As clear as muddy water

FACE MURKY ALLEGATIONS This is the third in a series of articles detailing investor failings in ‘fallen angel’ stocks.

When listed companies have cross-holdings in other listed companies, the waters can get muddied. This is the case with the Resilient group of property companies (Nepi Rockcastle, Greenbay Properties, Fortress), which suffered a spectacular 60% share price collapse, from over R150 to R60 a share. Management is accused of share price manipulation in numerous analyst reports.

Interestingly, CEO Des de Beer faced fraud allegations at Pangbourne – a previous iteration of the Resilient group. It’s suggested De Beer and others in the group bought up properties from Pangbourne at below-market value and sold them at an inflated price.

All the Resilient group companies have faced a similar sell-off since the allegations surfaced, losing over R120 billion of value. Reports by 36One, Navigare Securities, Arqaam Capital, and Mergence Investment Managers, alleged premium valuations of Resilient group shares weren’t due to normal market activity, but share price manipulation. They allege share price inflation was made possible by a convoluted group structure, in which four companies each own stakes in one another and trade inter-group shares frequently.

Group company shares were also traded through its black economic empowerment trusts, which weren’t consolidated in the group’s financials. It’s suggested the Resilient share price was inflated to keep it in the Top 40 Index, so index-tracking funds would be forced buyers.

Resilient got former auditor-general Shauket Fakie to conduct an independent investigation. A similar tactic was employed during the Pangbourne years, with Werksmans producing a report few have seen. Fakie found no evidence of market manipulation, insider trading or misconduct.

However, Resilient conceded the independent review couldn’t access the full set of transaction records in Resilient’s JSE shares to identify potential insider trading or share price manipulation. It admitted Fakie didn’t have the power to compel all parties with relevant information to provide testimony or produce documents.

The Resilient companies’ share prices haven’t recovered since Fakie report.

In August the Public Investment Corporation, Old Mutual and Coronation Fund Managers, among others, wrote to the four Resilient companies’ boards, calling for a big-four accounting firm to probe share-price manipulation allegations. This request was denied.

Despite cleverly investing in central and eastern Europe 11 years ago, De Beer and Resilient have lost investors’ trust.

Resilient and associate companies are still under investigation by the Financial Services Conduct Authority. We await the outcome and hope the worst is over for shareholders. Meanwhile, we’ve begun moving capital into MAS Real Estate. It provides exposure to Eastern Europe, headed by great capital allocators.

Lee Kern is Cratos Capital assistant portfolio manager

These views are the author’s and can’t be construed as financial advice.