ALEC HOGG: This programme is fourteen years old this year, and we’ve been at it since April 1997. And for most of those 14 years we’ve been looking at the story that seems to have finally come to a conclusion on Friday. It’s one of the biggest frauds ever to happen in South Africa, a company called LeisureNet. It was listed on the Johannesburg Stock Exchange, it collapsed, losing well over a billion rand for investors, and the two gentlemen in the middle of it, Rod Mitchell and Peter Gardiner, were accused of fraud. Well, it’s hard sometimes, to read through court papers. The full judgment is on Moneyweb right now, so if you’re a lawyer or you want to go and see the judgment, you can go onto Moneyweb and read it.
But to give us some context on exactly what happened, here’s Costa Qually. He’s an interesting gentleman. Costa is the former head of reputation and risk at Deloitte. Costa, the reason why you’ve been following LeisureNet so carefully over the past decade since all the issues started breaking was that Deloitte was itself at one point in time being accused of maybe not doing its job properly.
COSTA QUALLY: Good evening, Alec, yes. That is correct. In fact there were at different times four claims against us, claims by four different parties against us, totalling nearly R500m. It included the liquidators and various other parties, some of whom had lent money to LeisureNet. Three of those claims have been withdrawn. The most recent one was by the liquidators, which was withdrawn last year. There is one other claim for which we received the summons many years ago – I don’t remember exactly when, 2005, 2006 – but nothing has happened on that, and we don’t imagine that that is going to succeed.
ALEC HOGG: Costa, with the benefit of hindsight, these guys have now been convicted, and their appeal against their sentencing – they are both going to go to jail for seven years effectively – has been set aside. So they are on their way behind bars. But with hindsight maybe you could just paint a picture for people who weren’t around at the time, and tell us exactly what went on.
COSTA QUALLY: Well, LeisureNet went through a huge expansion programme, both in South Africa and overseas, swallowed up huge amounts of capital and got to the stage where they just ran out of cash to meet all their commitments. They weren’t able to organise additional finance when they wanted to, and that resulted in them going into liquidation.
But my understanding of the four charges against Mitchell and Gardiner – that relates to a specific transaction where LeisureNet acquired interests in offshore operations that were held by a company called Delmore, in which both Mitchell and Gardiner had an interest. And the basis of the fraud charge – my understanding is that they failed to declare their interest in that company to the board when they were considering the acquisition. And, although they’ve repaid the funds that they got from it to the liquidators, they’ve been found guilty of fraud. But that in itself had nothing to do with the liquidation of LeisureNet at all.
ALEC HOGG: And there were a lot of investors who were upset about it. Do you remember Iqbal Survé…
COSTA QUALLY: Of Sekunjalo, one of the claims against us. That was withdrawn, oh, probably 2005 I think.
ALEC HOGG: Are there many lessons that we can take from all of this?
COSTA QUALLY: No. The unfortunate reality is when a company goes into liquidation, and particularly if it is a high-profile listed company and people lose money, obviously people want to know why. And if there is a basis that they can recover it from, they will go that route. And unfortunately one of the first questions that people ask is: “Where were the auditors?” Certainly our position on LeisureNet is we’ve always maintained that we were not negligent in any way, or party to any misrepresentation, we complied fully with our duties as auditors. But it depends on who is making the claim and whether they feel they might be successful.
ALEC HOGG: I guess everybody wants to blame somebody, or find somebody to blame. Again with hindsight, looking back, was it something that you would never have been able to find? Was there collusion or was the collusion at such a degree that it was impossible to actually penetrate that veil?
COSTA QUALLY: Which is this – in relation to the Delmore…?
ALEC HOGG: Yes.
COSTA QUALLY: In the scheme of things, the amount that they were paid was about R12m, which is not a particularly large item of expenditure in relation to the acquisition. It was all part of their expansion in Europe, and they were spending many, many millions. So even with the benefit of hindsight, if there is deliberate concealment of facts it’s very, very difficult for auditors to pick that up.
ALEC HOGG: Costa Qually is the former head of reputation and risk at Deloitte.
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