The Financial Services Tribunal (FST) has upheld the JSE’s decision to fine former Steinhoff chief executive Markus Jooste a total of R15 million and ban him from being a director of a listed company for 20 years.
The decision, which was handed down on Tuesday, follows soon after the Tribunal upheld the reduced fine of R20m imposed on Jooste by the FSCA for insider trading.
Read: FSCA welcomes decision to uphold revised R20m fine on Markus Jooste
In January this year, the JSE imposed two fines of R7.5m on Jooste – R7.5m is the maximum allowable penalty – and barred him from being a director of a listed company for 20 years for failing to carry out his responsibilities with due care and skill.
One of the R7.5m fines was for releasing financial statements that did not comply with the International Financial Reporting Standards and the JSE’s Listings Requirements because they contained incorrect, false, and misleading information. The financial statements were for the 2015 and prior financial periods and for the 15 months to 30 September 2016.
The second fine was for what the JSE called a fictitious transaction that falsely inflated the income of a subsidiary called Steinhoff at Work by about R376m.
Moonstone reported on the JSE’s findings against Jooste earlier this year.
Read: Regulators are turning up the heat on Markus Jooste
The publication of the Tribunal’s decision occurs in the same week in which Steinhoff is scheduled to be liquidated and delisted. The liquidators of the multinational holding company have set Friday, 13 October, as the final winding-up date. The debt- and fraud-stricken furniture and household goods retailer will be delisted from the JSE and the Frankfurt Stock Exchange. Ownership of Steinhoff will move from shareholders to the creditors to whom it owes billions of euros and rands, and the company will then be transferred into a trust.
At its peak in March 2016, Steinhoff traded at R96.85 a share and had a market capitalisation of R359.6 billion. Yesterday, it was trading at 2 cents a share on the JSE.
Jooste’s defence
The gist of Jooste’s defence was that he was not aware of the accounting irregularities, and he relied on the financial officers, accountants, and auditors across the 32 countries in which Steinhoff operated to ensure that the group’s books were above board.
The Tribunal’s decision quoted from Jooste’s submission as follows:
“By the time Steinhoff’s consolidated accounts came before Mr Jooste for approval (prior to publication), they (and the underlying accounts) had been scrutinised many times over, including by Steinhoff’s group CFO, its audit and risk committee and its external auditors. The systems in place at Steinhoff, and the personnel involved in those systems, were impressive. Mr Jooste was entitled and, to an extent, constrained, to rely on those systems and personnel.”
The FST rejected this, saying Jooste’s own emails show that “he was intimately involved in how the finances worked within the group and how the book entries shifted funds from the one to the other”.
It said Jooste had to inform the group’s CFO, Ben la Grange, “who did not understand the machinations”, how things worked within Steinhoff.
In August 2022, the JSE barred La Grange from acting as a director for 10 years and fined him a total of R2m for his role in the Steinhoff at Work transaction.
Read: JSE fines former Steinhoff CFO a total of R2 million
The FST, after traversing the evidence, agreed with the JSE’s finding that the whole Steinhoff at Work transaction was fictitious, and that Jooste was intimately involved in it.
Two sets of financial statements
Counsel for Jooste also argued that neither Jooste nor the JSE have seen PwC’s forensic report into Steinhoff because the report remains confidence (Steinhoff claims legal professional privilege). Therefore, the opinions and allegations made by PwC, on which Steinhoff relied, could not be used against Jooste, and the JSE acted irregularly by having regard to the quoted section of the report.
“The answer to this argument is that this is a reconsideration application, and we shall, while discussing the Steinhoff at Work facts, test whether the facts in essence establish what PwC had found,” the FST said.
“Dealing with probabilities, the question is, what was the cause of the demise of Steinhoff? It was not because of Covid or some eruption of Mount Krakatoa. The applicant [Jooste] did not even attempt to offer an explanation, nor did he deal with any of the financial restatements.
“The answer […] is accounting irregularities suspected by Deloitte and later confirmed by PwC and the board and, one may add, the inability of the applicant, who alleged that audit proof was available to produce it when push came to shove.”
The Tribunal agreed with the JSE’s finding that: “There are therefore two sets of financial statements for the same periods that have been released to the market, i.e., the information that was published under Mr Jooste’s direction and leadership versus the information which was subsequently restated. Both versions of the same set of financial statements cannot be correct.”
There was no reason to doubt that the JSE’s view that the financial position and performance of Steinhoff for the 2016, 2015 and prior financial periods were materially misstated and required restatement.
Income from ‘fictitious and irregular’ transactions
The Tribunal’s decision quoted from the publicly released “overview” of the PwC forensic report, which stated that a small group of Steinhoff former executives and Steinhoff non-executives structured and implemented various transactions over many years that substantially inflated the profit and asset values of the Steinhoff Group over an extended period.
“Fictitious and irregular transactions” were entered with parties made to appear to be third-party entities independent of the Steinhoff Group and its executives, but which now appear to be closely related to and/or have strong indications of control by the same small group of former executives and other non-executives, the overview said.
“Fictitious and irregular income” was, in many cases, created at an intermediary Steinhoff Group holding company level and allocated to underperforming Steinhoff operating entities as so-called contributions that took many different forms and either increased income or reduced expenses in those operating entities.
“The transactions identified as being irregular are complex, involved many entities over a number of years and were supported by documents, including legal documents and other professional opinions that, in many instances, were created after the fact and backdated,” the overview said.
‘A message must be sent’
The Tribunal applied three established principles in assessing the appropriateness of the fines: the gravity of the offence, Jooste’s personal circumstances, and the public interest.
Regarding the public interest, the FST stated it is important that a message is sent to the business community “that playing around with book entries, creating a false image of the financial health of a company, and misrepresenting to the public the true state of affairs, whether intentionally or because of gross negligence, is serious and demands appropriate penalties and not slaps on the wrist”.
As to seriousness, the Tribunal said, what is particularly relevant is that shareholders lost billions of rands, the demise of an important South Africa-linked company, and the loss of credibility in accounting methods and the financial control of listed companies.
It said Jooste’s personal circumstances did not have a material impact on the penalty. The fact that he lost part of his fortune was irrelevant because he was, at least in part, responsible for the demise of Steinhoff.
The Tribunal said counsel for Jooste made no submission regarding the 20-year directorship ban, presumably because Jooste conceded it is highly unlikely that he will again be a director of a JSE-listed company.
Jooste is 62, so he could only be a director of a listed company when he is in his 80s.
In a statement released yesterday afternoon, the JSE said Jooste “is immediately liable for the payment of the financial penalties imposed” and disqualified from holding the office of a director or officer of a listed company for 20 years.
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