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How Fidentia’s Brown blew a billion

New report describes in gory detail what happened to widows’ and orphans’ cash.

JOHANNESBURG – A new report provides a detailed account of how Fidentia spent more than a billion rand of widows’ and orphans’ money. The report was prepared by Fidentia curator and chartered accountant George Papadakis.

Papadakis compiled the comprehensive report at the request of the National Prosecuting Authority (NPA) because he had been asked to testify as an expert witness in Brown’s criminal trial. For reasons yet unexplained by the NPA, Papadakis was never called to testify. NPA spokesperson Bulelwa Makeke has failed to respond to Moneyweb’s queries regarding its failure to call Papadakis to testify.

Papadakis’s report was recently presented to the High Court by the Financial Services Board as a supplementary curators’ report. It can be downloaded here.

The report makes for grim reading. It deals not only with the R1.5bn in the Living Hands Umbrella Trust (LHUT), but also with other investments received by Fidentia, including R200m invested by the Transport Education & Training Authority, R45m from Antheru Beleggings Trust, R38.6m from Balltron, and R48.9m relating to Evertrade. In total R1.8bn was invested.

Investments received by Fidentia Asset Management

Investments received by Fidentia Asset Management
Name Amount (Rm)
Teta 200.0
Antheru Beleggings Trust 45.5
Evertrade Medical Waste 48.9
Balltron 38.6
Living Hands Umbrella Trust 1467.4
1800.4

Papadakis describes former Fidentia chairman J Arthur Brown as a “serial Ponzi schemer”. Papadakis notes that Brown used money received from new investors to pay amounts owing to existing ones. For example, the report notes that from the Teta money, R17.5m “was paid to persons and entities that had not previously invested funds with FAM [Fidentia Asset Management], but appear to have invested with Maddock Inc.”

Maddock Inc was the firm of former Fidentia financial director Graham Maddock.

Papadakis says this payment of R17.5m to Maddock’s investors “illustrates the existence of a Ponzi scheme in operation prior to Fidentia Group commencing with its operations”.

What happened to the Living Hands money?

Fidentia Asset Management’s largest investment was the Living Hands money. It initially got R1.13bn from Old Mutual in 2004. This money was for the benefit of about 46 000 widows and orphans. Over time until the date of curatorship the trust received an extra R337m in “source funds” or retirement fund money.

The way in which this money was spent could hardly be described as a suitable investment for widows and orphans. In fact the majority of the cash was not even spent for their benefit.

For example, one of the single biggest payments was R90m to Cornerstone, an entity associated with the late Angus Cruikshank. This payment was allegedly to plug a ‘black hole’ that had been created by Cruikshank, who had stolen money from his own investors.

The single biggest ‘investment’ was Infinity, a technically insolvent rewards company. The company was bought for R160.3m from Mel Cunningham. It cost a further R2.9m in operating expenses. Infinity formed part of Fidentia’s ‘private equity portfolio’, a motley collection of companies which were not registered in investors’ names or in the name of a nominee company. The companies in the private equity portfolio were either held in the name of Fidentia Holdings or its subsidiary Bramber.

Then there was Sante, a ten-bedroom, loss-making hotel which Fidentia bought for R86.5m. A spa suite and villas were added at a cost of R26.9m, bringing the total cost to R113.4m. The hotel’s operator, Sante Wellness, burnt R31.8m in operating expenses, and its successor, Sheckels, went through another R9.6m. The operators were Fidentia companies.

A game farm, Thaba Manzi was purchased for R32m and a further R4.3m ploughed into its operating losses. Says Papadakis: “A portion of the game farm was registered in Brown’s personal trust. He said it was a mistake. You know what’s so coincidental about this ‘mistake’? The farm was made up of eight portions, most of them undeveloped land. The one portion, on which properties were built – the most valuable portion – that was the one that was registered in Brown’s trust.”

Brown and his co-shareholders also extracted a lot of Living Hands money for themselves. A R40m ‘dividend’ was paid to Brown Brothers, a Fidentia shareholder, which was ultimately owned by Brown through a trust. ‘Restraint of trade’ payments were R25.2m. Brown also advanced to himself a director’s loan of R25.5m.

The list of payments contains extravagant and seemingly unnecessary expenses. Fidentia used LHUT money to pay R6.1m for Leapfrog, a company used to generate marketing and printing material for the Fidentia Group. It also spent R750 000 on its own printing press. Gym equipment was bought at a cost of R2.9m. All of this contributed to very comfortable work environment: Fidentia’s employees had their own gym, free meals, high salaries, and had grown accustomed to business class travel. Papadakis said when he arrived he had a fight to get employees to fly economy class to meetings. Says Papadakis: “I told them ‘I fly Kulula, you’re also going to fly Kulula.’”

The table below details how more than R1.4bn of Living Hands money was spent:

Description Amount
Payments to investors (monthly stipends and ad hoc payments) R 280 200 000
Fees R 51 000 000
Taxes relating to beneficiaries R 2 290 000
Payment to Antheru R 12 519 048
Dividends to shareholders of Brown Brothers R 39 822 223
Restraint of trade payments paid to certain shareholders of Brown Brothers R 25 200 000
50% interest in Boland Rugby as well as sponsorship funding R 8 200 000
Bowman Gilfillan for legal fees R 12 336 596
Danisa Baloyi R 7 900 000
To Cliffe Dekker being a R3.5m deposit on Waterford Place and R24.5m purchase price for Facets R 28 000 000
71.8% of Definiti, now a dormant company R 32 700 000
28.2% of Definity R 12 860 000
Payment to Cornerstone, an entity controlled by Angus Cruikshank R 90 400 000
This payment allegedly assisted Cruikshank to cover a “black hole”
that had been created by Cruikshank’s theft of investor funds
Dell Computers R 11 509 893
Purchase and conversion of two Nissan 350Z cars for racing R 1 190 000
Payment to Grant Thornton for the “sponsorship” of above cars R 1 300 000
Payment to Kepano Ke Matla relating to the acquisition of Software Futures R 2 280 000
Payment to Landman & Steyn for the purchase of the Thaba Manzi game farm R 32 278 055
The most valuable portion of the farm, on which the buildings and improvments were located, was
registered in the name of a trust controlled by Brown.
Used to fund the operating losses associated with the farm R 4 300 000
Acquisition of three companies from Mcubed R 40 000 000
Payment to M Cunningham for Infinity R 160 300 000
To fund Infinity’s monthly operating expenses R 2 900 000
Acquisition of Moshate Holdings, a dormant company that has never traded and is still dormant R 15 000 000
Payment to Norwalk which relates to the failed attempt to establish a foreign operation R 2 692 568
Payment for the acquisition of the Sante Hotel R 86 500 000
Operating losses of Sante R 31 800 000
Operating losses for Sante’s successor, Sheckels, since liquidated R 9 600 000
Purchase of a spa suite located at Sante R 3 215 315
Purchase of two villas located at Sante R 13 570 000
Installation of a video conferencing system R 1 100 000
Acquisition of Manning Rangers Football Club R 1 710 000
Monthly running expenses of the Club R 3 400 000
Acquisition of Leapfrog, a company used to generate marketing and printing material for the Fidentia group R 6 100 000
Purchase of a Heidelberg printing press (purchase associated with Leapfrog) R 750 000
Acquisition of an interest in Yellowood Architects R 8 250 000
To fund Software Futures and its subsidiaries R 14 248 762
To acquire six Condor vehicles R 862 200
Gym equipment R 2 900 000
To establish a call centre R 2 700 000
For a bus for the choir R 715 814
Funding for the choir R 1 200 000
Advances to Vilayet, a restaurant concession in the Kruger Park R 1 550 000
To fund the operating expenses of ERP Elementals R 3 250 000
To Thebe Securities/Ovation deposited into accounts operated for the benefit of Steve Goodwin R 37 298 564
Transaction fee paid to PLJ (Namibia)/Thebe Bank to facilitate a fictitious asset swap transaction R 17 500 000
Relating to the Evertrade deal R 56 645 000
Purchase of Waterford Place, Fidentia’s head office R 31 500 000
Purchase of majority shareholding in Mantadia from Pacific Star, Danisa Baloyi’s company R 69 000 000
To acquire three vacant stands in Blue Horizon Bay R 13 100 000
Directors’ “loan” to J Arthur Brown R 25 500 000
Acquisition of paid-up life insurance policies in which Polex traded. Polex repaid R8.547m of this amount R 13 753 000
To Vilayet R 750 000
Funding of companies not owned by investors. For example, about R90m was advanced to R 163 300 000
Fidentia Administration Services which was applied predominantly toward the payment of
salaries, including that of Brown. Approximately R40m to Facilities, which company
bought business furniture and equipment, and R19.6m to Fidentia Society Investmens
  R 1 498 947 038
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