National Post (National Edition)
Katanga pays $28.5M in OSC case
Failed to disclose risks of doing business in DRC
• Katanga Mining Ltd. , a subsidiary of Anglo-swiss commodities and mining conglomerate Glencore PLC, has paid $28.5 million to settle allegations that it issued materially misleading financial information and that it failed to adequately disclose the risks of doing business with associates of an Israeli businessman in the Democratic Republic of Congo.
Entities associated with Dan Gertler — an Israeli billionaire sanctioned by the U.S. government in December of 2017 in a sweep targeting corruption and human rights abuses that focused on his “close friendship” with DRC President Joseph Kabila — held at least 11 per cent of Katanga’s shares until February of 2017, according to a settlement approved on Tuesday by the Ontario Securities Commission.
In addition, the settlement agreement says Katanga, whose shares are traded on the Toronto Stock Exchange, “relied upon and paid the Gertler Associates to maintain relations with the DRC government and for a variety of other services which required interactions with DRC government officials to represent Katanga’s interests.”
Though Katanga bought out Gertler’s interest and took steps to terminate the business relationships in 2017, the firm “did not properly consider the disclosure it was required to provide in connection with its ongoing engagement of the Gertler Associates and the related risks,” the settlement states.
What the firm told shareholders in disclosure documents filed between 2012 and 2016 did not adequately describe the heightened risks associated with an environment where there was an “elevated risk of public sector corruption,” nor that “the risk that a cessation or deterioration in Katanga’s business relationship with the Gertler Associates could have an adverse impact on Katanga’s business,” Carlo Rossi, senior litigation counsel at the OSC, told a threemember panel of commissioners at a hearing Tuesday morning before they approved the settlement.
As part of the settlement, Katanga agreed to submit to and pay for a review of its practice and procedures by an independent consultant agreed to by staff of the commission.
The OSC settlement, which also resolved separate allegations against seven current and former executives and directors of Katanga, netted combined payments of $34.4 million, and an additional $1.85 million to cover the regulator’s costs.
The individuals, including Katanga’s CEO Johnny Blizzard, settled with Canada’s largest capital markets regulator on a range of breaches of securities laws governing financial statements and disclosure at various points between 2012 and 2017.
Blizzard, who will relinquish the CEO job within 30 days and will be banned from becoming an officer or director of a reporting issuer in Ontario for two years with limited exceptions as part of the settlement, admitted he “authorized, permitted or acquiesced in Katanga making statements that were misleading in a material respect” in financial statements and other documents between Jan. 1, 2015 and March 31, 2017.
The settlement allows him to continue as director of operations for 90 days after he resigns as CEO subject to a number of specific restrictions.
The other individuals who were part of Tuesday’s settlement are a former Katanga CEO and two former chief financial officers, as well as three directors who were also senior executives at Glencore, the world’s thirdlargest copper miner.
“The individual respondents engaged in conduct that undermined Katanga’s corporate governance, internal controls and culture of compliance,” the OSC settlement says.
“This ‘tone from the top’ contributed to a culture in which Katanga staff failed to adhere to documented policies and overrode controls.”
The executives, former executives, and directors agreed to pay financial penalties ranging from $350,000 to $2.45 million, with the highest amount to be paid by Glencore’s former head of copper trading and marketing, Aristotelis Mistakidis, a key long-standing lieutenant of Glencore CEO Ivan Glasenberg.
Mistakidis was a director of Katanga, but he stepped down from the majoritycontrolled subsidiary’s board a little over a year ago along with two fellow Glencore executives, Liam Gallagher and Tim Henderson — who also settled with the OSC Tuesday — after an internal probe prompted by the OSC’S investigation into accounting unearthed “material weaknesses” in Katanga’s financial controls.
The internal probe by Katanga’s independent directors, triggered by the OSC investigation, resulted in the company restating consolidated financial statements for fiscal 2015 and 2016, in addition to the management discussion and analysis for the quarters ending March 31 of 2016 and 2017.
Rossi, the OSC lawyer, said Mistakidis was the highest-ranking Glencore executive on Katanga’s board and that the other two directors reported to him.
In the settlement agreement, Mistakidis admitted he “authorized, permitted or acquiesced” in Katanga making statements that were misleading in a material respect, including with regard to copper cathode “misstatements” in annual financial statements in 2014 and 2015. Under the terms of his settlement, he is prohibited from becoming or acting as a director or officer of any reporting issuer for four years.
It was revealed earlier this month that Mistakidis would leave Glencore by year’s end.
In a statement Tuesday, Glencore said the firm is “disappointed by the conduct that has led to today’s settlement.”
The firm, which owns most of Katanga’s shares and was essentially its only customer, has taken “appropriate remedial actions in response to this conduct,” the statement said.
In addition, Glencore is “working with Katanga to implement the various changes to improve its reporting and control functions and to address the cultural failures that led to this conduct.”
The OSC is not the only regulator to take an interest in Glencore’s DRC operations. In July, Glencore disclosed a subsidiary had been subpoenaed by the U.S. Department of Justice to produce documents dating back to 2007 in connection with business in Nigeria, Congo and Venezuela, with respect to compliance with rules governing foreign corruption and money laundering.