Heather Sonn, with the sort of enviable calm that has typified her 14 months as chair of retailer Steinhoff, casually told parliament this week that forensic investigators have gathered enough paper that, piled high, would reach to the moon and back.
It was one of those alarming tangible details that hints at the gravity of what is now officially SA’s largest corporate fraud, according to an anorexic 11-page summary of PwC’s 15,000-page forensic report.
In response to one parliamentarian, who suggested Sonn and Steinhoff CEO Louis du Preez looked "leisurely", Sonn replied: "Maybe we’re just tired. We take all of this very seriously ... We remain in a precarious position," she added.
But quite how precarious, investors have to guess — because last week Steinhoff published a sanitised and neutered "overview" of the forensic report released by PwC late on Friday.
Steinhoff’s summary ran to all of 11 pages — less than 1% of the full report — and somehow managed to avoid directly naming former CEO Markus Jooste as the mastermind of the largest corporate fraud to have hit SA.
Inevitably, that coyness didn’t last long. Just two days later, parliament instructed Steinhoff to reveal which individuals had been flagged as central to the fraud.
So, Du Preez rattled off the names: Jooste, former Steinhoff European CEO Siegmar Schmidt, former Steinhoff finance chief Dirk Schreiber, former finance director Ben la Grange, SA executive Stéhan Grobler, and three foreigners, Alan Evans, Jean-Noel Pasquier and Davide Romano.
No real surprises there. Most of that group had been outed in this publication as central to a plan to create hidden "off balance companies" that did secret deals with Steinhoff to make its accounts look far better than they were.
But even though the 11-page summary was flawed by its brevity, the PwC summary did do a number of important things.
First, and most obviously, it confirmed the worst-kept secret: there was a monstrous fraud which had the effect of "substantially inflating the profit and asset values of the Steinhoff Group over an extended period".
And, critically, it puts a value to the "fictitious and/or irregular transactions" — that is, the fraud: €6.5bn or R106bn.
As brokerage Vestact put it, the fake profits are "huge considering that the market cap was €25bn before the collapse [and] what makes it worse is that the €6.5bn is higher than the profits declared by the company over that period".
This is far larger than SA’s other epic frauds in recent years, even adjusting for inflation — including those involving Brett Kebble (R56bn in today’s money), Masterbond (R4.1bn), LeisureNet (R2.4bn), Fidentia (R2.2bn) or, more recently, VBS Mutual Bank (R2bn).
Most of Steinhoff’s fake revenue — €4.16bn— was channelled through a murky little-known company called Talgarth, while another €660.4m came from "trademark sales" to a company in Switzerland called GT Global Trademarks.
"The income from these transactions was in many instances not paid by the so-called independent entities to the Steinhoff Group, resulting in loans or other receivables owed to the Steinhoff Group that had little or no economic substance and, which, as such, were never settled," it said. In other words, fake transactions duping shareholders, which went undetected by the board and went on for a lot longer than people expected.
Christo Wiese, who was Steinhoff’s chair for 14 months until shortly after the scandal broke, told the FM this week that he still got key information from the abbreviated version. "What’s important is that it’s patently clear that this wasn’t a fraud that happened in the last few years. So it wasn’t just something that started in 2015 or so — it was a continuation of a fraud that’s more than a decade old," he says.
Another revelation directly affecting Wiese is that the PwC report did not find that the nonexecutive directors — a string of A-list names including Wiese, Steve Booysen, Sonn, Len Konar and Johan van Zyl — had any knowledge of this fraud. "You can imagine how important that is for me that they didn’t find any complicity," says Wiese.
But on the scant nature of the report, Wiese says he doesn’t understand the motivation for releasing so little information.
"I can’t see how doing that either helps the company or prevents further trouble for them. But perhaps it’s because, as they hinted, this is not the last section of the report that will be released," he says.
Andrew Cuffe, who was head of research at JPMorgan when the brokerage first flagged Steinhoff’s "aggressive accounting" in 2007, said this week that the report is "scant on details and quite defensive".
The carefully worded statement is laden with legal disclaimers and speaks of "accounting irregularities", which Cuffe says is really just a euphemism for fraud. "The end result is the same: shareholders get cheated," he says.
Craig Butters, a former analyst at Brait and Prudential, says the report is important as it also flags "misappropriation" — in other words, that money has disappeared.
But like Cuffe, he believes Steinhoff ought to have released more information. "I am concerned they hide a little bit too much behind legal privilege … shareholders have the right to know," he says.
Famously, back in December 2009, Butters gave Wiese a 40-page presentation of why he should avoid Steinhoff — about three years before Jooste first enticed Wiese into buying shares in his retailer. But Butters also warned Deloitte and Steinhoff’s bankers and they too ignored him.
Speaking about that this week, Wiese says: "Sure I was warned by Butters, but it was his view. At that time, I could give you 300 reports by other analysts who had a completely different opinion, and who said it was a buy," he says.
Clearly, few analysts foresaw the chilling depth of the con.
To paint a picture of what the group of individuals named by Du Preez this week actually did, here are a few examples.
Take Campion Capital, a private equity company registered in the small Swiss town of Martigny near the Valaisan Alps in June 2014. The PwC report says Campion now "appears to be either closely related to, and/or have strong indications of control by the Steinhoff Group or certain of its former employees and/or third parties or former management".
Campion’s registration documents listed three people as officials: Schmidt, Evans and Pasquier. All three had deep links to Steinhoff. Schmidt, a German accountant, was in charge of Steinhoff Europe from 1999 to 2013. After he left, he claimed he was "independent" of Steinhoff, even though leaked e-mails show he was conspiring with Jooste. In those e-mails he speaks of "our plans/forecasts" and reminds Jooste of the "balance sheets we pushed up in recent years".
Evans, 69, an Englishman, had a long history with Jooste. "Alan was one of Markus’s guys, everyone knew that," says one Steinhoff insider. "For each Rugby World Cup, every four years from 1999, Alan would come along as Markus’s guest."
In 2003, Poland Monthly published an exposé placing Evans at the centre of an offshore scam involving Poland’s largest insurance company, PZU, as well as Russia’s partly state-owned energy company, Gazprom. The magazine said Evans used techniques "both effective and traditional in money-laundering circles".
Pasquier, a French-born accountant, appears to have met Evans in March 2011 when he joined a consulting company in Geneva called Applegate FS.
While Campion was notionally "independent" of Steinhoff, the reality is that it seems to have been created purely to do hidden deals with Steinhoff that had the effect of making the retailer’s accounts look better than they were.
Though Campion claimed on its website that it "advises private investors and shareholders of medium and large-sized companies", it only ever did three deals — all with Steinhoff entities.
It bought JD Consumer Finance, it bought Pepkor’s financial services arm, Capfin, and it bought Steinhoff’s trademarks through a company called GT Branding for €488m.
What Steinhoff told nobody, however, was that it actually lent €810m to Campion to buy the trademarks — money it was never likely to get back.
One London-based hedge fund which saw through this charade was Portsea Asset Management. In June 2017 — six months before Steinhoff’s collapse — it published a damning report on Steinhoff titled "The empire builder has no clothes".
Said Portsea: "We can state with a high degree of certainty that Steinhoff’s loans and investments are not to Chinese suppliers (as it claimed), but at least Sf809m (Swiss francs) are loans to GT Branding. We believe the remainder are likely loans to the Campion entity that purchased JD Consumer Finance."
There were two problems with this. First, Campion wasn’t likely to repay Steinhoff for that loan, and second, Steinhoff included "interest repayments" on these loans in the revenue numbers it reported to investors.
Michael Jacks, an analyst for Arqaam Capital, published a report a few months later, in December 2017, echoing Portsea’s findings. "Campion Capital and related companies appear to be entities that are, in substance, controlled by Steinhoff and should potentially have been consolidated," said Jacks.
PwC now seems to agree. In the summary of its forensic report, it has flagged the wider Campion group as having been instrumental in €1.68bn of "fictitious and/or irregular transactions" that boosted Steinhoff’s income.
"The income from these transactions was in many instances not paid by the so-called independent entities to the Steinhoff Group, resulting in loans or other receivables owed to the Steinhoff Group that had little or no economic substance and which, as such, were never settled," it said.
To make much of it disappear, Steinhoff apparently "reclassified" these debts into, bizarrely enough, "cash and cash equivalents" as well as other assets, or "set off" this debt elsewhere in the accounts.
Either way, it created the impression those debts were settled. An immense lie.
When it came to the allegations against La Grange and Grobler, it appears that part of this relates to another scam entirely: the creation of fictitious "buying groups".
These "buying groups" would supposedly pay "rebates, bonuses and marketing contributions", which were used to lower Steinhoff’s cost-of-sales and ultimately make its profits look good.
Testifying in parliament in August 2018, La Grange said: "We were all led to believe there’s an external buying group – it would take volumes of product, and someone would negotiate with suppliers to give additional rebates."
But, he said, this buying group was "nonexistent" and these payments were "funded by loans from Steinhoff".
The FM understands that PwC investigators found an invoice for one of the buying groups signed by La Grange.
Insiders say the story is that La Grange was told by Jooste to provide an invoice for a specific amount, which he did. But La Grange wanted to see evidence of the cash flows — which he also got — and he then assumed all was fine. This suggests La Grange himself may also have been duped by Jooste. It turns out there was also a contract for that buying group, which may have been one of the many documents flagged by PwC as having been "created after the fact and backdated".
It is unclear how pivotal a role Grobler played in constructing these back-dated agreements. When contacted this week by the FM, Grobler said he is "prevented by confidentiality obligations from providing any comment".
It seems inevitable that the full report will soon emerge, which may contain further detail on whether Steinhoff’s directors acted quickly enough after they were first tipped off about a potential fraud.
Insiders say PwC has questioned whether these directors were sceptical enough, especially after Deloitte began raising issues in September 2017.
Deloitte also seems to have come off lightly, mainly because the fraud happened largely in Europe, where Steinhoff had a different auditor: a small German accounting firm with four offices, known as Commerzial Treuhand (CT). Deloitte relied on CT’s work in compiling the group’s accounts.
Nor has the full story been told when it comes to the economic loss from the fraud, which far exceeds the €6.4bn in "fictitious" deals flagged by this report.
For example, you have to add the €11bn that Steinhoff wrote off in total equity in June last year. And you have to add other impairments, like the €1.1bn write-off made to its €2.2bn European property portfolio in 2018.
As Du Preez told the MPs, the full financial impact of all the fraud will become clearer when the company releases its audited financial results on April 18.
Still, the PwC summary will be helpful for people who sold companies to Steinhoff after 2009, as they’ll be able to claim they were duped based on fictitious accounts.
Wiese, for one, has a R59bn claim on Steinhoff for the losses he incurred thanks to his decision to sell Pep to Steinhoff in 2014. Now, he’ll be able to claim he did so based on a false vision of what Steinhoff really was.
Not that any legal claim will recover what he’s lost. "What has become patently clear to me is that I can, at best, recover a fraction of my loss," he says.
Besides the money, Wiese says the scars of the ordeal will take far longer to heal than it will take to wrap up the litigation. "I’ve built my business by placing full trust and reliance on people, but you can’t do it any other way.
"There’s risk in trusting people, but there’s greater risk in not trusting people," he says.
The ordeal still rankles with Wiese. "I made a bad mistake in trusting Jooste, but it’s a mistake I made in very good company — hundreds of analysts, regulators and bankers made the same mistake," he says.
And yet Steinhoff’s share price in Germany rose 10% on Friday, as the abbreviated report was released. When the JSE opened on Monday, it rose 7% in SA too. This seems to suggest that for some investors, the damage of €6.4bn in "fictitious deals" isn’t as bad as they thought.
Wiese says there’s another reason the share might have gone up. "It could also be that Steinhoff’s litigation committee has suggested that now is the time to start settlement negotiations with everyone, so perhaps they see an end to this," he says.
If Steinhoff can get all its creditors in one room, lock the door and scratch out a compromise, it would be a big victory. It would remove one headache for a company already juggling €10bn in debt, which it owes to numerous financiers, including a group of hedge funds.
The debt is a big strain for a company that, for the three months to December, eked out a paltry 3% rise in revenue to €4.69bn. Its best assets were Pepkor Europe (revenue up 15% to €993m) and its 71% of the local JSE-listed Pepkor (where revenue grew 5% to €1.19bn).
In the minus column for those three months, Conforama’s revenue fell 3%, while its disastrous US purchase, Mattress Firm, had a 4% fall in sales.
PwC report should spark legal action
— What it means
But if Steinhoff survives in its current incarnation, rather than opting to sell off assets like Mattress Firm and its Australian entities, it’ll almost be a better scenario than anyone could have predicted, considering the mounting legal claims.
Sonn, at least, seems to believe that despite the immense structural damage outlined by PwC, the company may yet survive.
"If there is nothing worth fighting for, we should all resign our jobs … the fact that we’re still here should be telling," she says.
For Jooste, who is still seen in restaurants in Cape Town and Hermanus where he lives, the PwC report is yet another sign that the net is closing.
Late on Tuesday, parliament released a statement castigating Jooste for not co-operating with PwC. It was "appalled that he is still a free man, seemingly without shame or a care in the world".
One MP, the DA’s Timothy Brauteseth, said in parliament that the PwC report indicated that Steinhoff was a "sordid grubby business" and there should be consequences for those executives who lied to parliament.
Last September, Jooste testified in parliament that he "did not know of any accounting irregularities", and that the whole disaster was caused by a business rival who spread lies, creating the "perception" of irregularities.
The PwC report seems to conclusively show that this isn’t true.
Yunus Carrim, who chaired the parliamentary session, said everyone wants those who committed the fraud to pay for it. "They must land up in jail — that’s our main target."
That day is nearing.
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