🔒 PREMIUM: Magda Wierzycka: How I quickly saw through “corporate ponzi” Steinhoff

LONDON — This powerful interview is sure to add many more to the army of those who support financial services firebrand Magda Wierzycka. A qualified actuary, she enjoys the freedom that self-employment brings. And in this fascinating interview she pulls no punches on the Steinhoff scandal, claiming that it is little more than a “corporate ponzi” scheme driven by greed and collusion. The biggest lesson for the investment community, she says is to open its collective mind to minority reports. Had they done so, the disaster might well have been averted. Invest half an hour listening to this cracking interview. It helps us to understand what went down at Steinhoff – and why most were fooled into first fuelling and then being hurt by South Africa’s biggest ever corporate scandal. – Alec Hogg

It’s a warm welcome now to Magda Wierzycka who yesterday wrote an explosive article that we published on BizNews. Magda, you unpacked the Steinhoff issue. You certainly gave my thought processes a jolt. Where does all of this insight come from?

The insight didn’t take me a long time to get. Obviously, I watched the same horror show happening on the JSE as everyone else did, as the share price plummeted by close to 20% and then 60% the next day. That obviously motivated me that evening to go and look at the financials of Steinhoff. I also scratched around the internet and found some horrifying recent reports. It was that one moment where you look at the numbers and you intrinsically feel that the numbers don’t make sense. That you cannot put the numbers and the business strategy together so you look at what Steinhoff has done, specifically in the last couple of years and it seems like they’ve taken on an enormous amount of debt. They went on a huge buying spree, almost like a frenzy buying spree and then I read all about their fleet vehicles where they seemed to have been booking their liability and then you of course read about the fact that they are being investigated for tax fraud.

When you put all those pieces together it doesn’t take long to form a picture of a company with clearly – why would you be doing all of this? You would be doing it to disguise losses, to inflate earnings, which are not there, and you would be doing it because you’ve done some tax dodging, which you are now trying to cover up or you continue to implement. Having bought companies myself, as part of a strategy, I know how long it takes to integrate a company, to understand the company, and to form a strategy around companies. So when you’re looking at a business model, which involves just a frenzy of buying at all cost. Poundland in the UK was all cost, you realise that those purchases are not because of some great strategic vision but there are probably some other purposes behind it and I think that is basically the safe way.

Sygnia CEO Magda Wierzycka

Yes, it’s very interesting that you’ve picked it up so quickly and many other people didn’t, and just maybe to put the other side of the coin because I’ve obviously, followed this company for a long time. I know Markus Jooste from horse racing days and he always used to argue. I remember David Shapiro and I went to go and visit them because we couldn’t understand it either, and he used to argue that they had a vertically integrated model. They would make the furniture. If you like, grow the trees, make the furniture, deliver it to their branches and all they needed was more and more volume. That was where he came from, which is a believable model for somebody who is not an actuary and clearly, we need more actuaries and less people listening to the stories.

It might be a believable model and I’m a great believer in vertical integration but when you are buying companies, and I’ve bought relatively small companies, it takes a while to integrate systems to figure out where the value is, to figure out how you can rationalise expenses. Buying companies does not involve going on a spending spree in a shopping mall on a Saturday morning and buying everything in sight at whatever price it’s going at. So, that might sound like a plausible business strategy. Perhaps the fact that I can take a bird’s eye view of it because I’ve never spoken to management. That was the very first lesson that I was taught was that management lies, and that when analysing a company, you should discount what management says. Be very sceptical and rather look at and scrutinise the numbers, scrutinise the corporate structures and it’s really that, that concerns me more. I think the overlay of the business strategy obviously is useful background but it’s when you look at the corporate structuring, when you look at off balance sheet vehicles. I suddenly had visions of the Gupta empire, where you had associates setting up supposedly unrelated but sort of related companies for no particular reasons.

It’s not that I untangled the entire web in half-an-hour. Of course I didn’t but there was so many red flags. Then I went back to 2015, where the type of hands and the same type of characters managed to convert their PSG shareholding into a shareholding in Frankfurt with Steinhoff and together they externalised all of their SA wealth outside of foreign exchange controls. You know that you are not dealing with pillars of society here.

That’s interesting and then just again, just to clear my mind up a little bit. On the buying spree that they were on they did remove themselves from two of those bids if you recall. They went for a bid and the point there was ‘we need to be financially disciplined – we don’t want to get into a bidding war and no hostile takeovers,’ and they’ve got these parameters in which they deal. From what you’ve seen and from what you’ve just said it would appear that that was a story again that didn’t have a whole lot of substance.

Yes, I think it is a story that didn’t have a lot of substance. I think they took out enormous amounts of debt but what we know now is that clearly, they inflated earnings. Clearly they created accounting practices to inflate those earnings that were probably never there. We don’t know how many years this goes back but as with all charismatic, very clever people they probably persuaded themselves that there is nothing wrong with what they’re doing. When I looked at all of this to me, it looked like a corporate structured Ponzi scheme. As long as the share price went up and as long as you had charismatic leadership everyone believed. Consequently, people just didn’t look too closely but when you scratched and when you looked at the opinions of various analysts in the market there were a lot of varied opinions, the minority reports, which basically said that they don’t believe the management. They don’t understand the business model. They cannot analyse Steinhoff because they cannot come to grips with the business model.

Must read: CARNAGEI Steinhoff share price plunge NEARS 90% as debt cut to junk

Then consequently, when you start dissecting this company into its component parts you suddenly realise that the asset value doesn’t bear much of a resemblance to the amount of debt that they’ve taken on. Again, I’m not an expert analyst but just in that half-an-hour there were enough red flags and I’ll tell you what I did. I’m not immune to the same human emotions as everybody else so, when the share price fell by 60% at 16:45, I’m ashamed to say, I said to my dealing room, ‘please buy some Steinhoff shares for me because I’m convinced that there will be a bounce the next day.’ I bought some shares at R16 and literally that evening I read through all those reports and at 05:00 I sent an email to my dealing room saying, ‘whatever the share price opened at you sell immediately.’

Wow that’s a very honest approach and I guess there are many lessons that all of us, and even you, are learning from this whole saga. Magda, what about Deloitte though? Deloitte signed these accounts for years and years surely, they should have waved some flags ahead of this thing that they did this week?

Yes, look we don’t know how far back all of this goes. We know that this year was specifically bad because this year they’re refusing to sign their accounts. The accountants will claim and, as you know, I’m not a great believer right now in what an accounting profession can and can’t pick up. I think that when management lies and has not disclosed information to auditors it’s not an excuse but I think it’s difficult for auditors to pick up fraud. It’s not that they shouldn’t and I do believe very firmly that the audit professions need to relook at their responsibilities. I believe that they need to relook at how they do business. I think they should relook at when you appoint an external auditor and the very first thing that you need to sign is an audit letter, and that audit letter is covered in disclaimers. So, it’s pages and pages of disclaimers where they get liability for nothing. You pay them millions and they get liability for nothing and I think that all of that needs to go. I think that auditors need to start taking serious liabilities for the numbers that they’re signing off on. If that means that they need to do much more in depth investigations and leave every stone unturned, then that is what they need to do. Again, I suspect that what we’ll find in this instance is that the auditors did not do a good enough job. They will claim that management lied and I’m just not buying it as an excuse any longer.

What’s interesting about this is Christo Wiese’s role. Here he is, this super wealthy man and he takes his life’s work, really, and injects it into Steinhoff. Changes trade shares that were valuable into shares that are today, pretty much might even be worthless. Did he not do his homework in this? Did he also because it begs belief that he couldn’t understand what was happening?

Of course, he understood let’s be very clear. That entire board of directors understood exactly what they were doing. They understood exactly their strategy. They had access to exactly the same numbers much sooner and much more frequently than you and I would so I don’t think for a second that they didn’t know what was going on. I think that like with any other Ponzi scheme, except that this is a corporate version of it, when it starts coming to the crunch he injected more cash into it, trying to buy market confidence. It is a suspicion on my part but I don’t believe for a second that he didn’t know what they were doing or what was going on in the company. Of course, they knew – the entire board knew.

I suspect that they convinced themselves that they were being very clever because I don’t believe…The question here is why, given that we now know that Steinhoff is dirty, that is now a fact, why they took the risk of moving this listing from SA, the primary listing, to a much more heavily regulated environment, such as Frankfurt? In SA, I think you can still control things and yet, they took the risk and I think that risk was taken because of greed and because they wanted to expand their wealth and they listed this company in Frankfurt. Suddenly they became targets for German regulators who are obviously a lot more scrupulous than our regulators here.

When you’re taking that kind of risk you’re only doing it because you believe your own story. You believe that what you’ve done is not necessarily illegal. It’s just very clever. Then I suspect that things just started snowballing, and I think that he made the purchase of the Steinhoff shares to show the market that as things started unravelling the last bit that you’ve got, which is to try and turn sentiment, by showing the market that you’ve got confidence in the company.

That’s extraordinary because if you go back to August, I had a look at the figures. In August there was a R5bn share buyback by Steinhoff.

I know.

They’re extraordinary numbers and to me that was five-billion reasons why the shares were cheap and if we believed everything they told us then clearly, on fundamental analysis, it seemed to be but it was anything but. So, they really, from the way you’re seeing it and certainly from the way it’s unravelling they were playing everybody. Even the banks, even the international banks?

Yes, the international banks. You know that the ECB bought some of their bonds.

The European Central Bank, geez?

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt. REUTERS/Alex Domanski
A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt. REUTERS/Alex Domanski

I think this story still has many chapters to play itself out because we still don’t understand and we don’t have full transparency of what happened within the company. That’s only one part of the story. The next part of the story is obviously, Christo Wiese took on a lot of debt in order to buy the shares. Now, when you borrow money and when you use shares as security to buy other shares the banks usually require you to put up at least five-times cover, at least. So, if you’re borrowing R10m and if you’re using shares as security, they require you to put R100m shares as security. So now, as the shares start dropping in value the banks come calling the very next day, it’s like a margin call, for you to top up your security. So you don’t know what other shares he had to put up in order to maintain his debt covenants and for his debt not to be recalled by the banks.

The next tier of issues, at the moment all we’ve seen is the equity price collapse. What we haven’t seen is how much debt Steinhoff has actually raised. We know that they raised a lot of debt in the international markets by issuing bonds but we still don’t know, at this stage, how much debt they raised in the SA market. So, it’s not just equity funds that will be affected. Similarly to ABIL, bond funds will be affected by this but we just haven’t seen the effect of that yet so I think that SA shareholders are still in for quite a few rude shocks. This story hasn’t played itself out yet.

Magda, when you wrote your excellent piece and we published it on BizNews we had quite a few emails. In fact, I even had a phone call from someone saying, ‘yes, but Magda herself owns these shares in her portfolios.’ What’s the story there?

In terms of Sygnia, we’ve got two main asset management product lines. We manage money on a passive basis so, there we track market indices. Our brief there really is to replicate the index and obviously, Steinhoff did feature in a number of indices that we track so, we did hold Steinhoff in our passive portfolios. The fortunate side is that in all these index trackers because there’s over a hundred shares that you’re holding, Steinhoff – I’m not going to lie, and say it’s not a significant portion. For instance, it’s in the SWIX index and is up to three percent of the SWIX index but by virtue of our mandate we are obliged to hold those shares – that’s the passive side.

When we manage money on a passive basis we don’t analyse companies. That’s what allows us to keep the costs down. We very passively, basically just replicate whatever the JSE includes in a particular index, like the All Share Index. We also manage funds, which are multi-manager funds, which are plans of passive and active strategies and when it comes to active strategies we outsource that active portion to third party asset managers, such as Investec for instance. Those managers, the active managers we have appointed also held, not all of them but some of them, held Steinhoff in their portfolios. So, the onus is on us to now engage and we are, trust me we are, to engage with those active asset managers and to figure out what sort of research did they do on Steinhoff?

First of all, if there were all these red flags in the market, if there were these red flags sending voices and minority reports, which said that this company is fraudulent then I want to understand what sort of research Investec or Coronation or Allan Gray did, who did not pick up any of those red flags? Why were they comfortable to double up on their shareholdings yesterday and the day before? So, there are a lot of question marks and a lot of hard questions that we are going to be asking the active managers that we have appointed. I’m not putting up myself as a paragon of virtue here. I am just saying that active managers are paid to research companies. They are paid to scrutinise these numbers.

You and I are punters. We can superficially look at companies and decide in our private capacity, managing our own money, with a bit of belief, a bit of hope, and a bit of knowledge buy some shares and hope that they grow in value. But professional fund managers act in a judiciary role so they are managing the savings of other people and what you’re paying them for is for intense research. You’re paying them to be sceptical. You’re paying them to be questioning. You’re paying them to not trust management. You’re paying them not to take extraordinary risks. That’s what they sell. This is their entire skill so we are certainly engaging, and trust me we’re not being polite, with every single active asset manager that we are using. We’ve got for instance a couple of unit trusts where the active asset managers didn’t have their own unit trust licenses so we kind of brought them in Sygnia branded unit trusts and those managers held Steinhoff shares so we are having very hard discussions with these managers.

If we don’t receive, and a KPMG story again, adequate explanations, and I don’t think we will by the way, then we are going to start firing managers. I also consulted with lawyers last night because I wanted to know – most asset managers in the asset management agreements include a gross negligence clause. So they’re not liable for much but they are liable when it comes to gross negligence. Most asset managers, when they sign these clauses, think of gross negligence as operational negligence, or admin errors. I think they’re missing the point that actually that liability clause covers asset management activities as well.

When I spoke to my lawyers last night they said to me that actually, the gross negligence clause in the contracts of asset management is a reasonable means test. So, it’s nothing more than saying, was it reasonable for them to invest in these shares? When you’re acting in a fiduciary responsibility the benchmark for what is reasonable, is lower because your level of scrutiny should be so much greater. I’m certainly going to try and test this issue of what constitutes gross negligence, when it comes to investing because look we’ve now had ABIL as an example. We now have Steinhoff as an example and I think the time has come to start questioning what it is that asset managers do for the money that they are paid?

It’s a fascinating development and what are the big lessons on all of this? Obviously, what you’ve articulated for the financial services sector itself, but this was a company if you recall, it was only a couple of years ago where there was quite a big scandal on the executives buying shares ahead of the merger with Pepkor. That seemed to go away. It’s a company that’s had its run-ins with international and local, and now of course, it’s also the ugly face of white monopoly capital, if you like, when you start looking at it from a political sense.

Yes, all of it, Alec. The first red flag should have been the fact that you are dealing with people who operate in shades of grey and you’ve always known that. The problem is, as with any other and I keep throwing the analogy to a Ponzi scheme but what does a Ponzi scheme do? A Ponzi scheme effectively shows you almost linear positive returns and most Ponzi schemes are led by very charismatic individuals so, people buy the returns and they buy the personality. I think that what you’re seeing here is Christo Wiese and the people who he had surrounded himself with, are highly charismatic people. I think the market has been fooled into believing that because he’s such a rich man, he’s got a Midas touch and that is definitely how he portrays himself. I did attend this thing, probably eight months ago, where he did this whole speech about his career and the way he makes decision. He is a highly charismatic individual so I think people just bought into the counter personality and overlooked some of the facts, which actually should have made you question whether this is the most credible person that you have ever dealt with. Particularly, when you look at this potential for front running, there’s externalisation of wealth – red flags, there are red flags everywhere you look.

I’m still confused about Christo Wiese because he was on the Steinhoff board for many years but he brings all his own wealth from a sensibly solid business, in Pepkor. Well, one doesn’t know at the moment, of course, but it didn’t seem to have any of the issues that Steinhoff had, and he swaps his shares for Steinhoff shares. Do you think he…?

Christo Wiese, billionaire and chairman of Steinhoff Holdings NV. Photographer: Waldo Swiegers/Bloomberg

No, Alec, that was just greed. That was just an attempt to externalise his wealth, out of SA. I’m a cynic. When I looked at it then I didn’t see it as anything else but a way of effectively shifting money out of SA through a mechanism, which effectively circumvented foreign exchange control regulations.

What about the politicians now? Given that that this will probably be, and I’m sure lots will come out in the wash, but what about the politicians now and this very sensitive period that we’re in, in SA right now?

Alec, it’s a disaster on so many fronts because we don’t need this noise so close to the December elective conference. We’re living through times where economics and politics have converged, where everyone in SA talks about corruption. I was just reading The Economist article this morning again, it’s all about corruption in SA. You can’t open The Financial Times without seeing an article about corruption in SA. It’s such an unnecessary negative narrative around this country and unfortunately, we’re living through times and the time is getting closer because we now really only have two weeks, where the outcome of the December conference is very binary. If the right things happen I think that we can restore SA to at least a semblance of a normal life and economy very quickly.

If the right things don’t happen then we are in for a very,very tough ride, economically and politically so in that kind of heightened political environment, do we really need this sideshow of this corruption that has happened, which has nothing to do with politics strangely enough? This is the first example where it’s not about bribery. It’s about fraud but that’s the pessimist in me. The optimist in me basically looks at this and says, ‘well, I’ve always maintained that corruption is one colour blind. That corruption affects the public sector and the private sector equally because for every rich tender from the public sector there is a private sector participant that’s willing to pay, and willing to pay big money and we’ve seen that.

Perhaps the fact that what we’re showing is that corruption is a rainbow. It’s not limited to the public sector. It’s not limited to the ANC at all. Maybe that’s the only positive thing that you can take out of it but as a country, we don’t need it. I think that if the right thing happens in December, we need to work extremely hard at rebuilding international investors trust in SA because that’s the only way that will lead to investment in SA. That will restore business confidence in SA. That will mean that there’s job creation that we can start tackling unemployment. That we can start tackling inequality and poverty, and lack of skills. It’s the only way that we can return to having normal life conversations. Not conversations about the Guptas. Not conversations about Zuma and corruption. Now, not conversations about Steinhoff and Christo Wiese but conversations about things that really matter. That is what I would so dearly love to see, in 2018.

There’s a wonderful saying in the horseracing community, where I met Markus Jooste. They say, ‘from your lips to God’s ears,’ and certainly those are the hopes of many South Africans. Magda, thanks for the work you’re doing. I know you take a lot of flak because you are prepared to stand out there and to say things as you see them and as they are, and usually come to pass as well. But I can assure you there are, within the BizNews community, hundreds of thousands of people who are very appreciative of your efforts so, don’t stop.

Thank you, Alec, and watch this space because I’m not done yet and I’m coming out with a big announcement on Wednesday, next week.

Well, we will be on it with you.

Hopefully, which will unify this country a little bit more and which will show people that we, as South Africans, will not allow a handful of corrupt individuals to hold 56-million South Africans hostage. I do have a plan. We are announcing it on Wednesday, hopefully, and I think it will be revolutionary in many ways, I hope, but I think it will be something that will give South Africans a lot more hope than is on the table today so, watch this space.

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