Steinhoff CEO quits amid accounting scandal
Publish date: 07 December 2017
Issue Number: 591
Diary: Legalbrief Forensic
Corporate scandals added to SA’s ethical woes this week as two of the country’s biggest companies, Naspers and Steinhoff International, both found themselves facing allegations of corporate shenanigans, writes Legalbrief. Steinhoff’s share price went into freefall yesterday after CEO Markus Jooste resigned over accounting irregularities at the retailer. Steinhoff’s share price plunged 60% when the local markets opened yesterday (Wednesday). Add to the mix the news that a US law firm is investigating the possibility of instituting a class-action suit against Internet and media giant Naspers over the MultiChoice debacle (see report below), and it's clear that SA’s capitalist class is in crisis, notes a HuffPost SA report. ‘I’m not surprised at this turn of events at all,’ economist Iraj Abedian from Pan-African Investment and Research is quoted in the report as saying. He believes that the actions of both companies’ leadership teams have fallen short of the principles that they themselves purport to represent. ‘They (Naspers and Steinhoff) react the same way that politicians do. They deny, deny, deny – until there is no room left for denial. Then they try to deflect and justify,’ Abedian said, according to the report. As respected financial journalist Ann Crotty writes in an analysis on the BusinessLIVE site (see Analysis section): ‘It has truly been an annus horribilis from which few of our formerly respected institutions have emerged unscathed. It’s not just politicians at the centre of allegations of staggering levels of corruption; increasingly it looks as though the politicians were abetted by sections of the corporate sector.’
Jooste has admitted in a letter to colleagues he made ‘some big mistakes’. In what seems to be an informal, personalised letter, which Fin24 says it received from two independent sources who confirmed it to be from Jooste, the former CEO of the global retail group apologised for the bad publicity he caused Steinhoff over the past few months. In August this year German business magazine Manager-Magazin reported that Jooste was among four employees being investigated by German prosecutors in connection with a 2015 case tied to possible accounting fraud. In his informal letter Jooste wrote: ‘Now I have caused the company further damage by not being able to finalise the year end audited numbers and I made some big mistakes and have now caused financial loss to many innocent people. It is time for me to move on and take the consequences of my behaviour like a man. Sorry that I have disappointed all of you and I never meant to cause any of you any harm.’
A number of red flags were raised before Steinhoff’s spectacular unravelling this week. A Moneyweb report says rumours of accounting shenanigans have been swirling around the company for years, but many investors dismissed these, believing that while the giant furniture retailer and manufacturer might sail ‘a bit close to the wind’, it was generally on the right side of the law. However other Steinhoff habits have made some investors nervous. These included the constant acquisition of poor or deteriorating businesses whose performance seemed to miraculously improve post-acquisition, even if only on paper. Steinhoff’s week from hell started with its auditor Deloitte saying it would not sign off on the company’s financial statements, but added that it would present the unaudited results yesterday (Wednesday). But, notes Moneyweb, from there events escalated, resulting in the resignation of Jooste, followed by the resignation of former Steinhoff CFO and current head of Steinhoff Africa Retail (Star), Ben la Grange. Jooste also resigned from the boards of Star, PSG and Phumelela Gaming. Steinhoff also announced that that new information had come to light relating to accounting irregularities that warranted further investigation. PwC has been retained to investigate, delaying the presentation of the results indefinitely.
US-based Viceroy Research added fuel to the fire yesterday (Wednesday) with the release of an explosive report that suggests that, among other things, the firm has used off-balance sheet vehicles to artificially inflate earnings, Moneyweb reports. So much so that it suggests that the yet-to-be-released 2017 results might ultimately have to be materially restated. The report says the first red flag was the dizzying rate of acquisition over the past decade. Steinhoff spans five continents, more than 30 countries and consists of dozens of non-integrated brands. No other retailer has successfully managed this level of operational and managerial complexity, the report says. While revenue has grown, the financials show a company that is having difficulty converting this to earnings and cash flow.
German prosecutors said they could not estimate when they will be able to conclude their investigation into suspected accounting fraud at Steinhoff because of the extent of the probe. Criminal investigators were currently reviewing documents and data seized during raids, the prosecutors’ office in the German city of Oldenburg said yesterday. It said four current and former managers were under suspicion of having overstated revenues at subsidiaries, notes a report on the Moneyweb site.
Steinhoff's chair, retail tycoon Christo Wiese, alongside former Pepkor CEO Pieter Erasmus, will run Steinhoff until a new CEO is appointed, a statement issued at 10.45pm on Tuesday night said. La Grange has been replaced by Star chief operating officer Leon Lourens as CEO with immediate effect, the company said yesterday. ‘The supervisory board of Steinhoff wishes to advise shareholders that new information has come to light today which relates to accounting irregularities requiring further investigation,’ the statement said. A BusinessLIVE report notes that Jooste, who had been with Steinhoff since 1988 and was CEO of Steinhoff International since 2000, was credited with growing the SA furniture manufacturer and retailer into Europe’s second-largest player, behind Ikea.
Meanwhile, international law firm Pomerantz has announced it is investigating claims that MultiChoice was involved in securities fraud or unlawful business practices relating to payments to Gupta-owned ANN7, according to a TimesLIVE report. Pomerantz said the claims were being investigated on behalf of investors‚ who could contact Robert Willoughby at the firm. ‘According to local media‚ citing leaked e-mails‚ MultiChoice substantially increased its annual payment to ANN7 from R50m to R141m over the past two years,’ a statement from the firm read. MultiChoice and its former chief executive have denied any wrongdoing. The Pomerantz probe could result in the firm launching a class action lawsuit against Naspers, MultiChoice's holding company, suggests a Moneyweb report. Pomerantz, with offices in New York, Chicago, Los Angeles and Paris, is active in the areas of corporate, securities, and antitrust class litigation. Recent securities litigation includes cases against AOL TimeWarner, Avid Technology, Lucent, Groupon and Tesla. The firm appears to have pioneered the field of securities class actions, fighting for the rights of the victims of securities fraud, breaches of fiduciary duty, and corporate misconduct and has recovered over $1bn on their behalf, says the report. Naspers investors have been invited to express interest in joining the class action.
Naspers CEO Bob van Dijk says the Internet and media group is taking the revelations about MultiChoice's payments to the then Gupta-owned ANN7 ‘extremely seriously’. Van Dijk maintains that the recently-announced probe into the matter by MultiChoice’s audit and risk committees will be carried out with ‘diligence’ and ‘independence’, according to a Fin24 report. This follows a #GuptaLeaks report in November, in which it was detailed how MultiChoice agreed to pay the Guptas' Infinity Media Networks a ‘once off’ payment of R25m in 2015. MultiChoice also agreed to increase its annual payment for Infinity's ANN7 news channel from R50m to just over R140m. The report notes that criticism has been heaped on the company for funding a channel with dwindling viewership which essentially became a propaganda machine for the Gupta and Zuma families. Van Dijk says critics who've accused Naspers of folding its arms following the revelations are wrong.