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When R2.7bn is peanuts

Former Steinhoff auditors and insurers agree to pay €156m to settle legal claims.
The announcement states, and later reiterates, that the settlement ‘does not constitute an admission of liability’. Image: Dwayne Senior, Bloomberg

For their failure to spot years of accounting irregularities at Steinhoff, Deloitte Accountants of the Netherlands and Deloitte & Touche South Africa – along with insurance companies covering directors and management against claims for their failings – have agreed to pay more than R2.7 billion to settle legal challenges from shareholders.

It sounds like a lot of money, but it isn’t.

It’s peanuts compared to the financial losses suffered by shareholders and other stakeholders who relied on the auditors, directors and other company officers to do their (high-paying) jobs properly.

When Steinhoff admitted in December 2017 that its financial records were wrong and that profits had been overstated by billions for several years, the share price dropped like a stone.

Read:

The crash wiped as much as R324 billion off the group’s market capitalisation, depending on where one starts when doing the calculations.

One starting point could be the beginning of 2016, when the share price hit a high of nearly R100 and market capitalisation was R366 billion, arguing that the share only reached R100 because investors accepted the financial statements as presented by directors and confirmed by the auditors.

When the share price fell to R1 at the end of 2017, the whole group was worth less than R42 billion.

Another starting point would be just before the announcement of the accounting problems in 2017, when the share price had already dropped to R57 after a few analysts had started to ask difficult questions. By then, Steinhoff’s total value has decreased to R239 billion – and would plunge by another R198 billion by the end of the year. (The market capitalisation has been calculated based on the number of issued shares at different times according to the annual reports).

Keeping things in perspective

Whether the inflated profit figures resulted in shareholders losing R324 billion or ‘only’ R198 billion is irrelevant when comparing their huge losses with the settlement of R2.7 billion paid by or on behalf of the auditors, directors and other managers who were trusted by investors.

It is interesting to note that Steinhoff’s announcement pointedly states that none of the managers, directors or auditors admit to any wrongdoing.

“The settlement does not constitute an admission of liability by any member of the Steinhoff group, or its directors, officers or employees,” according to the formal announcement published on the JSE Sens service.

In terms of the settlement, Deloitte also does not “in any way admit liability for the losses incurred by Steinhoff and its stakeholders as a result of the accounting irregularities at Steinhoff”.

The announcement states that Steinhoff has reached an agreement to settle claims with certain insurance companies underwriting Steinhoff’s Directors and Officers insurance policy and certain former directors and officers who have worked for or been associated with a Steinhoff Group company.

Read: Steinhoff insurers agree to pay $93m for legal claims (Mar 23)

The insurance companies will pay up to €78.1 million (R1.375 billion at the current exchange rate) in terms of the insurance policies “in exchange for certain waivers and releases”.

Companies take out such policies on behalf of senior employees to remove the risk of legal action for mistakes, sometimes negligence, should things go wrong.

Settlement erosion

However, shareholders who instituted legal action to claim damages won’t see the full €78.1 million – only €55.5 million will be available for distribution. The rest goes towards costs.

The settlement with the insurance companies includes most of the directors at the time, including Christo Wiese, Claas Daun, Bruno Steinhoff, Heather Sonn and Jannie Mouton.

However, it excludes others.

Steinhoff specifically mentions “for the avoidance of doubt” that the settlement does not include Markus Jooste, Ben la Grange, Stéhan Grobler and Siegmar Schmidt.

Read: Steinhoff: First criminal charges loom (Mar 4)

The announcement further states that all Steinhoff group companies maintain the right to institute or continue claims against former directors and employees, listing:

  1. Certain other former directors and officers (Jooste, La Grange, Grobler and Schmidt) for their alleged involvement in the alleged accounting irregularities;
  2. Certain legal entities and other individuals who are alleged to have been recipients of payments by Steinhoff Group companies made in the context of the alleged accounting irregularities without legal cause, justification or due consideration; and
  3. Certain former directors and officers who are alleged to have been recipients of payments, in the context of the alleged accounting irregularities, made by Steinhoff Group companies or by third parties which allowed such former directors and officers to gain a profit or advantage to which they were not legally entitled under the terms of their directorship (including any secret profits).

Deloitte agreed to settle all claims against it for an amount of up to €77.94 million (R1.37 billion), as well as a contribution to claimants’ costs and some other costs to the tune of €7.6 million.

Negotiations have been ongoing with six different groups of claimants. The settlement offer from the insurance companies and Deloitte will become effective if five of the six groups accept it.

The announcement states that online claim forms have been loaded on the Steinhoff Settlement website, which has been specially created for the settlement procedure.

The website says shareholders may be eligible for compensation if they:

  • Held or purchased shares in Steinhoff International Holdings NV and/or Steinhoff International Holdings Pty Ltd at any time in the period from March 2, 2009 up to December 5, 2017, and continued to hold such shares until (at least) December 5, 2017 close of business; or
  • Bought shares before March 2, 2009 and still held those shares on December 5, 2017.

The calculation of the compensation is based on the date Steinhoff shares were purchased (and sold).

The announcement says that Steinhoff wishes to finally resolve as many claims as possible that arise from its legacy accounting issues announced in December 2017.

“It is essential for the future of the Steinhoff group that these claims are settled,” according to the documents, which repeat that the “settlement does not constitute an admission of liability by any member of the Steinhoff group, or its directors, officers or employees”.

Critics might disagree with the last point.

Aren’t company directors (and auditors) the very people – the only people – responsible for ensuring governance and financial compliance to ensure that investors’ savings are protected?

Considering the damage, is the payment of R2.7 billion without admitting wrongdoing fair?

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The whole of the Steinhoff-type of incidents show that most advisors have no cooking clue of understanding complicated companies interwoven together in such ways that nobody understands the value of it.
The same applies for cryptocurrencies.

This and EOH is next GameStop.

Moral high ground aside. This goes to 10 rand when when settlement is reached. Pepco is the real jewel.

However, any snags in the next 12 months and this goes to zero. Simply as. Don’t see how stakeholders can let this fail. The system is broken but let it work for you.

SA and the world, except for China, seems to have entered an age of “blamelessness” which prevailed in the political sphere where corruption could be hidden behind committees and being quietly shifted from office but now it seems to be a way of life with arrogance of people like Moyane telling lawyers to “shut up” and by inference telling the Deputy Chief Justice to “shut up” as well.

In China, he would have been history by now.

Just hope SARS keeps an eye on these payments as they can not be considered Tax Deductible.

End of comments.

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