The FSCA’s R475-million penalty on Markus Jooste is the largest the Authority has imposed on a single individual. How did the FSCA arrive at such an amount?
Read: Markus Jooste fined R475m for publishing misleading Steinhoff financials
Section 167(2)(a) of the Financial Sector Regulation Act prescribes three factors the Authority “must” consider when determining “an appropriate” administrative penalty for someone who has broken a financial sector law. These are:
- the need to deter such conduct;
- the degree to which the person has co-operated with a financial sector regulator in relation to the contravention; and
- any submissions by, or on behalf of, the person that is relevant to the matter, including mitigating factors referred to in those submissions.
The need for deterrence
In its penalty order issued against Jooste, the FSCA says there are two aspects to deterrence. First, the person who contravened the law should be deterred from doing so again. Second, the penalty should deter others from engaging in similar conduct.
The Authority said that, in meeting both goals, “care must be taken not over-emphasise a person’s ability to pay the penalty. A penalty set too low may achieve the goal of personal or specific deterrence but not general deterrence.”
In this matter, the FSCA asked itself what type of penalty would deter someone in a similar position as Jooste, a chief executive.
According to the order, Jooste received an income of R651 531 222 from Steinhoff International alone over the period (2014 to 2017) when the false, misleading, or deceptive statements about Steinhoff International Holdings Limited and Steinhoff International Holdings were published.
The extent of Jooste’s co-operation
The penalty order says Jooste failed to answer all the questions put to him and “intentionally lied” about the accounting irregularities at Steinhoff. His limited co-operation “served to deceive and waste the time of the FSCA”.
Jooste’s submissions regarding the penalty
In December 2022, the FSCA notified Jooste of its intention to impose an administrative penalty on him and invited Jooste to make submissions on the findings of the FSCA’s investigation and the intended penalties.
The order says Jooste made only one submission in respect of the amount of the intended penalty. He compared the proposed penalty of R475m against him with the reduced penalty imposed on Steinhoff International. “Steinhoff ultimately paid a penalty nine times less than the penalty FSCA intends imposing on me,” the order quoted Jooste as saying.
The Authority imposed a penalty of R1.5 billion on Steinhoff in 2019, but this was reduced to R53m because of Steinhoff’s precarious financial position.
Seven aggravating factors
Paragraph (b) of section 167(2) lists seven additional factors the FSCA “may” consider when deciding on an appropriate penalty:
- the nature, duration, seriousness, and extent of the contravention;
- any loss or damage suffered by any person as a result of the conduct;
- the extent of any financial or commercial benefit to the person, or a juristic person related to the person, arising from the conduct;
- whether the person has previously contravened a financial sector law;
- the effect of the conduct on the financial system and financial stability;
- the effect of the proposed penalty on financial stability; and
- the extent to which the conduct was deliberate or reckless.
The penalty order deals which each one of these factors.
Nature, duration, seriousness, and extent of Jooste’s contravention
The false, misleading, or deceptive statements were knowingly and deliberately published for at least three-and-a-half financial years and were intended to continue in the future, the order says. Furthermore, Jooste chose to abuse his position to inflate Steinhoff International’s financial results.
Loss or damage suffered as a result of Jooste’s conduct
Steinhoff International’s market capitalisation plunged by R220.4 billion between 1 December and 29 December 2017, resulting in substantial losses to retirement funds, institutional investors, and individuals. Jooste was “the mastermind” of the scheme that caused these losses, the order says.
Extent to which Jooste benefited financially
From 2014 to 2017, Steinhoff International paid Jooste cash or benefits as part of his remuneration totalling R710 939 749. This amount comprised salary, bonuses, and long-term incentives, the order says.
“His remuneration was linked to the company’s overall performance and was thus inflated by the overstated false, misleading, and deceptive annual results. He also benefited from the increases in Steinhoff International share values, as he received share incentives and dividends over the years.
“By disposing of his shares to corporate entities or trusts or providing shares as security, he was able to purchase other assets for personal benefit or the benefit of the trusts in which he held his assets,” the order says.
Previous contraventions of a financial sector law
As Moonstone has reported, the FSCA found Jooste guilty of insider trading and fined him R162m, which was reduced to R20m following a reconsideration application to the Financial Services Tribunal.
Last year, the JSE’s found that Jooste failed to comply with its Listings Requirements and fined him R15m and banned him from being a director of a listed company for 20 years.
Jooste’s attempts to have both the revised FSCA fine and the JSE fine overturned by the Tribunal failed. But it has come to light that Jooste had yet to pay either of the fines because he intended to have the decisions reviewed by the High Court.
The FSCA said last week that Jooste had until 26 March to file his application against the fine it imposed for insider trading.
News24 quoted the JSE’s director of issuer regulation, Andre Visser, as saying Jooste had until 8 April to lodge his application to have that decision reviewed.
Effect of Jooste’s conduct on the financial system
The FSCA concluded that Jooste’s conduct reflected negatively on the financial system, knocked investors’ confidence in South African companies, and caused negative sentiment towards foreign and local investment in South Africa.
“The collapse of the Steinhoff International share price and the subsequent disclosure of the very significant quantum of the reduction in asset value and earnings in the restated Steinhoff International financial statements have been described as South Africa’s Enron, and have left a lasting suspicion of the quality of South African published annual financial statements,” the order says.
Effect of the proposed penalty on financial stability
“The penalty will not harm the financial stability of the markets. Instead, it will serve to restore and improve local and foreign investor confidence and reassure the general public that financial markets in South Africa operate in a manner that is fair and efficient and that when the rules are broken, appropriate consequences follow,” the order says.
Extent to which the conduct was deliberate or reckless
The FSCA concluded that Jooste acted “deliberately and without regret”.
At the time of the contravention, Jooste had about 16 to 19 years of experience as an executive of a listed entity and as a Chartered Accountant. “He was more blameworthy than others because he acted deliberately in contravention of the law and was well qualified to understand his conduct’s implications.”
