It appears the only people who made money from the failed Highveld Syndication (HS) schemes were the directors and management of the HS companies, Bosman & Visser (B&V) and the brokers who sold the investments to investors.
Nic Georgiou, Orthotouch and Zephan also contributed more funds to repay investors than the former received following the HS companies being placed in business rescue in 2011, and the subsequent Scheme of Arrangement restructuring.
Furthermore, an investigation into all the property transactions related to Orthotouch and Zephan found no “proof of any misappropriation”.
These are the views Jacques du Toit, the business rescue practitioner (BRP) of Orthotouch and Zephan, expressed in the business rescue plans of the entities and communication with Moneyweb. Du Toit expressly stated that these views are based on the information that is available to him.
Orthotouch and Zephan were put into business rescue late last year. Du Toit recently published the business rescue plan, which offers the 18 700 investors who put R4.7 billion into the scheme two final settlement offers.
In response, the former HS directors and several brokers vehemently denied these claims and called for an investigation into the property transactions and the flow of investors’ funds between the various entities.
In response to Moneyweb’s questions, Du Toit said although the original HS investments did not form part of the business rescue process of Orthotouch, it appears as if the values of the properties marketed to investors were inflated.
“With the information at my disposal, the original investments were marketed to investors based at overstated projected values. If the HS companies were forced to sell the properties directly after the syndication process, investors would have received around 40% less as the actual market prices were much lower.
“I assume that the only people who made money in this investment process are the directors, management and brokers involved in the initial investment, namely B&V, HS companies and the management companies.
“If I were an investor, I would like to see B&V and the HS companies’ financial records to ascertain what happened with the approximate R3 billion that might be unaccounted for. This amount might be easily explained, but such information is not available to me.”
Du Toit emphasised that Zephan, a company owned by Georgiou, did not sell properties directly to the HS companies, but through B&V. B&V then inflated the purchase price from Zephan and sold it for 11% more to the HS companies, which in turn sold the properties to the HS companies at even higher valuations.
“Effectively between the B&V and the HS prospectuses, the monies raised from HS investors was approximately 40% more than the original purchase price,” he said.
Du Toit also said economic conditions did not improve after the global financial crisis in 2008 and 2009, and the subsequent downturn in the property market resulted in the HS companies running into financial difficulties in 2010.
In an email to Moneyweb, Du Toit also questioned whether brokers explained the risks of the increased selling prices between B&V and the HS companies and that the syndication valuations were based on projected or possible future values.
Payments to investors
Du Toit emphasised that investors received more than R2 billion interest and capital repayments. This consists of capital repayments of R882 million and interest payments of R1.2 billion.
Du Toit stated investors should take these payments into account when looking at the terms of the two Orthotouch settlement offers, as these historic payments represent substantial amounts relative to their original investments, especially for investors in HS15 to HS21. The table below summarises the interest investors received relative to their initial HS investments.
|Interest received by investors as a percentage of the original capital amount invested|
The business rescue plan offers investors two options for a final payout, which will be based on a “net investment amount”. This amount will be the original capital investment minus all interest received.
According to the rescue plans, investors will receive between 6.3% and 25% of their original capital if the plans are adopted. This will include the interest investors have received since 2011, and a final payment of 6.3c in the rand for the remaining capital.
According to Moneyweb’s calculations, investors could expect to receive final payouts of between 1.9c to 6.3c in the rand depending on the option they select.
Where is the money?
Du Toit also provides a reconciliation of money flows in a letter to investors to show what happened to the R4.7 billion investors put into the schemes.
The reconciliation appears in the table below.
The reconciliation shows that although the properties were syndicated to investors for R4.75 billion, the collective market value was only R2.6 billion. This, according to Du Toit, means investors overpaid for the properties to the tune of R2.1 billion.
The reconciliation also provides insights into the operational expenses of Orthotouch. This includes “running expenses” of an exact amount of R420 million, which related to legal, business rescue and other office expenses. The reconciliation also shows “trading losses” of R567 million. These losses are the net amount of all rental income received from the properties minus direct property-related expenses.
These running and operational expenses were not segmented. Du Toit said in response to Moneyweb questions that the auditors provided the amounts. These revenues and expenses are not audited amounts, as Zephan last published audited financial statements in 2009 and Orthotouch in 2015.
The reconciliation also shows Zephan contributed R1.4 billion to the benefit of investors, which includes the highly disputed R883 million short payment from B&V and an additional R500 million made after the implementation of the Scheme of Arrangement.
Moneyweb put Du Toit’s opinion to Ben van der Linde and Morkel Steyn (former directors of the HS companies), Rikus Myburgh (director of Picvest and sole shareholder of B&V) and a significant number of brokers who marketed the original HS investments.
Myburgh did not respond to the opportunity to comment.
Overvaluation of properties
Van der Linde and Steyn strongly denied Du Toit’s claims that investors overpaid for the properties by as much as 40%. “The valuations were based on head lease agreements to secure income and buyback guarantees to secure capital. All agreements were signed between the HS companies and Zephan. These agreements were the core of the marketing strategy and main reason investors took up the investment,” Van der Linde said.
Johan Stander, a broker and executive member of the Highveld Syndication Action Group (HSAG) who is pursuing the class action against Georgiou, said Du Toit’s assertion “is not only untrue, it is reckless”.
He said any claim of inflated valuations would imply fraud, as the valuations were based on the buyback and head lease agreements. “Mr Georgiou signed these agreements. The property valuations could only have been inflated if the assumptions in the buyback and lease agreements were inflated.”
Flow of funds
Stander submitted a document from Calculus Chartered Accountants which confirms the full amount of R2.3 billion was paid to Zephan and another document that shows communication between transfer attorney Eugene Kruger and Zephan, which also confirms the purchase prices were settled in full.
“This proves there was never a short payment of R883 million. In fact, Zephan has never proven this dispute, and it remains to this day only allegations.” Stander questioned why Du Toit did not meet with the legal teams of the claimants against Georgiou and the class action as part of the investigation. “If he did that, he would have received the information regarding the flow of funds.”
Who made money?
The former HS directors and several brokers also vehemently denied that they excessively benefitted from the failed schemes as alleged by Du Toit.
“First of all, the directors of the HS Companies never received any payment or salary from the HS Companies. They were obligated by Picvest to serve as directors for the HS Companies at no payment or lose their marketing jobs at Picvest. His statement is thus false,” Van der Linde said.
Johan Pretorius, a former broker, denied the commissions brokers received were excessive. “Advisors earned a once-off 6% commission, which was paid by Picvest. Investors did not pay the commission. Investors received a 100% allocation of their investment amount.”
Pretorius added that this 6% commission compared favourably with estate agent commissions of up to 7.5%, upfront commissions of up to 5% and ongoing fees of up to 1.5% a year related to investments in collective investment schemes.
Van der Linde and Steyn both supported an independent investigation. “Such an investigation should focus on the flow of cash from and between the bank accounts of the transfer attorney, HS companies, B&V and Zephan,” said Steyn.
Pretorius described Du Toit’s business rescue plans as more of a settlement offer than a rescue plan, “which is an abuse of the companies act and business rescue proceedings”.
“This offer, as with the BRP in 2011 and subsequent [Scheme of Arrangement], are manipulated to the benefit of Mr Georgiou. I believe a liquidation would result in a better return because of the powers a liquidator has in terms of the insolvency act, it is my opinion that this is a possible money-laundering scheme and the corporate veil needs to be lifted. If there was any misconduct and people are found guilty by a court of law on criminal charges, they can potentially forfeit not only the assets that investors paid for in cash but also their other assets.”
Van der Linde also said he does not support the offer from Orthotouch and encourages the investors to continue tenaciously in efforts to recoup their income and capital as promised by Orthotouch.