Inside the Tongaat schlenter
400 pages of court papers, surfacing now, spell out the mechanics of an epic R12bn fraud second only to Steinhoff
It’s been a momentous week for fallen sugar titan Tongaat Hulett.
On Tuesday, shareholders agreed — despite staunch opposition from some — to approve a R4bn rights issue that will probably see the opaque Zimbabwean company Magister emerge as its largest shareholder.
To remind people why it needed so much money, Tongaat last week said it had gone to court to reclaim R450m from former executives, including ex-CEO Peter Staude, for allegedly perpetrating an immense fraud on the company. Only, it actually lodged those claims 15 months ago — so it ended up as a ham-fisted attempt to shift the attention from its new investors (see page 6).
Then again, given how explosive those court papers are, it’s perhaps no wonder Tongaat kept its powder dry until now.
The FM has obtained 400 pages of court papers which provide unprecedented insight into how the 132-yearold sugar giant seems to have fallen prey to a fraud second in scope only to Steinhoff locally.
This goes far beyond the anaemic sevenpage summary of
PwC’s forensic report, released by Tongaat
CEO Gavin Hudson in
November 2019. And it details the mechanics behind a series of apparently epic lies that, in 2018 alone, saw assets overstated by
34%, profit by 239%. Its
“retained earnings” ended up R10.2bn less than Tongaat had said they were.
In the 319-page summons, Tongaat claims that, between 2015 and 2018, Staude, finance director Murray Munro and others were involved in “four categories of misconduct”.
The first allegedly involves “manipulation of sale agreements” to push revenue from land sales into a particular year to “inflate revenue”. And it wasn’t just once or twice: 18 land deals near Umhlanga in KwaZulu-Natal appear to have been backdated, with a combined value of R1.58bn. This includes a R9m land sale to the Toyota SA Educational Trust, a R44m sale to Growthpoint in 2016, and a
R180m sale to Taylor-Made Property Asset Managers in 2017.
“The backdating of these sale agreements had the effect of artificially inflating revenue in the earlier reporting period in which the sale was accounted for,” the court papers say.
For example, Staude allegedly authorised an R84.2m sale of property to the Ocean Forest Club Trust on April 5 2017, which was “accounted for in the year-end results of March 31 2017”.
There were other instances of sleight of hand too. For example, when someone bought one portion of a property, Tongaat would transfer the whole property to him or her, subject to a provision that they could “take back” the portion they didn’t sell later. The value of these “take back deals” exceeded R2.26bn. This was done, Tongaat says, so staff could “qualify for bonuses”.
The bottom line: Tongaat’s accounts reflected R2.4bn in revenue which it shouldn’t have done. Staude and Munro “knew of, and encouraged the practices” of these land deals, or “could and should have known”, the summons says.
Interestingly, Tongaat was warned about some of these things by its auditors, Deloitte.
At a meeting on October 20 2017, Tongaat’s
audit committee got a report from Deloitte advising that “sale revenue had been recognised” for the Taylor-Made deal, even though there was no resolution ratifying the sale. In another case, the sale was recorded even though the deposit hadn’t been paid.
In a separate case, Tongaat is seeking
R76.6m from Mike Deighton, former head of its land division, for alleged land shenanigans. For example, Tongaat claims Deighton did a deal which saw an estate on Umhlanga’s Ridgeside transferred to the buyers “before the payment of the purchase price, and before planning rights had been obtained”.
In the end, the buyers never paid the final R10.6m owed, claiming that the lack of planning rights led to delays in the project, so Tongaat ended up out of pocket.
Now Tongaat’s former executives, including Deighton, are defending this case.
The second category of misconduct was overvaluing sugar cane, making it appear to investors that Tongaat’s assets were more formidable than they really were. In 2018, for example, PwC estimated that the roots were overvalued R1.08bn and the standing cane by R312m.
The third category involved Tongaat fiddling its expenses, allegedly shunting all kinds of costs onto the balance sheet that it ought to have deducted from its income. It got so bad that salaries, cellphone costs and even road maintenance costs in Zimbabwe were apparently capitalised. “There was no sound commercial or accounting basis for these cost allocations,” the summons says.
This week, in a rare interview with the FM, Staude said he would fight Tongaat’s claim in its entirety. “I did not believe that the financial statements of Tongaat Hulett during my time were ‘false and misleading’ when they were
published,” he said. “I personally question the correctness and timing of the current restated balance sheets.”
Staude disputes the argument that sugar cane was incorrectly valued, and that costs were incorrectly capitalised. When it came to the land deals, he says: “I did not sign the land sales agreements nor was I directly involved in the determination of the accounting treatment of these agreements.”
But the fourth category of “misconduct” detailed in the summons is perhaps the most intriguing: the alleged creation of “fictitious Zimbabwe sugar sales”.
This emerges from about 100 pages of e-mails, annexed to the court papers, which paint a disturbing picture of how desperate Tongaat’s top brass were to create the appearance of a cashflush business briskly selling tons of sugar.
In an echo of how Enron used “special purpose vehicles” to boost its numbers, it appears that Tongaat structured a deal through Zimbabwe’s BancABC in 2018 in which it supposedly “sold” sugar to an intermediary called Rardon. The way it worked was, BancABC lent money to Rardon, which it used to “buy” sugar from Tongaat’s subsidiary, Zimbabwe Sugar Sales (ZSS). In turn, ZSS would then act as an “agent” to sell Rardon’s sugar.
In one e-mail seen by the FM, one of Tongaat’s staff says “the actual involvement of the broker is minimal — actually just a conduit — but the nature of this transaction would need to be kept confidential”.
Tongaat now says this was all just a ruse. In reality, “there was no physical delivery of sugar to Rardon”, and the sale agreements were “fictitious to the extent that the stock reflected therein was not actually sold and was not available to be sold”.
The net effect was that Rardon got a small margin, the bank got a fee, and ZSS was able to reflect “sales” and cash flow.
As a result, the court papers say, ZSS’s sales were overstated by 67,973t of sugar, and Tongaat’s finances reflect R781.4m of sales “that had not been earned”. This, it claims, was nothing more than “financing transactions, designed to take place at financial half-year and year-end to reflect increased revenue, higher cash balances, and therefore lower levels of net debt”.
This motivation seems clear from the e-mails, in which one of Tongaat’s executives discusses the structure, and says “we need to explore all avenues to protect the first-half results”.
Later on, another executive, in an e-mail to Munro and others in September 2014, warns that this transaction would have to be structured properly, otherwise auditors would be “unlikely to accept this as a genuine sale”.
In the summons, Tongaat says: “Staude was aware of these practices, and suggested they be phased out, but took no steps to ensure they were brought to an end.”
However, when asked about this by the FM, Staude says that during his tenure Tongaat looked at “various ways” to deal with the complicated case of Zimbabwe given its “severe currency and local pricing fluctuations”.
But, he adds, as far as he knew, “the arrangements complied with the relevant legal and accounting practices in Zimbabwe and SA”.
Hudson sees it differently. He tells the FM: “Imagine you’re a bottle store owner. If you usually sell 10 cases of beer a month, and you pre-sell five cases to be delivered months later just so you can say you made the sale, you have to keep cycling faster and faster to recognise earnings earlier than you should the next year.”
It seems reasonable to assume that the criminal case which Tongaat lodged months ago against Staude and the other executives revolves mainly around these four categories of misconduct. But given the lack of financial nous in the Hawks, it would seem unlikely that arrests will take place any time soon.
This is despite the cost to Tongaat and SA’s economic fabric. The fact that Tongaat now finds itself entertaining suitors that rub shareholders up the wrong way is because of the savaging its bottom line, and reputation, took from this ordeal.
At the heated shareholders’ meeting this week to approve the Magister deal, Tongaat finance director Rob Aitken said that in all, nearly R12bn in equity had vanished through the “restatements”.
So it was zero surprise that at the meeting, Tongaat said it was also pursuing Deloitte, which signed the botched financials.
Linda de Beer, who now heads Tongaat’s audit committee, wouldn’t give away how much the company wants from Deloitte. But you can expect it’ll be sizeable — potentially life-changing for a company with R6bn debt it is struggling to shed.
Whether it gets what it wants is debatable. In Staude’s case, it wants a stratospheric R101m for “misrepresentations” that it says were, at worst, “fraudulent”, at best, “negligent”.
But as Staude tells the FM: “The amount claimed from me is an immense amount of money particularly as much of my wealth was tied up in Tongaat Hulett shares. I have not sold Tongaat Hulett shares for many years and still have not done so.”
As much as Staude will fight this, Tongaat is unequivocal: Staude and others “signed, consented to, or authorised the publication [of] financial statements for [Tongaat] that were false or misleading in a material respect”. They “grossly abused” their director’s positions.
Once the case goes ahead, expect more skeletons to emerge. But from the court papers filed so far, it would appear that Tongaat was far more desperate — and far more rotten — than anyone could have guessed.