Issue: Dec 2013 - Feb 2014
Editorials

JSE RULES

Fit for a King

Dave King is having a swimmingly good time, as well he might. Not only is the fight with SA Revenue Services behind him but, since the decade-long tax dispute was settled in August, the share price of JSE-listed Micromega Holdings that he controls has shot the lights out. In the past three months, the price has rocketed – at one stage, by over 400%.

It’s like magic, reflecting gloriously on King’s ability to run the company unfettered by distraction. Yet investors who recall the debacle of Specialised Outsourcing Ltd (SOL), from which King made the mega-millions that became the subject of his SARS marathon, might nevertheless be “advised to deal in the shares with caution” as the jargon has it.

King could have a way to go before his reputation is restored in the eyes of institutional investors, particularly those whose clients (such as pension funds) lost out the last time. He’s now made admissions that belie his earlier denials. They’re preceded by the stain of the 2006 court case when Justice Southwood shredded his credibility over dealing in the SOL shares.

And last time round, he and colleagues had to face an exhaustive interrogation by the Financial Services Board into alleged insider trading that accompanied the SOL debacle. “Why are you now making such a fuss?” King amiably asks TT. “The investigation found nothing.”

That’s a little exaggerated. More accurately, the FSB submitted its report to the National Prosecuting Authority. It was considered in the 36 charges, ranging from racketeering to fraud, subsequently laid against King.

“I was acquitted!” he happily recounts. Indeed he was. However, the trial left a cloud because the court made no finding. The state had to drop charges when a crucial witness was unable to testify and documentary evidence – some 200 000 documents had been seized – was ruled inadmissible through procedural irregularities. “It’s not my fault that the NPA stuffed up,” he laughs.

Such a big joke, given the legal costs to the state and King that embrace expenses of all the criminal and civil actions as well as the enquiries and investigations over the years. The amount of King’s settlement and fine, with costs added, equates to perhaps half of the R2,5bn (including penalties) that SARS had ultimately computed.



King . . . a star again

Is he entirely out of the woods? Well, yes but maybe no. Yes, in that he needn’t bother about the Financial Markets Act so far as a revival of the SOL controversy is concerned.

The FSB is precluded from using its extended powers under this Act -- to investigate and impose administrative penalties for insider trading, market manipulation and false reporting – because it only became effective last year and is not retrospective. Also, were the FSB to invoke earlier legislation applicable when the market abuses alleged against King took place almost 20 years ago (see following article), it would be practically impossible to summons witnesses who might still be around and to rely on their memories.

Maybe no, in that there are prevailing JSE rules on the “fit and proper requirements” for directors of listed companies. They’re considerably broader than the Companies Act requirements, which cover all directors of all companies, and they give the JSE wide discretion.

They say that an officer or director of a listed company must “comply with such criteria of good character and high business integrity as the JSE deems fit”. In determining compliance, the JSE will take into account such factors as whether the person has been:

  • Convicted of an activity constituting a criminal offence involving fraud or theft;
  • Held civilly liable for fraud, theft, dishonesty or market abuse;
  • The subject of a formal investigation by any regulatory or government agency.

Now look at the media statement, jointly issued by SARS and King, on August 29. It details a court-ratified plea and sentencing agreement, tantamount to a conviction. Is accepting liability for contraventions of the Income Tax Act, “including the failure to disclose information and the failure to provide correct information over a number of years”, not indicative of dishonesty? Is the payment of a R3,2m fine, and a further R8,75m to the Criminal Recovery Asset Fund, not illustrative of serious offences?

Then what of all the previous statements under oath, when SARS and King were at daggers drawn? Or the findings of Justice Southwood that, for instance, King’s evidence before an Income Tax Act enquiry “was materially false and in certain respects a complete fabrication”? Or the formal investigations by the FSB and SARS? Maybe these questions remain relevant; maybe they don’t.

The JSE requirements aren’t in the nature of Companies Act strictures, the latter defining the precise circumstances under which a person automatically becomes ineligible or disqualified to serve as a company director or prescribed officer; for example, where the person has been convicted of an offence “involving fraud, misrepresentation or dishonesty” and sentenced to imprisonment without the option of a fine.

By contrast, the JSE requirement seems open to informed case-by-case interpretation on the criteria it has set out. Saying sorry doesn’t necessarily vaporise the causes of the apology. Rather, they provide a record for the rule to be interpreted.

Then, were it to consider the circumstances of a particular case and conclude that the record of the person being examined falls short of the “fit and proper” standards that the rule envisages, the JSE sanction is obscure.

The rule states: “Dishonesty or deliberate omission in an application to the JSE will result in immediate disqualification of a person’s fit and proper status”. On a simple read, it could be taken to mean that a person who has admitted to dishonesty but doesn’t make “an application” to the JSE, has the “good character and high business integrity” that the rule requires.

That’s looks anomalous. It’s accompanied by vagueness on how processes to interrogate the rule’s application are to be triggered, whether on a complaint or on the JSE’s independent initiative, and the penalties to apply in the event that the rule is held to have been breached. Equally unclear are the consequences; for instance, the effect that withdrawal of “fit and proper” status is supposed to have.

So far as can be ascertained, the JSE (supervised in the execution of its regulatory responsibilities by the FSB) has never sought to invoke the requirement, at least in relation to a serving director suspected to fall within the JSE’s criteria. Here’s an opportunity for one of the world’s best-regulated stock exchanges to make a start.

It’s an occasion for the JSE to reflect on why the rule exists and to use the high-profile King matter to explore its continued relevance. Better still, the JSE will interpret the rule in the King context and come to a conclusion one way or another that it will publicly explain.

Unless this “fit and proper” requirement is applied, in a manner that its purpose becomes evident, it might as well be abandoned.

ABOUT DAVE

He is a serial entrepreneur i.e. according to his definition, a person who loves to create businesses and to dispose thereof at a profit, quickly, as soon as the business is a success and before it develops or encounters problems. He considers that the best way of disposing of a business was to take the shareholding of the vehicle to the Stock Exchange, as stock exchanges tend to overprice this type of business. i.e. the type of business which he creates.

There is no moral or other obstacle or reason for him not to dispose of the shareholding in a company created by him. He will always ensure that he leaves behind him a business which (he’s) sold because otherwise people will not continue to support him in his next venture.

-- Justice Southwood, summarising a King interview after he’d sold his SOL shares.