DTI finds bulk of investor's funds used for commission and payments to directors

A report commissioned by the former Minister of Trade and Industry Mandisi Mpahlwa clearly reveals the financial shenanigans of the GAREK scheme.

Essentially the GAREK scheme involved the formation of various companies which solicited investments from members of the public through the sale of unlisted shares. These shares were sold on the promise that they would increase substantially in value upon the listing of the entity in which the shares were sold on the Johannesburg Securities Exchange South Africa (JSE).

According to the report of the Department of Trade and Industry (DTI), a total of R74m was received from investors. Of this amount, R24m was paid to directors. A further R16m was paid to brokers.

The unlisted shares purchased by complainants were essentially in two connected entities namely Global Africa Resource and Energy Corporation Limited (GAREK) and Mwamko Africa Trade Resource Industrial and Commerce Corporation Limited (MATRIC).  

Intrinsically related to GAREK and MATRIC are several other unlisted companies amongst which we have Resourcefin Strategies International Limited (RSI); Independent Holdings Limited (IHL); Appropriate Structures in Emerging (ASEM); and Markets Limited and Holistic Resources Limited (HRL).  

The mandate of the inspectors of the DTI was to ascertain whether: “The business of any of the companies is being conducted with intent to defraud their creditors or the creditors of any other person or otherwise for a fraudulent or an unlawful purpose or in a manner oppressive or unfairly prejudicial or unjust or inequitable to any part of their members or that any of the companies were formed for any fraudulent or unlawful purpose....”

The investigation found inter alia that:

· Shares issued to related entities were done without any proceeds being received, whilst shares issued to public investors were sold at a substantial premium;

· In most instances no determinable value could be found in any underlying assets, to justify these inflated premiums. In fact some of the entities were in the process of being liquidated, thereby resulting in losses for the investors;

· Supposed profits realised by a particular company on the sale of the unlisted shares were transferred to a different company, within the GAREK scheme, to the one selling the assets;

· Assets were randomly transferred from one entity to the other without any substantive or legal basis for doing so and without any resolutions or agreements detailing such transfers;

· Upon transfer of assets from one company to the other, shareholders in the former company were issued with shares in the company to which such assets were transferred;

· Substantial amounts in commission were paid on shares purchased by the individual investors, thereby reducing the value of their investments;

· In addition to a failure in many instances to issue financial statements there have been various additional offences in term of the Companies Act, 1973 (Act No 61 of 1973) (the Companies Act). These included a ‘Failure by directors and the company secretary to adhere to corporate governance principles’ and a ‘failure to hold annual general meetings as contemplated in section 179 of the Companies Act’;

· Shares were issued to related companies, within the GAREK scheme, without proceeds being received for such shares. This amounted to financial assistance as envisaged in section 38 of the Companies Act;

The directors of the following companies within the GAREK scheme failed to issue financial statements in contravention of Section 286 of the Companies Act:

· RSI issued no financial statements for the years ending 30 September 2000; 2001; 2003 and 2004;

· MATRIC issued no financial statements for either the year ending 30 September 2003 or September 2004;

· GAREK issued no financial statements for the year ending 30 June 2005.

“Despite commitments to list on the JSE, which was the basis on which investors were invited to invest, the companies have still not listed,” the DTI investigation found.

“GAREK in particular has not applied for a listing despite making several representations to its shareholders through the company’s website and brokers that the company was going to list on a recognised exchange.

“‘A large portion of investor’s funds was not applied to acquire assets and/or investments as was represented to them, but for operational expenses, commission, and as payments to directors and other key individuals associated with the companies,” the DTI said in the report.

The total funds received by RSI, MATRIC, GAREK, ASEM and IHL amounted to R179,176,382.57 of which R74,046,875.99 was recorded as having been received from investors and an amount of R76,410,739.74 relating to inter- company deposits.

Total payments amounted to R178,897,640.88 of which R23,753,561.96 was paid to the directors, and R61,597,867.95 paid to other identifiable individuals and entities;

Of the bank accounts made available for inspection “only R299, 061.89 was left”.

A significant amount, in excess of R10 million, of investor’s money was used to fund commission in respect of [the same] shares purchased. Of this amount, Andre van der Merwe, an authorised financial services provider from Uvongo, Kwa-Zulu Natal, appears to have benefitted to the tune of almost R4, 5 million by way of commission for the sale of shares to the public.

The report concludes with the following recommendation: “It is further recommended by the inspectors that the Minister release the report for consideration of possible criminal prosecution of directors and officers of RSI, MATRIC and GAREK and possible recovery of investor’s funds by the National Prosecuting Authority.”