Report 68 Business Practices Committee 2. Documents received by the Business Practices Committee

 

 

GCI was first brought to the attention of the Committee (3) by the Financial Services Board (FSB) in a letter dated 6 February 1998. Sales material in the form of loose A4 pages and two GCI circulars were attached to the FSB letter. On 17 February 1998 the Committee received a letter with some documents attached from the Registrar of Companies (the Registrar). The Registrar stated inter alia that:

 

"No prospectus of the company has been registered with this Office. The matter has been referred to the Commercial Crime Unit of the South African Police."

 

Some of the documents that were sent to the Committee by the Registrar were also sent to the Committee by the FSB. On 16 March 1998 the Committee received a submission from GCI. It contained a "mission statement", "vision statement", "company focus" and "salient features".

 

In its letter of 6 February 1998 the FSB stated inter alia:

 

"The rate at which this company is expanding is phenomenal and various queries regarding their business have been received from a large number of members of the public.

 

Although the returns and comments set out in the documentation seem very unrealistic, the sales material contain misrepresentations with regard to auditors and companies in which shares are held.

 

This case will also be referred to the Registrar of Companies".

 

On 12 February 1998 the Committee resolved to undertake a section 4(1)(c) (4) investigation in terms of the Harmful Business Practices Act, 71 of 1988 (the Act), into the business practices of GCI. On 23 February 1998 and 20 April 1998 officials of the Committee held discussions with Botha and de Beer about statements made in the letters and annexures which the Committee received from the FSB and the Registrar. The following were discussed with Botha and de Beer, namely:

 

 

Some questions raised during these discussions were further elucidated by Botha and de Beer in a letter dated 29 April 1998 addressed to the Committee.

 

 

With regard to the "... misrepresentations with regard to the auditors", the FSB attached a copy of a letter dated 4 February 1998 written to Botha of GCI by Deneys Reitz, attorneys of Ernst & Young. It was inter alia said in this letter:

 

"In the course of the "company overview" the following representation is made:

 

"During 1995 and 1996 GCI produced more than 62% return per annum, and has maintained this in 1997. The total revenue and assets to be acquired in 1997 are expected to be in excess of R50 000 000. Assets already acquired and verified by Ernst & Young are currently valued at more than R25 000 000. Annual return on investment is expected to be above 76% for the year ending 1998".

 

Our clients record that Gauteng Corporate Investments is not, and has never been, a client of Ernst & Young. Ernst & Young have never verified any information relating to your company.

 

Telephonic enquiries addressed to your Chairman PJ Sadie elicited the response that your company had "intended" to change its auditors and appoint Ernst & Young, but had later decided not to do so.

 

We are instructed to require your urgent confirmation that:

 

 

 

On 5 February 1998, in a letter from GCI to Deneys Reitz, Botha said "Please accept my apologies to Ernst & Young with regard to the above". The reference to Ernst & Young as the auditors of GCI, according to Botha, was based on a misunderstanding. It is not known how many shareholders bought shares in GCI in believing that Ernst & Young were the auditors of the company.

 

 

The first page read:

 

"Gauteng Corporate Investments

 

There was no head office in Midrand and there were no offices in Brussels and London.

 

According to the minutes of the first meeting of the board of directors of GCI held on 11 October 1997 Burger said that (translated from the Afrikaans)

 

"... the office in London is not yet in operation and the office in Brussels is there with 'auditors and everything'. ("met ouditeure an als"). It is known as Ega Accent Ltd".

 

Botha could not name the three top JSE specialists and the company certainly did not have more than 40 years' experience in investments because it started doing business in October 1997 only. On 23 February 1998 and again on 20 April 1998 Botha said that the statements did not apply and that the information was wrong. Botha said that the document was circulated among friends and family of the directors of GCI before he (Botha) joined GCI.

 

The second and third pages respectively read:

 

"Short Term Income Projection

 

GCI Income Potential

 

The statements on these two pages were reminiscent of schemes investigated by the Committee and subsequently closed down by the Minister of Trade and Industry, namely Newport Business Club and Rainbow Business Club. Again Botha said that these statements were never implemented.

 

On the fourth page it was said:

 

"Secure your Retirement

 

These statements are so ridiculous that it does not warrant any comment. Botha said that these statements also never came to fruition. The business of GCI only started in September 1997 and up to that stage GCI did not even had a bank account. SADIE LATER TOLD OFFICIALS OF THE COMMITTEE THAT BURGER INSTRUCTED HIM TO OPEN AN ORDINARY SAVINGS ACCOUNT IN THE NAME OF GAUTENG CORPORATE INVESTMENTS. BURGER, ACCORDING TO SADIE, OFFERED SEVERAL EXCUSES WHY HE (BURGER) WAS UNABLE TO PERSONALLY OPEN THE SAVINGS ACCOUNT).

 

The management and directors were at a loss as to who was responsible for the ludicrous statements made in these four pages. The origins of the four pages were a mystery, even to Burger, the founder of the company. SADIE TOLD AN OFFICIAL TOWARDS THE END OF 1998 THAT HE WAS A COMPUTER SPECIALIST AND THAT HE DEVISED THE ORIGINAL FOUR PAGES ON HIS COMPUTER. THE CONTENTS OF THE PAGES WERE PRESENTED TO HIM BY BURGER. HE, SADIE, COULD NOT HAVE DEVISED THE FOUR PAGES HIMSELF. HE SAID THAT HE KNEW COMPUTERS, BUT THAT HE KNEW ABSOLUTELY NOTHING ABOUT COMPANY SHARES OR THE ECONOMY.

 

 

The following are excerpts are from this circular

 

"... 1990 saw the birth of a company - Various Level Marketing (Pty) Ltd" (VLM) This company was registered in 1991 as a (Pty) Ltd with registration number 91/06577/07 and incorporated on 19 November 1991". The director was Jay.

 

"From 1994 to 1996 the company firmly established itself in the financial markets and outstanding results were achieved, yielding high returns and growth to its investors. Growth, however, was restricted by limited funds and the decision was made in June 1997 to change the name to Gauteng Corporate Investments Ltd and register it as a public company".

 

These statements contained a number of misrepresentations. There was no evidence that the company "... firmly established itself in the financial markets and outstanding results were achieved". The name VLM was unknown and Botha suggested that be asked about this statement.

 

"The legal format of Gauteng Corporate Investment Ltd is a Limited Liability Company"

 

"During 1995 and 1996 GCI produced more than 62% return"

 

This statement was devoid of all truth. The name Gauteng Corporate Investments was only registered on 2 October 1997. No proof of the 62 percent return could, obviously, be furnished. Again Botha suggested that Burger be questioned on this aspect.

 

"Extensive research over the past 6 years"

 

Again the business started in October 1997 and Botha could not produce the results of the "extensive research". He again suggested that Burger be questioned on this aspect.

 

"Gauteng Corporate Investments Ltd's shares are sold in US Dollar denomination, further increasing growth as the Rand depreciates against the Dollar".

 

The following was the wording of Certificate Number PR10111

 

"Gauteng Corporate Investments Ltd. This is to certify that (NAME OF THE SHAREHOLDER) is the registered holder of 85558 fully paid ordinary GCI Shares, Purchased at a price equal to US$ 0.12 per share on this day, 30 December 1997 at the current exchange rate of 4.87 per Dollar".

 

This share certificate was signed by Botha and Sadie, the chairman of GCI at that time. Again Botha said that Burger must be asked about the rationale of this somewhat strange wording on the share certificate. SADIE SAID IT WAS BURGER'S IDEA TO ISSUE SHARES THAT WERE LINKED TO THE US$ TO THE PUBLIC. It is unknown how many shareholders bought shares in GCI believing that its share price was in some way linked to the US$. Those that did so were obviously misled.

 

 

This circular was signed by TJ Bruyns. On 20 April 1998 Botha said that this circular was sent to shareholders without his knowledge. He was on holiday in Cape Town on 13 January 1998 and only came to know about the circular when he returned from holiday on 19 January 1998. In this circular the following was inter alia stated:

 

"GCI shares have risen to a trading equivalent to US$ 0.18 and there is no indication of the shares decreasing in price, in fact there is a very strong indication of the shares rising even further due to the fact that we have obtained large percentages in various companies of shareholding".

 

It was stated that GCI acquired 39 per cent in Reeva Foreman's Holding Group of companies, four per cent of Wesco (Wind Energy Supply Corp) and 40 per cent of the share capital of Princess Diana European Land Trust Memorial Limited. It was said that the holding in the "Princess Diana European Land Trust Memorial Limited" held in a great potential for GCI. On 20 April Botha said that the Reeva Foreman deal never realised and that he would put in writing the mechanics and potential of the "Princess Diana European Land Trust Memorial Limited" and Wesco.

 

Botha inter alia stated on 29 April 1998 in a letter to the Committee (directly translated from the Afrikaans):

 

"The idea of the Princess Diana project was conceived by a Mr. Malcolm Middleton. He approached GCI through Mr. Pieter Sadie. The name reservation was done for the Princess Diana European Land Trust Memorial Ltd and the name was awarded by the Registrar of Companies. (This was confirmed by the Registrar). It was however, necessary to do a lot of footwork around this project and the reservation of the name was extended. GCI received 40 per cent of the shares in lieu of the marketing that would have been done by GCI for the Princess Diana project. Finalisation of this project was delayed because permission had to be obtained from the Princess Diana Trust in the British Isles. This project will build a holiday complex next to the Kruger Park for members of this trust. Monies obtained will be used for procuring aardvarke (a mechanical device) for destroying land mines in Mozambique and surrounding areas. Some of the money will also be allocated for the fight against aids. Lady Diana did valuable work in this regard. ... I am still very positive about this project because this will be a profitable project for GCI with a huge income potential".

 

The idea of a public company being involved in the destroying of land mines is, to put it mildly, rather unique. At a meeting held on 8 May 1998 (5) between the directors of GCI and officials of the Committee, the "Lady Diana Project" was laughed at and it was said that this "project" was rejected at a previous board meeting.

 

BRUYNS SAID THAT THIS LETTER WAS DRAFTED BY VAN WYK. HE (BRUYNS) EDITED THE LETTER AND WAS INSTRUCTED BY BURGER TO SIGN THE LETTER.

 

 

Botha could not indicate on which date the "Profile" was written and to whom it was sent. He vaguely said that "... it was given to a few people who wanted to know something about the company, such as friends and family of employees".

 

"During 1995 and 1996 GCI produced more than 62% growth in its selection of shares per annum, and has operated on this basis ever since. The total assets in private and public companies to be acquired throughout the rest of 1998 is estimated to be in excess of R25 000 000. Assets already acquired by GCI is estimated to be valued at around R5 000 000. The annual growth on GCl's selection of shares will exceed 76% for the current year".

 

The 62 per cent growth was confirmed by Botha on 20 April 1998. He said all the figures in the paragraph was based on "... a hypothetical basis". There was no trading during 1995 and 1996.

 

".. for even wider Global Expansion ..."

 

Wider global expansion gave the impression that GCI was already involved in offshore investments. There were none and this Statement was simply misleading.

 

"In all comparisons, Gauteng Corporate Investments Ltd's provide a higher yield than traditional investments. In most cases, the differences are substantial"

 

This statement could not be substantiated. As Botha said it was a "...hypothetical assumption". In a letter dated 29 April 1998 de Beer wrote to the Committee:

 

"... Mr. Burger's personal experience and hypothesis (sic) was used as a base line indication for to project the company's potential growth and yield. Mr. Burger with the help of professional friends and aquitances (sic) from companies such as BOE Natwest and Nedcor was able to accurately manage a substantial share portfolio on the JSE, but lack of funds prohibited. This enabled GCI to produce acceptable profit margins, which could be realised, until investment opportunities and viable projects could be identified. Documentation also contained certain expectations, concerning assets that the company would acquire with the funding of the sale of shares and the yield on these assets, as envisaged. Certain projects i.e. Reeva Forman transaction, Princess Diana European Trust Memorial Limited and Wesco were initialised. At this point in time the Board of Directors valued the present value of these contracts and used those figures as asset values in documentation. This information was never verified by any auditor and unfortunately no person with enough expertise or knowledge helped them do the calculations on viability and valuations. Based on these calculations the Board of Directors determined value of shares to be sold to the public, by means of anticipated yield on capital investment as well as anticipated asset capitalization. Mr. Burger's personal results in the financial fields was used extensively in the documentation as proof of what was expected to be achieved in this corporate structure."

 

This rather garbled explanation contributed nothing towards a better understanding of events.

 

 

On 16 March 1998 the Committee received a further submission from GCI. It contained a "mission statement', "vision statement", "company focus" and "salient features". Botha said on 20 April 1998 that the document was not made available for the general public but that it was complied for the information of the BPC only.

 

The "Corporate profile" as set out in these submissions contained a number of statements, such as:

 

"Not quite anticipating the market which created an enormous demand for GCI Ltd shares, further restructuring as necessary within a very short period of time"

 

"3. Participating in, and directing investors into high-yielding international business and project activities around the world"

 

"Taking the unique GCI Ltd way of doing business into consideration, it should be noted that an exceptional growth is achievable when purchasing GCI Ltd shares (see graph)".

 

"The period from 1st of October 1997 until 31st of January 1998 has been very rewarding for GCI Ltd as well as all its shareholders. Taking into account that GCI Ltd shares started selling at a value of R0,50 per share, and that the trading value was R0,89 per share as at 31 January 1998, it is evident that in less than four months, the GCI Ltd share value has increased by 78% due to the increase in nett asset value of the company".

 

"... intensive research during the previous years resulted in our investment specialists being able to successfully predict and anticipate the worldwide stockmarket crash. Substantial profits were thus realised by GCI Ltd for its shareholders where the markets in general suffered tremendous losses".

 

It was put to Botha and de Beer on 20 April 1998 that these statements could not be substantiated. On 23 February 1998 they agreed that the price of 50 cents per share dropped from the sky. There were no calculations done to arrive at this price. It was further put to them that the value of the shares did not increase. The "demand" for the shares was artificially created (the "enormous demand") by their "marketers" (a private placement applied) and the "calculation" of the share price using the net asset value had severe shortcomings. There was no international business and there was no "exceptional growth". The "... intensive research during the previous years" could not be produced and the "investment specialists" turned out to be Burger. Botha said that Burger could be regarded as the "portfolio manager" of GCI. There was no evidence of the "... substantial profits were thus realised by GCI Ltd for its shareholders where the markets in general suffered tremendous losses".

 

It is clear that consumers who bought shares in GCI on the strength of the statements made in the documents discussed in sections 2.1 to 2.6 above were grossly misled. THE INDIVIDUAL MEMBERS OF THE BOARD OF DIRECTORS THAT COULD BE CONTACTED ALL CLAIMED IGNORANCE OF THESE DOCUMENTS. IT IS UNLIKELY THAT NONE OF THEM KNEW ABOUT THE DOCUMENTS. It is, however, likely that Fennie and Van Wyk were unaware of these documents. They were appointed as non-executive directors in February 1998.

 

In the "Corporate Profile", as could be expected, flattering remarks were made about the board of directors and management. The remarks that were inter alia stated about the directors are followed in square brackets by what was not revealed to the shareholders.

 

Jan A (Jay) Burger: "An entrepreneur with a phenomenally successful track record spanning over 35 years. Mr. Burger has developed the reputation of being the power behind some of the most amazing projects that may be attributed to a single individual in one life time". [BURGER TOLD OFFICIALS THAT HE WAS A REHABILITATED INSOLVENT].

 

Pieter J Sadie: "Mr. Sadie is most definitely one of the new generation of rising stars in the South African market place today. He launched his first computer company at the tender age of 25, and quickly became one of the leaders in the field of computer Network Support, Network Engineering and Intranet Structuring."

 

Adolphe Botha: "He careered on into the investment markets where he certainly made his mark in the industry, distinguishing himself as significant innovator and highly sophisticated strategic player. His leadership in the company is most definitely the single biggest contributing factor towards the fast and sharp rise of the GCI Ltd ire the market place". [BOTHA INFORMED OFFICIALS THAT HE WAS REHABILITATED AS AN INSOLVENT ON 8 JULY 1997].

 

Tobie Bruyns: "His insights into consumer needs with regard to banking has made him an important link in the role GCI Ltd is to play in supplying a world class financial service to its shareholders". [BRUYNS TOLD AN OFFICIAL THAT HE WAS A REHABILITED INSOLVENT].

 

Jacobus G van Rheede Van Oudtshoorn: "Mr. van Oudtshoorn is a veteran of 35 years standing in marketing, covering a wide spectrum of sectoral involvement ranging from the services sectors to heavy industrials, and not in a single instance as a bad or average performer". [VAN OUDTSHOORN REHABILITATION APPLICATION WAS SUBMITTED ON 23 MAY 1995. HE WAS AGAIN SEQUESTRATED 25 JUNE 1998 AND WAS (NOVEMBER 1998) SERVING A JAIL SENTENCE FOR A FELONY IN THE PRETORIA PRISON].

 

Stanley Mahlangu: "A much decorated executive in the past, great things are expected from his association with GCI Ltd in the future".

 

Gerhard C E van Wyk: "Advocate Gerhard van Wyk is no ordinary legal professional. His intimate knowledge of all aspects of mercantile law, coupled by his formidable experience in economic development, has certainly produced the surprise package in the GCI Ltd boardroom. Advocate van Wyk holds the position of non-executive Director (Legal and Administration) with the company".

 

Jacob (Jakes) Fennie: "As a black South African born in District Six, Caps Town, Mr. Fennie went on to qualify himself and attained the following degrees: BSocSc (Hens) - Cape Town, RSA, Mphil (Economics) - London, YK, MBA - New York, USA, Doctorate in Business Administration (DBA) - California, USA. He has lectured (and Published) widely on affirmative action, corporate strategy, change management, productivity and quality, franchising, management and leadership development, innovation and entrepreneurship, economic restructuring and development and business process re-engineering".

 

Jac F de Beer: De Beer was the "Company Secretary and Financial Manager". He held the following qualifications: "B Comm (Law), AIAC, FICB, ROA". [JACOBUS FREDERIK DE BEER WAS AN UNREHABILITATED INSOLVENT WHO WAS FINALLY SEQUESTRATED ON 3 JUNE 1997].

 

"Regional Managers" were Henry Bosch (Pretoria Central), Ockert (Ockie) Erasmus (Mpumalanga) and Jeremy White (Western Cape).

 

IT WOULD SEEM FROM THE ABOVE THAT BURGER SURROUNDED HIMSELF IN HIS OLIGARCHICAL EMPIRE WITH SOME PEOPLE THAT WERE CLEARLY NOT ADEPT IN MANAGING THEIR OWN PRIVATE FINANCIAL AFFAIRS. YET, THEY AND HE APPARENTLY BELIEVED THAT THEY COULD MANAGE THE MONEYS, AND LOTS OF IT, OF OTHERS BETTER THAN THEIR OWN. THE EVIDENCE SUGGESTS THAT THEY WERE UNABLE TO DO SO.

 

 

At 09h25 on 20 April 1998 GCI furnished the Committee with Financial Statements as at 31 January 1998. This draft was marked "Draft For Discussion Purposes Only". Botha said the "... for discussion purposes only" meant discussion with the Committee only.

 

The auditors stated on page 1 of this draft inter alia: "The financial statements ... have been prepared from the books and records of the company, and from information supplied by the directors. No audit has been conducted and accordingly no opinion is expressed".

 

On page 2 of the statements it was stated: "Dividends in the amount of R12 266 were paid during the period" and 404 117 339 ordinary shares were allotted at a premium of R3 062 962 during the period".

 

It was put to Botha and de Beer that there could have been no talk of dividends (6) as the company traded from October 1997 only and the company suffered a loss R1 058 385 for the period to 31 January 1998. GCI responded in writing and stated:

 

"From the initial interim report from the company's auditors it appeared that an amount of dividends had been paid out to share holders due to the fact that management was under the impression that profits on the share portfolio on the JSE was seen as actual profits. The auditors of the company pointed out that the profits on the portfolio was unrealised until the portfolio was actually realised".

 

The Committee found it difficult to understand the statement that "... 404 117 339 ordinary shares were allotted at a premium of R3 062 962 during the period". The authorised share capital of GCI was:

 

200 million class "A" monthly ordinary shares of R0.00001 each R2 000

200 million class "B" yearly ordinary shares of R0.00001 each R2 000

400 million class "D" deferred ordinary shares of R0.00001 each R4 000.

 

The 400 million "D" class shares were issued to the directors and the R4 000 was paid by them on 17 July 1998 (7). Approximately 4.1 million shares were issued as at 31 January 1996, ostensibly to "friends and family" (8) for a total of ±R3 058 962 (R3 062 962 less R4 000). Thus, the directors bought 400 million shares at R0.00001 each and 4.1 million shares were bought by the public at between 50 cents and 89 cents by the end of January 1998. It would have been more correct to state in the financial statements that during the accounting period 404 117 339 ordinary shares were issued at a premium of R0.007579 cents per share. (404 117 339 times R0.007579 = ±R3 062 962). As stated, 400 million shares were issued to the directors at .001 cents each. The shareholders paid, at various stages, 49 cents, 59 cents, 64 cents and R0.69 per share.

 

Under "Capital Employed" in the balance sheet was an entry "Directors' Loan R296 000". The notes stated that the loan was "... unsecured and interest free, with no fixed terms of repayment, but is by intent of a long term nature". The loan was to Burger. IT LATER APPEARED THAT THIS LOAN WAS NOT GRANTED. The accumulated deficit of GCI at 31 January 1998 was R1 072 406.