Taxpayers are to foot a massive bill for the government-mandated inquiry into controversial investment house Corpcapital after inspectors exonerated the company on every major charge levelled against it by former director Nic Frangos.
That is because the Companies Act has no provision to compel people who bring spurious complaints to the minister of trade and industry to pay for any investigation he may order.
Frangos had alleged that the other directors had, among other things, fraudulently inflated the value of Cytech, an online casino company, to produce glowing financial results, and earn large bonuses. He quit the company in a blaze of publicity, suggesting his lone crusade for governance standards could no longer be sustained from inside Corpcapital. The company ultimately ceased operations, saying it was unable to continue under a cloud of scandal.
But the report of the inspectors appointed in 2003 by then minister Alec Erwin clears the company on all of Frangos’s allegations, and hints that it would have recommended that he be compelled to pay for the inquiry if this option were catered for: “The Companies Act should be amended to give the minister a discretion to direct an applicant to pay or contribute to the costs of an investigation … Corpcapital should not contribute to the costs of the investigation,” it says.
Erwin’s successor, Mandisi Mpahlwa, has for two-and-a-half years refused to release the report, and has this week handed it to Corcapital only after being compelled to do so by a court order.
This reluctance has never been explained, but the recommendation on costs, and the fact that Frangos is given short shrift by the report, are potentially embarrassing to the ministry.
Erwin heard representations from Frangos, but not from Corpcapital, and used his powers in terms of section 258 of the Companies Act to appoint Advocate John Myburgh — best known for his role in investigating the collapse of the rand — and accounting professor Keith Prinsloo as inspectors.
“This was an ill-conceived process,” says Neil Lazarus, a non-executive director at new Corpcapital. “The minister’s office has wasted a huge amount of money because the initial application was heard ex parte.”
Lazarus argues that had Erwin been prepared to listen to Corpcapital before ordering the inquiry he might have acted differently, not least because Nigel Payne, a corporate governance expert appointed by the company to investigate the claims, had already cleared the company. Frangos described Payne’s report as a whitewash, and hired his own experts, who disagreed with Payne.
“The minister and his officials backed the Frangos horse … It is a huge embarrasment,” Lazarus told the Mail & Guardian.
“Taxpayers have ended up paying millions to fund Frangos’s ego.”
Lazarus puts Corpcapital’s costs for lawyers and expert testimony at between R7-million and R8-million. The total cost of the inquiry and the failed court bid to keep its findings confidential is likely to be much higher.
Mpahlwa, who took over as minister from Erwin just as the report was completed, has, since 2004, been fighting off calls to release the report, and the Department of Trade and Industry continues to refuse to make the document available to the media. Mphalwa is now appealing the court order on principle in an attempt to ensure that he has the final say on the release of similar reports in future.
In a statement following the judgement, Mpahlwa said he had reservations about the way the inquiry had been conducted, and suggested it had exceeded its mandate. He also echoed Frangos’s claims of procedural unfairness, saying Frangos had not had a chance to respond to some of the expert testimony provided by Corpcapital.
The inspectors do have some criticisms of Corpcapital, notably that it may have violated exchange-control regulations when it set up its offshore businesses, and that its corporate governance structure was not always compliant with requirements of the King commission. But the damage to Frangos looks much worse.
He breached his fiduciary duties by giving confidential, price sensitive information to a select group of institutional investors, the report says.”[He] was advancing his own cause, and not that of the company, Corpcapital.”
The report also finds that in his attempt to find evidence that Corpcapital and Lazarus had ordered a private investigation firm to spy on him, he not only invaded the privacy of Lazarus and his family, but”acted badly, contrary to the portrayal of himself as an ethical, righteous upholder of sound corporate governance”.
What is more, Frangos had no basis to believe that the Payne report was a whitewash, or that he had not been given an adequate hearing, the inspectors found. Mpahlwa’s office had not responded to a request for comment when the M&G went to press.