Unit trust fund turns out to be huge Ponzi scheme

The reg­u­la­tions gov­ern­ing col­lec­tive in­vest­ments are there to pro­tect you, the in­vestor. But they didn’t pro­tect in­vestors in the CMM Cash Man­age­ment Fund, the cu­ra­tors re­veal. Bruce Cameron re­ports

Weekend Argus (Saturday Edition) - - GOODPASTIMES -

A Ponzi scheme of mas­sive pro­por­tions, which is likely to see in­vestors lose hun­dreds of mil­lions of rands, has been re­vealed in the sec­ond re­port by the cu­ra­tors of Cor­po­rate Money Man­agers (CMM), which im­ploded ear­lier this year. CMM con­trolled a fixed-in­ter­est var­ied spe­cial­ist unit trust fund, the CMM Cash Man­age­ment Fund (CMF), which mas­quer­aded as a money mar­ket in­vest­ment.

Over R140 mil­lion of in­vestor cap­i­tal was used by CMM to pay in­ter­est to in­vestors. In other words, the in­vestors were be­ing paid re­tur ns from their own money, de­plet­ing their cap­i­tal.

Even­tu­ally, when CMM could no longer sus­tain the fraud, the whole struc­ture col­lapsed. Ma­jor with­drawals took place ahead of a suc­cess­ful Fi­nan­cial Ser­vices Board (FSB) ap­pli­ca­tion to the Pre­to­ria High Court in Fe­bru­ary to have the scheme placed un­der cu­ra­tor­ship.

In their sec­ond re­port to the High Court, the cu­ra­tors – Graeme Pol­son, Louis Stry­dom and Peter Stry­dom – state bluntly that there was reck­less trad­ing, theft and fraud in the re­moval of money from the unit trust port­fo­lio.

CMF, which holds both reg­u­lated and un­reg­u­lated in­vestor as­sets, has li­a­bil­i­ties (mainly to in­vestors) of R1.1 bil­lion. It is not clear how much of this is at risk, be­cause the full ex­tent of the theft and the full de­fault po­ten­tial of the prop­erty de­vel­op­ers to whom money was lent have yet to be es­tab­lished.

The 146-page re­port re­veals that at the cen­tre of the fraud­u­lent scheme, and a ma­jor ben­e­fi­ciary of the al­leged plun­der, was Jo­han Hen­drik Bakkes and his fam­ily.

The re­port is a damn­ing ex­posé of how Bakkes, who is yet to be crim­i­nally charged, set about plun­der­ing the sav­ings of in­vestors, many of whom are pen­sion­ers.

The re­port is also an ex­posé of how the reg­u­la­tory struc­tures that were set up to pre­vent this type of thiev­ery failed in­vestors.

In par­tic­u­lar, the re­port re­veals that the theft took place un­der the noses of the reg­u­la­tor; the cus­to­dian of the fund’s as­sets, Absa Cap­i­tal In­vestor Ser­vices; and the lo­cal rat­ing agency, Global Credit Rat­ings.

The in­vest­ment-grade credit rat­ings of the var­i­ous en­ti­ties and in­stru­ments en­abled Bakkes to per­suade peo­ple to in­vest in his Ponzi scheme.

Both Global Credit Rat­ings and Absa have de­nied any re­spon­si­bil­ity for the fi­asco, with Global Credit Rat­ings re­peat­edly threat­en­ing Per­sonal Fi­nance with le­gal action.

FOREN­SIC ANAL­Y­SIS

Cen­tral to the cu­ra­tors’ lat­est re­port is a re­port by foren­sic ac­coun­tant Jo­hannes van Rom­burgh, who has been in­volved in analysing a num­ber of high-pro­file frauds. In brief, the re­port re­veals:

Bakkes set up a string of com­pa­nies that were rated by Global Credit Rat­ings.

Th­ese com­pa­nies pro­vided a con­duit through which the money in­vested in CMF was os­ten­si­bly lent to prop­erty de­vel­op­ers for short­term fi­nance for the pe­riod be­tween buy­ers in the de­vel­op­ments sign­ing an agree­ment to pur­chase and the de­vel­op­ers re­ceiv­ing their money from banks af­ter buy­ers’ mort­gage bonds had been reg­is­tered.

The money that did find its way to prop­erty de­vel­op­ers was, in fact, lent for long-ter m prop­erty de­vel­op­ment in high-risk projects, in con­tra­ven­tion of the Col­lec­tive In­vest­ment Schemes Con­trol Act (Cisca). The Act re­quired that CMF hold mainly short-term, prop­erly credit-rated in­vest­ments.

Con­duit com­pa­nies – Miro, Allegro and Four Rivers – is­sued prom­is­sory notes that were handed to the CMF cus­to­di­ans in re­turn for the cash of or­di­nary in­vestors.

As the prop­erty de­vel­op­ers de­faulted on re­pay­ing both in­ter­est and cap­i­tal on their loans, fraud­u­lent prom­is­sory notes were is­sued by the Bakkes com­pa­nies. Th­ese notes were handed over to Absa in re­turn for more in­vestor money.

This fraud­u­lently with­drawn money was then chan­nelled through the var­i­ous com­pa­nies, each tak­ing fees for “ser­vices not ren­dered”, with the resid­ual money be­ing paid back to Absa as sup­posed in­ter­est on the prom­is­sory notes, cre­at­ing the false im­pres­sion that the prop­erty de­vel­op­ers were re­pay­ing loans and in­ter­est.

At one stage, CMM paid div­i­dends of R31 mil­lion to share­hold­ers out of non-ex­is­tent prof­its, os­ten­si­bly from this fraud­u­lent cash flow. The im­plo­sion of Cor­po­rate Money Man­agers (CMM) with its non-eq­uity unit trust fund is not the first time its owner, Jo­han Bakkes, has run into trou­ble.

Back in 2001, Stan­dard Bank’s cus­to­dian depart­ment ef­fec­tively closed down an­other Bakkes money mar­ket op­er­a­tion. Bakkes had a cosy lit­tle ar­range­ment with the mCubed unit trust man­age­ment com­pany (now Ayanda, fol­low­ing its sale to Fi­den­tia prior to its col­lapse in the midst of mis­ap­pro­pri­ated mil­lions).

At the time, Stan­dard Bank Fi­nan­cial Ad­vi­sory Ser­vices was the cus­to­dian/trus­tee of mCubed. Stan­dard Bank be­came in­creas­ingly con­cerned about mCubed not meet­ing its obli­ga­tions un­der the Unit Trust Con­trol Act (now the Col­lec­tive In­vest­ment Schemes Con­trol Act).

In­dus­try sources at the time said that, among other things, mCubed was sweep­ing free cash at night into an un­reg­is­tered money mar­ket port­fo­lio run by Bakkes. The mCubed funds would hold a pro­por­tion­ate share of the Bakkes port­fo­lio’s as­sets.

Stan­dard Bank called a halt to the prac­tice, which re­sulted in the clo­sure of Bakkes’s port­fo­lio. Of this, more than R8 mil­lion was paid in tax, re­sult­ing in the state, in ef­fect, un­know­ingly re­ceiv­ing stolen money. The div­i­dend was not paid as cash but was recorded as a loan to CMM share­hold­ers (ul­ti­mately the Bakkes fam­ily) on CMM’s books.

Van Rom­burgh says the “round-trip­ping” of the cash re­sulted in in­vestors be­ing paid in­ter­est out of their own cap­i­tal. The amount of in­vestor money round-tripped from Oc­to­ber 2007 to Fe­bru­ary 2009 to­talled R142 mil­lion. The to­tal value of the new prom­is­sory notes is­sued to cam­ou­flage the in­ter­est amounts un­paid by the prop­erty de­vel­op­ers for the fi­nan­cial years end­ing Fe­bru­ary 2008 and 2009 was R99 mil­lion.

In the process of com­mit­ting the fraud, ex­ten­sive use was made of the in­ter-lock­ing com­pa­nies, and there were even false bank de­posits to hide the par­lous state of af­fairs that fi­nally de­vel­oped.

On at least one oc­ca­sion, Absa ac­cepted a R15-mil­lion prom­is­sory note from Thun­der­struck, an­other com­pany con­trolled by Bakkes, which was not credit rated and was there­fore un­ac­cept­able in ter ms of Cisca.

Van Rom­burgh says the prom­is­sory note did not “com­ply with the def­i­ni­tion of com­mer­cial pa­per. It is un­rated and not in liq­uid form”. He also says the “com­mer­cial pa­per is­sued by Thun­der­struck was non­in­vestible in terms of the pro­vi­sions of Cisca”.

SUS­PECT NOTES

Charles Rus­son, the chief fi­nan­cial of­fi­cer of Absa Cap­i­tal, said in a state­ment to Per­sonal Fi­nance: “The trus­tee noted the in­clu­sion of the prom­is­sory notes, in ac­cor­dance with (and in ex­cess of) its du­ties un­der Cisca. It in­ter­ro­gated their in­clu­sion and then con­sulted the FSB. As a re­sult, the notes were re­moved without any ap­par­ent loss to in­vestors.”

Bert Chanetsa, the FSB deputy ex­ec­u­tive in charge of fi­nan­cial mar­kets, says that, be­cause CMF was not a money mar­ket fund, the fact that Thun­der­struck was not rated did not dis­qual­ify it from in­clu­sion, as Cisca per­mits 10 per­cent of a port­fo­lio to con­sist of un­listed in­stru­ments. The in­stru­ments are, how­ever, re­quired to be listed within 12 months af­ter ac­qui­si­tion, fail­ing which they are to be dis­posed of.

“It was our un­der­stand­ing that th­ese in­stru­ments were dis­posed of within 30 days of ac­qui­si­tion,” Chanetsa says.

But the money was never re­paid. The in­vestor money that Thun­der­struck re­ceived was used to buy a prop­erty that was rented by Thun­der­struck to CMM for the ex­traor­di­nary, ex­or­bi­tant amount of R229 825 a month from Au­gust 2008 to April 2009. Af­ter the col­lapse of CMM and since it has come un­der cu­ra­tor­ship, Bakkes has tried to lay

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