Hudaco in legal battle to recoup R500m

Industrial firm sues financial advisers Cadiz and Bravura

JSE-listed industrial group Hudaco has taken legal action against its advisers on an empowerment transaction to recover hundreds of millions of rand it claims to have lost through intentional misrepresentation.

It is also claiming there has been negligence on the part of Bravura Equity Services and Cadiz Asset Management.

Hudaco said yesterday it aimed to recoup R180m in “alleged secret profits” and a further R312m paid to the South African Revenue Service (SARS) as a penalty.

“The Hudaco board firmly believes that Hudaco has been wronged, ultimately to the detriment of shareholders, and that … to seek redress is the right thing to do,” it said.

The dispute revolves around the financing of Hudaco’s 2007 black economic empowerment (BEE) transaction. Hudaco said it did not want BEE shareholders to have to borrow money on “onerous terms”, by being dependent on dividends from its listed entity Hudaco Trading, or an increase in the value of the shareholders’ shares.

At the time of the deal, Hudaco Trading bought most of the operating businesses from the old Hudaco group and funded the BEE purchase through the issue of a R2.2bn subordinated debenture held by a unit in the Morgan Stanley group.

The proceeds of the sale were placed in a ring-fenced subsidiary, Barbara Road Investments, part of the old Hudaco structure, and invested in preference shares in a company in the Cadiz group. The transaction adviser was Bravura Equity Services, which arranged the participation by Morgan Stanley and facilitated the preference share investment.

Hudaco claims to have lost money through “round-trip” transactions, which involves the selling of an asset to another company with an agreement that it would be bought back for about the same price. The company said it was advised that the transactions would stand up to SARS scrutiny and “round-tripping” should be avoided.

Hudaco said it was told that the money invested by Barbara Road Investments with Cadiz would be used to buy South African government bonds. But, to its “great surprise” SARS informed it in November 2012 it had uncovered a “highly elaborate web of arrangements that were established by Bravura-related entities, individuals related to Bravura Equity Services and its associates”.

Hudaco said the SARS investigations showed the Cadiz group had “immediately invested” the proceeds from the preference shares with one of the Bravura associates. “The funds were transferred through a number of local and international entities such that government bonds were ultimately purchased.

“However, these government bonds were given as out-and-out security to Morgan Stanley, which sold them on the same day that they acquired the debentures issued by Hudaco Trading. This effectively means that the funds flowed in a circular fashion and that no real external funding was introduced by any third party,” Hudaco said.

It had paid a R312m penalty under SARS’s pay-now-argue-later policy, Hudaco said.

Bravura rejected the allegations as “inaccurate, groundless and without merit. Legal advice is being sought in this regard and Bravura and its directors intend to contest any legal action brought against them. Bravura looks forward to clearing its name and reputation in court.”

Stellar Capital Partners, which holds 47% of Cadiz, said it would comment today.

“We think we are being caught in the cross-fire between Hudaco and Bravura,” Stellar CEO Charles Pettit said. With Marc Hasenfuss