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Millions here, millions there as Steinhoff saga goes other-worldly

22 March 2024 Gareth Stokes

The big financial services story from this week started with the 19 March 2024 announcement by South Africa’s Financial Sector Conduct Authority (FSCA) of a R475 million administrative penalty against Marcus Jooste for “making or publishing false or misleading or deceptive statements” relating to Steinhoff International Holdings Ltd (Steinhoff) and Steinhoff International Holdings NV (Steinhoff International), and ended two days later, with news that Jooste had taken his life.

Money at the heart of conflict

As this writer scanned the 27-page ‘signed order’ he could not shake the oft-repeated common expression that goes ‘money is the root of all evil’. In fact, he could think of no better phrase to describe the multi-year deception that played out at the one-time-darling of the Johannesburg Stock Exchange (JSE) and impacted broad swathes of the South African investment community, including members of the Government Employee Pension Fund. The sums involved are jaw-dropping, even when dividing by five to approximate a US-dollar or Euro equivalent. 

Per paragraph 27 of the FSCA order, Steinhoff’s market capitalisation plummeted by R220.4 billion between 1 December 2017 and 29 December 2017. Paragraph 33 contains many more zeros, documenting that Steinhoff International paid cash or benefits to Jooste totalling more than R700 million over the period 2014-2017 including R89 million in the 2014 year, and R143 million; R175 million; and R242 million over the following three years. This remuneration was paid ex Steinhoff International; the firm was dual-listed on the JSE and in Frankfurt. 

The FSCA argues that Jooste’s deception around the financial performance and prospects for the business “may have been motivated by the prospect of higher levels of income”. Debating the Steinhoff-related crime and punishment seems moot given recent developments; but regulated financial institutions and the executives appointed to steer them can learn valuable lessons from the sombre sequence of events. The 27-page order also gives as thorough and unemotional an account of what went down at Steinhoff as you will find. 

False, misleading or deceptive statements

The administrative penalty was levied for contraventions of section 81(1)(a) and (b) of the Financial Markets Act (FMA) during the financial years 2014-2016 and over the first half of 2017. 

As the FSCA explains: Section 81(1)(a) of the FMA prohibits a person from, directly or indirectly, making or publishing any false or misleading or deceptive statement, promise or forecast in respect of any material fact regarding the past or future performance of a company which has listed securities on a regulated market and which the person knows, or ought reasonably to know, at the time and in light of the circumstances in which it is published, is false, misleading or deceptive. 

This type of regulation is not unique to South Africa, as Pretoria-born billionaire Elon Musk can attest to. Musk was hauled over the coals and fined by the US Securities and Exchange Commission (SEC) in September 2018 for misleading comments made on the then-Twitter news platform. He landed in hot water for a tweet made on 7 August of that year alleging that he could take the electric vehicle (EV) manufacturer, Tesla (NASDAQ: TSLA), private at USD420 per share, and that he had secured funding for the transaction. 

The SEC held that Musk’s tweet was misleading and had contributed to a 6% surge in Tesla’s share price, causing significant market disruption. Musk and Tesla are not the topic of this newsletter, so aside from a quick snipe about Tesla’s share price diving and soaring by 5% or higher on many, many trading days, this writer will abandon the digression. Returning to the matter at hand, the FSCA noted that section 81(1)(b) of the FMA also “prohibits such a publication if, for the reason of the omission of a material fact, the statement, promise or forecast is rendered false, misleading or deceptive”. 

Financial statement chicanery

The order documents many such transgressions in Steinhoff’s 2014-2017 Audited Group Annual Financial Statements and Integrated Reports, and clearly lists the discrepancies between reported numbers and actual, restated numbers. Furthermore, the FSCA held that “Jooste knew or ought reasonably to have known [that the numbers he signed off on] were false, misleading or deceptive” because he “had created or caused transactions to be created which had no economic substance”. Misstatements of one of Steinhoff’s subsidiaries illustrate the extent of the deception. 

Again, per the FSCA order, “Jooste directly and / or indirectly published in the Steinhoff International Half-Year Report for 2017 that Mattress Firm Holding Corp in the United States had an operating profit of EUR21 million when in fact it had an operating loss of EUR53.64 million”. The regulator argues that Jooste “knew or ought reasonably to have known that the profit could only have been reported because of contribution transactions of EUR80 million that had no economic substance, [and] that formed part of the published fact”. PS, the operating profit in question was conjured up from a contribution from a group company, which contribution never existed! 

How much of a deterrent is exactly right?

In determining an appropriate penalty, the FSCA lean on section 167(1)(a) of the Financial Sector Act, read with section 167(2)(a)(i). It considered both general and specific deterrence, with the former defined as “using the penalised contravener as an example to all potential contraveners that the conduct results in undesirable penalties”; and the latter as “penalising the individual contravener for their conduct to keep the individual from future similar conduct”. 

Events have since overtaken both the general and specific deterrence considerations, though it must be worth commenting that Jooste’s financial and personal circumstances were dramatically different at the time the order was handed down compared to five-to-seven years previously. 

As reported by Corruption Watch, the South African Reserve Bank (SARB) seized assets worth up to R1.4 billion from Steinhoff and the Jooste family trust in 2022. They also noted that the JSE had fined Jooste R15 million for “violations against its listing rulings and for falsifying financial statements” and that he was barred from holding office in listed companies for 20-years. All moot now, dear reader, though the various administrative penalties and asset forfeiture rulings will likely become entangled in the winding up of Jooste’s complex estate. 

Is money the root of all evil?

Money fuels corruption and greed, with many taking a flexible approach to ethics and morality in their pursuit of personal wealth. It can further be argued that financial incentives are central to the conflicts of interest (COI) that plague many modern day commercial transactions, not least of which in the financial services sector. Money and wealth accumulation are also central to the philosophical debate around inequality; the sums mentioned in this article coming across as rather obscene in a country like South Africa. And the size of the FSCA’s administrative penalty should, no doubt, be assessed in this context. 

It may be easy to offer greed as the basis for the Steinhoff saga, but to claim that ‘money is the root of all evil’ is an oversimplification. “While money can be a factor in promoting negative behaviours and outcomes, it is not inherently evil; its impact depends on how it is acquired, distributed and used by individuals and societies,” notes Chat GPT, when prompted. The generative artificial intelligence argues that in the right hands, money can become a force for good that can be used to improve lives, foster economic growth and support other positive initiatives. 

This writer’s parting thoughts: Life is short; when you cross over from this mortal coil to the next, you will have to leave your worldly spoils behind. 

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Twitter: @stokesmedia

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