It is a case of eyes wide shut if potential profits beckon
The optimism around Cyril Ramaphosa’s election has distracted attention from yet another dramatic corporate failure, that of the Resilient Group.
Since January 1 more than R143bn has been wiped off the market capitalisation of the four companies that make up the group. That is R143bn of largely South African investors’ savings. Combine it with the loss of R229bn from Steinhoff, and savers have lost a staggering R372bn from fraud alone.
I followed the saga closely after reading a leaked report by a hedge fund manager, which exposed a tale of potential corruption, market price manipulation, insider trading and a litany of other woes.
Ignoring the noise, I delved into the companies’ financials. I did not need the report to see that Resilient Group was a wolf in sheep’s clothing.
Presented as a listed property group, most of its profits came from active trading of its own shares between group companies. Handsome dividends paid to lure asset managers came from capital raises on the JSE and not from operating profits.
Off-balance-sheet vehicles were lent money on a nonrecourse basis to buy more shares in Resilient Group and borrow money from banks to — you guessed it — buy more shares in Resilient Group. Inflated valuations, significant cross holdings and the perception of trading volume led the JSE to include both Resilient and sister company Fortress in its prestigious top 40 index with no questions asked.
I went a step further. I phoned around the listed property industry, only to discover that the story was widely known. However, I was repeatedly told that CEO Des de Beer was a “dangerous” man. I even had a meeting with one of the asset managers who actively invested in the Resilient shares. He gave me a long thesis on the quality of the malls the Resilient Group owned, how clever it has been and how De Beer is a man of utmost integrity and he denied all the allegations surfacing in the public arena.
Yet whereas Steinhoff was a well-obfuscated fraud, Resilient Group was none of that. All the information was in the public domain. You did not need a private investigator or a conspiracy theory to see it.
This really does bring into question the role of asset managers and auditors.
The listed property sector of the JSE is not huge in terms of the number of counters. Consequently, Resilient Group comprised more than 40% of the market capitalisation of the sector. If you specialise in managing property, you would be under pressure to include Resilient Group shares in your portfolio or suffer “underperformance” relative to your peers as the shares kept rising and rising while the competition languished. Hence, I believe that a lot of information was ignored by asset managers in their chase for returns.
At the same time, I am not a fan of what we have seen in the past six months on the JSE: analysts uncovering fraud and, instead of reporting it to the relevant regulators, first profiting from it before releasing the information. That is not what I would regard as ethical business practice.
I have no problem with shorting. If you believe that a share price will fall because the company has weak management or no strategy, by all means short the share. However, when you discover fraud your obligations are different. Hence neither Viceroy nor the hedge funds that profited have my voice of support when it comes to Steinhoff and Resilient Group.
I DID NOT NEED THE REPORT TO SEE THAT RESILIENT GROUP WAS A WOLF IN SHEEP’S CLOTHING