by Khadija Sharife and Mark Anderson

16October 2019

Regiments Capital, a boutique South African securities investment firm, earned more than 891 million rand ($58.7 million) in shares by taking advantage of a government initiative designed to mitigate the inequality of 50 years of apartheid, an OCCRP investigation reveals.

Regiments has already been implicated in several schemes that allowed the controversial Gupta family to siphon money out of state-owned entities.

The relationship between the Guptas and Regiments began in 2012 when Salim Essa, a key associate of the family, started a discussion with the investment firm on how to capture 775 million rand ($52.6 million) over a period of two months from state-owned companies.

Essa would go on to take half of Regiments profits from the schemes. He eventually founded another firm, Trillian, where he and another Regiments director scored billions in public contracts.

The United States Treasury included Salim Essa in a sanctions order on three of the Gupta brothers that was issued on Oct. 10.

Read more OCCRP reporting about the Guptas business activities and influence in South Africa.

Regiments may even have had the Guptas in mind when they conspired with a former executive at South Africas state investment firm to make lucrative deals under the auspices of the countrys post-apartheid Black Economic Empowerment (BEE) program.

The program was intended to reduce inequality for South Africas disenfranchised black citizens by getting big white-owned companies to sell stakes in businesses at a massive discount to eligible black partners. Companies could gain political clout through this process, while the new investors, who often had close ties to the ruling African National Congress, acquired valuable assets at little or no cost.

On their own, neither Regiments nor its co-founder, Eric Wood, who is not black, would have easily qualified to participate in the empowerment program. So Wood forged a partnership with Tshepo Mahloele at the time a key official at the state-owned Public Investment Corp (PIC) that allowed them to form a new Black Economic Empowerment entity: a consortium of influential political and business insiders who manipulated the initiative to buy shares in one of the countrys largest banks at a secret cut-rate price.

To artificially prop up the shares market value despite this hidden deal, the consortium obtained hundreds of millions in financing from a state investment fund that covered the difference. Then, as the market value of the shares rose, the consortium arranged to sell them to the PIC at a profit. It then tried to create yet another empowerment entity to buy them back for yet more profit. Altogether, Regiments holds shares worth 891 million rand ($58.7 million) from its BEE deals.

Supporters of President Cyril Ramaphosa's ruling African National Congress (ANC) celebrate election results at a rally in Johannesburg in May. Ramaphosa campaigned on an anti-corruption platform, promising to crack down on graft within the ANC. Credit: Mike Hutchings/Reuters

The PIC is Africas largest fund, overseeing 2 trillion rand ($131 billion) in assets, and is meant to manage government investments, including the pensions of public employees. The fund owns significant stakes in many of South Africas most valuable companies and controls over 10 percent of the market capitalization of the Johannesburg Stock Exchange. The consortium hijacked these funds for their private gain.

Last October, South Africa President Cyril Ramaphosa established a Commission of Inquiry to probe allegations of impropriety at the PIC between 2015 and 2018. The focus of its investigation is whether senior officials, including Mahloele and his former boss, Jabu Moleketi, abused their power for personal gain. (A separate government inquest, the Judicial Commission of Inquiry into Allegations of State Capture, is currently probing links between the Guptas and the administration of the last president, Jacob Zuma.)

Dan Matjila, the former head of South Africa's state asset manager, the Public Investment Corporation (PIC), appears at an inquiry into alleged wrongdoing and poor investment decisions during his tenure, in July. Credit: Siphiwe Sibeko/Reuters

Partly because of manoeuvers like this, South Africas 20 years of black empowerment efforts have done little to alleviate apartheids lingering economic imbalance. Last year, the World Bank declared South Africa one of the most unequal countries in the world.

Instead, most of the benefits of high-stakes BEE deals have accrued to politically connected people like Mahloele, who already had seats at the boardroom tables of Johannesburgs affluent Sandton suburbs.

The monies subsidising these aspirant plutocrats were sourced from public funds in a country where over half its people live in poverty. Once again the poor are subsidizing the illicit lifestyle of an elite, said Hennie van Vuuren, the director of Open Secrets, an organization that promotes transparency in government in South Africa.

After the fall of apartheid in 1994, there was widespread demand in South Africa for financial reparations that would overturn the countrys legacy of inequality and allow control of the countrys wealth to spread beyond the white minority. In response, the government enacted programs like Black Economic Empowerment (BEE).

But in practice, BEE resulted in strategic investment deals that concentrated ownership in the hands of a select group of politically connected black South Africans. The deals spearheaded by Regiments and Mahloele illustrate how the countrys elite hijacked BEE for their own benefit.

"No political democracy can survive and flourish if the majority of its people remains in poverty, without land, without their basic needs being met, and without tangible prospects for a better life," the party wrote on Nov. 23, 1994 in an official government newspaper.

But it wasnt until 2001 that the BEE program was formalized by the government. The release of the BEE Commission report in the same year paved the way for new legislation that required South Africas biggest companies to prove they had sufficient black ownership and met employment quotas and career development objectives.

Following outcry that the original BEE strategy didnt benefit ordinary people, a new program, Broad-Based Black Economic Empowerment, was announced in 2003. The legislation forced the countrys biggest companies including Anglo-American, BHP Billiton and ABSA bank to prove compliance with new quotas and ownership laws. Despite these efforts, in practice BEE has resulted in investment deals that concentrated ownership in the hands of a select group of black South Africans.

In testimony to the PIC Commission, Mahloele said he had resigned from the PIC that March (before Woods April email). But he was in a position to continue making decisions afterwards: In the previous year, the PIC had appointed him to head a multi-billion-dollar infrastructure investment fund. The fund was managed by a shelf company called Harith. Once owned by the PIC, Harith was handed over to Mahloeles control in 2007.

In April 2006, Eric Wood, then a director of Regiments, sought out an email introduction to Mahloele, who had been in charge of the PICs alternate investment arm, including a social development fund called Isibaya. This fund is intended to make investments for the public good, but since it is not listed on the stock exchange, decisions are often made at the discretion of managers like Mahloele with little oversight from the PIC.

Later that year, Capitec, currently South Africas fifth-largest bank by assets and a lender that catered to the countrys poor, held a BEE sale of around 12 percent of its shares, at a heavily discounted price of a penny per share. The offer appeared to be made accessible to just a handful of politically connected insiders, including Mahloele.

Regiments and Mahloele worked fast to take advantage of the sale. They set up a new consortium of BEE investors, carefully chosen to maximize political clout and qualify for BEE status. They included:

This consortium, which they named Coral Lagoon Investments, quickly bought all 10 million empowerment shares issued by Capitec for a penny each, a massive discount from their market value of 30 rand per share.

The extremely low price of the deal was negotiated in secret, with media reporting that the Capitec shares had been bought at their market value.

To protect Capitecs share value which would have plummeted if it became known that 10 million shares had been sold for so little the Coral Lagoon consortium members obtained 285 million rand ($18.68 million) in financing from the states Industrial Development Corp (IDC) to cover the difference. The companys share value thus reached the level the market expected.

Such usage of public funds to prop up the value of corporate shares sold through BEE schemes is not unusual in South Africa, and has contributed to public dissatisfaction with the program.

Internal documents reviewed by OCCRP show Regiments and Keabetsoe were firmly in control of the Capitec deal, with Regiments taking the lead on its financial structure and Keabetsoe appearing to handle other aspects.

According to Mahloeles testimony, he left his job at the PIC in March 2006 to focus on growing his private business ventures. That year, the duo also formed a new holding company, Ashbrook Investments 15 Ltd., and put Coral Lagoon ostensibly under its control.

The Capitec shares Coral Lagoon held were valued at 1.5 billion rand as if they really had been bought for 30 rand each. Wood and Mahloele were already profiting from the dividends, but now they sought to cash in by selling a portion of the shares to the PIC Mahleoles former employer. Using sophisticated hedging and vendor financing schemes, they earned a huge profit on the deal, enabling them to repay the 285 million rand they owed the IDC and make millions for themselves.

Regiments and Keabetso may have had access to confidential information that helped them. The two companies entered into a secret non-disclosure agreement with a third company, Circle Capital whose role, and owners, were unknown. The agreement allowed them to gain access to certain information pertaining to a listed company, apparently Capitec, though no name was given. No other shareholder was included.

According to another mysterious agreement that makes no obvious business sense, each Coral Lagoon shareholder owed Circle Capital 7 million rand; no reason was declared.

In February 2012, the PIC, through the Isibaya Fund, which had previously been run by Mahloele, purchased half of the shares in Capitec that Coral Lagoon held for 826 million rand ($54.5 million), or 156 rand per share. Since they had been purchased for just a penny a share, this was a massive windfall for the Coral Lagoon consortium, worth billions of rand, at the expense of the South African public.

Court records show that Regiments share of Capitec was ultimately valued at 891 million rand ($58.7 million), a vast increase from its original stake of 9 million rand ($600,000).

Rather than becoming a shareholder, PIC simply warehoused the shares until they could be repurchased at a lower price by a new Black Economic Empowerment company, which Regiments assumed it would also take the lead in forming.

A February 2011 letter to Capitec from top executives of Regiments and Keabetso outlined the plan. The letter said that a new black economic empowerment transaction was being structured and negotiated between the PIC, Coral Lagoon, and a new BEE company that would be even better positioned to take advantage of future black empowerment deals.

Capitecs financial director, Andre du Plessis, told reporters in 2012 that the bank was unaware of the possibility that the ANC could benefit from the transaction.

Private correspondence obtained by OCCRP indicates that Regiments may have intended the Guptas as beneficiaries of the PIC-related deals. The investment firm also tried to formalize its control over the deal, announcing that it intended to handle all legal, secretarial and accounting functions for Coral Lagoon.

But what Regiments didnt realize was that Mahloeles team had been working behind the scenes to get there first.

On May 12, 2015, Capitec suddenly announced that a new BEE company called PetraTouch (later renamed to Lebashe Investment Group) had acquired the warehoused shares at 461 rand ($30) per share. Capitecs share price plunged by 6 percent at the news, suggesting markets were not happy that the PIC had sold the shares it was holding to a new BEE group.

The sale was touted in South African media under the curious headline Capitec wants this BEE deal to be fair, implying the previous sale had not been. The story described PetraTouch as a new company led by an unknown black investor, Warren Wheatley.

Wheatley told media that the sale was not one of your old BEE transactions, and that PetraTouchs owners were not big political names and are new entrants.

Regiments seemed shocked by the move, according to private correspondence obtained by OCCRP. The firms staff frantically tried to determine how the warehoused shares had been snatched out from under them and who exactly was behind PetraTouch, a company none of them had heard of.

They soon learned that it had very close links to somebody they had heard of: their purported business partner, Tshepo Mahloele.

PetraTouch was registered at an address that Mahloele had used on other company registration forms. Another major shareholder in PetraTouch used the same address. And Fawzia Sidwell, Mahloeles personal assistant at Harith Fund Managers, another firm he founded (and which had also received PIC funding), was copied into most emails between PetraTouch and the PIC.

Even more disturbingly, several other shareholders had close ties to the chairman of the PIC, Jabu Moleketi, a powerful figure in the ANC and former deputy finance minister. They included:

Regiments staff also said that Moleketi had been a shareholder in Keabetsoe Holdings all along, allegedly making him an original member of the Coral Lagoon consortium, even as he had been leading the PIC.

It wasnt just Regiments that was in the dark. Capitec was apparently never fully informed of the identity of the shareholders behind Keabetsoe or, later, PetraTouch. If it had, as a listed banking entity it might have been required to publicly disclose information related to politically exposed persons.

This, in turn, would have exposed Moleketi and Mahloele as the lopsided beneficiaries of a deal meant to benefit and empower those dispossessed by the apartheid regime. And rather than being new entrants, the beneficiaries of the new sale appeared to be the exact same people who had already profited from the previous one.

The final twist of the knife for Regiments was the discovery that a former employee, Jonathan Loeb, who left to start his own business in 2014, had been providing financial services to PetraTouch. He had even revealed to them Regiments hedging techniques, which PetraTouch used to buy the warehoused shares without spending a dime. The new deal had been touted in the press as fairer because the consortiums members were putting their own money down, but this turned out to be untrue.

PetraTouch did not stop there. The company sought to purchase more shares of the bank from Coral Lagoon. Although the Regiments side of the consortium was miffed and declined to sell, Keabetsoe and other ANC shareholders appeared to agree.

PetraTouch made the purchase with 1.5 billion rand ($101 million) loaned by the PICs Government Employee Pension Fund, which has 1.2 million active members and more than 400,000 pensioners and beneficiaries. This amounted to nearly one percent of the PICs total investment in private companies, according to Wheatleys testimony before the PIC Commission.

In a letter Bantu Holomisa, the leader of the opposition United Democratic Movement and a fierce government critic, reportedly sent to the Commission, he alleged that Mahloele and Moleketi had used PetraTouch as a portal to access PIC funds.

A BEE cartel of executives had easy access to PIC coffers and systematically looted public pension funds, Holomisa said in April.

Moleketi said the claim that he had exploited public funds was extremely hurtful.

In an email to reporters, Capitec said: Capitec did not select the members of the Ash Brook consortium. Directors of Petratouch was [sic] involved in the Ash Brook BEE consortium which held shares in Coral Lagoon. We knew these directors from the initial Coral Lagoon BEE consortium.

Regiments did not respond to questions sent by email.

In a response to questions from OCCRP, a representative of Petratouch (now called Lebashe) wrote, Over time, additional investors, including Mr Moleketi became shareholders in the entity. Mr Mahloeles prior employment at the PIC provided no advantage to the transaction.

Speaking to the matter of politically exposed persons, the spokesperson said the companys techniques were necessary: This system, called Apartheid could be classified as unfair In order to climb out of institutionalised poverty we had to develop and utilise other resources at our disposal. Sophisticated financial engineering was used in this instance.

However, the beneficiaries of the Capitec deal, both black and white, were wealthy individuals.

Ironically, the court has ordered that the money held by Regiments in Capitec shares be used to repay Regiments vast theft from a different pension fund (as previously reported by OCCRP). Though Regiments has agreed to the deal, Eric Wood, the companys co-founder and one of the beneficiaries of the Capitec deal, has sought to block the agreement. The case is still pending.

With billions of rand in profit being made on the back of the PIC, the Commission of Inquiry has extended its scope to investigate claims by whistleblowers around the illicit activities of former PIC officials. At stake are the pension funds of thousands of retired government employees whose futures have been invested in these dodgy deals.

Michiel le Roux, a Capitec board member and shareholder, is the founder of the Millennium Trust, a funder of the Platform for the Protection of African Whistleblowers, where Sharife is a director.

See the original post:
How South Africa's Black Economic Empowerment Initiative Empowered the Powerful - OCCRP