Weaving a web of corporate deceit

The mystery surrounding the financial dealings of the late Brett Kebble had led to fears of an epic corporate scandal in South Africa. Kirsty Laschinger investigates

In what has been described as South Africa’s own Enron, two listed mining companies, JCI and Randgold and Exploration (R&E), have been plundered of hundreds of millions of rand. Fingers have been pointed at Brett Kebble, a man who has been described as just about everything from “patriot sponsor of black economic empowerment” to “art connoisseur” to “grotesque spider in the centre of a web of corporate deceit”. However, justice will not be served to Kebble himself as he was shot dead in a Johannesburg suburb on 27 October 2005. His death sent shockwaves through the entire business community as questions surfaced as to whether this was the country’s first corporate assassination. The case is still under investigation, but forensic auditors have unearthed a complex web of fraud and theft that has, in many ways, superseded Kebble’s death and looks more like a badly-scripted soap opera.

The immediate short-term consequence of his death was the continued delay of the publication of the financial results of JCI and its subsidiary R&E. One of the key reasons for the delay was the mystery surrounding the whereabouts of R&E’s holding in London-listed Randgold Resources, a company independent of Kebble’s empire. As far as shareholders were concerned, R&E’s key asset was 18.4m shares in Randgold Resources. At the time Randgold Resources was adamant it could only ascribe four million to R&E ownership. In a nutshell, Kebble maintained he had lent the missing share to a black economic empowerment (BEE) partner Inkwenkwezi, led by Mafika Mkwanazi. The loan was controversial because Kebble had broken the South African Companies Act if, as Randgold Resources claimed, those shares had been sold without shareholders’ approval.

Both JCI and R&E had just been through a torrid two months that included their suspensions from the JSE (and the NASDAQ in R&E’s case) for late submission of financial statements. In addition, Kebble had been ousted as CEO of both companies, as well as another gold mine Western Areas (of which JCI owned 39%), by large institutional shareholders in August 2006. He was replaced by Peter Gray in both JCI and R&E. Chris Lamprecht was appointed as financial director in both companies. At the same time, Investec extended a R460m (£36.7m) facility to JCI that enabled it to follow its rights in Western Areas’ recapitalisation in December last year.

New management began forensic audits, performed by Umbono, in both JCI and R&E that took nearly six months to unravel Kebble’s web.

At the end of March 2006, R&E summarised the findings of the Umbono audit. Umbono found that Kebble, together with other unnamed individuals, stole and sold millions of Randgold Resources shares, worth about R1.8bn (£143.5m) between April 2002 and August 2005.

Kebble appears to have channelled most of the proceeds from the fraudulent share sales worth about R1.1bn (£87.7m) into JCI, which was his most important personal asset. This was done in an attempt to ensure that JCI retained its holding in Western Areas. About R491m (£39.2m) went back into R&E and the remaining R367m (£29.3m) just disappeared. Of the latter, about R165m (£13.2m) seems to have found its way to Kebble’s personal bank account through a complex money laundering arrangement.

However, some of the money was used legitimately. Nearly R600m (£47.9m) funded JCI’s investment in Western Areas as the latter ploughed cash into its South Deep mine. The gold mining group undertook rights issues in both 2004 and 2005. In unrelated deals, R&E received R409m (£32.6m), which was used primarily to fund Western Areas shares bought from Anglo America, in the guise of the Inkwenkwezi and Bookmark BEE deals.

The news was equally bleak for JCI, as the forensic audit showed the group may owe R&E about R1.1bn (£87.7m) in compensation for the Randgold Resources shares misappropriated and sold by Kebble. In addition, about R500m (£39.9m) is missing from its coffers, of which about R266m (£21.1m) was directed to third- party transactions, including support for BEE transactions by Kebble associates. About R200m (£16m) was paid to former JCI directors and officers and R40m (£3.2m) was shares in Western Areas that belonged to JCI. And the pilfering was not limited to cash only: Kebble appears to have sold down JCI’s stake in the jewel, Western Areas, to 25%. The good news, however, has been that JCI remained solvent.

Neither company will be able to recover anything from Kebble’s estate. The executor estimates the realisable assets at around R70m (£5.6m), but it owes the South African tax authorities about R186m (£14.8m) and R&E and JCI about R300m (£23.9m). However, the estate is under investigation through the sequestration process in order to identify who else benefited from this fraud. The focus will be on identifying and prosecuting Kebble’s accomplices. The country’s National Prosecuting Authority’s elite investigative team, the Scorpions, is also looking into the matter.

Criticism

Both Gray and Lamprecht have been criticised for potential conflicts of interest for their roles as CEO and financial director of two related companies. In addition, Gray found himself in the firing line as he was previously the CEO of T-Sec, the stockbroker used by Kebble to execute a number of fraudulent transactions. Gray maintains that Kebble and his accomplices deceived T-Sec with fraudulent documentation and that the stockbroker did not knowingly participate.

At the request of R&E, Umbono investigated T-Sec’s records. During the course of this, Umbono identified the existence of further documentation of extensive theft from R&E that was not in T-Sec’s possession.

In May 2006, Lamprecht resigned from both JCI and R&E. Although he has always been well regarded, the move opened the speculation floodgates as to his role - if any - in Kebble’s malfeasance, although he has denied any wrongdoing.

Recently, it has emerged that Western Areas was also plundered. KPMG Services’ forensics team found that “Kebble, or entities related to him, benefited from alleged unauthorised share transactions within the [Western Areas Share Incentive] Trust”. Kebble was the sole beneficiary of the trust and appears to have removed half a million shares from it, leaving it with just 640 shares.

While this corporate shenanigan may make for gripping reading, it does have serious implications for South Africa’s auditing profession.

PricewaterhouseCoopers (PwC) signed an unqualified audit opinion on R&E’s last set of audited accounts for the 2003 financial year. Following the forensic investigation, R&E management published revised figures for 2003, which differed substantially from the original, as well as financial, statements for 2004 and 2005.

As an investment holding company, R&E was primarily a net asset value play for investors. However, the forensic audit reduced the value of the group’s underlying assets - the number audited by PwC - by 82% for the 2003 financial year. The reasons for the discrepancy are under investigation but could include management failing to disclose or hiding certain information or negligence on the part of the auditors. Interestingly, PwC’s audit fees increased 68% that year, which may signal either an underprovision of prior year costs or a perception of higher audit risk.

The newly-formed Independent Regulatory Board for Auditors (IRBA) intends investigating PwC’s role in the saga.

The conclusion of this extraordinary tale has yet to be written. Like Enron, it may take years. However, it is certain that the full extent of Kebble’s wheeling and dealing has yet to be revealed - as well as the identities of those who profited with him.

Kirsty Laschinger is a freelance writer for a number of South African publications and is a chartered financial analyst.