in that, alternatively, the auditors had a duty not to make the aforesaid statement…
This is because Abil “pursued aggressive/reckless accounting practices…”
They also claim that “The auditors were aware or should have been aware of the fact that Abil was concealing non-performing loans by making new loans to the same debtors in order to service old loans for the sole purpose of making collections look good when actually they were not.
The BEE investors charge that as results of recklessness, Abil shareholders suffered losses of R40.6 billion. Their share in this loss is calculated at about R2 billion.
The question is: If there is an element of truth in these allegations why is it the BEE shareholders, who held only R2bn of the lost value, making protest noise. Why are the custodians of the R38 billion not seeking recourse?
Could this have something to do with the incestuous corporate sector relationships that tend to compromise integrity?