It may be the most corrupt company you’ve never heard of. Yet this opaque firm lies at the heart of the Steinhoff schlenter, and is central to why former CEO Markus Jooste was charged criminally in Germany last week.
Its name is Talgarth Capital, and it was set up by a disgraced ex-banker known as George Alan Evans, 72 — a consigliere to Jooste, who was adept at creating the sort of web of trusts and structures you often see in labyrinthine frauds. It’s no surprise that Evans was also charged last week in Germany.
Talgarth’s remarkable role in this saga has gone almost unnoticed, which is surprising since PwC’s forensic investigators calculated that it was responsible for an eye-watering R72bn of the R110bn in “fictitious and irregular transactions” that were drip-fed into Steinhoff’s accounts between 2009 and 2017.
Quite how this was done has remained largely unexplained until now. But the charge sheet from the Oldenburg prosecutor’s office last week, implicating Jooste, Evans and two other former Steinhoff executives, provides part of this puzzle.
Prosecutors say Jooste and his accomplices created “bogus transactions” that inflated the value of Steinhoff’s profit, while “concealing losses” from its European subsidiaries — and Talgarth was central to this.
The FM has now obtained a string of “confidential” internal Steinhoff documents, revealing that the criminal charges in the German docket are precisely the same transactions flagged to Steinhoff’s board by those prosecutors in September 2015.
This is critical. Not only does it predate the German police’s raid on Steinhoff’s European headquarters in December 2015, it also shows how Steinhoff’s board was warned, more than two years before Jooste’s resignation amid “accounting irregularities”, of these “balance sheet falsifications”.
To be fair, it’s not as if Steinhoff’s board, led by Christo Wiese, did nothing.
After receiving a letter from the prosecutors on September 3 2015, saying they were investigating this potential fraud, Wiese’s board commissioned a number of firms to conduct an “independent and comprehensive investigation”.
Foremost was German law firm Flick Gocke Schaumburg (FGS), which reviewed Steinhoff's accounts under German law. But it also included Linklaters (to review capital markets disclosure), Noerr (to review compliance standards), Grant Thornton (to review International Financial Reporting Standards accounting matters) and Commerzial Treuhand (Steinhoff's European auditor.)
But what is remarkable is that the firms concluded there was little to worry about. It was a monumental miscalculation.
So what is Talgarth accused of doing?
Well, that September 2015 letter from the German prosecutors alleges Steinhoff’s European arms, Tau Enterprises and Omega Enterprises, “sold” special purpose companies “with no active business operations” to Talgarth for a suspiciously large amount, then recorded this as “income” in their accounts.
The prosecutors believed these were sham deals, since Talgarth wasn’t really an independent third party but was effectively “controlled” by the related parties of Jooste and Evans. These deals, they say, were artificially created not for any genuine economic purpose, but rather to boost Steinhoff’s profits and assets.
The prosecutors said this would mean Steinhoff’s accounts were incorrect and, with the retailer due to list on the Frankfurt Stock Exchange in December 2015, it could “lead to a deception about the actual market value of the group”.
That letter was sent to Steinhoff weeks before the listing, which casts a new light on Jooste’s decision not to travel to Germany for that Frankfurt debut, ostensibly because of “neck pain”.
Still, these firms told Wiese’s board not to worry.
In a 26-page memorandum by FGS, sent to Steinhoff in February 2016, the law firm said it was “nearly out of the question” that anything could have “remained hidden from Deloitte as the consolidated financial statements auditor”.
“The assumption of a sham transaction is out of the question already, because the companies received claims against Talgarth Capital, brand rights, and participations in real estate companies as compensation for their claims during the subsequent financial years,” it said.
And, FGS argued, Steinhoff received an unqualified audit report from Deloitte every year since its JSE listing in 1998, indicating that “this statutory offence is also out of the question”.
Others thought the same. On October 6 2017 — two months before Steinhoff’s crash — lawyer Bernd Groß wrote to Jooste, confirming he’d represent him in Germany.
“My assessment is that the allegations are incorrect, as there have not been incorrect balance sheets in the German companies. The allegations are mainly based on a misunderstanding of the facts, and incorrect statements from a former business partner,” he said.
Fatally wrong, again.
In the end, Deloitte was tipped off that something was rotten between Talgarth and Steinhoff, and refused to sign off the accounts in December 2017. It was Deloitte’s resolute, albeit late, refusal that ultimately popped this bubble.
In 2019, PwC vindicated this decision. Its forensic report found that of the €6.5bn (R110bn) in “fictitious and/or irregular transactions”, Talgarth accounted for the vast majority, €4.16bn (R72bn). In fact, between 2009 and 2013, Talgarth was pretty much the only outside vehicle used to cook Steinhoff’s books.
PwC said while firms such as Talgarth supposedly “bought” assets from Steinhoff, “the income from these transactions was in many instances not paid ... resulting in loans or other receivables owed to the Steinhoff Group that had little or no economic substance and which ... were never settled”.
To make these amounts vanish, PwC said, these “receivables” were then shifted around the group, “reclassified” as other assets, or supposedly “set off” against money owed elsewhere.
These transactions are frighteningly complex, as they’d have to be to dupe Steinhoff’s board that boasted three accounting PhDs. This is another reason the German prosecutors, who’d been investigating for more than seven years, were the first to charge Jooste rather than the South Africans, who began later.
Nonetheless, for those who still claim the revelations of “accounting irregularities” came out of nowhere in 2017, the German charge sheet reveals a different story.
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