Poor conviction rate results in 50% rise in white-collar crime

The new year looks set to bring yet another court battle from J Arthur Brown – the Fidentia chief executive accused of misappropriating funds belonging to widows and orphans – who has spent eight years fighting his charges and now his sentence.

The Constitutional Court confirmed on Tuesday that Brown’s lawyer applied on December 19 for leave to appeal a Supreme Court of Appeal (SCA) judgment sentencing Brown to 15 years for two counts of fraud.

The SCA overturned a high court decision to fine Brown R150 000 for what is considered one of the biggest corporate crimes in South Africa.

Judge Mohamed Navsa, in sentencing Brown, said the penalties had to be sufficient to act as a deterrent: “We must guard against creating the impression that there are two streams of justice, one for the rich and one for the poor.”

He was referring to a concern, also raised by Corruption Watch head David Lewis, that people accused of white-collar crimes generally had sufficient resources to “delay a possible prison sentence”.

Navsa said people who had committed lesser crimes had served jail time.

Had Brown not appealed his sentence, he would have been one of the first alleged fraudsters of large commercial crimes in the past 10 years, to finally begin his sentence.

‘Assisted suicide’
Brett Kebble, a former JCI mining boss who ran one of the biggest scams involving share price manipulation, and First Strutt’s Jeff Wiggle, whose company folded in one of the largest corporate bond defaults in South Africa – exceeding R925-million – never faced jail time. They each died in an “assisted suicide” – or perhaps murder.

Former Tigon chief executive Gary Porritt and his business partner Sue Bennett have kept their case in courts for nearly 12 years, bringing different actions. The two are accused of tax fraud and Companies Act infringements, after encouraging investors to take their money offshore.

Porritt, Bennett and Brown have turned to Legal Aid intermittently, returning to their own counsel when costs extended beyond the Legal Aid tariff.

Shares drop
More recent cases under investigation involve Pinnacle Africa, a distributor of ICT equipment, and Auction Alliance’s auctioneer and founder of the company, Rael Levitt.

Pinnacle first made the headlines when its executive director, Takalani Tshivhase, was accused of attempting to bribe a senior police officer to ensure his company was awarded a R1.6-billion tender. The charges against Tshivhase were dropped, but the company’s shares also dropped by 40%.

The Financial Services Board (FSB) said it was continuing its own investigation into the sale of about 1% of the company’s shares by some Pinnacle staff before Tshivhase’s arrest became public knowledge.

FSB chief operations officer Gerry Anderson said “four people from Pinnacle” had been referred to the FSB’s enforcement unit for further investigation and possible fines.

Tshivhase is one of those believed to have benefited from the sale of shares, but this was not confirmed by Anderson.

Paul Ramaloko, the former Hawks spokesperson now with the police, said the investigation into Auction Alliance and Levitt was ongoing despite some delays in the court action, including the replacement of an acting magistrate, which has delayed one judgment.

Auction Alliance stands accused of using a “ghost bidder” to drive up the price in the auction of Quoin Rock Winery and Manor Estate. A complaint was brought by bidder Wendy Appelbaum, after she began to suspect that she was bidding against herself.

International affairs
Steven Powell, the managing director of the forensics unit at law firm ENSAfrica, said it was not only South Africa that was struggling to convict big corporate fish. The United States and the United Kingdom, among others, are battling to prosecute white-collar criminals, despite having strong legislation.

Take the case of businessperson and investor Bernie Madoff, who was found guilty of running a scheme in which investors’ returns were funded by money brought in by new investors, rather than profits.

The US Securities and Exchange Commission had been suspicious of Madoff’s business practices for some time. But it was not until his sons went to authorities and presented them with sufficient evidence to launch an investigation into Madoff that he was arrested in December 2008.

Madoff was sentenced to 150 years in jail and investigations against senior members of his company are ongoing.

The court found, as the SCA did in its ruling on Brown, that Madoff remained unrepentant about a crime he had been committing since the mid-1990s. The shares dropped 40% at news of his arrest.

The US has gone all out to make it attractive for staff to expose fraudulent activity by companies or their staff. In 2010 the Barack Obama administration introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act, in which provision is made for a kitty of between 10% and 30% to pay whistleblowers of successful prosecutions.

Lack of convictions the impetus
Back in South Africa, John Oxenham, the director of specialist litigation company Nortons Inc, has seen his share of corporate crime. He believes that lack of conviction is one of the reasons white-collar crime has increased by about 50% in the past 10 years.

“People only commit these kinds of crimes because they honestly believe they will never be punished for them,” he said.

Take the case of Peter Gardner and Rodney Mitchell, joint chief executives of LeisureNet. They were arrested in 2002, but remained on R500 000 bail until they had exhausted all their options in 2011, when they were jailed for 12 years, some of which was suspended.

LeisureNet, which owned the Health & Racquet gym franchise, was liquidated in 2000. The two men were convicted of fraud amounting to R12-million in 2007, which included the unauthorised purchase of a German company, value-added tax fraud and using money from the company to fund a lavish lifestyle – expensive cars, refurbished homes and dining at fancy restaurants.

Overworked investigators
As was the case with the successful prosecution of Regal Treasury Bank chief executive Jeff Levenstein for fraud, these convictions are for crimes that occurred in the late 1990s.

Brigadier Stefan Grobler, the former head of the national directorate of the Anti-Corruption Unit and the Special Investigation Unit, said that in his experience small cases were more likely to be pursued by law enforcement officers than more complicated corporate fraud.

Grobler, who has worked on white-collar cases for most of his career, said the lack of convictions in the large, more complicated cases, were often the result of overworked and, in some cases, poorly trained police.

“To prosecute these kinds of cases, you have to have a passion for forensic investigations and training so that you can hand over a case to the National Prosecuting Authority that can stand up to scrutiny in court,” the veteran policeman said.

Prosecutors also need to be well trained in forensic accountancy, Grobler said.

Plea agreements
The news is not all negative, according to Powell, whose law company has been involved in a number of investigations and prosecutions of white-collar criminals.

“The number of convictions I am seeing in the specialised commercial crimes is encouraging,” said Powell. “They still have qualified prosecutors in that division, which is why I believe it is so important to retain specialised units.”

Plea agreements are still a popular option, because they are cheaper than years of litigation. Former estate agent Wendy Machanik was given a R1.5-million fine for dipping into her company’s trust fund during the 2008 economic downturn.

“The best solution is to make a deal as quickly as possible in white-collar crime cases to avoid the case dragging on for years, and the victims are more likely to get some of their money back,” said Powell. “[In] the bulk of cases we see, the accused gets a five-year jail sentence.”

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