The high life - Corporate Codes



FINANCE WEEK

26 May 2003

The high life

By Deon Basson

dbasson@

A COURT battle going back to 1995 – involving Corpcapital boss Jeff Liebesman and three other current directors – has been dredged up in the Witwatersrand Local Division of the Transvaal High Court. The case was settled in 1997 but kept confidential in terms of a secrecy clause. In court papers it’s alleged that Liebesman and partners – chairman at that time of W&A – used around R96m in company funds for personal expenses.

Alleged payments from various companies’ funds included loans to a private company under Liebesman’s control, improvements to a luxury home in Sandhurst, north of Johannesburg, the settlement of his brother’s personal debts, the purchase of three luxury cars for use by Liebesman and his wife, the acquisition of a private investment in a colliery and a bar mitzvah party for Liebesman’s son at the Sandton Sun.

The plaintiffs were five companies in Liebesman’s former FSI empire: FSI Corporate Services, Forward Corporation (previously known as W&A), FSI Corporation, Hunts and Hunts Manufacturing Company.

The defendants were Liebesman, his former colleague Neville Cohen, a private company under Liebesman’s control called Confor Investments One, auditing firm Kessel Feinstein and one of its partners, CK Herman.

Liebesman’s attorney was Benji Liebmann, now an executive director of Corpcapital. Senior counsel was Neil Lazarus, now also a Corpcapital executive director. Kessel Feinstein’s senior counsel was Wim Trengrove, now a non-executive director of Corpcapital.

Liebesman and his co-defendants vigorously denied detailed allegations listed in the court papers, saying that they had carried out their responsibilities “honestly and reasonably” at all times. Liebesman, Cohen and Confor retaliated with a counterclaim of up to R94m.

The case, after 18 months of an aggressive paper war between the parties, was suddenly and secretly settled out of court. A cryptic fax from Cape attorneys Sonnenberg & Galombik to Liebmann in March 1997 and equally cryptic notices by both parties are the only evidence in court files about the secret deal.

It has subsequently been suggested that Eric Ellerine, current chairman of Corpcapital, intervened to resolve the bitter dispute. He was apparently also involved in efforts to settle the Liebesman group’s debt problems with SA’s major banks.

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Ellerine strongly denies any direct and indirect involvement in settling any claims against Liebesman directly and indirectly linked to his tenure as executive chairman of W&A.

Ellerine at the time had already become involved in building a new future for Liebesman. Early in 1996, Finance Week (then F&T Weekly) reported that Liebesman was consulting to Motolink, a company in which Ellerine had a shareholding via Citizens Corporation and Global Capital.

In the same year, Corpgro (now Corpcapital) was formed, with Ellerine as a prominent shareholder and a director. It would probably be fair to expect that he had a moral obligation to disclose the nature of the litigation to the full Corpgro board and shareholders.

Confor payments

In the 1995 summons, the plaintiffs – the companies whose funds were allegedly misappropriated – alleged that Liebesman and Cohen facilitated R72,4m in loans from several companies in the FSI empire to Confor between 1989 and 1993. Expenses of R20,6m were also paid by several companies on behalf of Confor.

Confor was a private company controlled by other private companies (JNT Investments and JML Investments), which in turn were controlled by Liebesman and which had substantial debt obligations to their bankers.

The four companies that made the alleged payments are: FSI, W&A, Hunts and Corporate Services (see diagram). The plaintiffs allege that the payments were never authorised. And only about R7m was recovered.

Corporate Services alone was apparently responsible for a R29m loan. Some of the money, according to court papers, was used for a R100 000 deposit on a Maserati, shares in FS Group and FSI by broking firm Frankel Pollak Vinderine, legal fees from Edward Nathan Friedland, Diners Club accounts and expenses incurred at Sun City, among others.

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The pattern repeats itself for FSI, which allegedly made payments of R29,3m, W&A (R11,2m) and Hunts (R9,2m). The plaintiffs claimed that some of these payments breached Section 38 of the Companies Act because they were used to buy shares in the group. In terms of corporate law, a company may not, subject to certain exceptions, financially assist the purchase of its own shares.

The alleged loans were not always made directly. In some cases they were routed through other companies in the group, such as Corporate Services, FSI or FSI Group, before ending up at Confor.

In each case, the companies that made the loans ceded their claims against Confor to the company, which made the book entry on the debt. This meant that other group companies had to carry the debt on their books, though ultimately the company ceding the claims had to recover the debt.

The plaintiffs said that Liebesman and Cohen must have realised by July 1998 that Confor could not repay the loans. This gave rise to a phantom agreement between Confor and Corporate Services for Confor to provide certain services to the FSI group on behalf of Corporate Services.

In terms of this agreement, fictitious credits of R17,1m were, according to court papers, booked against Confor’s loan account between 1988 and 1993 to reduce its debt. These management fees, in violation of the Companies Act, were not disclosed by FSI or Corporate Services in their financial statements.

Liebesman’s and Cohen’s private companies issued redeemable preference shares to institutions to finance their interests in the group. The dividends on the preference shares had to be serviced by the dividend distributions by the listed companies in the group.

By 1990 group profits had fallen and the dividends were no longer able to service the preference dividends. Liebesman and Cohen, facing financial pressures, allegedly transferred substantial amounts from Corporate Services, FSI, W&A and Hunts to Confor to service the preference dividend.

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As a result, Confor’s debt had to be reduced in terms of the phantom agreement; but Confor did not provide any further management services to another company in the group until July 1990.

Liebesman and Cohen were also partners in Corporate Charter Services, which owned a Cessna Citation aircraft bought in 1988. The two and Confor allegedly devised a scheme to reduce Confor’s debt by creating false credits for fees payable by the group to use the aircraft. About R2,7m in fictitious entries was consequently made in favour of Confor.

The plaintiffs argued that, in terms of Section 424 of the Companies Act, Liebesman and Cohen were personally liable for Confor’s debt to Corporate Services, FSI, W&A and Hunts because of their reckless behaviour.

The Liebesman camp alleges that all the transactions were approved by the boards of the various companies.

The Sandhurst property

The use of company funds went even further, according to the plaintiffs. Liebesman’s wife Merlé allegedly owned a luxury home in Harrow Avenue, Sandhurst. Between 1989 and 1993 costly improvements were made and several antiques, art works and pieces of furniture were bought. Restoration and maintenance work was also carried out. Flowers were delivered regularly to the house.

Liebesman and Cohen were allegedly directly involved in Corporate Services paying R1,9m for the house, but say that at least R1,3m was for an “asset” of Corporate Services – namely “a study” for Liebesman and an “executive office situated at 53 Harrow Avenue”.

The Liebesman camp admitted that the money was paid but argued that it was done with the approval of Corporate Services’ board. They did not hide it, nor did they make false entries in the books.

Brian Liebesman’s debt

On 19 April 1993, Liebesman’s brother Brian owed First National Bank R121 699, Standard Bank R139 163, Absa R439 052, Nedbank R259 617 and other creditors R58 232, totalling around R1m.

In August that year, Liebesman and Cohen arranged for Corporate Services to pay Brian’s debts, using Corporate Services funds, via Confor. The plaintiffs claim that Liebesman and Cohen had no plan for Corporate Services to recover the amount. However, their response was that, again, Corporate Services had approved the settlement of Brian’s debts.

Expensive cars

Liebesman and Cohen also, according to court papers, bought expensive cars – other than “company cars” – for Liebesman and his wife using lease agreements paid by Corporate Services. These cars included a Rolls-Royce and a Mercedes-Benz 500SL and a Mercedes-Benz 560SEC, which apparently was for Merlé’s use. The total cost – funded by Corporate Services – was R720 159. The vehicles were sold or traded in in 1994 for a loss of just over R400 000, costing Corporate Services a loss of just over R1,1m.

Liebesman and his fellow defendants said again that while this was all largely correct, Corporate Services had again approved the expenses.

C&G International

And then there was the investment in a colliery. C&G International was a commodity company owned directly or indirectly by Confor and Ernest Leibowitz, Liebesman’s cousin. In 1989 or 1990, C&G acquired a substantial interest in Maggies’ Mines.

Maggies’ Mines had an overdraft with Nedbank. Confor provided surety for Maggies’ debt, which by March 1992 stood at R6m.

Liebesman and Cohen allegedly arranged for Teamcor to pay R6,6m to C&G and for W&A to pay R400 000. To justify the payments, a marketing agreement was signed between Teamcor and C&G, which the plaintiffs claim was never a “real” agreement.

Shortly after, Liebesman and Cohen allegedly decided to rather treat the payments as an investment. The facts surrounding the investment were allegedly never disclosed to the various boards. In 1994, C&G paid R1,35m in full settlement of any possible claim. W&A therefore suffered a loss of R5,65m.

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The Liebesman camp alleges that it has no knowledge of the loan with Nedbank. The marketing agreement was signed by Leibowitz (on behalf of C&G) and Cohen (on behalf of Teamcor). The money was only then paid to C&G. W&A paid R6,6m to Teamcor, which it in turn paid to C&G. The defendants denied any knowledge of the R5,65m loss.

Bar mitzvah party

And finally, a smaller expense funded by company funds was Liebesman’s son’s bar mitzvah in September 1994 at the Sandton Sun. The Liebesman team maintains that Corporate Services’ board approved the expense.

• The allegations against Kessel Feinstein and Herman, and their replies to them, are also wide-ranging and differ in part from the allegations against the Liebesman camp.

Banks and rights issues

TRENCOR group supported a R654m rights issue in the four listed companies in the FSI empire in 1993. The four companies in the controlling pyramid were: FS Group, FSI, Waicor and W&A. Trencor’s contribution to the rights issue was R294m. Trencor also shared joint control with the Liebesman consortium, but the specific control arrangements were vague.

A year later, Liebesman suddenly left the FSI companies. Shortly after that, F&T Weekly reported debt of more than R100m in private companies under Liebesman’s control, which had direct and indirect interests in FS Group. Confor Investments One was one of them.

In addition, the four listed companies had a combined debt of around R1bn. The banks again had to support a rights issue in 1995 and were involved in a comprehensive conversion of debt into share capital.

By the time the summons was issued against Liebesman and the others in 1995, Trencor was in control of the five plaintiff companies but the four major banks’ exposure was so massive that they had a special interest in the welfare of the group of companies.

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