A scheme supposedly designed to rescue 33 000 investors, mostly pensioners, from liquidation has paid off handsomely for some of the very people who were responsible for their misery. Such is the distasteful situation at Nova Property Group, a public company that now owns a large portfolio of commercial properties that were originally sold to investors by Sharemax, a failed property syndication promoter.
Four directors – Connie Myburgh, Dominique Haese, Rudi Badenhorst, and Dirk Koekemoer – paid themselves R66 million in salaries and bonuses (including accrued bonuses) in four years since Nova came into being. But this pales in comparison to the potential value of shares they awarded themselves in Nova. A three-year court battle to access Nova’s shareholder register has finally revealed that these four directors own 87% of Nova in equal portions.
The latest financial statements show that Nova has a property portfolio valued at R3.9 billion and a net asset value of R1.2 billion. Thus the four directors own shares worth, on paper, more than R1 billion.
Haese and her co-directors paid virtually nothing for this enormous stake in Nova. The shares were effectively given to them for free.
What must be most galling to investors is that two of Nova directors were intimately involved with the failed Sharemax scheme. Nova’s CEO Haese, especially, played a pivotal role at Sharemax. She was its financial director, and, later, acting managing director, up until it entered business rescue in November 2011. Haese was appointed a director of Sharemax in December 2006. She thus had knowledge of, and responsibility for, the syndications that were sold to investors from that date onward. The other ex-Sharemax director is Koekemoer. Koekemoer was Sharemax’s director of property management. He was appointed a director of Sharemax in November 2008.
When I petitioned Nova to view its shareholder registers back in 2013, I expected to discover this type of self-enrichment. What I did not expect was the scale. Nor did I expect a three-year legal battle that led all the way to the Constitutional Court, before access to the registers was given. I owe a debt of gratitude to Moneyweb and editor Ryk van Niekerk for seeing this matter through to its conclusion at considerable expense.
Nova’s directors, who used company money to defend such a weak case, ought to be ashamed of themselves. That money would have been better spent paying off former Sharemax investors.
For her part, Haese denies ever keeping the shareholder details secret – except from Moneyweb, which she accuses of having an underhand agenda. However, the details of Nova directors’ shareholding has come as news to just about everyone, including economist Dawie Roodt, who was involved in the Sharemax rescue before he fell out with Haese and Myburgh.
Haese also makes much of the fact that R167 million has been paid to debenture holders – R86.6 million in the form of interest and R80 million return of capital. But this is just a small fraction of Nova’s outstanding debt to former Sharemax investors, which totals R2.5 billion. If Nova continues to return capital at the same rate it has done in the past four years, it would take 125 years to repay its debt.
Foxes gain control of the hen house
It is reasonable to ask how two former Sharemax directors, and two newcomers, managed to gain such iron-clad control of a structure designed to right former wrongs.
When Sharemax collapsed, investors were faced with the prospect of having their companies liquidated. They were prepared to vote in favour of just about any other alternative. Brokers also had strong incentive to advise clients to vote in favour of a rescue scheme – any rescue scheme. To liquidate would be to accept that the investment they recommended was a failure.
Myburgh and his co-directors took full advantage of this situation, knowing that a vote against any proposal would be unlikely.
Myburgh crafted the scheme at considerable expense (in just one week he billed 102 hours at R3 000 an hour). It gave investors two options: accept shares in Nova, or debentures issued by a Nova subsidiary. Unsurprisingly, most investors chose debentures, which offered the prospect of some income and an enforceable claim against Nova.
Only around 2 000 of the 33 000 investors elected to receive shares. In the process, they surrendered Sharemax-promoted debentures worth R94.7 million – which means they “paid” around 98c per share.
Another 2.2 billion B shares were issued for free to the seven founding shareholders, which includes the four Nova directors. This was done in accordance with a single paragraph tucked away below a formula in Appendix ARR8 of Myburgh’s 250-page rescue scheme document. The paragraph states that the founding shareholders would receive all the Nova shares that were available to the 31 000 investors who decided not to exercise the option to swap their debentures for shares.
Since only 2 000 investors elected the share option, and received 4.3% of Nova’s shares, the founding shareholders pocketed the balance of 95.7% without paying a cent.
Investors screwed. Twice.
Sharemax was started in 1999 by Willie Botha, a businessman with a shady past involvement in the failed Oude Molen property syndication scheme. Sharemax sold its first property to investors for R9.7 million. Over the next decade it would sell properties of ever-increasing value. It collapsed while raising funds for The Villa, an enormous, incomplete shopping centre east of Pretoria, that had an estimated syndication value of R3.5 billion. In total investors poured R4.6 billion into Sharemax-promoted syndications.
The concept of selling portions of properties to investors is a simple one. It ought to be a relatively low-risk investment. It is a concept that underpins some of the largest JSE-listed property companies on the JSE, such as Growthpoint, Redefine, Hyprop etc.
But right from the beginning there were warning signs that Sharemax’s business model was neither low-risk nor investor friendly. The scheme caught the eye of South Africa’s most celebrated financial journalist, Deon Basson. Basson, six-time Sanlam Financial Journalist of the Year, published many articles that were critical of Sharemax. For his efforts, he was sued in his personal capacity by Sharemax for alleged defamation. The case never reached court; Basson died of a sudden heart attack on September 13 2008. He was 53.
It may be a stretch to blame Basson’s untimely death on the actions of Sharemax’s directors. But they certainly made his life miserable in his final years. The directors also chose to play the man rather than the ball, by suing Basson in his personal capacity, and not the publications that carried his articles.
Basson’s illustrious career speaks for itself. He almost certainly had no malicious agenda. His only interest in the Sharemax matter was to prevent pensioners losing their savings.
Basson had two main concerns about Sharemax’s investment model. Firstly, the costs were unusually high. For every R100 invested in any Sharemax-promoted scheme, a minimum of R15 went to costs and commissions. The lion’s share of these exorbitant costs went to financial advisers – salespeople who were either too unqualified, or greedy (or both) to dismiss the investment as inappropriate for their clients.
Basson’s second concern was more serious. Unlike conventional property investments, the Sharemax-promoted syndications didn’t simply pay net rental income to investors. It seduced them with an income that was higher than the rental the underlying property was able to produce. Just how Sharemax offered this tantalising return remains a secret. However, the most obvious answer is that money from investors in newer, ever-larger syndications was used to subsidise investors in older ones. Such a structure would be a classic Ponzi scheme – an opinion held by Fais Ombud Noluntu Bam, who has ordered several Sharemax brokers to refund their clients.
In any event, the entire Sharemax structure collapsed, beginning with the drying up of cash at its Villa development in September 2010.
The investors’ pain was felt as soon as Sharemax-promoted syndications stopped paying unsustainable high income that had been promised to investors. At least one of the 31 000 investors paid the ultimate price. Villa investor Bohuslav Kautsky, 67, committed suicide outside Sharemax’s offices in Waterkloof Heights, Pretoria. Kautsky’s daughter told Moneyweb that he wanted the directors to know the devastation they had caused.
Many investors have asked what happens now that Nova’s enrichment has been exposed. It is encouraging that Nova’s auditors BDO have announced an “extensive investigation” into Nova’s affairs. Despite this I expect the Sharemax saga to end in the same way that countless other dubious schemes have: with investors losing everything and zero serious consequences for the perpetrators. Let this be a cautionary tale for anyone contemplating an unlisted investment that pays high commissions to its brokers.
Consider the words of Bam, who wrote in a 2013 determination against a Sharemax broker: “Let us look at the damning facts; in recent times South Africans have lost billions to failed investment schemes. In the Leaderguard scandal, involving forex investments, a staggering amount of about R380 million was lost. In the Blue Zone property syndication investors lost R450 million. Whilst an amount of about R300 million was lost in the Blue Pointer scheme, and so the list continues. Incidentally, none of the perpetrators have been prosecuted notwithstanding that this office reported some of these cases to the National Director of Public Prosecutions.”
Nova declines to respond
A draft version of this article was sent to Nova and the directors were offered an opportunity to respond. They declined the opportunity to respond to the content of the article. They did send the following letter:
Dear Mr Cobbett
Your draft article contains numerous untruths, inaccuracies and negative innuendoes and goes no further than rehashing Moneyweb’s incorrect reporting, already responded to by the Nova Group on RSG Radio on November 21 at 6pm (refer to transcript available on Moneyweb’s website) and in the question-and-answer documents exchanged between Moneyweb and the Nova Group, which answers provided (prior to Moneyweb’s publication) the correct information to Moneyweb, only to be reported on incorrectly and out of context by Moneyweb (refer to all three sets of Q&A documentation attached to the Moneyweb articles on Moneyweb’s website).
Responding, effectively to Moneyweb, through you, is simply not the correct forum. Consequently we have no further comment to your email or draft article.
Please ensure, should you elect to publish anything, that you include in such publication our above response, verbatim.
CEO: Nova Property Group