More questions than answers at Steinhoff hearing

Less than impressed. That is the best way to sum up the reaction of members of parliament to information provided by Steinhoff directors and SA regulators, at the briefing into events that resulted in the collapse of the Steinhoff share price last December.

The briefing was convened by the Standing Committee on Finance, the Standing Committee on Public Accounts, better known as Scopa, and the Standing Committee on Appropriations.

“We don’t get a keen enough sense that you are taking this as seriously as you should,” the briefing’s chair Yunus Carrim told the assembled regulators, including the JSE and the Financial Services Board, as well as Steinhoff board members, including acting chair Heather Sonn; acting CEO Danie van der Merwe; chair of the audit committee, Steve Booysen and shareholder Christo Wiese. “We urge you to be clearer. We would like a more decisive sense of movement.”

The MPs’ frustration is understandable. According to National Treasury’s Ismail Momoniat, up to R200 billion in shareholder value could have been lost due to the collapse in Steinhoff’s share price. Aside from local and international investors, a big loser was the Government Employees Pension Fund whose 9% holding fell from R23 billion to R3 billion in value. “For the crimes that have been committed people must go to jail; there is no doubt about it,” he said.

But what exactly those crimes are and precisely who committed them remains elusive. “We will uncover the truth; we will fix what went wrong, we will prosecute where there is wrong-doing,” acting chair Heather Sonn told the committees.

“We appreciate that there has been frustration about our communication. However we don’t want to compromise the [PWC] forensic investigation; much is price sensitive. As time goes we will be able to communicate more freely,” she said.

A lot has happened behind the scenes

Following the December news that CEO Markus Jooste had resigned after auditor Deloitte refused to sign off on the annual financial results, Steinhoff’s credit lines dried up and the company faced an immediate liquidity crisis. “We appointed PWC to conduct an independent forensic investigation and we appointed specialists to assist with liquidity. This was a priority – we had to keep the doors open to trade,” Sonn said. “The retention of 130 000 jobs remains paramount.

“Our leadership team has been reorganized and we are in the process of appointing a chief restructuring officer. This business will be managed very differently,” she said. “Maintaining and restoring value for shareholders is also a priority.”

And then the bombshell

Based on preliminary information from PWC, the Steinhoff board has reported former CEO Markus Jooste to the Hawks on suspicion that he committed offenses under the Prevention and Combating of Corrupt Activities Act. “The matter is now in their hands for further investigation and prosecution,” Sonn said.

The objective is to find out “what went wrong and whether it could have been prevented.”

As for the regulators

This question is occupying the minds of regulators too. The JSE as the frontline regulator has completed a preliminary investigation into whether there was insider trading on the Steinhoff share, whether Steinhoff published or made any false statements or whether there was any market manipulation. It has given a report to the FSB. “The FSB through the Directorate of Market Abuse has the powers of subpoena and investigation and can take civil or criminal action,” JSE CEO Nicky Newton-King said.

The JSE will not suspend the trade in Steinhoff NV shares – despite it not releasing audited financials within the stipulated time-frame. “Steinhoff’s primary listing is in Frankfurt. They will not suspend them for failing to produce financials,” she said. “If we suspend trade then South African shareholders are at a disadvantage. We will review our position in relation to the listed bonds and preference shares in due course.”

The FSB’s Solly Keetse, the head of department for the Directorate of Market Abuse, confirmed the group is currently investigating two possible cases of insider trading between August 2017 and December 2017, and one case of possible false, misleading or deceptive statements.

The FSB is also liaising with German and Dutch regulators and has written to the US Securities and Exchange Commission to make enquiries about Viceroy Research, the group that wrote the explosive report outlining Steinhoff’s alleged financial irregularities.

The SA Reserve Bank has investigated whether the collapse of Steinhoff poses a financial stability risk (it doesn’t) and whether any exchange control laws were broken (it doesn’t think so).

The Financial Services Board’s deputy executive officer for pensions Olano Makhubela investigated the impact on the pension fund industry – he estimates that pension funds lost 1% of their value over this time. This excludes the GEPF’s exposure.

Ismail Momoniat from National Treasury made it clear that Steinhoff is not regulated by Treasury legislation, as it is not a financial institution. Treasury’s concern is whether different regulators in SA and Europe are indeed talking to each other.

Lastly, the Independent Regulatory Board for Auditors (Irba) will start its official investigation into Deloitte in February. It’s worth noting though that Irba has jurisdiction over registered auditors in SA. For the last three years (since 2015), Steinhoff’s auditors have been European.

While there is some action, and a lot of talk, it seems the real truth will only be outed once the PWC forensic investigation is complete.

So did the parliamentarians get an answer to their question: Were the regulators caught napping?

“Fraud is extremely difficult to catch anywhere in the world,” responds Newton-King. “We have the checks and balances already – but are they working as intended? It doesn’t require another word of legislation. Rather we should think about increased levels of engagement – with large asset managers for instance: how do they hold the board accountable? how does the board hold management accountable?

“Capitalism is driven to incentivise performance. It works on the basis that there are countervailing forces that hold companies to account. That conversation has already started with some large shareholders – about how can we do better. Because, for sure we cannot have this happen again.”

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