This landmark case shows that investor activism is on the rise
Belinda Anderson
A shareholder in disgraced pharmaceutical company Beige Holdings is suing some of the former directors for his losses incurred, he argues, by investing in a company whose share price was inflated by false profit declarations.
Beige was suspended in late 1999 when an accountant blew the whistle on fictitious invoicing. His warning led to other irregularities being uncovered, including suspected fraud, theft, overstated profits and fictitious debtors who were paid with the profit of the sale of the inflated shares. One of the front companies used was Gapp Trading, while other entities, known as Nolene, Xanadu, Genmed and Hosmed were also used to channel artificial orders.
The results were subsequently restated for two years back, one of the directors, Syd Rogers, paid a fine to the Financial Services Board for suspected insider trading and the company was sold off. Le Sel Rearch bought most of Beige for half of what it had offered before the results were properly restated an offer of 30c a share decreased to between 10c and 15c as it became apparent that an extra R8-million in profit had been created. Beige has been managed by a turnaround team, led by Arcay’s Kevin de Villiers, for about a year and various subsidiaries have either been retained, sold or placed in liquidation. De Villiers confirms that the company will be reinstated for trade in the near future. The company is looking to hold an annual general meeting in early September and the share could possibly be relisted after that.
The shareholder, Chris Schutte, invested almost R1,2-million in Beige shares between July 1998 and September 1999. He is looking to recover that, plus interest and costs. The stock ran up to almost R10 within six months of listing and was suspended at 49c in September 1999. The case was due in court last week and the defendants are Syd Rogers, Dennis Heyman and former financial director Barry Duke. Former chairperson Len Konar said on Monday that the case was sub judice and he could not discuss it.
Beige was listed in November 1997 at R1, and investors were enticed with the promise of more than 60% earnings growth (5,18c to 8,43c) in the first financial year to 1998. But it was not only private individuals who bought into the vision. Asset managers including Sage, Old Mutual, Sanlam, Liberty and Absa did too. After suspension, the funds were left holding 6,3-million Beige shares in their unit trust portfolios. The listing provided for 14-million shares to be placed with institutions, six million to be offered to the public and another two million to be allocated to staff. The two founding directors, Dennis Heyman and Syd Rogers, formed part of a consortium that owned 45-million shares, or 66,8% of the company at the time of listing.
Beige and the directors are using as a defence the fact that the company was trading under cautionary between February and June 1998. In their plea, they claim to “have no knowledge as to whether or not the plaintiff [Schutte] was misled as alleged by him and accordingly deny the plaintiff’s allegations in this regard”.
They also assert that the profit warning put out on September 6 1999 stated clearly that earnings had been negatively affected by adverse trading conditions, the performance of one of the subsidiaries and related restructuring costs, as well as a fire at one of the manufacturing subsidiaries.
“The problem areas have been identified and appropriate actions are currently being implemented to address them,” the warning said.
Schutte invested in Beige in July 1998, spending R1,06-million. But he bought shares in four more tranches two weeks after the profit warning, when the prospects were less rosy than the prospectus had predicted.
Schutte says he bought more shares in an attempt to cut his losses by decreasing the average cost a share.
In late 1999 advocate Jules Browde was hired as a consultant by the company to conduct an inquiry into the irregularities and make recommendations about the directors and company secretary Barry Fink. Browde expressed shock at the evidence placed before him and recommended that the four employees be dismissed.
The police commercial crimes unit opened a fraud docket into the irregularities at Beige in March last year and investigating officer Superintendent Chrisna Botha has confirmed that the investigation is continuing. An advocate, Tony Mostert, has also been contracted by the reinstated Beige board led by De Villiers to conduct an inquiry into the irregularities. He says the investigation is advanced, he is looking at both civil and criminal matters and there is a substantial amount of money involved. The scope of the investigation includes looking at some of the share transactions, as well as investigating whether some of the directors can be held personally liable (under Section 424 of the Companies Act) for the company’s losses.