November 14, 2009
 By Bruce Cameron
A Ponzi scheme of massive proportions, which is likely to see investors lose hundreds of millions of rands, has been revealed in the second report by the curators of Corporate Money Managers (CMM), which imploded earlier this year. CMM controlled a fixed-interest varied specialist unit trust fund, the CMM Cash Management Fund (CMF), which masqueraded as a money market investment.
Over R140 million of investor capital was used by CMM to pay interest to investors. In other words, the investors were being paid returns from their own money, depleting their capital.
Eventually, when CMM could no longer sustain the fraud, the whole structure collapsed. Major withdrawals took place ahead of a successful Financial Services Board (FSB) application to the Pretoria High Court in February to have the scheme placed under curatorship.
In their second report to the High Court, the curators - Graeme Polson, Louis Strydom and Peter Strydom - state bluntly that there was reckless trading, theft and fraud in the removal of money from the unit trust portfolio.
CMF, which holds both regulated and unregulated investor assets, has liabilities (mainly to investors) of R1.1 billion. It is not clear how much of this is at risk, because the full extent of the theft and the full default potential of the property developers to whom money was lent have yet to be established.
The 146-page report reveals that at the centre of the fraudulent scheme, and a major beneficiary of the alleged plunder, was Johan Hendrik Bakkes and his family.
The report is a damning exposé of how Bakkes, who is yet to be criminally charged, set about plundering the savings of investors, many of whom are pensioners.
The report is also an exposé of how the regulatory structures that were set up to prevent this type of thievery failed investors.
In particular, the report reveals that the theft took place under the noses of the regulator; the custodian of the fund's assets, Absa Capital Investor Services; and the local rating agency, Global Credit Ratings.
The investment-grade credit ratings of the various entities and instruments enabled Bakkes to persuade people to invest in his Ponzi scheme.
Both Global Credit Ratings and Absa have denied any responsibility for the fiasco, with Global Credit Ratings repeatedly threatening Personal Finance with legal action.
Forensic analysis
Central to the curators' latest report is a report by forensic accountant Johannes van Romburgh, who has been involved in analysing a number of high-profile frauds.
In brief, the report reveals:
Bakkes set up a string of companies that were rated by Global Credit Ratings.
These companies provided a conduit through which the money invested in CMF was ostensibly lent to property developers for short-term finance for the period between buyers in the developments signing an agreement to purchase and the developers receiving their money from banks after buyers' mortgage bonds had been registered.
The money that did find its way to property developers was, in fact, lent for long-term property development in high-risk projects, in contravention of the Collective Investment Schemes Control Act (Cisca). The Act required that CMF hold mainly short-term, properly credit-rated investments.
Conduit companies - Miro, Allegro and Four Rivers - issued promissory notes that were handed to the CMF custodians in return for the cash of ordinary investors.
As the property developers defaulted on repaying both interest and capital on their loans, fraudulent promissory notes were issued by the Bakkes companies. These notes were handed over to Absa in return for more investor money.
This fraudulently withdrawn money was then channelled through the various companies, each taking fees for "services not rendered", with the residual money being paid back to Absa as supposed interest on the promissory notes, creating the false impression that the property developers were repaying loans and interest.
At one stage, CMM paid dividends of R31 million to shareholders out of non-existent profits, ostensibly from this fraudulent cash flow. Of this, more than R8 million was paid in tax, resulting in the state, in effect, unknowingly receiving stolen money. The dividend was not paid as cash but was recorded as a loan to CMM shareholders (ultimately the Bakkes family) on CMM's books.
Van Romburgh says the "round-tripping" of the cash resulted in investors being paid interest out of their own capital. The amount of investor money round-tripped from October 2007 to February 2009 totalled R142 million. The total value of the new promissory notes issued to camouflage the interest amounts unpaid by the property developers for the financial years ending February 2008 and 2009 was R99 million.
In the process of committing the fraud, extensive use was made of the inter-locking companies, and there were even false bank deposits to hide the parlous state of affairs that finally developed.
On at least one occasion, Absa accepted a R15-million promissory note from Thunderstruck, another company controlled by Bakkes, which was not credit rated and was therefore unacceptable in terms of Cisca.
Van Romburgh says the promissory note did not "comply with the definition of commercial paper. It is unrated and not in liquid form". He also says the "commercial paper issued by Thunderstruck was non-investible in terms of the provisions of Cisca".
Suspect notes
Charles Russon, the chief financial officer of Absa Capital, said in a statement to Personal Finance: "The trustee noted the inclusion of the promissory notes, in accordance with (and in excess of) its duties under Cisca. It interrogated their inclusion and then consulted the FSB. As a result, the notes were removed without any apparent loss to investors."
Bert Chanetsa, the FSB deputy executive in charge of financial markets, says that, because CMF was not a money market fund, the fact that Thunderstruck was not rated did not disqualify it from inclusion, as Cisca permits 10 percent of a portfolio to consist of unlisted instruments. The instruments are, however, required to be listed within 12 months after acquisition, failing which they are to be disposed of.
"It was our understanding that these instruments were disposed of within 30 days of acquisition," Chanetsa says.
But the money was never repaid. The investor money that Thunderstruck received was used to buy a property that was rented by Thunderstruck to CMM for the extraordinarily exorbitant amount of R229 825 a month from August 2008 to April 2009. After the collapse of CMM and since it has come under curatorship, Bakkes has tried to lay claim to the property and continue collecting rent.
When Personal Finance revealed in August that financial services company Dynamic Wealth was demanding that Absa make good on any losses on R230 million it had channelled into CMF, Absa rejected the claim.
Russon said Absa had "fulfilled the function of clearing agent and the function of custodian".
Dynamic Wealth, meanwhile, is also facing an FSB application to place it and various of its entities under curatorship, based on its investor clubs and investment portfolios that the FSB believes are unregistered collective investment schemes.
It was from one of these portfolios that Dynamic Wealth invested R230 million in CMF.
At the time, Russon said Absa approved all the assets when they were included in the CMF portfolio. In doing this, Absa relied on the Cisca-required credit ratings of the instruments, which were provided by an approved rating agency, namely Global Credit Ratings.
Included in the attachments to Van Romburgh's report is an agenda for a meeting on June 25, 2008 between CMM and Absa Capital Investor Services. The agenda reflects questions about non-credit rated promissory note issuers, including Thunderstruck; the payment of promissory notes into incorrect bank accounts; and problems with identifying instruments that were issued for withdrawals from the cash assets held by Absa on behalf of investors.
In the wake of the CMM report, Chanetsa says while the FSB seeks to put measures in place "to protect investors' interests, it is impossible for us to anticipate all possible contraventions or attempted circumventions of our measures.
"For instance, there is often a grey area between inspired industry innovation and subtle circumvention. We are constrained to strike a balance between a proactive as against a reactive approach."
He gave the assurance that new measures are now being introduced, including a move to limit the proliferation of white label funds. Consideration is also being given to bringing credit rating agencies into the regulatory net and making increased use of on-site visits to fund managers and their third parties before and after approval.
The mCubed connection
The implosion of CMM with its non-equity unit trust fund is not the first time Bakkes has run into trouble.
Back in 2001, Standard Bank's custodian department effectively closed down another Bakkes money market operation. Bakkes had a cosy little arrangement with the mCubed unit trust management company (now Ayanda, following its sale to Fidentia prior to its collapse in the midst of misappropriated millions).
At the time, Standard Bank Financial Advisory Services was the custodian/trustee of mCubed. Standard Bank became increasingly concerned about mCubed not meeting its obligations under the Unit Trust Control Act (now the Collective Investment Schemes Control Act).
Industry sources at the time said that, among other things, mCubed was sweeping free cash at night into an unregistered money market portfolio run by Bakkes. The mCubed funds would hold a proportionate share of the Bakkes portfolio's assets.
Standard Bank called a halt to the practice, which resulted in the closure of Bakkes's portfolio.
mCubed complained to the FSB, but the FSB sent mCubed packing and told the company that what it was doing was illegal.
Standard Bank was also perturbed about:
The way in which mCubed took money offshore via its life licence and then invested in units in non-compliant offshore hedge funds registered in the Cayman Islands. The units were incorporated into the mCubed local portfolios. They were not registered in the name of the trustee, Standard Bank.
The sale of mCubed life assurance was blocked by the Reserve Bank and the FSB some years later because of these transactions, and mCubed was penalised for contravening exchange control regulations.
Regular unreconciled amounts on mCubed portfolios at month end.
The result was a meeting with the then managing director of mCubed unit trusts, Chris Rogers, who was previously involved in the launch of the Absa Fund Managers money market fund. At the meeting, he fired Standard Bank as the custodian.
The new custodian was Absa.
At the time, Personal Finance also revealed that mCubed was paying secret kickbacks to financial advisers to induce them to place client money in mCubed funds.
And, in their second report, the CMM curators say that the South African Revenue Service is asking the curators for R1.4 billion, which, it is suspected, "... arises out of a transaction between mCubed, Specialised Insurance Solutions Trust (Mauritius), a Mauritian citizen and CMM".
The curators say the nature of the transaction will have to be investigated, with the money trail being followed through bank accounts and by perusing documents from mCubed, counter-parties and interested parties.
And the final twist in the tale was that Bakkes got to open his unit trust fund again, thanks to mCubed, which provided him with its FSB collective investment scheme licence to allow Bakkes to operate what is called a white label fund under its auspices!
  
 
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