The Highveld Syndication property syndication schemes represent one of the largest investment failures in South Africa. Between 2005 and 2009, 18 700 investors – most of them elderly – invested R4.6 billion of their life savings in the syndications, and there remains little chance they will ever recover their money. The collapse of the schemes left many of these investors destitute. Several investors and financial advisors have also committed suicide.
In an attempt to find some answers as to what went wrong, Moneyweb conducted an in-depth ‘follow the money’ investigation. It focused on the 79 properties originally sold to investors for R4.6 billion in terms of the original syndications, analysing the actual sales transactions from before the establishment of the syndications to who owns those properties today.
The main findings will be published in a series of articles over the next few weeks. But the Highveld Syndication (HS) story is a complicated one. Here follows a history of key developments.
The history of the HS companies dates back to 1998 when PIC Investments (Picvest) successfully marketed and syndicated around 120 properties to investors. The company was founded by Durand Botha, the brother of Sharemax’s Willie Botha. The first 14 syndications (HS 1 to 14) were successful and all investors were paid in terms of the agreements.
The total syndication value of these syndications was R723 million, and they were sold in 2007 to the prominent businessman and Bloemfontein property magnate Nic Georgiou for R892 million. (Georgiou and his company Zephan, previously named Zelphy, and other entities related to him, would later sell a significant number of the properties to the later syndications.)
In 2007 Botha sold Picvest to Rikus Myburgh for an alleged amount of R330 million. Myburgh later resigned as CEO (in 2011). Picvest marketed the HS 15 to 22 syndications to investors between 2005 and 2011. The executive directors of the HS companies were Ben van der Linde and Morkel Steyn.
The syndication values as per the prospectuses of the various syndications appear in the table below:
|Syndication||Year||Number of properties||Syndication value|
|HS 15||Sep 2005||6||R253 550 000|
|HS 16||Oct 2005||10||R309 655 000|
|HS 17||Feb 2006||2||R233 220 000|
|HS 18||Oct 2006||13||R345 800 000|
|HS 19||Jan 2007||13||R602 000 000|
|HS 20||Dec 2007||16||R678 900 000|
|HS 21||May 2009||11||R1 332 000 000|
|HS 22||Aug 2009||8||R888 000 000|
|79||R4 644 925 000*|
|* This excludes an amount of R132 million that was allegedly oversold to investors.|
Although the agreements and conditions of returns varied between the different syndications, the investment cases were straightforward and attractive.
Picvest would lump a number of handpicked commercial properties into a property syndication. Investors would then invest, and their money would then be used to buy the properties. The unmortgaged properties would be transferred to the respective syndications. Investors received shares, and a pro rata loan account, in their respective HS companies for their investments, which means they effectively became co-owners of the properties.
A marketing video of the HS 21 syndication.
The rental income was used to pay attractive interest rates of up to 12.5% to investors. The syndication periods were for a minimum of five years, after which the properties were supposed to be sold and the capital returned to investors.
The HS 21 and 22 syndications were slightly different and contained specific buyback agreements in terms of which Georgiou, or entities related to him, would buy back the investors’ shares after five years.
On paper, the returns looked attractive and ‘risk-free’ – and following the success of the HS 1 to 14 syndications, as well as attractive 6% commission for brokers, it wasn’t too difficult to convince 18 700 mostly elderly people to invest R4.6 billion.
The initial syndication values were high
There were, however, a few issues. For one, the valuations of the properties in the syndication schemes were extremely high, which means that arguably investors initially paid too much for the properties. In March 2010 Carl Nel and Joe Knipe, the independent evaluators of the HS 21 and 22 syndications, also withdrew their valuation of the properties.
The table below shows the extent of the original syndication valuations. It lists only three of many properties where entities related to Georgiou bought properties in 2006 then sold them for massive profits to the HS companies in 2010. Three years later the properties were then sold to Accelerate – a company steered by Georgiou’s son, Michael Georgiou – at vastly reduced values.
|Property||Price sold to Georgiou entity in 2006||HS syndication valuation in 2010||Price sold to Orthotouch in 2013||Price sold to Accelerate in 2013|
|Glen Gables||R59 million||R200.7 million||R123.3 million||R32.5 million|
|1 Charles Crescent||R41 million||R206.3 million||R216.4 million||R110.8 million|
|9 Charles Crescent||R19 million||R68.9 million||R61.3 million||R17.1 million|
These are not isolated examples. Moneyweb analysed the title deeds of 27 properties that were sold to Accelerate. Their total syndication values were R1.8 billion, around R700 million more than the R1.1 billion Accelerate paid for these properties. (This will be analysed in more detail in future articles.)
Non-transfer of properties
Initially, all went according to plan, at least for HS 15 to 18. The properties were acquired in terms of the prospectuses and transferred to the syndication companies. Investors also received their monthly interest payments.
Unfortunately, this was not the case for HS 19 to 22. Despite investors paying the collective R3.5 billion syndication value, the properties were not transferred to the respective syndication companies. Investors did, however, receive their interest payments, for the time being at least.
This non-transfer of properties remains one of the most critical events leading up to the failure of all the HS syndications. It is also a mystery that this has never been forensically investigated.
The process through which the HS companies acquired the properties was complicated. The HS companies procured the properties from a company named Bosman & Visser (B&V). The B&V directors were Rikus Myburgh and Derik Reichel, the respective CEO and financial director of Picvest. But interestingly, although the B&V company report shows Van der Linde and Steyn were former directors of B&V, both strongly deny any knowledge of their appointments or resignations from the company. (Moneyweb will investigate these claims in more detail in a future article).
B&V acted as a sort of ‘middleman’ between Georgiou’s main company Zephan and the HS companies. The company would buy the properties from Zephan, fix them up and then resell them to the HS companies at a higher price. This structure was used for one property in HS 17 and all the properties from HS 18 to 22.
The dispute between Zephan and B&V
But a dispute arose between Zephan and B&V in 2009. Zephan alleged that B&V “short paid” it an amount of R883 million, a claim B&V denied at the time. Nonetheless, Zephan used this dispute to suspend the transfers of all properties to the HS 19 to 22 companies, despite the fact that investors had already paid the full purchase prices.
It is also unclear why Eugene Kruger, the transfer attorney who received the R3.5 billion from investors, released the monies from his trust account prior to the transfer of the properties. The transfer of the properties is not only required by law but is also specified in the HS prospectuses. Kruger did not want to speak to Moneyweb as the case was sub judice. He is, however, defending legal action related to the release of these funds from his trust account.
Despite the scale of the dispute, and the impact it had on the transfer of the properties to the HS schemes, it never saw the inside of a courtroom. Zephan never sued B&V for the R883 million. An even bigger mystery is that even if there was a short payment of R883 million, the remaining R2.6 billion of the total R3.5 billion investment remains unaccounted for.
It is extremely curious that this dispute has not been forensically investigated, either by law enforcement agencies or during the subsequent business rescue process.
Georgiou’s version of events
Although Georgiou did not respond to Moneyweb’s questions related to the dispute and the non-transfer of properties, he claimed in an affidavit filed in defense of a recent liquidation application against Zephan that he never received money directly from Kruger or the HS companies.
He said once investors’ funds were paid to Kruger, the money was transferred to the HS companies’ current accounts via a third-party fund administrator. The HS companies then paid B&V, which in turn paid Zephan. In the affidavit, Georgiou said the HS companies therefore had no claims against Zephan.
Despite frequent references to the dispute in various documents, Moneyweb has not been able to find any documentation where Georgiou justifies the non-transfer of properties as a result of the dispute.
Financial problems and business rescue
The HS fairytale came to an end in 2011. The syndications allegedly ran into financial difficulty and could not continue to pay interest in accordance with the original HS agreements. The South African recession flowing from the 2008 international financial crisis and the B&V dispute were blamed as the culprits.
During this time, the South African Reserve Bank (Sarb) also investigated Picvest for the alleged contravention of the provisions of the Banks Act, and although there was a period of uncertainty, the Sarb never found any wrongdoing.
In an effort to remedy the situation, Georgiou conceptualised the ‘Orthotouch proposal’, a proposed restructuring of the syndications to stave off liquidation. Under the proposal, all the HS companies’ properties would be transferred into a new company called Orthotouch, owned by Georgiou. The properties were to be managed within Orthotouch and investors would receive reduced interest payments. It also provided for the cancellation of the head lease and buyback agreements, on which many investors based their original investment decision.
This proposal was not implemented and a few months later the HS directors (Van der Linde and Steyn) put the HS companies into business rescue after an investor applied for the liquidation of HS 19.
Hans Klopper, an experienced corporate lawyer, was appointed as the business rescue practitioner of the HS companies.
Klopper produced a business rescue plan (BRP) which confirmed that without a restructuring, the HS companies would face liquidation, and this would lead to massive value destruction for investors. The BRP was virtually identical to Georgiou’s original Orthotouch proposal and was approved in December 2011.
Klopper said in a recent communication sent to investors in response to the Highveld Syndication Action Group (HSAG) newsletters that at the time only Georgiou approached him as BRP with a solution that would ensure continued interest payments to investors. “My view was that the only way to avoid the liquidation of the HS companies was to renegotiate the terms of the March 2011 agreement with Orthotouch, and thereby ensuring the continuation of the monthly interest payments to the Investors.”
Appointment to board not a conflict of interest – Klopper
The BRP also proposed that all the HS properties would be transferred into Orthotouch, and investors would receive their capital back five years from the adoption of the plan. Investors would also receive reduced interest payments during this period.
Following the approval of the BRP in December 2011, Klopper was appointed to the Orthotouch board on January 9, 2012. In a communication sent to investors, Klopper stated that “this [his appointment to the board] does not in any manner suggest that there was a conflict of interests between the position of the writer as the business rescue practitioner overseeing the implementation of the plan and the interests of the shareholders. The interests of both parties are in fact 100% inextricably aligned.”
Klopper resigned from the Orthotouch board in October 2018 citing “personal reasons” for his decision.
Klopper’s failure to investigate the dispute and the non-transfer of properties, as well as not taking legal action to recover the R3.5 billion, deserves further scrutiny.
Section 141 of The Companies Act stipulates that if a business rescue practitioner suspects there were any fraudulent activities or contraventions of the law prior to the start of the business rescue proceedings, they must report this to authorities such as the police and Sars, and take action to recover such assets.
But in the BRP Klopper doesn’t even formulate an opinion on the accuracy and veracity of the allegations pertaining to the dispute, saying it would be too costly to pursue and that any litigation may result in liquidation.
In response to a draft version of this article, Klopper said this interpretation was “misleading”, adding that the BRP was a negotiated business rescue plan. He also said the issue of taking legal action was discussed with investors at length at the meeting where the BRP was adopted.
Klopper also said it was made clear at the meeting that he had very limited time to draft a rescue plan. “It is incorrect to suggest that the business rescue practitioner ought to have rather spent his time ‘investigating’ the affairs of the various companies instead of negotiating a solution for the plight of more than 18 000 investors.
“Mr Klopper wishes to make it very clear that the opportunity to rather embark upon a litigious cause of action was explored and put to the affected persons as an alternative … when the business rescue plan was considered and voted on,” he said.
Klopper’s message in a communication to investors in February 2012 is slightly different. In this communication, he said the adoption of the BRP ensured that the HS companies ceded all the claims they had against Picvest and Zephan to Orthotouch. “Insofar as investors may believe that they have claims against Zephan Properties (Pty) Limited and/or Bosman & Visser the BRP does not believe that there is any nexus between the investors and these companies and there could consequently be no claim against these companies by investors.”
A draft version of this article was sent to Georgiou prior to publication, but he did not respond.
Publisher: MoneyWeb / Ryk van Niekerk / 4 March 2019 00:27