Some of the most frequent, racist critiques of BEE in the comments on our social media adverts or pages are that BEE enables corrupt Black people to enrich themselves; that if there were no BEE there would be no corruption, and that this corruption is Black-only.
This article then, is for the haters. it’s the story of six senior, already very wealthy and entirely white executives, including the founders of one of South Africa’s most admired companies. They conspired to defraud their shareholders by hiding a basic theft in a structure that they pretended was BEE. It’s a story of fraud and of fronting and was covered in a recent High Court judgement.
As Rob Hersov says about reading the judgement in this interview “It’s a crime novel; I couldn’t put it down. Knowing some of the people involved makes it even more pertinent and sadder.”
As Judge Fisher put it: “From a South African black empowerment perspective, it is of grave concern that these white captains of industry have subverted the empowerment legislation for their own benefit.”
The fraud at the heart of the matter
The six protagonists were founders and execs of DiData (one of South Africa’s most admired companies). NTT, a major Japanese multinational, owns DiData.
DiData needed BEE points.
DiData had some (it’s unclear how many) points from the ‘continuing consequences’ of prior BEE ownership. It had carved out 15% of its equity to a majority Black-owned staff share scheme, which then gave them 15% ownership using the modified flow through calculations. But, they needed more to be competitive.
The protagonists designed a fraudulent scheme as follows:
- They persuaded DiData’s shareholder, NTT, to sell a major asset – the DiData campus in Bryanston -in a ‘sale of assets’ BEE transaction. Sale of Assets transactions can result in legitimate BEE points if the many rules around them are followed exactly.
- The buyer of the DiData campus appeared to be a Black private equity fund. Black private equity funds can count as Black shareholders, again if the many rules around them are followed exactly.
- The seller vendor-financed the deal. Vendor financing is common in BEE deals and is legitimate if the rules around Net-value are followed exactly.
- This deal would (and it did) get DiData much needed BEE ownership points. They went from 15% black ownership to 51%, and from level 4 to level 2 – a major difference in competitive advantage.
Where’s the fraud?
- The protagonists not only didn’t disclose to the NTT shareholders that they were the ‘silent’ partners behind the Black private equity fund, they actively sought to conceal their interests. In other words, they were signing off on the deal as sellers while they were also the buyers. This is a major conflict of interest and against the law in respect of director fiduciary duties for those on the seller’s board. But, deceitful concealment exposes all involved to criminal liability.
- Before the deal, the execs extended the lease between DiData and the Campus for a further seven years. This guaranteed the owner’s cash flows for the (undisclosed) buyers.
- They priced the transaction at R 1.4b, well below market value, and ignored higher offers from independent parties. The discount to market value was at least R150m, possibly a lot more.
- The protagonists persuaded the NTT shareholders to vendor finance the deal. The terms of this are unclear, but what we do know is the protagonists invested R65m into the fund to secure an asset for R1.4b that was worth much more.
- NTT shareholders were persuaded that this was their best option, in part because it brought the BEE points they needed. They used this to shut out other potential buyers of the property (including legitimate BEE partners).
- They went to great lengths to hide their ownership of the ‘Black private equity fund’, by introducing layers of ownership and cutting in third parties to front for them. But there is no doubt that the beneficial buyers of the DiData campus included the six protagonists and they were trying to hide this from DiData/NTT.
While NTT leadership believed the sale would result in ownership of the Campus by a Black-owned company, Judge Fisher found that this did not happen.
In summary then, the protagonists designed a scheme to defraud the DiData shareholder, NTT, of at least R150m. They conspired to drive the value down, to hide their involvement as purchaser while acting for the seller. The dressed this up as BEE.
The transaction was approved and they thought they were off the races.
How did they get caught?
A whistleblower alerted NTT to the transaction.
How did NTT respond?
NTT hired independent investigators to look at the transaction. The investigator’s findings led to the litigation. The Gauteng High Court ruled in the matter at the end of November 2024.
A key point is that NTT acted properly, as a shareholder, and took this matter very seriously. They have refused to entertain offers from the protagonists to ‘pay back the money’ (a South African get-out-of-jail-free card).
They have acted with integrity and the type of values we wish were more prevalent in South Africa.
Was this about BEE?
We think the crux of the case, from our perspective, is that the Judge found that the transaction must be unwound, not because of the BEE laws, which it had nothing to do with, but because it was a fraudulent (i.e. criminal) scheme which allowed conflicted fiduciaries to make secret profits (in contravention of South African law).
This can be seen by the following conclusions reached by Judge Fisher:
[428] On the undisputed facts the purpose of the Transaction was to benefit the six white Protagonists. It had nothing to do with BEE. The expression of the will to revive some non-existent BEE value is, on all the undisputed, facts simply impossible.
[429] In all the circumstances and on the undisputed facts, the Protagonists entered into an illegal scheme designed to appropriate for themselves a secret financial benefit which placed them in conflict with their boards both from a section 75 perspective and their common law duties as directors.
[430] The scheme was brazen and dishonest. It was orchestrated without due regard to the relationships between the Japanese holding entities and the SA interests.
Was this a front?
While the judgement makes it clear that this was nothing to do with BEE per se, it’s still useful to look at whether fronting happened.
Before we go there, it’s important to note that the protagonists were advised by major law firms. There is no mention in the judgement of a BEE verification – but we’re assuming an agent also signed off on the transaction. This is most likely as the transaction was reportable to the B-BBEE Commission. The transaction, along with the share scheme mentioned above, are listed amongst the ±80 reportable transaction of that year here.
The BEE angles at play are 4 fold, with different levels of legitimacy:
- Some prior ownership points due to the ‘continuing consequences’ of their prior BEE shareholding – the amount isn’t specified. This is seemingly legitimate but was outside of the case.
- A staff share scheme that owned 15% of the equity, of which 51% was held by Black staff (and the other 49% by senior white execs). This was vendor financed. Although only 51% was actually Black owned, the full 15% counted as BEE ownership using the modified flow through rule. This was not looked at in the case, and there is no reason to question its legitimacy.
- The sale of assets to a Black company (Identity Prop Co – a subsidiary of the black private equity fund). This is the transaction that the Court ruled to be an illegal scheme.
- The nature of the Black private equity fund itself, which also appears problematical.
Problems with the sale of assets:
One of the protagonists explained at the time of the deal that BEE codes cater for the sale of shares to qualify for ownership if certain criteria are met, and these include a sale-of-assets transaction.
This must:
- Result in the creation of viable and sustainable businesses in the hands of Black people;
- Result in the transfer of critical and specialised and managerial skills and productive capacity to Black people;
- Involve a separately identifiable related business that has a) no unreasonable limitations or conditions with regard to its clients and b) clients or suppliers other than the seller;
- Be an arm’s-length operational or outsourcing arrangement between the seller and the separately identifiable business; and
- Be subject to a valuation by an independent valuation expert.
It may be that the valuation of the property deal was manipulated by the protagonists or that it wasn’t independent. It could fail on this alone. We also question how many, and to what degree, any of the other criteria for asset sales were ever met.
Problems with the way DiData used BEE private equity rules:
It’s worth stating at the outset that BEE private equity (the space where Tusker operates) is trying to achieve two things: (a) grow the value of assets under management (AUM) of Black private equity fund managers, and (b) increase the investment into Black companies. Let’s keep that in mind…
Private equity funds typically operate in this way: the fund manager raises money from investors, then invests that money into portfolio companies (usually high growth businesses that can afford expensive capital). Ideally, the portfolio companies grow rapidly and are sold to someone else later. The funds are returned to the investors and a share of excess returns accrues to the fund manager. It can be lucrative for all.
The most common Private equity forms include: (a) an ‘en commandite‘ partnership (as used in the DiData transaction) or (b) a corporate structure (our preferred approach). In the corporate structure, the ownership of the fund is transparent because of KYC requirements and beneficial ownership reporting requirements applicable to companies. However in the partnership approach the investors in the fund (i.e. the owners of the fund, aka “Limited Partners”) are often ‘silent’. But, this can be useful and isn’t uncommon.
Before we explore the implications of having silent/hidden investors in the DiData deal, we should point out that who the owners/investors of the fund are is irrelevant for BEE purposes. This is because private equity funds raise their capital from a variety of local and foreign investors. To insist on Black investors only would reduce the pool of capital available, stifle the industry immediately and prevent the achievement of the aims of the BEE Act . So, from a BEE private equity perspective, there is nothing wrong with the six protagonists being the ultimate owners of/investors in the the fund.
So how is empowerment achieved? While the rules are complex, the two most relevant are included here. An investment by a private equity fund can be treated as Black if:
- The fund manager is Black (and here the relevant fund manager is Identity Fund Managers (IFM), an established Black financial service provider); and
- The fund invests 51% of its capital (at cost) into companies that are at least 25% direct Black owned immediately following the deal.
The latter point was not addressed by the Court and could be where the transaction is most at risk of being considered a front.
- Although the BEE private equity rules have no requirement for the investors to be Black, the protagonists went to great lengths to hide who they were. Firstly, using the en commandite structure, and second layering their ownership behind other firms, who they paid 3% to front – in the non-BEE sense- for them. This obfuscation was necessary to hide that the buyers weren’t Black and were in fact people employed by the seller. It’s primarily part of the fraud, but it’s possibly also a front because they misrepresented to DiData who the Black investors were.
- A more complex part of the structure, where we don’t have enough details from the judgement, relates to how Identity Prop Co (the buyer of the campus) would have been regarded as Black. To recap: the fund was managed by a Black fund manager. Ok. But in terms of the BEE rules, the fund needs to invest most of its capital into businesses 25% or more Black owned. Identity Prop Co could only be regarded as Black if it was directly 25% Black owned? The Judgment does not go into this at all, either there were Black shareholders for at least a quarter of Identity Prop Co or there weren’t. If there weren’t, front charges will follow. And while a front is less likely with 25% Black owners, it is also possible that the Black parties may themselves be complicit, and therefore as guilty, of fronting.
- If Identity Prop Co was not 25% Black owned it would not qualify as Black and selling the Campus to it would not qualify as a sale-of-assets transaction.
More happened later…
On Nov 1 2022, the Fund and the manager (IFM) respectively were replaced by the protagonists by themselves as the fund (via Areti Capital Partners) and as the manager (via K201953314).
There are several problems here:
(a) this was done without the consent of the buyer which was required in terms of the vendor financing agreement,
(b) Fund managers can be fired. But, for BEE credentials to be maintained, they would need to be replaced by another Black licensed fund manager. In other words, Areti would need to be a licensed financial service provider and 51% Black owned etc, as required by the BEE Private Equity Rules. The judge did not comment on this, but Areti is not listed as a regulated financial service provider by the Financial Sector Conduct Authority and the Judgment makes it clear that the Protagonists controlled Areti (and therefore it could not be majority Black owned).
(c) Did IFM have a say in this? They lost R14m or more of annual fees, but one would like to believe that they were not in it for simply the money and would have been conscious of their obligations to further the BEE Act’s objectives and prevent fronts.
(d) How was the transfer of ownership from Identity Prop Co to the new entity effected? and
(e) If this new transaction was also in excess of R25m and involved be BEE ownership points it would be a major BEE transaction and reportable to be the B-BEE Commission. Presumably, the deal was concluded closer to the R1.4b mark, well in excess of R25m, or the Black Private Fund was properly prejudiced, and presumably the loosing of BEE points so soon by DiData would go against the very purpose of the transaction. We cannot see why this was not reported.
We don’t have all the information, but things certainly look ‘fronty’ and there’s no doubt that the lack of independent valuation and the extreme lengths the protagonists took to hide their ownership of the fund suggest that this was a wilful front (or that at the very least the protagonists used the BEE rules to hide their role from the seller, and thus commit a fraud). Then there is the post-deal stuff – removing the black fund manager and changing ownership of the property itself. Smoke…fire…
Rob Hersov said it best: “If this was an honest transaction, they should have announced the BEE investors. But Stephen Nathan refused. The lawyers should have demanded transparency. Weber Wenzel and Werksmans have a lot to answer for, not just the six executives.”
Japanese values v greed
South Africa has been wracked by successive corporate frauds, perpetrated by smart and wealthy people. Steinhoff. Rees/Tannenbaum. Warriner. Tongaat Hulett. Spar. EOH. Liebenberg…etc.
We can now add these “captains of industry” to this list of shame.
These were respected businessmen. All of whom are already wealthy – none had a problem to raising the average share of R15m inthe fund. But they were greedy and devious. They wanted more, and being full of hubris probably thought they could get away with it.
They might have, except their shareholders are NTT, and Japanese culture has a strong sense of ethics (this is our chance to learn from it). The NTT shareholders investigated and refused to settle. They know the problems in South Africa. They know we need to expose the rot and send senior people to jail. We’re lucky to have them pushing this case into the courts.
To quote Rob Hersov again: “It’s also amateurish—the kind of fraud you’d expect from Keystone Cops. These are supposed to be sophisticated businesspeople, but this was carried out in a way that leaves you wondering: What were they thinking? It’s an affront to everything”
Putting a price to BEE ownership
We always advise our clients that BEE ownership is a strategic choice and an investment decision: do the analysis of likely benefits from BEE ownership v the costs. There are many ways to do BEE ownership, each with their own economics, pros and cons.
[65] At this meeting Ord made it clear in his presentation that it was crucial that strategic equity partners with correct BEE credentials to be found. He emphasised .. that it was vital to get BEE accreditation urgently as the S A enterprises … was being shut out of business because of .. poor BEE rating.
Judge Fisher
Some back of the envelope numbers we know from the judgement:
- The justification for selling the campus for only R1.4b was the BEE points this would bring. We know that the price was at least R150m lower than other offers, and that’s probably conservative. i.e. R150m is part of the cost.
- The sale of the property was vendor financed. We don’t know the terms of this but in the world of BEE, net-value calculations mean that this deal would have a term of eight years. DiData would be paying rent to Identity Property Company for the period, which would pay off part of the money. With corporate rentals in the range of 5%-10% of the real estate value, the rental would have been somewhere in the region of R111m pa (7.5% of R1.4b). Over eight years that starts approaching R1b. There would still be a gap of R500m on the purchase price. Less the capital the protagonists injected, means that NTT vendor funding was probably another cost of about R400m over the eight-year period.
- The fund was ‘managed’ by IFM for 1% of capital i.e. R14m pa.
- Roughly, because we don’t have all the info, the cost of doing this BEE deal to DiData was around R640m over the eight years or around R80m each year.
- The deal added about 36% black ownership to their scorecard (less whatever they had for continuing consequences). Say 30%, which implies a cost per % of ownership of about R3m.
To some, these number might seem high. But, consider the turnover of DiData, or it’s profitability.
What would 30% of dividends be? What’s 30% of DiData worth? Are these numbers even remotely the same?
What happens next?
Unsurprisingly, the protagonists have announced that they will appeal, and it’s likely that an appeal will be heard. From there, well, we South African’s know the drill…
But, assuming the judgement is eventually upheld: Given that Judge Fisher found the transaction fraudulent, it has to be unwound. This means that DiData will lose the ±36% BEE ownership that this deal contributed (the staff share scheme contributed 15% and together 51%). If this scheme took them from level 2 to level 4 this judgement will reverse that. The result of this is that customers may choose to take their business elsewhere, and the same six protagonists will be liable for the damages suffered by the group.
In the meantime, none of the protagonists are employed by the NTT group. Other whistleblowers who know of prior dodgy dealings may now feel emboldened to come forward. Reputations are gone, once illustrious careers will now end in ignominy. Braai and Bar Mitzvah invitations will be drying up. Wives and lovers will be whispering. Children will forever be torn between loving their dads and knowing the truth revealed in the judgement.
NTT wants all six protagonists declared delinquent directors, and given the evidence, criminal charges would follow after exhausting all appeals. These can be on the basis of fraud, and on fronting. We understand that NTT is already suing each protagonist directly.
There’s a high probability of jail time if this judgment stands. The protagonists would be charged with fraud, contraventions of company and financial service legislation and also fronting in terms of the BEE Act. If the transaction is a front, everyone knowingly involved (including those who should have known) is guilty of the front too, not just the protagonists. The law firms, financial service providers and verification agents (if any) will also have to face the law.
If the judgment is upheld, it would send the right signal and criminal charges will follow.
Sources:
Techcentral: https://techcentral.co.za/massive-fraud-scandal-hits-dimension-data/206854/
Press reader: https://www.pressreader.com/south-africa/sunday-world-8839/20241201/281724095115547
