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IN THE MATTER OF THE MYBURGH INVESTIGATION AND REPORT (“INSPECTORS REPORT”) INTO ALLEGATIONS OF FRAUD AND IMPROPER CONDUCT BY THE EXECUTIVE DIRECTORS OF CORPCAPITAL LIMITED (CONDUCTED IN TERMS OF SECTION 258 (2) OF THE COMPANIES ACT) AND RELATED MATTERS.

REPORT OF C A STRIDE (“Stride”) PREPARED FOR THE PURPOSE OF A SUBMISSION BY WWB TO THE MINISTER OF TRADE AND INDUSTRY REGARDING THE SECTION 258(2) INVESTIGATION OF CORPCAPITAL, AND IN CONTEMPLATION OF LITIGATION IN THE REVIEW

ON THE MYBURGH REPORT.

A. PROFESSIONAL BACKGROUND

1 Details of my professional background are attached as Annexure 1.

B INTRODUCTION AND INSTRUCTION

2 I have been requested by Webber Wentzel Bowens, acting for Frangos to evaluate and express an opinion on the Myburgh Investigation of the Corpcapital Group made under or in terms of the instructions contained in the letter from the Minister: Trade and Industry dated 19 May 2003 attached as Annexure 2.

3 I have also been requested to establish whether in my opinion a proper investigation had been conducted by Judge John Myburgh and Professor Keith Prinsloo in respect of the matters set out in the Ministers letter of Appointment relating inter alia to:

3.1 The inception of the original entity in the Corpcapital Group

3.2 The manner in which Cytech/Netainment was valued and whether such values were unjustifiably inflated to boost profits artificially and possibly fraudulently inflated to boost profits artificially and possibly fraudulently.

3.3 Whether profits in turn were used as the basis to pay bonuses and restraint payments.

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3.4 The appropriateness of the accounting treatment applied to Cytech/Netainment

3.5 The adequacy of disclosures made about the investment directors, audit committees and ultimately to shareholders.

3.6 The issues relating to the Merger of Corpgro, Old Corpcapital and Corpcapital Bank in relation to the swap ratios and any possible inherent conflicts of interest that might have existed in the merger process

3.7 Any possible prejudice to the investing public as a consequence of the Cytech/Netainment overvaluation.

3.8 Possible inadequate disclosure to shareholders and the adoption of inappropriate accounting policies.

3.9 The Payne Report into the affairs of Corpcapital, produced by Mr. Nigel Payne.

3.10 Possibility that the non-executive directors, did not properly discharge of their fiduciary duties and responsibilities

3.11 Possibility that the management did not properly discharge their duties and responsibilities.

4 I have also been requested to note and comment on areas where, in my opinion, the Inspectors may have been misled or failed to report upon and in particular to:

4.1 Whether the Cytech/Netainment investment could have been “held available for sale”?

4.2 The revaluations of the Cytech/Netainment investment.

4.3 Whether the Cytech/Netainment investment could in fact have been a joint venture?

4.4 Whether there had been any breaches of the Exchange Control Regulations?

4.5 Whether or not the directors had fulfilled their fiduciary and statutory duties?

5 I have been requested to ignore the legal issues relating to the manner in which the investigation was conducted.

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6 I have been requested to accept the validity of draft minutes, electronic copies and photo static copies of records for the purpose of this report.

7 I have interpreted my brief to require me to commence my review of the documentation disclosed to the Investigators, and such other documentation as I have considered necessary, from the initial formation of the overseas structures that acquired Southgo, the initial cash shell, which became Corpgro and to trace the executives shareholdings therein and the benefits that they derived up until and including the dissolution of the Group. This involved inter alia the following

7.1 Ascertaining what overseas entities were established and on whose behalf.

7.2 Ascertaining the manner in which those entities/ executives acquired the original investment in the cash shell.

7.3 Reviewing the circulars and prelisting statements and the disclosures made therein.

7.4 Expressing an opinion on the fairness of the presentation of the annual financial results.

7.5 Reviewing the effect of acquisitions on earnings and net asset values and the possible need for certain of the acquisitions.

7.6 To express an opinion on the legality or otherwise of disclosures, results or conduct of management.

C OFFSHORE TRUSTS, HOLDING COMPANIES AND INTENTION

KEY POINTS Commencing in December 1995 various overseas trusts and entities

were established illegally by persons who were to become key executives in Corpcapital

It is clear that the intention of the parties was to:o Initially enable funds to be illegally remitted overseaso Acquire shares in listed South Africa cash shell companies.o Avoid disclosure of the directors shareholdings

It is clear that the Inspectors did not investigate these entities or report thereon

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As will be seen later, when the various Corpcapital entities failed to perform the executives falsely pumped up profits in a fraudulent manner

When discovery took place the executives put in place a sophisticated and aggressive cover-up, which later included the dismantling of the company

8 The information provided to the Investigators by Peter Moss revealed the following.

8.1 Overseas trusts had been established. The IBIT Trust (“IBIT”), was registered in Switzerland and controlled by Moss and Welbake Investment Trust (‘Welbake’) - controlled by Liebesman .and a trust controlled by Liebmann). (F1 pages 1-2)

Comments:1 A computer word search of the Myburgh report revealed no

reference to Peter Moss. I assume his evidence was thus ignored.

2 A computer word search for references to the SARB or Exchange Control in the Myburgh report indicates that consideration was being given to reporting breaches of the Exchange Control regulations in respect of Cytech/Netainment but there is no reference to the breaches arising from the illegal establishment of the overseas trusts set up for Liebmann and Liebesman.

8.2 On 11 December 1995 Jeffrey Michael Liebesman, Gustav Benjamin Liebmann and Peter Moss entered into an agreement in terms of which IBIT and Welbake would acquire, (at what would appear to be no cost), all the shareholders interests in Werner & Pfleider Industrielle Backtechnik GmbH, 50% of the shareholders interests in Bakery Equipment Inc and all the interests in Werner & Pfleider SA (Pty) Ltd in the ratio of 60:40%. (F1 pages 3-9).

8.3 Combined Bakery Holdings Ltd,(“CBH”)(registered in the BVI) owned by IBIT and Welbake duly acquired the interests referred to above from Krupp Hoesch Industries GmbH (F1 pages 10-16).

8.4 On 1 April 1996, the unsigned draft minutes of a CBH board meeting approved the acquisition of Combake SA (formerly WPSA) by WPIB from CBH for

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an amount of 7,5 million DM, approximately R20 million at the prevailing exchange rate of DM1 to R2.69 on the day. (F1 pages 17-20).

Comment:If the business had in fact been acquired at no cost, the purchase of the South African operations for R20 million could have been a scheme to illegally remit fund overseas.

8.5 Following restructuring and claims the companies acquired comprised of cash resources of some R 42.7 million, mainly arising from funds paid in by Krupp under German Law to cover commitments to employees of the company being sold following the sale of the company to Moss.(F1 page 2 para 2.7)

8.6 On 19 April 1996 the IBIT and Weldan trusts apparently passed resolutions in terms of which the trusts acquired 47.32 and 52.68% of the equity in CBH I (F1 pages 21-22)

8.7 Unsigned draft minutes of the CBHI board meeting held on 19 April 1996 makes it clear that CBHI, would be the vehicle utilized to participate in the Consortium which was to acquire Southgo.(F1 pages 23-24)

8.8 On 3 May 1996 there is a memorandum (drafted by GBL- presumably Liebmann) (P1 pages 25-27) which notes the following

8.8.1 Presuming that the Southgo acquisition proceeds and is coupled with a rights issue the initial issue share capital will be approximately R32m.

8.8.2 CBHI’s investment is R8m i.e. 25%8.8.3 I have arranged with Ariel Kreuter to purchase Rands on a gradual basis for

the purpose of the investment.8.8.4 The question arises (para 10)(F1 page 27) should CBHI make its investment

in the cash shell through a South African holding company? This means that at the initial stage of an enquiry the investor will be South African. Clearly this does not survive any deeper an enquiry, nor is it hoped or necessary to do so.

Comments:1. Clearly there was concern about disclosure or an

investigation.

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2. Why was this attempt to avoid disclosure of an illegal transaction was not investigated?

8.9 A memorandum dated 16 July 1996 (F1 pages 28-30)(drafted by GBL) notes:

8.9.1 Approximately DM3,000,000 currently held by Republic for CBH, is soon to be used to acquire, directly or indirectly, shares in a listed South African company.

8.9.2 The holding will represent approximately 40% of the South African company’s total share capital.

Comment:Clearly this must relate to the disclosure that CBH was to acquire a 38.5% shareholding.

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8.10 The CBH Group structure at 16 July 1996 and Particulars to the CBH structure are set out on F1 pages 31-32. It is clear that the overseas trusts would own both CBH that controlled a South African company. CBHI was established specifically to acquire shares in Southgo.

Comments:1. There is also no reference in the Inspectors report to the Reserve

Banks restrictions on South African residents holding South African investments through foreign trusts. The Reserve Bank has confirmed that a “loop” structure is not permissible without prior written approval.

2. It is clear from the above that the establishment of the overseas trusts and their indirect investments in Southgo were illegal.

3. It would appear that certain of the funds to make the acquisition in Southgo came from the use of Employees trust funds retained in the company. The original Krupp cash injection into a German operating company was now in the process of being applied to a purpose different to what Krupp intended.

4. It could never have been the true intention that the employees’ trust funds could be available to make an investment. This is probably a fraudulent misuse of Employees Trust Funds.

8.11 On 14 August Liebmann addresses a letter to Moss regarding the Frampton loan.(F1 page 33)

Comments:1. It is not clear why Glen Ulterhalter (of Gestinor) would be

calculating whether there would be 71,000,000 or 66,186,072 shares and how the quantity would vary based on a R2.60 price.

2. The involvement of Gestinor should have been investigated as well as ascertaining how many shares were in fact held by directors in offshore structures.

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8.12 A Memorandum dated 26 August 1997 records for the sake of clarity(F1 pages 34-37)

8.12.1 For the purpose of agreement it has been assumed that the number of shares held is 78,000,000.

8.12.2 On 1 September an amount of R8m will be paid

Comments:1. It would appear that the reference to 78,000,000 shares must

refer to the shares held by G Rubenstein/CMC. 2. It is clear that Gestinor administered the affairs of IBIT, CBH and

CBHI.3. No references to these documents have been found in the

Myburgh report

D. ACQUISITION OF LISTED CASH SHELL COMPANIES

KEY POINTS The first cash shell targeted was South East Rand Gold Holdings Ltd

(“Southgo”) Neither the Southgo Circular nor the Pre-listing Statement dated 9

September 1996 disclose any of these shares being acquired by any of the directors

The shares acquired by the executives were significant It is clear that the Inspectors did not investigate these entities or report

thereon It is apparent from the documentation that the overseas advisors were

aware of the risk of an investigation and had suggested that a South African entity be used and that hopefully an investigation would end at that level

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9 Having established the overseas trusts and holding companies the structure to acquire the first cash shell was as follows:

10 From the documentation prepared by SAB&T(F1 pages 38-39) the original consortium members were:

Eric Ellerine and his family interests 25%Frangos:-Global Equities 10%Moss:-CBHI 40%Grolman:-Global Capital 25%

100%

11 The first cash shell targeted was South East Rand Gold Holdings Ltd (“Southgo”) and it had an issued share capital of 132,318,000 shares (para 2.5.2 (page 47) of the Circular to Shareholders)(F1 pages 40-66).

11.1 Of the issued share capital 75,762,050 shares were controlled by Consolidated Mining Corporation Ltd (“CMC”)(para 2.4.3)(F1 page 46). Of the remaining 56,555,950 shares no less than 64,051,000 shares were traded (at prices ranging from a low of 6 cents to a high of 50 cents per share) during the period Apr-June 1996 (F1 page 118).

Comments:1. Neither the Southgo Circular nor the Pre-listing Statement dated 9

September 1996 disclose any of these shares being acquired by any of the directors.

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2. Given the stated intention of Liebesman and Liebmann on 3 May 1996 (F1 pages 25-27)-to acquire shares in Southgo it is inconceivable that they acquired no shares. This lack of disclosure should have been investigated. It is unlikely that unrelated parties would buy 64m shares at prices of up to 50 cents when the cash shell had a net asset value of only 2.8 cents per share. See also F1 pages 34-37 where reference is made to 78,000,000 old shares being acquired, presumably from abroad.

3. It is apparent that the overseas advisors were aware of the risk of an investigation and had suggested that a South African entity be used and that hopefully an investigation would end at that level (F1 page 27 para 10)

4. There is no indication that the Inspectors considered any of the information contained in the pre-listing statement. Had they reviewed this document it is inconceivable that they would have failed to ascertain who acquired the 76,572,000 shares from Rubenstein/CMC or the majority of the 64 million shares traded in the three months prior to the change of control.

E CIRCULAR TO SHAREHOLDERS OF SOUTH EAST RAND GOLD HOLDINGS LIMITED (“SOUTHGO”)(F1 pages 40-66)

KEY POINTS The circular to shareholder contained a number of false declarations,

relating particularly to hiding the executive’s involvement There is no reference to the circular to shareholders in the Inspectors

report

12 The extracts from circular reflected the following disclosures:

12.1 It was announced in the press on 3 July 1996 that:

12.1.1 Southgo would acquire the entire issued share capitals of and claims on loan account against CorpBuild and IS (para 1.2.1)(F1 page 40).

12.1.2 CorpBuild would acquire the BBS businesses (para 1.2.2)(F-page 40)12.1.3 Control of Southgo would change to the consortium pursuant to which the

consortium would extend the consortium offer (para 1.2.3)(F1 page 40)

12.2 It was announced in the press on 16 August 1996 that (F1 page 41)

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12.2.1 CorpBuild would acquire the business of F&F (para 1.3.1)

12.2.2 Southgo would acquire the entire issued share capitals of and claims on loan account against Matador Refrigeration (para 1.3.3)

12.3 In terms of an agreement entered into on 15 May 1996 between Southgo, (“CMC”) and the consortium. CMC and Southgo agreed to cast all votes available to it for the purpose of ratifying and implementing the acquisitions and appoint the consortium’s nominees as directors (para 2.2.1)(F1 page 44)

Comments:1 The reference to CMC means Consolidated Mining Corporation Ltd,

previously the holding company of Southgo.2 The consortium was defined collectively as the Opportunity Trust

(the trustees of which are Messrs Jeff Liebesman, Benjamin Liebmann and Ernest Liebowitz), Citizens Corp (Pty) Ltd controlled by Eric Ellerine, Global Capital Ltd controlled by Saflife Ltd, Global Equities (Pty) Ltd controlled by Nic Frangos and CBH Investments Ltd controlled by Peter Moss.

3 As there is no reference to CBH in the Myburgh report I assume that this evidence relating to the shares held by CGH Investments Ltd was thus ignored.

12.4 Following the issue to the consortium of the 291 071 429 shares, arising from BBS renouncing their rights, the consortium will hold 38,7% of Southgo’s issued share capital and will accordingly have acquired control of Southgo (para 2.2.3)(F1 page 45).

Comment:This is a false statement as it ignores Consortium members (Liebesman and Liebmann’s) holdings in CBH.

12.5 Southgo’s name would be changed to Corpgro Limited (para 2.6).(F1 page 48)

12.6 After the claw back offer, assuming that all Southgo shareholders other than CMC and the vendors follow their rights…,the consortium will hold 970 021 574 Southgo shares, constituting 64,5% of Southgo’s then issued share capital.(para 2.4.4) (F1 page 46)

Comment:

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This is a false statement as it ignores Consortium members (Liebesman and Liebmann’s) holding in CBH.

12.7 At this stage the control structure would have been as follows:12.8 The holdings of securities and declaration of interest disclosed in para 5 (F1

page 57) reveals:

12.8.1 G.B.Rubenstein (CMC) owned 76,572,000 shares.12.8.2 None of the new directors holds any shares, directly or indirectly, in

Southgo.

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Comments:1. Moss has recently confirmed that the CMC shares had been

acquired from abroad prior to the Circular and Pre-listing statements being prepared. Leibesman, Liebmann and possibly others thus had control of the cash shell prior to the consortium’s involvement, thus making a sham of the JSE requirements.

2. The statements are thus false. Liebesman and Liebmann thus deliberately signs false statements when making disclosures in the Pre-listing Statements.

3. The lack of truthful disclosure sets a precedent that is repeated on numerous occasions as will be seen later.

12.9 The directors of Corpgro will be Liebesman, Ellerine, Frangos, Grolman, Liebmann and Moss (para 5.3.6) (F1 page 58)

12.10CMC, who holds approximately 57% of Southgo’s current issued share capital, has irrevocably undertaken to vote all its shares in favour of all the resolutions (para 9.3).(F1 page 62)

12.11The Corpgro Proposed Pre-listing statement to shareholders dated 9 September 1996, provides information that enables the members of the consortium’s share of the rights issue to be estimated as follows (F1 pages 97-98)

Name Entity % held Shares(‘000)

Frangos Global Equities 3,9 29 107Ellerine Citizens and others 9,7 72 768Grolman Global Capital 9,7 72 768Liebmann/Liebesman Opportunity Trust 4,8 35 714CBHI Own-offshore 15,5 116 429

Total 43.6% 326 786

Comment:Some of these disclosures are false.

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12.12The new directors collectively and individually accept full responsibility for the accuracy of the information given in the circular…and certify that to the best of their knowledge and belief there are no facts omitted from or not revealed… the omission of which would make any statement contained in this circular false or misleading (para 11.2)(F1 page 63)

Comment:These statements are false as offshore holdings have not been disclosed.

F CORPGRO PROPOSED PRELISTING STATEMENT DATED 9 SEPTEMBER 1996

KEY POINTS The prelisting statement revealed that 64 million shares traded during

the period April-June 1996 and Consolidated Mining Corporation Ltd owned 76,572,000 (57.3%) shares out of the total issued share capital of 132,318,000 shares. There is no disclosure as to who bought these shares

Southgo name change to Corpgro No disclosure of executive offshore interests in stock exchange

documentation The executives, principally Liebesman, Liebmann and Grolman, held

648 302 000 shares, 43.1% of consortium shares (mainly undisclosed) There was no investigation of these matters by Myburgh

13 The following points are noted.

13.1 The number of issued shares was 132 318 000 (F1 page 71)

13.2 Corpgro is an industrial holding company. It will acquire and invest in business opportunities which offer shareholders above average long-term sustainable growth in value. (in the Salient Information on P5 and under para 1)(F1 page 71)

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Comments:1. It is clear that the intention of Corpgro was to hold for above

average long-term sustainable growth.2. Corpcapital, a subsidiary of Corpgro, applied for Exchange

Control approval for a similar long-term holding in respect of Cytech/Netainment.

13.3 Corpgro will exercise either control or joint control over the acquired businesses (para2.1)(F1 page 74)

Comment:At this stage it was not contemplated that short term passive investments would be held or that joint ventures would be entered into. It is assumed that the same control or joint control policy would apply to its subsidiary Corpcapital.

13.4 In the initial stage of implementing Corpgro’s strategy it is anticipated that significant increases in both earnings and net asset value will be added by the acquisitions as well as further acquisitions currently under negotiation. (para 2.4).(F1 page 77)

Comment:With the Consortium, CBH and CMC owning or controlling a very high percentage of the equity such a statement would have the desired effect of increasing the share price or keeping it a price higher than its net asset value.

13.5 The interests of directors and major shareholders are set out in para 12 and reflect (F1 pages 97-98)

Number of Corpgro shares

Direct(‘000)

Indirect(‘000)

J M Liebesman - - (1)E Ellerine - - (2)N Frangos - 29 107E Grolman - - (3)G B Liebman - - (1)P S Moss - 50 938

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(1) After the implementation of the clawback offer the Opportunity Trust (the beneficiaries of which are the children of J M Liebesman) will hold 35 714 286 Corpgro shares(2) E Ellerine has an indirect interest in Corpgro by virtue of his interests in a number of family companies and trusts holding 9.7% in Corpgro.(3) Grolman has an indirect in Corpgro by virtue of his shareholding in Saflife Ltd, which owns 54% of Global Capital Ltd which in turn holds 9.7% of Corpgro.

Comments:1 The reference to CMC refers to Consolidated Mining Corporation

Ltd, previously the holding company of Corpgro. (F1 page 69.2 The consortium was defined as collectively ,the Opportunity

Trust (the trustees of which are Messrs Jeff Liebesman, Benjamin Liebmann and Ernest Liebowitz) , Citizens Corp (Pty) Ltd controlled by Eric Ellerine, Global Capital Ltd controlled by Saflife Ltd, Global Equities (Pty) Ltd controlled by Nic Frangos and CBH Investments Ltd controlled by Peter Moss.(F1 page 69)

3 The statements by both Liebesman and Liebmann are both false.

13.6 A clawback offer of Southgo shares (751.5 million) was extended to shareholders at 2,8 cents per share, where by agreement, various shareholders (previous owners) renounced their rights to some shares in favour of the Consortium, who took these shares up at the offer price resulting in a change in control of the company.(F1 page 69)

13.7 As all the outside shareholders did not follow their rights in respect of a Southgo rights issue the consortium acquired an additional 685.1 million shares. (F1 page 126) The balance of shares was taken up by minorities who did not renounce their rights. The Consortium controlled 976 204 143 shares (685.1 million shares plus 291.1 million shares renounced from the BBS acquisition in favour of the consortium) of the total issued share capital of 1 503 012 190 shares, giving the consortium a 64,9% stake in the ownership of the group, according to Nedbank Investment Bank, (F1 page 126) who managed the Southgo transactions.

13.8 The executives, principally Liebesman, Liebmann and Grolman, held 648 302 000 shares, 43.1% of consortium shares (mainly undisclosed) (Refer to para 13.9 below).

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13.9 According to a memorandum from Liebmann to Frangos dated 12 November 1996, (referred to in the SAB & T report at para 4.5.2 on page 20), after the rights issue, the share allocation of and among consortium members is materially different, as set out in the table below;(F1 page 127)


Frangos Global Equities 6.2 93 186Ellerine Citizens and others 15.5 232 966Grolman* Global Capital 15.5 232 966Grolman Own .6 8 333Liebesman Opportunity Trust 2.3 34 256Sacks Own .1 1 750CBHI Owned offshore 24.8 372 747Total 64.9 976 204

*Global Capital was a public company. These shares were unbundled and Grolman as a shareholder would have acquired some of these shares.

Comments:1. The actual position, (para 4.5.3)(F1 page 127) as calculated from

information provided by Moss, reconciles to the above table as follows;

2. CBH shares beneficially owned as to: (F1 pages 127 and 128)Liebesman 39.51%, Liebmann 13.17% and Grolman 47.32%

4. According to Moss, (para 4.5.3.3)(F1 page 128) Grolman and others purchased his entire shareholding in a number of offshore off-market transactions. These shares are accordingly allocated to Grolman.

5. In terms of the Companies Act the directors are required to disclose their shareholdings.

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Frangos Global Equities 6.2 93 186Ellerine Citizens and others 15.5 232 966Grolman Global Capital 15.5 232 966Grolman CBH 12.3 184 717Liebesman CBH & Opportunity Trust 12.1 181 529Liebmann CBH 3.2 49 090Sacks Own .1 1 750Total 64.9 976 204

13.10The share trading history of Southgo set out on P55 (F1 page 131) revealed the following;

Quarterly1994/5

Low(cents per

share)

High(cents per

share)

Close(cents per share)

Volume(shares)(‘000)

July-Sept 110 140 130 2730Oct- Dec 80 140 100 3406Jan - March 80 95 90 2720April - June 78 97 80 1476July-Sept 65 82 65 2019Oct- Dec 50 75 70 3633

Quarterly1996

Low(cents per

share)

High(cents per

share)



Jan - March 3 105 6 9008April - June 6 50 41 64051

Monthly1996

Low(cents per

share)

High(cents per

share)



March 3 85 6 6347April 6 18 14 15130May 12 24 18 21203June 18 50 41 27717July 32 86 53 34532August 47 75 50 13950

Comments:1 Southgo had an issued share capital of 132,318,000 shares (F1

page 71) 2 According to Moss, CMC (Rubenstein) is falsely reflected as

holding 75,762,050 (para 2.3.3)(F1 pages 45, 46 and 57) or 57.3% at the time of the change of control.

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3 CBH is reflected as owning 116 429,000 shares but excludes those that may have been acquired during the period April to June 1996 when 64,051,000 shares were traded. (F1 page 98) CBH Investments Ltd was controlled by Peter Moss.

13.11In the Circular at p27 Gerald Rubenstein is reflected as owning 76,572,000 shares (F1 page 57)

Comments:1. It is possible that these shares were later transferred abroad?

See para 2 of the Memorandum dated 26 August 1997 agreement (F1 page 34)

2. It is clear that the Inspectors failed to properly investigate the initial acquisition of Corpgro and did not properly fulfil their mandate in this regard.

G. CONSORTIUMS DISCLOSED AND UNDISCLOSED INTERESTS IN CORPGO IMMEDIATELY AFTER THE CHANGE OF CONTROL

KEY POINTS On the first day of the listing of Corpgro the executives shareholding,

including offshore undisclosed, was valued at R183.5 million There is sufficient evidence to suggest that significant offshore trading

took place, and that much of it may have been based on inside information

No investigation was undertaken by Myburgh

14 From the documentation disclosed the cost of controlling consortium’s interest in Corpgro (excluding shares held offshore) was R27.33m, calculated as follows (F1 page 128)

CostCost of BBS renounced shares291 071 429 @ 2,8 cents per share R 8.15mClawback shares taken up 685 132 714 @ 2,8 cents per share 19.18mTotal976 204 143 shares (F1 p 126) R27.33m

15 Arising from the information discovered (para 4.5.5.3)(F1 pages 128-129) as a result of Frangos’ investigation the individual cost and shareholding of each party was:

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Cost

Frangos Global Equities 6.2 93 186 2.6Ellerine Citizens and others 15.5 232 966 6.5

Global Capital 15.5 232 966 6.5Grolman CBH 12.3 184 717 5.2Liebesman CBH & Opportunity Trust 12.1 181 529 5.1Liebmann CBH 3.2 49 090 1.4Sacks Own .1 1 750 .04Total 64.9 976 204 27.3

16 The executive directors direct and indirect shareholdings in Corpgro based on the information obtained by Frangos (para 4.6.4.2)(F1 page 130) indicates that the values of their personal interests, in October 1996 were as follows.

Holding entity Total Liebesman Liebmann Grolman SacksCBH* 372 747 147 272 49 091 176 384Opportunity Trust 34 257 34 257Sacks 1 750 - - 1 750Grolman 8 333 8 333Total shares held 417 087 181 529 49 091 184 717 1 750% of issued share capital 27.8% 12.1% 3.3% 12.3% 0.1%Closing price – 7/10/1996 44c 44c 44c 44c 44cValue held R183.5m R79.9m R 21.6m R81.3m R0.7m

*- Beneficial shareholding in the ratios: Welbake (Liebesman) 52,68%,IBIT (Moss) 47,32%

Comments:1. From the above it would appear that the executive directors had

disclosed and undisclosed holdings worth R183.5million.This ignores who acquired the CMC shares and those traded prior to the change of control.

2 With the largest block as a group this would put management in a very powerful position when taking decisions and the risks of conflicts of interests would be heightened.

3 Clearly the Inspectors failed to establish these facts.

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17 Following the consolidation of Corpgro shares on the basis for 1 for every 9 held. the effect of this on the shares held by executives identified above, together with any other shares issued during the period October 1996 to August 1997 is set out below (para 4.6.4.3)(F1 page 132)

Holding entity Total Liebesman Liebmann Grolman SacksConsolidation(9:1)CBH* 41 416 16 364 5 455 19 598Opportunity Trust 3 806 3 806Sacks 194 - - 194Grolman 926 926Total shares held Aug 97 46 343 20 170 5 455 20 524 194% of issued share capital 35.2% 9.8% 2.7% 10.0% 0.1%Closing price – 31 Aug 1997 250c 250c 250c 250c 250cValue held R115.9m R50.4m R13.6m R51.3m R0.5m

CBH shares beneficially owned in the ratios: Welbake (Liebesman) 39.51%, Liebmann 13.17% and Grolman 47.32%

Comments:1. It would appear that the total cost of this investment consisted was

R10.4 million financed by the cash injected by Krupp into WPIB and transferred to CBHI. plus R1.25 million outlaid by the executives(Liebesman R1m, Liebmann R0 m, Grolman R0.2m and Sacks R0.05 m)(F1 page 128-extracted from the report by SAB & T)

2. Grolman paid Moss an estimated 60% of market value for the Corgro shares he purchased from him. This transaction was conducted in Frampton, a Jamaican company owned by Grolman, according to the affidavit of Moss.(F1 page 128-extracted from the report by SAB & T)

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H. ACQUISITION OF THE SECOND CASH SHELL

KEY POINTS The second cash shell acquisition, TPN, follows the same pattern as

Southgo Executives held undisclosed shares and shares in the names of

nominee companies representing offshore entities Acquisition of effective control in a bank with substantial cash assets No investigation has taken place to ascertain who bought the

controlling shareholders’ interests or purchased shares on the JSE with insider knowledge

It is clear that the Inspectors did not seek to establish whether or not a previous strategy of having undisclosed offshore holdings had been repeated

18 The second cash shell targeted was TPN, later to be named Corpcapital. The 1997 annual financial statements reflect (F2 page 10) that the directors and associates of directors owned 66.85% of the company that became a cash shell by 30 June 1998 (F2 page 12).

Comments:1. It is clear that the Inspectors did not seek to establish whether

or not a previous strategy of having undisclosed offshore holdings had been repeated.

2. No investigation has taken place to ascertain who bought the controlling shareholders’ interests or purchased shares on the JSE with insider knowledge.

19 TPN was a cash shell listed on the Johannesburg Stock Exchange, with the existing shareholders apparently willing to enter into an agreement whereby the company would change control into the hands of the executives and Corpgro.

19.1 TPN would become a 60% subsidiary of Corpgro following a large rights issue.

19.2 TPN would at the same time acquire a 49% interest in Fulcrum Bank (‘Fulcrum’), with an undertaking of support from other Fulcrum shareholders to sell a further 25% interest thereby effectively giving operational control of the bank to the Corpgro group and the executives as will be seen below.

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Shareholder control required the approval of the Minister of Finance, which was delayed for some two years.

19.3 TPN changed its name to Corpcapital.

20 The investigations conducted by Frangos revealed that to same old tactics were adopted.

20.1 The total issued share capital in TPN prior to the change in control amounted to 50,000,000 shares.

20.2 The annual financial statements of Corpcapital at 31 august 1999 disclose directors as holding 18,907 shares or 2.9%(F2 page 41)

Comment:As can be inferred from the following information, since discovered, the disclosure of directors’ shareholdings is probably false.

20.3 Prior to the change of control in TPN, the following significant shareholders appeared on its shareholders register: Shareholder VolumeSchindlers Reg Treuunternehmen 10,226,329Weldan Investments Ltd 5,900,000Beacon International Ltd 5,900,000Ligitprops 59 (Pty) Ltd 5,563,000Labornium International Ltd 3,408,776Pringle Bruce Macdonald 425,000

Comments:1. Schindlers Reg Treuunternehmen is an offshore administration

company based in Lichtenstein and which was utilized by Liebesman in setting up Weldan Investments in accordance with documented evidence during the period of interaction with Moss and CBHI.

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2. It would thus be reasonable to assume that the shareholding of Schindlers Reg Treuunternehmen represent the beneficial holding of Liebesman and Liebmann. The shares would have been held offshore in violation of exchange control regulations.

3. It is known that Weldan was an offshore entity controlled by Liebesman. It is reasonable to assume that Beacon and Labornium International Ltd was also controlled by one or more of the executives.

4. These above shareholdings represent some 44.1% of the issued share capital of TPN, prior to the change in control and this company becoming Corpcapital.

5. No evidence has been presented to me to confirm that Liebesman and Liebmann disclosed themselves as related parties to the board of directors of Corpgro.

6. It would appear that once again Weldan/Liebesman illegally obtained shares in a listed South African via an offshore structure.

7. There is no reference to any other structure other than the Corpgro/Cytech/Netainment being investigated nor are there any recommendations in the Inspectors’ report that other transactions be investigated

I. ACQUISITION OF THE THIRD CASH SHELL

KEY POINTS The third cash shell targeted was ABSEC Ltd name changed to Aqua

Online Holdings. Aqua provided important back office services to Cytech

It is clear that the old strategy of obtaining a shareholding from abroad was repeated yet again

There were also numerous undisclosed directors’ shareholdings and related parties in all the structures

There is no evidence that an investigation was conducted by the inspectors

The group of companies relating to Cytech were crucial to any investigation.

21 The third cash shell targeted was ABSEC Ltd name changed to Aqua Online Holdings

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Comment:It is clear that the Inspectors did not seek to establish whether or not a previous strategy of having undisclosed offshore holdings had been repeated a third time.

22 The investigation commissioned by Frangos revealed the following:

23 There were numerous undisclosed directors’ shareholdings and related parties in all the structures. (It is assumed that the shares held by Schindlers are held for Liebesman and others)

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23.1 Overseas “related” parties involved in the ABSEC cash shell were ascertained from the share register which reveal that the shareholders included:

Number of sharesCorpgro Capital (Pty) Ltd 25,000,000Brait Investments Ltd (who are they held for?) 11,237,319Weldan 3,833,335Syderstone International Ltd ? 7,666,665Corpcapital Ltd 7,666,665Stratop Nominees (Pty) Ltd 3,665,500Stratop Nominees (Pty) Ltd 23,455,713Stratop Nominees (Pty) Ltd 11,250,000Stenham Gestinor 4,090,900L J Equity (administered by Schindlers) 12,375,000Dawson Properties (administered by Schindlers) 17,375,000Aqua Information Station (acquired from Syderstone, Weldan and Corpgro

9,583,333

Comments:1. It is clear that the old strategy of obtaining a shareholding

from abroad was repeated yet again.2. Weldan/Liebesman illegally obtained shares in a listed South African

via an offshore structure. Liebmann is the sole director of Stratop.3. It is not known why Syderstone has the same holding as Corpcapital

Ltd.4. There is no reference to this structure being investigated nor are

there any recommendations in the Inspectors’ report.5. It is not known what other benefits were derived and this transaction

should also be the subject of further investigation.

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J. CYTECH/NETAINMENT ACQUISITION AND REVALUATION

KEY POINTS Cytech was formed by Corpcapital in an offshore tax haven Management’s ability to revalue Cytech and include the revaluation

surplus as income was a key opportunity to inflate profits This was achieved by book-keeping entries at year end in 2000 and

2001 To achieve this objective management fraudulently convinced the

auditors and the inspectors that:o At all times the investment was “held available for sale in the

near term” o the employees were in fact joint venture partners o the investment was capable of being sold and could in fact be

sold almost from inception o the R2 million investment for a 47.5% minority stake could be

revalued up to R211 million and could be sold at this price o the undisclosed annual revaluation surpluses could be included

in profits The fraudulent revaluations increased Corpcapital’s profit in 2000 by

313%, and Corpgro’s profit by 63%. Corpcapital’s profit in 2001 was increased by 145%

The increased profits and asset base had a major impact on the swap ratios at the merger in 2001

Corpcapital raised hyper-technical accounting defences to deflect attention away from the fraud

The ruse that Cytech was “held exclusively available for sale in the short term” is contradicted by Corpcapital’s own evidence, and by their application to the SARB

24 A key requirement was for management to continue to reflect increasing profits. Management’s ability to revalue the investment in Cytech on an annual basis and include the revaluation surplus as income was the ideal opportunity to inflate profits.

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25 To include the valuation surpluses in profit required management to fraudulently;

25.1 Convince the auditors and the inspectors that the long term overseas investment that exchange control had approved was in fact at all times “held available for dale in the near term”, in breach of the approval

25.2 Make the case that contrary to the information provided to the exchange control authorities the employees mentioned in the application were not in fact employees but joint venture partners. Other evidence to the contrary was also ignored.

25.3 Make the case that the Cytech business was capasble of being sold, could infact be sold for management’s valuations, and that steps to sell the investment had commenced shortly after start up.

25.4 Include the undisclosed grossly inflated” revaluation surpluses” in profits. These undisclosed “surpluses” (or bookkeeping adjustments) increased Corpgro’s disclosed profits by 63% and Corpcapital’s disclosed profit by 313% for the year ended 31 August 2000, and Corpcapital’s disclosed profit by 145% for the year ended 31 August 2001.

26 In the application to the Reserve Bank for permission to acquire a 50% interest in

Cytech/Netainment and for this interest to be held in a wholly owned subsidiary. The following was stated by Corpgro (F1 pages 133 to 142)

26.1 The new investment for which approval is sought constitutes an integral part of Corpcapital’s Specialised Outsourcing Division which will provide, to Commerce and the Formal Banking Sector, specialized financial services through focused business units in close partnership with management (para 2.3)(F1 page 133) Corpcapital intends to hold its interests in the E-Commerce Industry and then list separately on the JSE (para 5.5) (F1 page 141) Comments: 1 It is clear that the intention was to hold a 50%

investment. 2 I have had confirmation from the Exchange Control

authorities that permission would not have been granted to make a short term investment “held available for sale”.(F1 page 143)

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3 The Reserve bank application implied that the E-commerce grouping of investments would be listed and not just Cytech/Netainment which relied on the resources of fellow subsidiaries and third parties and could not readily be listed on its own. A listing would also imply that Corpgro, through Corpcapital, retained long term control.

4 It is not known on what basis the Inspectors concluded from the Exchange Control application (which they had in their possession), that the investment in Cytech/Netainment was either “held available for sale” or was a “joint venture” for which there is no reference in the application.

5 In my opinion, the Inspectors knew or ought to have known, that the Reserve Bank would not have approved a short term overseas investment to be “held available for sale.” They should also have known that no overseas investment can be made without prior approval and any change in intention would also have required approval.

6 It is clear that the Inspectors conclusions that a minority 47.5% holding was being “held available for sale” was not supported by the Exchange Control application or approval obtained.

7 There is no evidence that the I could ascertain that the Inspectors requested or obtained the actual Reserve bank approval.

26.2 Permission was requested to advance US$560,000 on loan account, secured by the underlying assets and repaid as a first charge against cash flows. (para 3.4)(F1 page 136)

Comments: 1 As the permission requested was to acquire a 50% interest and to

be the main provider of loan funds ($560,000 v $40,000) there can be no doubt that the Group had significant influence. The Letter of Intent having lapsed is of no consideration..

2 No cognizance appears to have been taken by the Inspectors of the almost sole financing and security provided before considering that there was no “significant influence” bearing in mind that the remaining shareholders were mainly employees.

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3 Hamburger confirmed that the SARB responded imposing thereon its usual conditions applicable to offshore investments.(Para 34) (F1 page 254)

27 The nature of the investment in Cytech is of considerable importance. Had the investment been considered as an associate, then only the actual earnings could have been equity accounted for. Corpcapital, in order to justify their revaluations, had to contend that the investment was firstly joint venture.

27.1 The Letter of Intent signed on 29 July 1998 makes no reference to there being a joint venture. (F1 pages 144-152).

Comments:1. The Letter of Intent was subject to the approval of Exchange

Control authorities being obtained within 45 days. No such approval was sought or granted. (para 7)(F1 page 145) and the Letter of Intent is thus of no force and effect.

2. When the application was made to the Exchange Control authorities on 11 November 21998 (F1 pages 133-142) No permission was requested nor received to enter into a joint venture. On the contrary it is clear that the investment was part of an overall E-Commerce strategy in “close partnership” with management.

3. Hapaz and Rose were to remain as full time employees for at least 3 years (para 3.5)(F1 page 136).

27.2 No shareholders agreement was ever concluded.

Comment:It is unlikely that arms length joint venture partners would have proceeded without a binding agreement being in place especially as the Letter of Intent had fallen away.

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27.3 Although the draft made reference to “a joint venture” (para 2.2) (F1 page 169) the true nature of the relationship can be determined from the following:

27.3.1 Nearly all the funding was being provided by Corpcapital (para 13) (F1 page 177).

Comment:With 93.3% of the funding coming from Corpcapital this, in my opinion, hardly looks like a joint venture.

27.3.2 If an executive shareholder ceases to be employed by the company for the reason of death or disability he shall be deemed to have first offered his shares to the remaining executive shareholders.(para 18.1) (F1 page 188)

27.3.3 If an executive shareholder ceases to be employed by by reason of his resignation or summary dismissal he shall be deemed to have offered his shares to the remaining shareholders in the prescribed ratio (para 18.3) (F1 page 190).

Comment: It is clear that the employees shareholding is linked to employment.

27.4 Hamburger in his evidence (F1 pages 240-325) makes the following points:

27.4.1 The Letter of Intent was subject to Exchange Control approval (para 24.1)(F1 page 252)

27.4.2 There were to be three year service agreements (para 24.2)(F1 page 252).

Comment:If there really was a joint venture partnership this is an extremely short period. Was it assumed the “joint venture” would only last three years?

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27.4.3 Sean and Tal were obliged to work with Corpcapital in the event of business failure (this mitigated the risk as we felt they were good operators. Additionally Corpcapital had medium term plans to expand overseas and Sean and Tal would be able to look for opportunities from London).

Comment: Sean and Tal were clearly regarded as group employees.

27.4.4 There were intense negotiations over the “equity” split. Initially both Sean/Tal and Corpcapital each required 75% of the equity. A compromise of 50% was finally agreed. The joint ownership embodied the “joint venture partnership” relationship between the two partners. (para 24.5.1)(F1 page 253).

Comments:1. The statement by Hamburger regarding the equity

split has to be false. It could never have been contemplated that Sean/Tal with only $20,000 each could have obtained a 75% shareholding with Corpcapital investing 93% of the funds for 25%. If anything there is likelihood that Sean/Tal were holding a proportion of their 45% shareholding as nominee for Corpcapital executives.

2. It would appear that the reference to “joint venture” in Hamburgers statement of 1 October 2003 (F1 page 325) is one of the main foundations upon which the Inspectors arrived at their finding that there was in fact a joint venture.

3. Hamburger highlighted the Specific veto ability ...in favour of both parties (para 24.5.2)(F1 page 253).(F1 page 148). This is likely to have been added in order to support the definition of a joint venture which is..” a contractual arrangement whereby two or more parties undertake economic activity that is subject to joint control” (Referred to by the Inspectors at F1 pages 332-333).

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4. There was in my opinion no joint venture and the true intention of the parties is set out in the Exchange Control application and approval. The executives were nothing other than employees with equity participation.

28 Secondly in order to be able to revalue the investment in Cytech and reflect the revaluation surplus as profit required Corpcapital to convince the Inspectors that the Cytech investment was being held “specifically for sale in the near term”.

28.1 Permission was not requested in the Exchange Control application for a short term investment to be “held available for sale” (para 5.5)(F1 page 141).

Comment:As the Exchange Control authorities had not approved a short term investment, no argument to the contrary is sustainable.

28.2 Hamburger made the following points:

28.2.1 Regarding the appropriate accounting treatment...the international best practice was for investment companies to mark their investments to market. (para 81)(F1 page 262.

28.2.2 A fundamental tenant was that the investments were “held for sale in the near future”)(para 83)(F1 page 262)

Comment:It is clear that the motive was to be able to comply with international best practice for investment companies and to be able to mark their investments to market and bring the revaluation surplus in as a profit. This motive has nothing to do with regard to the true nature of the investment and the argument should have been rejected by the Inspectors.

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28.3 To be “held available for sale” would have at least required:

28.3.1 the audited annual financial statements to be available, a fact the Inspectors were aware of at least in respect of the 1999, 2000 and 2001 years.

28.3.2 independent verification of earnings and projections, neither of which existed.

28.3.3 copies of the signed shareholders agreement to be available. There is no such agreement and the Inspectors were aware of this.

28.3.4 written authority from the remaining shareholders authorizing a sale. There was no such authority.

28.3.5 outsourcing agreements in respect of the back office etc. There were no such agreements and the Inspectors were aware of the complicated offshore structure and the related party transactions.

Comment:There was no such documentation.

28.4 To be “available for sale” should also have required the Inspectors to have considered what additional factors were required:

28.4.1 From the Cytech/Netainment Structure (F1 page 158) it can be seen that a complex overseas structure existed. Comments:1. A complex structure makes it extremely difficult if not

impossible to sell just a component thereof. Retaining the structure implies that it was not intended to dispose of the investment in the short term. In any event it was the stated intention to list the whole of the E-Commerce unit and not parts thereof.

2. Other companies in the structure (F1 page 158) such as Aqua Online were referred to in the Exchange Control application as being part of the long term strategy to list on the JSE.

28.4.2 Additional agreements (which have never been available and were not requested by the accounting firms “involved” in reviewing the valuations of management) would have been required to

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have been inspected to ascertain whether or not Cytech/Netainment (on its own) was ever capable of being sold:

28.4.2.1 Audited annual financial statements reflecting precisely what assets and resources Cytech/Netainment possessed. Cytech/Netainment was in effect almost a virtual company.

Comment:From the information made available to me the software was licenced, the back office and credit card collections were outsourced and the company only ran the screens and did the marketing. Hardly an entity worth over R400m at one time.

28.4.2.2 Software licence agreements to determine what the heart of the business was worth. What proprietary rights existed, software maintenance agreements, source codes etc.

Comments:1. The original software systems were licenced from

Micro Gaming Systems a supplier to most of the major casinos. The software systems are available to anyone who wishes to enter into the online gaming sector.

2. The Corpcapital evidence presented to the Inspectors, by Hamburger, noted that when Cytech/Netainment’s new software was installed in September 2001, it had disastrous results on income.

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3. I have not been able to ascertain whether or not the experts “valuing” Cytech were aware of the fact that licenced software costs had been excluded when determining future earnings. This information ascertained by Frangos would, in my opinion, have had a material effect on the valuation.

28.4.2.3 The back office and other functions were outsourced to Aqua Online and others.(see also F1 page 309)

Comments:1. As the back bone of the system was outsourced it

reduced the value of what “own assets” were being acquired by a potential buyer.

2. Cytech was a virtual company outsourcing most of its functions to related entities. An investigation of Cytech, therefore, necessarily involved an investigation of all related entities. The inspectors appeared not to have considered this aspect nor did they obtain the outsourcing agreement to evaluate its terms and the impact on future earnings.

28.4.2.4 Credit card collections were outsourced to CFI.

Comments:1. As the collections were dependent on a third party

for resources the company did not have this further reduced the value of what “own assets” were being acquired and at what cost.

2. The experts appeared not to have considered this aspect nor did they obtain the agreement to evaluate its terms and the impact on future earnings.

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28.4.2.5 The agreements between the related parties.

Comment:Whilst the inspectors had a copy of the agreement it had never been signed. Hardly a good place to start sale negotiations when your own agreements are not in place.

29 At 31 August 1999 the Annual Financial Statements reflected the Cytech/Netainment investment as being worth R2,500,000 greater than cost.

Comment:It is clear that there was in fact no valuation. The company was certainly not “held available for sale” just a short period after being established, and none of the documentation necessary to properly determine a price or conclude a sale was present.

30 When considering the revaluation result the following criteria should have been investigated:

30.1 Why would a buyer be willing to pay goodwill of say R400 million for an entity that he could set up for less than 5% of that price?

Comments:1. Surprisingly this aspect does not appear to have been

considered by the Inspectors, the experts, or anyone else.2. There is no reference to any offer having been received for

the “valuation” price 3. On 10 September 2004 the investment in Cytech was sold for

US$2,759,000 (F1 page 239) or approximately R20 million .The buyers were the remaining shareholders who on establishment only apparently had US$ 40,000 available to invest. This related party sale should be investigated.

30.2 What was it that would have given a prospective buyer long term assurance that the company would have continued to make the super profits the valuation purchase price would have required?

Comment: In my opinion the valuation was fraudulent and no such selling price could ever have been realized. The investment was “valued” by

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executives for the sole purpose of fraudulently inflating profits for their own purposes and to the prejudice of shareholders.

30.3 The reliance that a buyer could have on a two key player business with limited employment contracts?

Comment:The Exchange Control application in July 1998 recorded that the 2 key employees had signed 3 year service contracts. When the business was said to be “available for sale” in 2000 and 2001 and 2002 this security would have become valueless to a prospective buyer.

30.4 How reliable would the projections be if based on less than two years trading from start-up?

Comments:1. Obviously they would have been almost irrelevant. There

were no contractual long term agreements with customers and the projections could have been nothing more than thumb sucks.

2. By far the most critical components of a DCF valuation are the assumptions. Bearing in mind that no audited financial statements were available, only part of the structure was being valued, future outsource costs were unknown, unsubstantiated adjustments had been made to the ‘trading results” and there was no independent market/competitor research no sound basis existed upon which assumptions could be made.

3. The Inspectors in their Executive Summary report (para 120)(F1 pages 159-160) find that KPMG did not do a valuation as alleged by the directors in their evidence, but still accept the valuations as being reasonable.

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30.5 What steps were taken to sell the investment in the near future (para 83)(F1 page 262).

Comments1. There is no evidence that Merchant Bankers or agents had

been appointed to find a buyer during 2000 and 2001.2. There is no evidence that the remaining shareholders were

aware that the shares were “held available for sale”.3. The investment was never permitted by the Exchange

Control authorities to be “held available for sale”.

30.6 Who would want a 47.5% minority interest in an unlisted start up that had no protected intellectual property?

Comments:1. There is no evidence that I could find indicating that this

aspect had been considered by any of the parties involved.2. There is no reference to offers that had been received.

30.7 What acceptable earnings multiple or discounted cash flow rate was acceptable to a prospective buyer? Proper cognizance must be taken of earnings yields of similar online listed entities, adjusted for Cytech/Netainment’s short track record, being unlisted (normally a 40% discount) and the lack of apparent control?

Comment:In my opinion a 24% pre-tax discount rate would have been wholly inappropriate for the reasons set out above.

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K. IMPACT OF VALUATIONS ON CORPGRO FINANCIAL STATEMENTS AND SHARE PRICES

KEY POINTS Corpgro was the controlling shareholder of Corpcapital Corpcapital was a major shareholder of Cytech The earnings attributed to Cytech were material The earnings were fraudulent From July 1998 the share price declined providing the motive to the

executives to pump up the profits by other means Without the artificial stimulus to profits the share price would have

declined further

31 The 31 August 2000 the Consolidated Annual Financial Statements of Corpgro (F1 pages 205-238) have been analysed to highlight the Bank contribution and the materiality of the Cytech/Netainment adjustment to remaining group income (reflected in columns added by me, adjusted for the minority 42% shareholding in Corpcapital).

INCOME STATEMENT 31 AUGUST 200031 August

2000Bank Remainder

of groupCytech/

Netainment adjustment

Materialityof Cytech

adjustment

R000

Sales 965 149Investing, trading and fee income 381 861 215 719 166 142 144 500 37.8%

Equity accounted income 26 272 21 066 5 206

Profit before taxation 350 899 127 580 223 319 144 500

Taxation 72 490 15 323 57 167 43 350

Profit after tax 278 409 112 257 161 152 101,150 36.3%Minority interests 126 695 47 148 42,483

Attributable profit 151 714 65 109 86 605 58,667 38.7%

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Comments:

1. It is not possible for anyone to conclude that the Cytech ”earnings”, (representing 38.7% of attributable profit), were not material. Put another way the attributable profit of R93,047,000(R151 714 minus R58 667) was increased by R58,667,000 or 63%)

2. As the Cytech/Netainment “earnings” represented an unrealised gain on revaluation they were not sustainable and this represents, in my opinion, a fraud on investors.

3. Whilst a sophisticated analyst could have determined from the cash flow note that R101,150,000 of attributable profit arose from revaluations this is not an adequate disclosure.(The amount is included in the figure of R110,024 disclosed in note 23 (F1 page 228).

4. But for the Cytech/Netainment “earnings” the Group with sales of almost a billion Rand (excluding the Bank) would have earned only R27,938,000 (R86 605 minus R58 887) and destroyed any confidence that the investing public may have had in management’s ability to create wealth increasing earnings on a sustainable basis.

5. In my opinion the Financial Statements were thus grossly misleading and the Inspectors should have come to the same conclusion. The main purpose of inflating the revenue was to disguise the shocking results.

6. The true intention is with regard to the investment was probably that stated in the proposal submitted to the Reserve Bank. In my opinion it would probably be impossible to sell a two man start up for the type of valuation that had been arrived at for an unlisted investment.

7. A word search of the Inspectors report does not reveal any comment on the materiality of the revaluation in relation to overall earnings or the sustainability of the earnings. On a sustainability point of view no one in their right mind could believe that a sum of R144,500,000 (or R72,000,000 as added in 2001) could annually be added to group earnings in respect of Cytech/Netainment.

8. Whilst the Exchange Control approval was granted for a long term investment (originally 50%) with ‘significant influence” and being part of a long term E-Commerce strategy to list on the JSE (more significant influence if Corpcapital could on its own decide where and when to list) the Inspectors seem to have decided on their own (or based solely on the evidence of Hamburger – see comment below), that the investment was a short term joint venture

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9. The unsigned shareholders agreement provides for an executive shareholder on ceasing to be employed to have been deemed to have offered his shares to the remaining shareholders. (para 18)(F1 page 188)

10. Hamburgers explanation for the need to recognise the investment as “held available for sale in the near future” was to comply with the requirements to be able to “mark their investments to market”. This has nothing to do with the real intention.

11. The Inspectors thus erroneously, in my opinion, concluded that the investment was in fact a joint venture and as such capable of being valued and the “valuation surplus” included in earnings.

12. There is no reference in the Inspectors report that I could find relating to them considering the contributions from the Bank, Cytech and the balance of the business and the impact of “valuation entries” on the group results.

32 The share performance of Corpgro to 31 July 2001 as ruling on the JSE is reflected below.

Corpgro - Analysis of Share price and volumes traded

0

100

200

300

400

500

600

700

800

Oct-96

Jan-9

7

Apr-97

Jul-9

7

Oct-97

Jan-9

8

Apr-98

Jul-9

8

Oct-98

Jan-9

9

Apr-99

Jul-9

9

Oct-99

Jan-0

0

Apr-00

Jul-0

0

Oct-00

Jan-0

1

Apr-01

Jul-0

1

Pric

e

-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

Volu

me

ACTUAL_CLOSE AVE PRICE/MONTH TOTAL VOLUME/MONTH

Comments1. As can be seen the share volumes increase dramatically after the change

of control in October 1996 but the share price does not respond

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until after July 1997. This massive volume of trading should have been investigated to ascertain who the buyers were.

2. Between July1997 and July 1998 the share price increases dramatically whilst volumes decrease.

3. Between July 1998 and October 1998 there is a 50% decrease in the share price.

4. By October 1999 the share price had decreased further. This could have been the motive for inflating earnings.

5. Even with “earnings” for the 2000 year being inflated by 63%, the share price hovered around 200 cents and would have crashed had the true earnings been disclosed.

6 The above graph graphically illustrates the executives “need” for performance to have been fraudulently improved.

L. IMPACT OF VALUATIONS ON CORPCAPITAL FINANCIAL STATEMENTS AND SHARE PRICES

KEY POINTS The Corpcapital share price declined in 1999 from 170 cents to 70

cents But for the “revaluation” and the profits earned by the Bank the results

of Corpcapital’s own operations would have reflected a loss R22.755.000

Management’s disclosed and undisclosed shareholdings, remuneration packages and ability to make acquisitions by way of share issues were highly reliant on continuously demonstrating that earnings per share were continuously increasing. To reveal that their businesses were making losses would have been catastrophic.

Bookkeeping entries took place in relation to Cytech’s “valuation” at year end which introduce false profits in the amount of R144.5 million to Corpcapital. This adjustment comprised 75.8% of Corpcapital’s attributable profit

Payne did not investigate Cytech properly in 2000 and the Myburgh report suggests that the inspectors failed in their duty to investigate the evidence.

Whilst the inspectors considered the materiality of the investment in Cytech they did not consider the materiality of the adjustments on profits

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33 At 31 August 2000 the Annual Financial Statements of Corpcapital reflected the Cytech/Netainment investment as being worth an additional R72,000,000 with earnings being increased by a like amount.

34 An analysis of the earnings from data disclosed at F2 pages 32-38) revealed:INCOME STATEMENT 31 AUGUST 2000

2000R000

Cytech2000

Adjustment

Materiality of Cytech

adjustment

Interest net income 32 580

Non interest income

382 927

Investing, trading and fee income 361 861 144 500 40.0%Equity accounted income 21 066

Provisions for bad debtsConvertible loan interest

2 200

76 354Operating expenses 94 844

Profit before taxation 242 109 144 500 59.7%

Taxation 51 457 43 350

Profit after tax 190 652 101 150 53.0%Minority interests 57 251

Attributable profit 133 401 101 150 75.8%

Comments:1. I repeat the comments made in respect of the 2000 year adjustment in

so far as they had an impact on Corpgro, the holding company.2. The earnings were fraudulently increased and shareholders were

misled. The unrealised “income” from the Cytech adjustment alone accounted for 75.8% of Attributable profit. Put another way the attributable profit of R32 251 (R133 401 minus R101 150) was increased by R101,150,000 or 313.6%).

3. Of the profit after tax of R190,652,000, the Bank earned R112,257,000 (para 52 below). If the Cytech adjustment is deducted a loss of R22,755,000 was incurred.

4. Frangos expressed concern about the Cytech revaluation in October 2002 (F2 pages 107-110)

35 At 31 August 2001 the Annual Financial Statements of Corpcapital (F2 pages 46-86)(previously Corpgro and including the assets of old Corpcapital and the

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Bank) reflected the unrealised investing income of R173,433,000 (F2 page 77) of which it is known that R72,000,000 was attributable to the directors further increase in the “valuation” of the Cytech/Netainment investment.

36 An analysis of the earnings from data on F2 pages 72-78 revealed:INCOME STATEMENT 31 AUGUST 2001

Notes 2001R000

Other 2001 unrealised

investingincome

Cytech2001

Adjustment

2001Materiality of

all adjustments

Interest net income Notes 17/18 83 841

Non interest income 558 702

Investing, trading and fee income

Note 19461 655 101 433 72 000 37.6%

Equity accounted incomeContribution from proprietary consolidated investments

25 710

71 337

Provisions for bad debtsConvertible loan interest

12 733

92 505

Total income 537 305 101 433 72 000 32.3%Operating expenses Note 22 149 582

Profit before taxation and exceptional items

387 723 101 433 72 000 44.7%

Taxation 74 405 30 430 21 600

Profit after tax 313 318 71 003 50 400 38.7%

Minority interests 108 420

Attributable profit before exceptional items 204 898 71 003 50 400 59.3%

Comments:1. I repeat the comments made in respect of the 2000 year adjustment in

so far as they had an impact on Corpgro, the holding company.2. The earnings were once again fraudulently increased and shareholders

were misled. Unrealised “income” for 2001 accounted for 59.3% of attributable earnings. . Put another way the attributable earnings of R83 485 (R204 898 minus R121 403) were increased by R121 403 or 145.4%).

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37 The share performance of Corpcapital to 31 July 2001 as ruling on the JSE is reflected below:

Corpcapital (old) - analysis of share price and volumes traded

0

50

100

150

200

250

300

350

Jan-9

8

Apr-98

Jul-9

8

Oct-98

Jan-9

9

Apr-99

Jul-9

9

Oct-99

Jan-0

0

Apr-00

Jul-0

0

Oct-00

Jan-0

1

Apr-01

Jul-0

1

Pric

e

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

Volu

me

ACTUAL_CLOSE Ave Price Total Volume

Comments:1. Between January 1998 and May 1998 when the change of control took

place the share price increases dramatically. This would appear to indicate that insider share trading had taken place.

2. As can be seen the average price and share volumes increase dramatically from April 1998. Between July 1999 and July 2001 there is a 50% decrease in the share price.

3. Even with “earnings” for the 2000 and 2001 years being inflated by the Cytech revaluations the share price hovered around 100 cents and would have crashed had the true earnings been disclosed.

4. The above graph graphically illustrates the executives “need” for performance to have been fraudulently improved.

M. DISCLOSURE OF CORPCAPITAL SHAREHOLDINGS

KEY POINTS There were no disclosure of real shareholding held by the

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executives

38 The financial statements reflect the following disclosures:

“Individual directors' shareholdings including directors' future entitlements under the share incentive trusts in terms of employee ownership initiatives are set out below:”

Cumulative Shareholdings excluding incentive entitlements

entitlementsunder Beneficial Non-benefici

alemployee Average holdings holdingsincentive strike post

mergerpost merger Pre merger

Directors' Interests schemes price 23 Oct 2001

23 Oct 2001 31 Aug 2000

E Ellerine - - 23 768 414 12 949 537 12 374 718N Frangos - 11 507 602 - 11 338 144 11 338 144J Liebesman 6 153 753 1.80 751 891 8 316 373 7 837 052 7 255 502M Sacks 8 478 055 2.26 898 566 940 000 1 110 128 1 110 128E Grolman 6 854 839 2.37 11 394 754 - 7 896 064 3 857 098B Liebmann 1 008 065 2.48 875 418 1 105 815 920 362 920 362N Lazarus 1 008 065 2.48 1 928 539 - 399 507 -W Trengove - 27 598 - - -B Kalkhoven 2 058 000 2.16 1 632 144 - - -

25 560 777 29 016 512 34 130 602 42 450 794 36 855 952

Directors' shareholdings% of shares in issue

6% 71% 8% 17% 15%

Comments:1 These disclosures were false as the offshore holdings were not disclosed

for certain of the directors.2 The falsification or non-disclosure of information has been a regular

feature.

N. PAYNE REPORT

KEY POINTS Payne’s view of his mandate was superficial Payne appears to have been intent on conducting a quick investigation

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to clear Corpcapital to counter any perception of wrongdoing arising from Frangos’ resignation

He expresses opinions without proper investigation of the facts and evidence

Payne’s findings are contradictory to the evidence There is no evidence that Payne investigated Cytech in 2000, the

seminal issue of the investigation, a fact confirmed by both Abrahams and Myburgh

Payne did not consider the merger in 2001 and the impact that the false Corpcapital profits and asset values had on the swap ratios

39 Payne wrote his own mandate letter on 23 January 2003 (F2 page 87) and his report dealing with 28 findings and was completed by 15 February 2003, some 15 working days later.

40 The scope of the engagement was:

40.1 To investigate and report on the dispute of facts evidenced by the letter from Frangos to Ellerine.(para 1)(F2 page 87)

Comments:3. Frangos was concerned about the attitude of executive directors

favouring their own interests. This is hardly a dispute of facts nor are his concerns about Cytech/Netainment’s valuation.

4. Frangos’ letter should not have set the terms and scope of the investigation.

40.2 To consider any other corporate governance, accounting and disclosure issues he believed to be relevant.(para 2)(F2 page 87)

Comments:1. It would appear to me that Payne drafted his mandate without

studying the Frangos letter to Ellerine in sufficient detail.2. The scope was also limited to other governance, accounting and

disclosure issues he believed to be relevant and was thus too limited. It is clear that quantum/materiality were not major features.

3. The scope of the report should have been determined by the non-executive directors who should have been the conduit between Payne and the executives. It should not have been

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possible for the executives to have been able to influence either the scope or the investigation.

41 Paynes report is set out at F2 pages 88-106.

Comments:Payne unlike most Chartered Accountants in public practice who would normally only express an opinion to the best of their knowledge and belief based on the information and explanations they have received, makes categorical statements which, in my opinion he was not capable or competent to make. He regularly used certain words loosely the definitions of which are worth noting.

i. Evidence – facts making for a conclusion- information (given personally or drawn from documents).

ii. Detail – minute account-small or subordinate particular, to call special attention.

iii. No – by no amount, not at alliv. Each – taken separately.

42 The report contains the following statements:

42.1 There is no evidence of criminal conduct or regulatory breaches by the company, its directors and management.

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Comments:1. It is not possible to categorically state that there is no evidence.

In 15 working days Payne could not possibly have examined every company document let alone knowing what the directors and management were up to.

2. It was also not possible for him to have studied (nor did he seek to examine) pre-listing statements and disclosures to ascertain what false statements or omissions were made therein.

42.2 There has not been a breakdown of corporate governance at Corpcapital.

Comments:1. Payne had not done a competent enough investigation to make

such a statement and no such statement could ever be a categorical statement.

2. It would appear that no statement is made in respect of Corpgro.

42.3 There has not been a breakdown of corporate governance at Corpcapital. The non-executive directors are all individuals with impeccable credentials.

Comment:It is difficult to understand why such a statement was made and what work/investigation Payne would have conducted to make such a categorical statement. What was Payne’s evidence?

42.4 The executives defer to the non-executives and have not deployed intimidatory tactics against them.

Comments:1. Not having attended board meetings Payne cannot comment on

whether intimidatory tactics were practiced or not. Tactics can be applied at meetings other than formal board meetings.

2. Payne is also not competent to categorically state that executives deferred to the non-executives. He would not know what decisions the executives may have taken without referring them to the board.

42.5 There is no evidence that the executive directors have conducted the business in a way that favours their interests over those of shareholders.

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Comments:1. Payne is simply not competent to make such a categorical

statement.2. There is no evidence that Payne studied share transfer records

and pre-listing statements to ascertain whether or not executives had acquired shares in target companies prior to a change of control, reviewed sales from non-resident shareholders to ascertain how they had acquired their shares, verified executives disclosed and actual shareholdings in the group or used nominee companies to hide their shareholdings etc etc.

3 Payne was also not competent to comment on the motives regarding the Cytech/Netainment revaluation and the merger swap ratios.

42.6 All material matters have been appropriately disclosed to shareholders.

Comment:I cannot think of a mandate that could possibly be given that would enable such a categorical comment to be made.

42.7 Accounting policies complied with GAAP and have been applied appropriately.

Comments:1. Clearly, in my opinion, the annual financial statements did not

fairly present the financial position of the Group or the listed companies. One revaluation of an incorrectly designated investment allegedly “held available for sale” increased disclosed earnings by 63% in Corpgro and 313% in Corpcapital for the year ended 31 August 2000.

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2. Had Payne reviewed the Exchange Control approval (which he as a chartered accountant would know was required), he would have ascertained that the Group’s intention was to hold Cytech/Netainment as a long term investment. As an expert Payne should also have known that the Reserve Bank would not have given permission for a short term overseas investment.

3. As the Group held 47.5% of the equity in Cytech/Netainment and provided the entire loan funding of $560,000 the Group had significant influence and any expert accountant would then know that only the actual earnings could be equity accounted for.

4. Payne does not express an opinion on how the executive directors own valuation of an unaudited start up entity accounting for 63% to 313% of earnings was justified. This must be taken in the context that but for this revaluation the Group, other than the bank, would have made a huge loss.

5. Payne also does not comment on what basis a minority holding in an unlisted start up could be valued on the basis that it was. As it was stated as being “held available for sale” there should have been documentation offering it for sale. There is no evidence prior to 2002 that agents or Merchant Bankers had been appointed to find a buyer, that a prospectus had being prepared, that audited financial statements were available, that the shareholders agreement had been examined to ascertain if there were pre-emptive rights, and ascertaining who would want to buy an unlisted minority stake etc, etc.

6. It would also appear that no discount was applied due to the fact that it was unlisted (normally 40%) or a discount applied due to it being a minority stake or whether the 2 year track record could ever have qualified for a listing or have been acceptable to a buyer. There is no reference either to the PE ratios of similar listed entities.

42.8 There is no evidence of a secret plan to delist the company.

Comment:Quite clearly, otherwise it would not be a secret plan. The question is what work could Payne have undertaken to make such a categorical statement?

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42.9 There is no evidence to that the governance processes, valuations and swap ratios relating to the merger were flawed.

Comments:1. As there is no evidence that Payne reviewed the comments of

African Merchant Bank and Starke he is not competent to make this statement.

2. The post swap financial figures which Payne could easily have calculated reveal that the minority shareholders, in my opinion, were prejudiced.

42.10Salary and bonus payments to directors were made after due and proper process.

Comment:There is no comment on whether the bonuses were based upon “fraudulently” overstated profits.

42.11When share options were repriced this was according to due and proper process, including appropriate disclosure.

Comment:Nothing is said about the fact that only Liebesman’s options were retrospectively repriced. There is no comment on whether or not repricing is permitted in terms of the JSE rules or if it is legal to do so.

42.12The valuations, accounting and disclosures of the investment in Cytech/Netainment were made according to proper process and were audited to their satisfaction by the external auditors.

Comments:1. As the revaluation profit on Cytech/Netainment should never

have been included. The blatantly false presentation of the financial position could never have been a proper process.

2. Elsewhere in Payne’s report he confirms that NO audit had been conducted of Cytech/Netainment’s results.

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3. A proper evaluation by Payne should have included an examination/audit by him of Cytech/Netainment’s records and satisfactory explanations sought for the yearend adjustments that dramatically inflated earnings.

42.13There is no reason to review or restate any of the annual reports.

Comments:1. In my opinion Payne had not conducted an investigation with

sufficient care and diligence to make such a hasty categorical statement

2. Consideration should be given to reporting these findings to the proper authorities.

42.14I have investigated each of the above in detail.

Comment:Payne could not have applied his mind to this statement which was probably made in the rush. Alternately this statement is false.

42.15Dealing with the Cytech/Netainment values Payne noted or concluded that:

42.15.1 During his investigation he did not identify any criminal conduct or regulatory breaches (F2 page 92).

42.15.2 During 2001 banks in the United States started preventing customers from using credit cards for internet gambling. This had a large negative effect on Cytech’s revenue (F2 page 100).

42.15.3 There is no evidence that management tried to manipulate the value of Cytech. (F2 page 100).

42.15.4 The final swap ratios approved by each board of directors, and each body of shareholders, fell within the ranges considered appropriate by the three audit firms (F2 page 105).

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Comment:His investigation did not identify any reason to suggest that the governance processes, valuations and swap ratios at the time of the merger were flawed and saw no reason why these matters should be revisited (F2 page 106).

43 The Frangos’ letter dated 2 December 2002 raised the following issues (F2-pages 116-126)

43.1 He was concerned about “the orientation of the six managers to favour their own interests” (para 1.2)(F2 page 117).

Comments:1. Despite having the concerns voiced by Frangos about managers

favouring their own interests it would appear that Payne did not ascertain whether such behaviour had not in fact occurred.

2. Payne does not commence at inception and review the Southgo Circular to Shareholders and Prelisting Statement to enquire about their involvement from the inception. The pre-listing acquisition of 64 million shares was a glaring lead.

3. Payne does not consider that Liebesman had a prior reputation of suspected mismanagement and corporate mismanagement.

4. Payne did not require more time to properly perform his mandate.

5. I could find no evidence that Payne reviewed Corpcapital’s decline in earnings and that the executives may have had something to hide.

6. There appears to have been no consideration of the effect of the materiality of the revaluations in 2000 and 2001 and no reference that revaluations had been properly investigated.

7. There also appears to have been no review of Circulars or Pre-listing statements as any review would have highlighted suspicions of insider trading just prior to takeovers which only could have been done by the executives involved.

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44 The Frangos letter dated 2 December 2002 raised the following issues (F2-pages 116-126)

44.1 He was concerned about “the orientation of the six managers to favour their own interests” (para 1.2)(F2 page 117).

44.2 “Disagreement about principles of disclosure and corporate governance” (para 2.1)(F2 page 119).

Comments:1. Payne expresses no opinion on whether revaluations that

have the effect of increasing profits by up to 313% are material or not.

2. Payne does not comment on how a 47.5% interest and providing 100% of the loan funding on a secured basis does not amount to ‘significant influence” nor does he refer to GAAP and the reporting requirements in respect of Associates.

44.3 Conflicts of interest relating to remuneration, restraints of trade payments and share options.(para 2.2)(F2 page 120).

Comment:There is no statement confirming that the Cytech/Netainment revaluation had no impact on executives’ remuneration or bonuses.

44.4 The valuation of Cytech/Netainment.(para2.3)(F2 pages 123-124)

Comments:1. Payne should have ascertained on what basis a revaluation of

Cytech could have been brought to account as income? With a significant influence the earnings of an associate should have been accounted for under the equity method (Myburgh at F1 page 327)

2. Payne being a Chartered Accountant should have known that the Exchange Control Authorities would not have granted permission for a short term investment. He does not appear to have reviewed the Exchange Control application or approval.

3. Payne should have considered the question of materiality.4. A proper review of the Cytech/Netainment valuation required:

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i. A review of the monthly management accounts of Cytech/Netainment.

ii. An explanation being obtained for yearend accounting adjustments that may have materially increased profits.

iii. Ascertaining whether the valuation of an unlisted minority interest could actually be sold at the valuation price.

iv. Reviewing the shareholders agreement with the shareholders owning the remaining 52.5%.

v. Ascertaining what sort of buyer would buy an unlisted minority stake in a business with only two key employees and pay a price of R145 million which consisted of a goodwill component of say R130 million.

5. It would appear to me that Frangos was so concerned about the attitude of management that he took unusual steps to express his concerns. A proper independent professional review or investigation should have been conducted especially as:i. It would appear to me that it was not possible to

competently conclude his report in 15 working-days.

ii. The materiality of the Cytech/Netainment “revaluation entry” in Corpcapital’s results for the year ended 31 August 2000 was of such a magnitude that it increased profit by 313%. The results, but for this entry would have been a disaster.

6. A computer word search of Payne’s report makes the following reference to the words:

i. “material” or “materiality” (once on P14 referring to other unlisted investments)(F2 page 101)

ii. “sustainable” or “sustainability” (not once). If the “revaluation” earnings were not sustainable and repeatable on an annual basis did Payne not consider that the non disclosure may have prejudiced shareholders?

iii. “available for sale”.(not once)7. In my opinion Payne’s report on the consequences of the

Cytech/Netainment revaluation and fair presentation is of no value.

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8. From what I have ascertained Payne did not complete his task relating to the Cytech/Netainment revaluation and disclosure with the sort of professional care and diligence that I would have expected.

9. It is clear from this report that I do not come to the same conclusions as Payne on material matters. These material matters include the following:i. That proper systems to safeguard the interest of

shareholders were in place, andii. That all material matters had been appropriately

disclosed to shareholders, andiii.That accounting policies comply with GAAP, and that it

has been appropriately applied, andiv.That valuations, accounting and disclosure of the

investment of Cytech/Netainment were made according to proper process, and

v. That there is no reason to review or restate any of the annual reports and/or financial statements

45 Payne’s report does however cover:

45.1 The fact that Cytech/Netainment was acquired in 1999 for R2m.(F2 page 100) It was valued on a discounted cash flow basis to:

45.1.1 R4.5m. at 31 August 1999, an increase of R2.5m.on a Mark-to-Market “fair value” basis.

45.1.2 R149m. at 31 August 2000, an increase of R144.5m.on a Mark-to-Market/”fair value” basis.

45.1.3 R221m. at 31 August 2001, an increase of R72m.on a Mark-to-Market/”fair value” basis.

Comments:1. My numerous comments above apply.2. There is no comment on how “fair value” was determined. Were

there comparable unlisted minority shareholdings being disposed of?

3. What criteria existed upon which to base the valuations or the justification of the values determined relative to the high “goodwill” content thereof?

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4. How were adverse comments relating to the gaming sector and the use of credit cards considered?

5. There is no evidence that Payne considered that executives may have had a motive for fraudulently inflating profits. Payne did not consider the concerns of African Merchant Bank and Starke as being of relevance?

6. Did Payne appear to have considered the merger and the effect that any overstatements would have? Had he merely looked at the quantum of the revaluation relative to the earnings without such an adjustment he should properly have concluded that a fraud had in fact taken place.

45.1.4 Valued at R110m. at 31 August 2002- Equity Accounted

Comments:1 How was the subsequent reduction in value by more than

50% motivated? It appears that this was simply put down to market conditions.

2 There is no evidence that the reduced figure itself was not sustainable or on what proper independent and competent basis the reduced figure had been determined.

3 The upward revaluations were recognised in headline earnings whereas the downward adjustments were excluded from headline earnings due to an accounting change. The interim results of Corpcapital for the six months ended 28 February 2003 reflect a further impairment of Cytech/Netainment.

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O. MERGER

KEY POINTS There is no doubt that the fraudulent valuations and profits attributable

to Cytech in 2000 impacted in a major way on the swap ratios for the merger

The persuasive testimony of Starke was discarded by the inspectors Without Corpcapital’s share of the Bank profits and the profits

attributed to Cytech Corpcapital would have experienced a massive loss

There is no way in which a reader of the financial statements could have determined the true state of affairs

46 The Inspectors investigated the swap ratios used at the time of the merger and concluded that:

46.1 Whilst the complaints of Starke and African Merchant Bank regarding the inequitable merger ratios; the exchange of quality, cash-backed earnings for largely unrealised profits; the unfocused nature of the Corpgro Group and the inequity of allowing the share incentive trust to vote were reviewed they were not considered to have been valid as an agreement of settlement had been reached.

46.2 Sacks significantly discounted the valuation of Corpcapital Bank arrived at by PwC for a number of reasons, including that the bank's financial performance at the time was substantially down from the prior year; and the bank's capital structure, implemented at Fulcrum Bank's inception, was being queried by SARS.

46.3 In regard to the issues which Frangos submitted to the Minister which required investigation relating to the merger and swap ratios, the inspectors find that:

46.3.1 the valuation of Netainment was not fraudulent;46.3.2 the value of old Corpcapital was not artificially inflated by the

valuation of Netainment;46.3.3 any inherent conflicts of interest were properly managed, inter alia,

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46.3.3.1 by the appointment of the three independent firms of accountants to assist in an objective valuation of the three pre-merger entities in order to arrive at acceptable swap ratios;

46.3.3.2 the SRP considered whether there was a need to appoint another set of independent external advisors, and came to the conclusion that it was not necessary to do so;

46.3.3.3 the SRP considered whether Ellerine and the share incentive trust were entitled to vote their shares, and came to the conclusion, on the basis of independent legal advice, that they were entitled to do so.

46.3.4 The swap ratios for the shares in the Bank were hotly disputed in the press. The concern expressed being that Corpcapital assets and income did not justify the swap ratios.

47 An analysis of the Corpcapital financial statements subsequent to the change in

control but before the merger, prepared for Frangos revealed:

1999Reported

CorpcapitalReported

Bank

Balance of Corpcapital

earningsIncome StatementAttributable earnings 161226 104271 56955Minority interests -48198 0 -48198Headline earnings 113028 104271 8757 100% 92.3% 7.7%Balance SheetAssetsCash & liquid assets 1867173 1858848 8325Investments and securities 758216 594693 163523Debtors etc 16196 14260 1936Associated company 82034 82034 0Property plant and equipment 5492 5390 102Advances 209373 165529 43844Liabilities 0Deposits and other -1782749 -1695699 -87050Deferred tax -22726 0 -22726Creditors and taxation -17797 -68368 50571Shareholders for dividend -33172 -34614 1442Compulsory convertible loan -304115 -304115 0Net assets 777925 617958 159967

2000Reported

CorpcapitalReported

BankBalance of earnings

Income Statement Attributable earnings 190652 112257 78395

Minority interests -57251 0 -57251

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Headline earnings 133401 112257 21144 100% 84.2% 15.8% Balance Sheet Assets Cash & liquid assets 408839 402694 6145Investments and securities 1178603 829064 349539Debtors etc 54600 20487 34113Associated company 229225 229225 0Property plant and equipment 43170 43170 0Advances 284412 276798 7614 Liabilities Deposits and other -433739 -433739 0Deferred tax -73853 -18332 -55521Creditors, provisions and taxation -150986 -69216 -81770Shareholders for dividend 0 0 0Compulsory convertible loan -127339 -127339 0Interest bearing debt -32911 0 -32911Repurchase agreements -135497 -135497 0 0Net assets 1244524 1017315 227209

Comments:1. The above analysis makes it abundantly clear that without the

contribution of Corpcapital Bank (92.3% of headline earnings in 1999, and 84.2% in 2000), Corpcapital would never be able to achieve its reported results which would have had an adverse impact on the market sentiment attributed to the company.

2. Corpcapital without the Cytech adjustment would have made a loss of R80,006,000 for the year ended 31 august 2000.

3. From the above it is clear that the minority shareholders in the Bank were defrauded as were the investing public who held shares in the group.

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P. UNBUNDLING AND RELATED PARTY TRANSACTIONS

KEY POINTS The constant changes to the format of financial statements made it

impossible for year on year annual comparisons After the merger in 2001, which again changed formats, the

dismantling and unbundling in 2003 had the same effect The effect of these constant changes was that the source of fraudulent

profits, such as Cytech, were disguised Evidence suggests that the dismantling may have been planned during

2002, and that their intent was the total unbundling of the company in a piecemeal fashion

If this was the intent, and subsequent events suggest that it was, then the board may have been a party to circumventing section 228 of the Companies Act

The board should not have allowed the executives the scope that they did in selling the assets and should have adopted a more transparent process to the benefit of the shareholders

The inspectors do not appear to have adequately dealt with these issues

48 According to Frangos (after his research) he believed executives held at least 40% of the shares, directly and indirectly.

Comments:1. This level may have been possible given that the shareholders who

acquired the 75,762,050 shares previously owned by CMC (F1 page 46) and the buyers of the majority of the 64,051,000 shares traded prior to the change of control of Southgo (F1 page 118) have not been identified. Other acquisitions from abroad have also not been investigated.

2. It was likely that additional purchases were made through nominee companies when the share price fell to 88 cents late in 2002. This excludes possible participation by the executives in related party transactions involving those companies being disposed of.

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49 The investigation conducted by Frangos revealed that:

49.1 Cytech/Netainment was acquired in 1999 for R2m. (F2 page 100) It was valued on a discounted cash flow basis.

49.2 The winding down strategy was announced on 28 February 2003, and all operations of the company were regarded as discontinuing.

49.3 The winding down strategy took place despite giving shareholders at the Annual General Meeting held in January 2003 assurances to the contrary.

Comments:1. The intent to wind down the entire group on a piecemeal basis

was borne out by subsequent events.2. This approach may have been adopted to circumvent section

228 of the Companies Act, which would have required the prior consent of shareholders.

49.4 According to the SAB 7 T report at page 46 para 8.4.3 the Investments in subsidiaries previously reflected in Old Corpcapital’s "trading" portfolio (with valuations directly impacted on distributable profit, asset base and the swap ratios) were now reflected as either subsidiaries or associates or joint ventures as follows:

Previous valuesR’000

2003 valuesR’000

LossR’000

Infinex (shown as subsidiary from 2001 whilst previously classified as trading / value from 2000 F/S) 51 185 ** **Cytech/Netainment (from investment to associate to joint venture) 227 000 20 000 207 000Cyber Finance Investments (CFI) *** 3 000 ***Onelogix 87 971 6 300 81 671Aqua Online 58 000 1 900 56 100Corpcom - -50 000* 50 000

* Claim against Corpcapital for potential overstatement of profit . warranties.** Carrying value of subsidiary not known*** Value of CFI incorporated in 2000 and 2001 F/S not known

Comments:

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1. Onelogix appears to have suffered a loss of 93% of its carrying value. Was this loss due to fraudulent mismanagement in this company, over which Corpcapital apparently had significant influence?

2. Aqua Online appears to have suffered a loss of 97% of its carrying value. Was this loss due to fraudulent mismanagement in this company, over which Corpcapital apparently had significant influence?

3. Corpcom loss arises from an alleged overstatement of profit. 4. The loss figures are substantial and the reasons therefore

should have been investigated by the Inspectors who only seemed to have concentrated on Cytech.

49.5 With respect to events subsequent to 31 August 2003, the directors’ report reflected, amongst others, the following:

49.5.1 Claims by Clear Channel Independent under warranties relating to the sale of Corpcom concluded in September 2001 in the maximum claimable sum of R 50 million. The company was taking advice in relation to this contingency.

49.5.2 60% of the interests in Corpcapital’s Property Division were sold to management and the Standard Bank of South Africa Limited. The sale was subject to regulatory approval.

50 Relinquishing the banking licence.

50.1 In May 2002, the Board made a decision to hand back the banking licence of the Group.

Comments:1. It should be ascertained when and who took this decision.2. The motivation for retaining the banks cash instead of

distribution it to shareholders needs to be determined. Could it have been retained as part of an overall unbundling to get cash in managements hands at a huge discount? A logical conclusion would have been to liquidate the assets of the bank and distributing the cash to the shareholders.

3. Relinquishing the banking licence removed the strict requirements which the regulatory authorities required and the net cash came under the direct control of the directors to do with as they pleased.

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4. The decision to hand back the license was within the discretion of the Boards of Old Corpcapital and/or Corpgro, in which the executives exercised significant influence.

51 Frangos has expressed the concern that in the light of what has been ascertained about the executive directors’ lack of transparency and potential to mislead shareholders the manner in which the unbundling took place requires investigation. He has ascertained that:

51.1 The unbundling and sale of assets was conducted by the executives rather than by an independent third party, such as a merchant bank.

Comments:1. In my opinion this was not an appropriate and transparent

process, and may have prejudiced shareholder interests.2. Bearing in mind the previous undisclosed shareholdings the

risk of related party transactions and insider trading cannot be discounted.

51.2 The specific disposals that Frangos believes should be investigated based on the research has highlighted:

51.2.1 The Iliad transaction involving the sale of CorpBuild to persons with whom Liebesman has had a past association.

51.2.2 The purchases of tens of millions of shares by the Corpgro Pension Fund.51.2.3 The disposal of Cytech/Netainment, Aqua Online, Onelogix, etc51.2.4 Share transactions and dealing;

Comments:1. To what extent had insiders been purchasing the shares?

During October/November/December 2002 the shares were trading at 88 cents, substantially below its net asset value.

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2. The acquisition of a 30% interest in the group by a fund administered by Winston Floquet needs to be investigated to ascertain who the fund members were and whether the fund was holding shares for foreign shareholders.

52 The investigation of directors and related parties share dealings conducted by SAB7T and Collett & Collett Associates (Pty) Ltd revealed the following parties became shareholders during the unbundling process.

Shareholder Number of sharesC.J. Pension SPS Corpcap (CAM) acquired during Apr 2003 63,775,981C.J. Pension SPS Corpcap (CAM) 43,566,475Citizens Admin Corp (Pty) Ltd (Ellerine) 11,465,760Ellerine Bros (Pty) Ltd 6,714,284

Comment:In my opinion these holdings should be investigated.

53 The investigation of directors and related parties share dealings conducted by SAB7T and Collett & Collett Associates (Pty) Ltd revealed the following undisclosed “insider trades".

Shareholder- acquired prior to change of control of Southgo Date Number of shares

Ellerine Bros (Pty) Ltd 2/03/96 32 040Martin Sacks 6/05/96 50 000Builma c/o Liebman and Liebesman 14/06/96 1 825Karen Anne Liebmann 27/06/96 83 200Karen Anne Liebmann 28/06/96 1 800

Shareholder- acquired in Corpcapital- but not disclosedBuilma Nominees – Liebesman is a director 8/09/98 622,600

Shareholder- acquired in ABSEC/Aqua Online- but not disclosedStratop - Liebmann is the sole director 23,455,714Stratop - Liebmann is the sole director 11,250,000

Comment:In my opinion these holdings should be investigated and charges laid for breaches of duty.

Q. COMMENTS ON THE INSPECTORS REPORT

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KEY POINTS The report appears to focus primarily on two issues, Cytech and the

character attack on Frangos The entire report is incorrectly predicated on the following fundamental

requirements:o The 47.5% minority interest in Cytech was capable of being sold

and was at all times “held available for sale”.o The investment was not an “associate” and classified as a joint

venture so as to enable the revaluation surpluses to be included in profits.

o The directors’ valuations were fair and reasonable and capable of being sold at those values.

o That the evidence presented to them was truthful even though it contradicted the exchange control requirements and approvals that regulated the Cytech investment.

The inspectors misapplied their minds in not investigating what actually happened, any motive therefore and appeared to have wasted time on irrelevant hyper-technical accounting arguments.

The inspectors did not conduct a proper investigation of the Cytech structure and investment. They ought to have known that all overseas investments could only be made in terms of the SARB application made and the approval granted. No consent was given, nor was it capable of being given, for a short term investment, no request was made or approved to enter into a joint venture and agreements that required SARB approval had not received such approval.

54 The entire report is predicated upon the conclusion that the Cytech/Netainment investment was at all times “held available for sale”. Without this decision the Inspectors could not have agreed that the investment could be legitimately revalued and the revaluation surplus included in income.

Comments:1. As the Cytech/Netainment investment was an overseas investment the

Investigators ought to have known that Exchange Control approval was required and would not have been granted for a short term investment.

2. Corpcapital’s application to the Exchange Control authorities requesting permission for a long-term investment was available to the Inspectors and was apparently ignored.

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3. The failure by the Inspectors to apply their minds to the question of whether or not the Cytech/Netainment investment could ever have been “held available for sale “ is demonstrated by their failure to:i. Understand the approvals and conditions required to hold an

overseas investment.ii. Determine the stated investment philosophy set out in the

Exchange Control application to hold until listed as part of the groups E-Commerce strategy

iii. Understand the requirement of being “available for sale”. This would require the investment to be “at one’s disposal” and “within ones reach”. This was clearly not the case and I have not been able to ascertain if this aspect was considered at all.

iv. Obtain evidence of documentation being available for prospective buyers during 2000 and 2001 (audited financial statements, professional valuations, prospectuses, forecasts, analysis of competition, legislative framework, risks, agreements with service providers, signed shareholders agreements (the shareholders agreement available to me was unsigned), long term employment contracts for the 2 main employees, etc etc.) I have not been able to ascertain that all these documents were requested or if in fact they existed. The evidence that attempts were being made to sell the investment refers to discussions with PwC in London during May 2002. This would not constitute in my opinion evidence that the investment was available during 1999, 2000 and 2001.

v. Properly consider Corpcapital’s response to the Inspectors that “Corpcapital did not exercise, nor was it in a position to exercise control over Netainment”. This statement was clearly false as it is a standard feature of all Exchange Control approvals that annual financial statements are prepared and lodged. It is unknown to me as to why such a knowingly false statement would have been accepted without comment by the Inspectors.

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vi. Consider that the “so called” Joint Venture Agreement (not disclosed to the Exchange Control authorities) or the letter of Intent were legally entered into given the fact that no prior Exchange Control approval had been obtained. The requirement to provide annual financial to the Exchange Control authorities is a standard requirement of approvals.

vii. Without a legal agreement and without the prior consent of the Exchange Control authorities there can, in my opinion, be no basis for the Inspectors conclusion that a “joint venture” existed.

viii. How it could possibly have been the intention as early as 1999 (when the directors own revaluation surplus was only R2.5m) to hold the Cytech/Netainment investment “held available for sale” This was contrary to the terms of the Exchange Control approval and was done purely to be able to comply with the requirements to “mark to market”.

ix. Consider why or how the Cytech/Netainment had been “held available for sale” for over 4 years. No evidence appears to have been requested to ascertain which overseas merchant bankers or agents had been appointed to locate buyer prior to 2002.

x. How the Cytech/Netainment investment could ever have been “held available for sale” when no audited financial statements were available and the investment represented a minority holding in a complex overseas web of companies supplying critical services. Clearly the Cytech investment was never “held available for sale”.

55 The Inspectors appeared, in my opinion, to concentrate more on processes. There is no evidence that I could ascertain that would confirm that with regard to the management valuation that they applied their minds to the following:

55.1 How a start- up company with 2 key employees and no proprietary intellectual property or special licences could warrant the price the Inspectors were happy with.

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Comments:1. Accept the 2000 year “valuation” of R147,500,000 for the

47.5% interest in Cytech/Netainment (R310,000,000 for 100%) implies that the buyer would pay a price that would include, in my estimation, goodwill of at least R120,000,000 for 47.5% and no control or say R280,000,000 goodwill for 100% This is clearly ridiculous for an investment that cost $560,000 in 1998/9.

2. Accept the 2001 year “valuation” of R211,000,000 for the 47.5% interest in Cytech/Netainment (R444,000,000 for 100%) implies that the buyer would pay a price that would include in my estimation, goodwill of at least R180,000,000 for 47.5% and no control or say R400,000,000 for 100%. This is also clearly ridiculous.

3. Not consider the huge goodwill component of the price that is paid only in recognition of “super profits”. There is no evidence that that the Inspectors required reliable forecasts to determine if such super profits would arise. The unaudited short profit track record would never have been a reliable basis for such a determination.

4. Why the PwC evidence that a pre-tax valuation was inappropriate and resulted in an overvaluation of 30% was not considered to be material.

5. The fact that the Cytech/Netainment investment represented a minority interest. There is no evidence to confirm that they had sought proof from Cytech/Netainment that it was legally entitled to negotiate a sale on behalf of all the shareholders or if failing that that they had considered who would be willing to buy a minority stake and what discount would such a buyer require.

6. The fact that Cytech/Netainment was unlisted and to have considered what discount an unlisted company would generally trade at. From experience and assuming that Cytech/Netainment could ever have qualified for a listing the discount would be around 40%

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56 The Inspectors further concluded that:

56.1 Netainment commenced business in December 1998.

56.2 The nature of the relationship between Corpcapital Investments and Rose and Harpaz was that of a joint venture. The investment in Netainment was a joint venture which was acquired and held exclusively with a view to its subsequent disposal in the near future. This is clearly taken from the wording of Hamburger’s evidence (F1 page 262).

Comments:1. The Inspectors failed to ascertain what permission had

been granted by the Exchange Control authorities and what the Corpcapital’s intention was. The application for approval contained the following informationi. approval was sought to make an investment in a wholly

owned BVI subsidiary which would acquire 50% of the share capital in and provide loan financing to Global Admin UK Ltd.

ii. the investment “constitutes an integral part of Corpcapital’s Specialised Outsourced Services Division which will provide ,to Commerce and the Formal Banking Sector specialised financial services through focused business units in close partnership with management. This is clearly not a joint venture.

iii. Corpcapital intends to initially hold its interests in the E-Commerce industry in a private equity fund. When the investments have reached an acceptable degree of maturity it is intended that the investment will be listed on the JSE.

iv. Global Admin was in the process of negotiating administration, management and marketing agreements for online music distribution, online pharmaceutical product distribution, online book distribution, online distribution of African curios and online casinos (later established as Cytech/Netainment).

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v. Online casinos were identified as one, if not the most prodigious current users of electronic cash from which to launch a wider range of E-Commerce users in order to be positioned at the forefront of the E-Commerce industry.

vi. Harpaz and Rose entered into 3 year service contracts with Global and not Cytech/Netainment. The Letter of Intent that was signed was in respect of Global Admin and not Cytech/Netainment.

2. The evidence of Hamburger (F1 pages 240-325) and the Letter of Intent was apparently the basis upon which the Inspectors concluded that the Cytech/Netainment investment was in fact a joint venture. The following points are noted:

i. Harpaz and Rose were to conclude service contracts incorporating restraints of trade in favour of Global and Corpcapital. (para 3.5)(F1 page 136).

ii. If the business failed they would be “employed by Corpcapital.

iii. Harpaz and Rose’s employment could be terminated by Global or Corpcapital (para 18 of the draft shareholders agreement F1 page 188).

iv. Harpaz and Rose provided funding of only $40,000 (para 3.2)(F1 page 136) and were to administer administration, management and marketing agreements for the E-Commerce Opportunity.(F-page-)

v. The terms of the Letter of Intent contain no references to there being a joint venture.

3. As there is no reference in the Exchange Control application to a joint venture there clearly no permission was obtained to enter into a joint venture. The investment in Cytech/Netainment was part of an overall E-Commerce strategy of Corpcapital which was intended to be listed separately.

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57 The Inspectors concluded that the valuation model used was appropriate for the revaluation of the Netainment investment.

Comment:In my opinion there was insufficient documentation or evidence for the Inspectors to even consider the appropriateness of a DCF method of valuation for a company such as Cytech, a method that places a huge reliance on assumptions and the availability of accurate data that was not available.

58 The fair value of the investment in Netainment was reliably measurable.

Comment:For reasons dealt with separately herein this is unsustainable. The Inspectors failed to apply their minds to ascertain who in their right minds would pay such a price for an unlisted minority interest.

59 The fair value of the investment was reliably measurable; the policy of including the revaluation surplus into net profit and headline earnings each year was in accordance with GAAP.Comments:1. As the Cytech/Netainment investment was not “held available for

sale” and the Exchange Control authorities had not approved such a request (and as there is no evidence of an authorized change of intention), the Inspectors conclusions that the investment was “held available for Sale’ is clearly unsustainable.

2. The Inspectors failed to determine whether the executives may have in fact had a fraudulent intent/need to inflate profits and hide disastrous results. The inclusion of managements’ revaluation surplus in income was in my opinion fraudulent misrepresentation of the earnings and asset values and of prejudice to the investing public.

3. The “partners” were nothing short of employees which is what they were referred to in the Exchange Control application.

4. Even had the Letter of Intent been approved by the Exchange Control authorities giving Corpcapital veto’s (para 15) over capital expenditure, contracts, licence agreements or the appointment and/or removal of professional advisors, bankers the fact that this would have “significant influence”, was ignored.

60 With regard to the Payne report the Inspectors noted:

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60.1 A striking feature of the Payne investigation is how quickly it was completed. An obvious question is whether there was a time limit placed on Payne. Payne and Corpcapital denied that there was a limit. However, as much as Payne and Corpcapital might protest that there was no time limit for the investigation; Payne must have felt constrained to complete the enquiry within a matter of weeks, rather than months.

60.2 Bearing in mind that it was in the interests of shareholders that the enquiry should be completed expeditiously, Payne cannot be criticised for the speed with which he did his work. The inspectors concerns are that:

60.2.1 he did not qualify his report by referring to the need for an expeditious enquiry and advising that his investigation and report should be judged in the light of that need; and

60.2.2 having found 27/1 in favour of Corpcapital in so short a time, he made himself vulnerable to the accusation, which Frangos then made, that the report was a whitewash.

Comment:Based on the review of the Payne report set out earlier I am of the opinion that he failed to apply his mind with the professionalism that I would have expected from an “expert” Chartered Accountant. Whilst he may have qualified his report he did not qualify his opinions.

61 With regard to the reliance by Corpcapital on the valuations done by independent auditing firms the Inspectors noted the factual statements made by Corpcapital were the following:

61.1 the investment in Cytech/Netainment was valued by KPMG in March 2001;KPMG's valuation of R241 million was reviewed and approved by Deloitte & Touche and PwC;

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61.2 since the inception of the Group's acquisition of Cytech/Netainment the valuations ascribed to its business were tested for reasonableness by KPMG, PwC, Deloitte & Touche and Fisher Hoffman.

Comment:There is no evidence that the Inspectors enquired from potential buyers such as Southern Sun (mentioned to them) whether in their opinion the valuations were reasonable. The reasonableness of a valuation could never be determined if audited financial statements were only available in July 2003.

62 The inspectors found that:-

62.1 KPMG did not do a valuation of Netainment. KPMG indicated at the time in its disclaimers that they had not independently verified the accuracy, completeness or reliability of the information on which their fair and reasonableness valuation was based.

Comment:The fact that they Inspectors found that no valuation had in fact been done and that this was contrary to what management and the directors had told them under oath, seems to have elicited no adverse comment.

62.2 Without an independent verification of the accuracy, completeness or reliability of the information, KPMG cannot be said to have independently valued Netainment.

62.3 The independent verification was especially called for because of the statements of fact in Corpcapital's indicative valuations that their valuations were based on unaudited financial information supplied by Netainment and that the information had not been independently verified by them.

62.4 The evidence of Carreira and Spies of KPMG that they did not do a valuation of Netainment must be accepted.

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62.5 KPMG reviewed the valuation of management. KPMG arrived at their opinion that the value of Netainment was in the order of $65 million on the basis of a review of the information received from management.

Comment:In my opinion this review cannot be worth the paper it is written on if it is to confirm a valuation. The only way KPMG could have performed a proper valuation would have required market research, audited financial statements, a survey of who would buy a minority stake at that price etc, etc.

62.6 D&T and PwC, in turn, reviewed the fair and reasonableness valuation of KPMG. D&T and PwC did not themselves independently value Netainment.

62.7 The review of the KPMG fair and reasonableness report by D&T and PwC was a review of the process followed by KPMG rather than a review of the actual valuation of Netainment.

62.8 At the end of a process of interaction between the three auditing firms, all three were satisfied with the fair and reasonableness valuation of Cytech/Netainment by KPMG.

Comment: The firms were however never asked to express an opinion on whether or not the Cytech/Netainment was in fact “held available for sale” or under what circumstances its revaluation surplus could be included in income. This further substantiates the point that the concept of the investment being ”held available for sale” was not raised at that time.

62.9 Corpcapital genuinely and reasonably believed that the pre-merger process followed by the three audit firms had vindicated the methodology and outcome of the valuations of Netainment performed by old Corpcapital.

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Comments:1. Bearing in mind the fact that the firms were however never asked

to express an opinion on whether or not the Cytech/Netainment was in fact “held available for sale” or under what circumstances its revaluation surplus could be included in income they could quite reasonably have been mislead, as they were.

2. Neither the firms nor the Inspectors considered what the real motive for the valuation may have been.

62.10Corpcapital cannot be criticised for contending in its press release of 19 January 2003 that the valuations ascribed to the business of Cytech/Netainment were tested for reasonableness by KPMG, PwC and D&T. The only small quibble in that regard is the statement that that had occurred "since the inception of the Group's acquisition of Cytech/Netainment".

Comments:1. Having lied about the true long term nature of the

Cytech/Netainment investment, the testing for reasonableness was on the false premise that the Cytech/Netainment investment was “held available for sale” even though over a lengthy period from 1999 to February 2002 no attempts could or were made to sell the investment.

2. The Inspectors also fail to address the decrease in value from R211,000,000 to R110,000,000 satisfactorily. The investment was finally sold for R20,000,000.(F1 page 239).

63 With regard to Disclosure in the financial statements (1999-2001) the Inspectors reported.

63.1 The investment in Netainment/Cytech/Netainment was accounted for in the 1999-2001 financial statements in terms of AC 133 at fair value, in accordance with AC 119.36, on the basis that it was acquired and held exclusively with a view to “its subsequent disposal in the near future”.

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Comment:1. Clearly this conclusion is unfounded for the reasons given

above. It was not a joint venture “held available for sale” and therefore there is no GAAP statement that would support the revaluation surplus being included as income with a corresponding increase to the asset values.

2. The contention that Cytech/Netainment was ‘available for sale’ is simply false and part of a misleading strategy to deceive the Inspectors. The argument appears to have been developed only since Hamburger gave evidence on 1 October 2003.

3. It would appear that the Inspectors and others have gone to great lengths to justify the revaluation of an investment “held available for sale” without ascertaining what permissions had been requested and granted. To make such a statement the Inspectors must have negligently failed as experts to obtain and review both the Exchange Control application and the approval granted.

4. The Inspectors must further have failed to apply their minds as to what documentation a buyer would require, its availability and the ability to sell an unlisted minority to an investor. They must also have failed to apply their minds to what could possibly have induced a buyer to pay hundreds of millions of Rands for something that could readily have been established from scratch for a fraction of that price. There were no super profits, proprietary rights, specialized software, contracted customers or any other asset that would justify the prices arrived at.

63.2 There is a difference of opinion amongst some of the experts as to whether Corpcapital was obliged to comply with all the disclosure requirements of AC 133 and as to whether the disclosure requirements of both AC 133 and AC 119 had to be complied with.

Comment:Having missed the point that the investment was never “held available for sale” the lengthy analysis of alternate disclosures was a waste of time.

63.3 It is the opinion of the inspectors that Netainment should have been disclosed

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separately in the 2000-2001 financial statements of Corpcapital as a joint venture (albeit held for the short-term) together with a description of the business and percentage interest held therein by Corpcapital.

Comments:1. As stated earlier in this report, in my opinion, this opinion is

incorrect and not supported by credible evidence. 2. This is one of the fundamental conclusions necessary to

conclude that the inclusion of the revaluation surpluses was acceptable and in accordance with GAAP.

3. The disclosure referred to here is the disclosure in the Balance Sheet with the corresponding revaluation surplus being included profits.

63.4 In addition, the accounting policies note should have included a policy to the effect that associates and joint ventures acquired and held exclusively with a view to their subsequent disposal in the near future were accounted for at fair value, while the definition of associates included in the Corpcapital financial statements should have been amended by the exclusion of the reference to "long-term interest", in accordance with the definition as per AC110.

Comments:1. The Inspectors have surprisingly supported Hamburger’s

evidence that the investment was held exclusively with a view to “disposal in the near future” or “held available for sale” and ignored evidence to the contrary.

2. To support their conclusions they go on to state that the groups own accounting policy was incorrect and that the definition of associates should have excluded the reference to “long-term interest”.

3. The inspectors also ignore any reference to the terms of the Exchange Control Application which they either knew or ought to have known would not have granted permission for an investment held for “disposal in the near future” and especially where no such request had been made.

4. The investment could never have been held exclusively for disposal as it was only a part of an integrated overseas investment strategy.

5. No explanation is given by the Inspectors as to why the

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investment was held exclusively with a view to “disposal in the near future” from 1999 to 2002.

6. In my opinion there was no credible evidence supporting the Inspectors conclusions. From the evidence available to me the investment was never available or capable of being sold in the near future and no real attempt were made to so.

63.5 In its final submissions, Corpcapital contended that Coppin's view, in his earlier submission, had been that there are different viewpoints on various aspects of accounting and disclosure within the accounting profession, and that this should be taken into account by the inspectors. The view expressed by Coppin and Wilmot in their final submission was that certain of the information found to be lacking by the inspectors in the 2000 and 2001 financial statements of Corpcapital was either included in the annual reports (albeit outside of the financial statements) or could have been determined indirectly from other information provided in the financial statements. The Inspectors, however, remain of the view that this information was not disclosed in the financial statements in accordance with the Companies Act and GAAP."

64 The inspectors' findings with regard to various disclosure issues raised by the experts are as follows:

64.1 that the requirements of the Companies Act and GAAP with regard to the disclosure of the unrealised element of the revaluation surpluses were complied with the information was available in the cash flow statements in both 2000 and 2001;

Comment:This is an unacceptable conclusion. The Inspectors have apparently ignored the evidence of Strauss of Investec bank who was required to meet with the executives before he obtained an understanding.

64.2 the information was also provided in note 19 to the 2001 Corpcapital financial statements;

Comment:Unacceptable for the reasons stated above

64.3 a number of experts were of the view that the financial statements of 2000 and

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2001 did provide adequate information in this regard for purposes of complying with the requirements of the Companies Act and GAAP;

Comment:There is no reference to possibly better qualified experts who did not agree. I agree with those who were of the opinion that no proper disclosure was made. In any event the treatment was incorrect as the investment was not “held available for sale”.

64.4 that the increase in the value of the investment should have been disclosed separately in the income statements, or notes thereto, of old Corpcapital and of Corpgro, for the 2000 financial year in particular, as well as in new Corpcapital for 2001:having regard to the specific requirements and wording of paras 42(s) and 66(2) of Schedule 4 to the Companies Act;

Comments:1. If the Inspectors had concluded that adequate disclosure was

made in accordance with GAAP this statement contradicts the earlier statement.

2. The yearend adjustments/revaluation resulted in increasing Corpgro’s attributable profit by 63% and Corpcapital’s attributable profit for the year ended 31 August 2000 by 313%. These were obviously material and the non disclosure was deliberately misleading.

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64.5 because of the materiality of the investment in Netainment; having regard to the requirements of para 27 of Schedule 4 to the Companies Act as well as to AC100.11 and AC101.06 and because of the materiality of the Netainment investment, the fact that this investment was unlisted should have been disclosed in the financial statements of old Corpcapital and Corpgro (2000) and new Corpcapital (2001)

Comment:A far more important point apparently ignored was that but for the revaluation declining profits and huge losses would have been suffered by the group (excluding the banking division) and the lack of profit would have had an impact on executives’ remuneration?

64.6 that while certain associates held for the long-term were equity accounted, and others (including a joint venture) held for disposal in the near future were accounted for at fair value, this was in accordance with GAAP;

Comment:This comment would appear to have been made to explain away the different treatment. As Netainment was a long-term investment it could only have been accounted for on an equity accounting basis. The real question that should have been probed was what was the motive for the false disclosure?

64.7 that they are unable to find that the disclosures regarding the investment in Netainment for the 2000 and 2001 financial years were not in compliance with the requirements of AC 125.49(a),AC125.81 and AC133.168(a);

Comment: As the investment was not “held available for sale” the disclosures were not in compliance and profits were falsely overstated.

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65 The inspectors are unable to find that the old Corpcapital and Corpgro financial statements for 1999 and 2000 and the new Corpcapital financial statements for 2001 did not fairly present, in all material respects, the financial position of the company and the Group and the results of their operations in accordance with GAAP and in the manner required by the Companies Act.

Comment:This in my opinion arises from the fact that the Inspectors did not properly fulfil their mandates and came to conclusions that they were not competent to come to.

66 In the 2002 annual financial statements of New Corpcapital the investment was accounted for in accordance with the equity method with 47,5% (i.e. approximately R8m) of Cytech/Netainment's net profit being included in Corpcapital's net profit for the year and in its headline earnings; the carrying (fair) value of the investment as at the beginning of the financial year (R221m) was regarded as the "cost" for equity accounted purposes, and this was written down to a figure of R110m at the end of the year, with the amount written off being described as goodwill. This write-off, being goodwill, was charged against net profit for the year, but was reversed for purposes of calculating headline earnings;

Comment:This bland statement that the equity earnings were R8m in 2002 is made without any consideration of why R144,500,000 had been included in 2000 and R72,000,000 was included in 2001.

67 The change in the method of accounting for Cytech/Netainment was not regarded as a change in accounting policy or a fundamental error and, therefore, the comparative figures were not restated; the only reference to this change in accounting treatment of Cytech/Netainment (and a number of other less material investments) in the financial statements was in note 37 on "Associates" in which pro forma figures for the carrying values of these investments at the end of the prior year were given, with the explanation, "Comparatives of investments reclassified as associates in 2002 are given for ease of reference".

68 It is noteworthy that the write down of the Cytech/Netainment investment in 2002 was charged against net profit for the year, but was reversed out in the

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determination of headline earnings, the expense being regarded as a write- down of goodwill.

Comment:There is no indication as to what is meant by “noteworthy”.

69 In the Corpcapital Group's financial statements of 1999-2001 the Netainment investment was not referred to separately and it was classified neither as an associate nor a joint venture. It was simply included on the balance sheet under the headings "investments" (2001), "investments and trading assets" (2000) and "investments and securities" (1999). The investment was accounted for on a "mark-to-market" basis with the resultant unrealised surplus on the revaluation during each of these years being credited to income and included in headline earnings.

Comment:On the Inspectors own admission the investment is not referred to as a joint venture.

70 The inspectors made the following findings:-

70.1 As the investment complied with the terms of the definition of a joint venture as per AC 119 from the outset, it should have been classified as such.

Comment:The Exchange Control application and the directors in the annual financial statements made no reference to there being a joint venture.. This is something that the Inspectors accepted following the untested evidence of Hamburger and they ignored evidence to the contrary.

70.2 The investment in Netainment was a joint venture which was acquired and held exclusively with a view to its subsequent “disposal in the near future”.

Comment:There is no tested evidence to support this false claim.

70.3 The valuation model used was appropriate for the revaluation of the

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Netainment investment.

Comment:As stated previously there is no basis for this claim.

70.4 The fair value of the investment in Netainment was reliably measurable.

Comment:With no audited and independent figures this conclusion cannot be arrived at.

70.5 Having expressed the view that the fair value of the investment was reliably measurable, the policy of including the revaluation surplus into net profit and headline earnings each year was in accordance with GAAP.

Comment:This is once again based on the false premise that the investment was “held available for sale” and that the valuation was reasonable.

71 The Inspectors comments on whether the investment in Netainment fairly valued in the period 1999 to 2001 were as follows:

71.1 The views of the experts are divided on this issue. The experts appointed by Corpcapital take the view that, in general, the valuations of Netainment were fair, whereas the experts appointed by Frangos, take the opposite view.

Comment:

In my opinion Frangos was correct and African Merchant Bank was correct with regards to its concerns.

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71.2 The inspectors are of the view that the R4,5 million valuation attributed to the investment in August 1999 was fair, taking into account the information available at the time and having regard to the materiality of the amount.

Comment:There is no basis for this conclusion.

71.3 Having regard to the many factors for and against whether the values in 2000 and 2001 were fair values and the conflicting opinions of the bevy of experts, the inspectors cannot find that the Netainment investment in those years was not fairly valued.

Comment:There is no basis for this conclusion, had a proper investigation of the materiality and impact been conducted.

72 The inspectors nevertheless express the following views:-

72.1 The 2000 valuation of Netainment was not "unjustifiably inflated to boost profits artificially and possibly fraudulently", as suggested by Frangos.

Comment:

There is no basis for this conclusion had a proper investigation been conducted.

72.2 While it is accepted that the valuations were subject to extensive debate amongst various executives and executive directors, it was essential for the non-executive directors to have been included in that process. In view of the significant uncertainties and risks related to the investment, the detailed valuations workings (including all the assumptions on which the valuations were based), and the full details of the uncertainties and risks should have been debated at old Corpcapital board level in finalising the value to be included in the financial statements. This should have been coupled with the debate as to what information was to be disclosed in the annual financial statements.

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Comments:1. This conclusion indicates that the executive directors did

not disclose material information to the board as required by the Companies Act and JSE regulations.

2. Notwithstanding this the Inspectors make no adverse findings against the executive directors about an extremely important component of the disclosed earnings based on their own valuations.

72.3 The decline in the NASDAQ and in Netainment's profits should have triggered a reduction in the forecasts and ultimately in the valuation at a more rapid rate in 2001 and 2002.

Comment:This would appear to be an attempt to justify the declining values. There is no evidence that the NASDAQ decline could have accounted for a decline from R450m to the ultimate realization value of around R20 million. (F1 page 239).

72.4 These declines should have been debated specifically and extensively with the auditors and the consultants involved in the valuation exercise for the merger, with the view to assessing the effect thereof on the valuation of Netainment and ultimately on the valuation of the old Corpcapital shares, for the purposes of the swap ratios.

Comments:My comments above apply.

73 On Frangos’ comments on the Payne report the Inspectors found that:

73.1 There were no objective grounds for Frangos' belief that Payne was actually biased or lacked independence, nor was there a reasonable apprehension that Payne might not bring an impartial and unprejudiced mind to the investigation; and the process

Comment:I submit that a proper investigation in accordance with the mandate should have determined otherwise.

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73.2 Payne -robust and swift as it was - was fair. Frangos cannot be heard to complain that he was not given a fair hearing. He was interviewed on a number of occasions for a period in excess of 24 hours in total.

Comment:Frangos’ right to have a fair hearing is not the issue. The Inspectors were required to conduct a thorough independent investigation in accordance with their mandate.

74 From what I have seen from the documentation reviewed by me, I am of the opinion, that the Inspectors’ investigation must have been adversely influenced or misdirected. In my opinion they were not entitled:

74.1 To conclude that no further proceedings were recommended.

74.2 To add insult to injury and recommended that Section 263 (1)(b) of the Companies Act be amended to give the Minister discretion to direct any complainant under Section 258(2) to pay or contribute to the costs of an investigation. This would merely support more corporate crime such as that committed by certain Corpgro executives to continue to go unpunished

74.3 To conclude that Corpcapital should not contribute to costs, thus completely vindicating the actions of executive directors, one of whom had previously been suspected of corporate fraud.

75 From the review of the documentation supplied to the Inspectors it is strange to say the least that:

75.1 The Inspectors make no reference to the non disclosure of material facts in the Southgo Circular to Shareholders or in the Pre-listing Statement of September 1996 despite being referred to these documents by Moss.

75.2 The Inspectors make no references to breaches of fiduciary duties or requirements of the Companies Act or the JSE

75.3 No recommendation is made to report the false disclosures in pre-listing statements, insider share trades to the South African Reserve Bank.

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75.4 No investigation be undertaken into who acquired the 64m shares traded during the period Apr-June 1996. It is not likely that unrelated parties would purchase 64m shares in a cash shell that had a net asset value of only 2.8 cents per share.

R. MATTERS REQUIRING FURTHER INVESTIGATION

KEY POINTS The illegal overseas shareholdings and in particular the buyers of the

Southgo shares prior to the change of control. Insider trading in group company shares. The role of foreign administrators and nominee companies. The benefits gained by the executives via their illegal, undisclosed

offshore shareholdings, their remuneration and their participation in the companies’ employee benefit schemes and provident funds.

Who benefited from the merger and unbundling and to what extent was the investing public defrauded as a consequence thereof.

76 As Corpgro started off as a cash shell the use of overseas trusts and entities to acquire shares in other cash shells on behalf of executive directors should be investigated and in particular.

76.1 Who were the beneficiaries of the offshore trusts such as Weldan?

76.2 Who owned Frampton and what was its relationship to Grolman?

76.3 Who bought shares in Southgo prior to the change of control? It is not possible for the majority of the 64 million shares traded in the period Apr-June 1996 not to have been insider trades with undisclosed shareholders. Correspondence disclosed shows that the acquisitions were contemplated?

76.4 Who bought the 75,765,050 shares held by G Rubenstein/CMC given that CMC was owned by Brett Kebble and he had confirmed to Frangos that consortium members had bought these shares?

76.5 Which overseas shareholders sold Corpgro shares at any time?

76.6 Who bought shares in TPN prior to its change of control? Overseas parties associated with the Southgo acquisition were involved?

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76.7 Who bought shares in ABSEC prior to its change of control? Overseas parties associated with the Southgo acquisition were involved?

76.8 What happened to the shares bought back by the company? Were they transferred to the Executive Incentive Share Trust?

76.9 Why a fund controlled by Winston Floquet acquired a 30% shareholding? For whom were the shares purchased and how were they acquired?

76.10What was the role of Liebmann and how were his overseas interests held?

76.11Why were the Exchange Control Authorities not notified by the Inspectors of the illegal offshore structures?

76.12What was the role of Schindlers in all three shell company structures/trusts and for whom did they act?

76.13What was the role of Stenham Gestinor in all three shell company structures/trusts and the administration of the Frampton loan?

76.14What false declarations were made in the circulars and pre-listing statements of Southgo, TPN and ABSEC?

76.15Why the Exchange Control approval letter not requested when investigating whether or not the Cytech/Netainment investment had been granted as a short term joint venture? (Such permission would not have been granted).

76.16Why the investment in Cytech/Netainment was accepted by the Inspectors as not being an Associate given that the Group was almost the sole funder, the loan was secured, the Group was the largest shareholder and the remaining shareholders were “employees.” It could never be said that Corpgro did not have ”significant influence”

76.17How was it possible for the Inspectors not to have considered the materiality of the Cytech/Netainment revaluation on earnings when:

76.17.1 It resulted in Corpgro’s earnings being increased by 63% for the year ended 31 August 2000.

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76.17.2 It resulted in Corpcapital’s earnings being increased by 313% for the year ended 31 August 2000.

76.17.3 It resulted in Corpcapital’s earnings being increased by 145% for the year ended 31 August 2001.

76.18Why the revaluation was not considered to have been fraudulent? The facts were that the intention could only have been to hold the investment for the long term as applied for. The investment could never have been “held available for sale”. The results, but for these fraudulent valuations would have been catastrophic for the share price and the merger.

76.19How could it be considered that the Cytech/Netainment revaluation was not driven by personal interests or did not influence bonuses etc?

76.20How it could be considered that the financial statements had fairly presented the financial position of the Group?

76.21Who acquired shares prior to the announcement to unbundled?

76.22Why the concern by Frangos about executives being more concerned about personal benefits was not the subject of investigation by the Inspectors?

76.23To what extent could or did executives benefit during the unbundling? Which companies were sold to entities in which executives had interests and which independent parties determined prices?

76.24Why were there such huge differences between the disclosed values in the financial statements and the 2003 values? Were values reduced in anticipation of stripping the assets for personal gain?

76.25Why was it possible for the CPS Pension Fund to obtain 107 million shares? What did the trustees know that disposing shareholders did not know?

76.26Who beneficially owned shares held by nominee companies like Stratop Nominees (Liebmann?) which acquired almost 35 million shares?

76.27Why were the complaints of African Merchant Bank and Starke regarding the swap ration not investigated more fully? Was it considered

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that overstatements of income by 63% to 313% did not have an influence on comparative earnings or tangible asset values?

77 The merger between Corpgro, Corpcapital and Corpcapital Bank (formerly Fulcrum Bank) where it is clear that the minority shareholders were prejudiced as a result of the fictitious earnings reflected in Corpcapital and Corpgro accounts.

78 It would appear that “insider trading” and undisclosed shareholdings were a common tactic adopted by certain of the executive directors. The following should be investigated further.

78.1 What happened to the shares acquired from abroad? When were they sold and for how much?

78.2 Who controlled Frampton and did it act on behalf of Grolman and what share trades did this entity conclude?

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S. CONCLUSIONS

KEY POINTS A proper investigation was not undertaken. The mandate of the Minister: Trade and Industry was not fulfilled. Incorrect conclusions were arrived at.

79 Based on the research conducted and the information provided to me I am of the opinion that the Annual Financial Statements were deliberately misleading and did not accord with the requirements of Generally Accepted Accounting Practice.

80 It is quite clear that in my opinion, certain of the Corpgro and Corpcapital executives perpetrated a fraud on the investing public. Their plan consisted of a number of phases which included the following:

80.1 The hiding of their initial investments through illegally created offshore trusts and entities.

80.2 Making false statements in relation to shareholdings and holding shares in the names of nominees.

80.3 Making false statements in the circulars to shareholders and in the pre-listing statements.

80.4 Obtaining control of cash shells from abroad.

80.5 Using their ability to initially inflate the share price of the cash shell to acquire unlisted companies and issuing shares therefore.

80.6 Fraudulently increasing the earnings of the company/group.

80.7 Repeating the process through the use of additional cash shells also partially owned from abroad.

80.8 Merging their company with fraudulently increased earnings and assets with a bank with solid earnings and assets.

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80.9 Defrauding the investing public either through the fraudulent disclosure of earnings or through the unjustified merger ratios.

80.10Later striping the group and delisting.

80.11Throughout the period the executives fraudulently obtained salary increases, performance bonuses and share options based on false results.

81 With regard to the report of the Inspectors

81.1 They failed in their duty to determine that a fraudulent scheme had in fact been perpetrated. It is clear that a blatant fraud had been perpetrated on the investing public and that earnings were inflated to avoid disclosure of declining profits and losses.

81.2 They failed to consider the profit performance or share price trends in order to determine whether or not the executives may have had a motive for fraudulently inflating earnings.

81.3 They based their conclusions with regard to Cytech/Netainment on the false and unsustainable premise that the investment was “held available for sale” They failed to enquire what steps were taken from 1999 to 2001 to sell the investment and failed to apply their minds to the Exchange Control requirements for a foreign investment.

81.4 They incorrectly concluded that Cytech/Netainment was a joint venture.

81.5 They failed to investigate any ulterior motive or need for the revaluation surpluses being included in income.

81.6 They failed to address the materiality of the revaluations and the impact on earnings, swap ratios for the merger, minority shareholders in the Bank or outside shareholders in group companies. In my opinion the inspectors misapplied their minds to the question of value and left it to the experts.

81.7 They failed to investigate if the methodology of using cash shells had been repeated.

81.8 They, in my opinion, misapplied their minds as to what or whom they were investigating. In this regard it is interesting to note that the complainant Frangos is referred

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to (according to the computer word search conducted by me) some 285 times, whereas Liebesman the CEO is referred to on only 90 occasions.

82 From the review of the documentation presented to me I am astounded that The Inspectors suggested in their report that no costs be borne by Corpgro/Corpcapital and that consideration be given to changing the legislation so that persons such as Frangos could be required to bear the costs of the investigation.

83 With regard to the mandate from the Minister: Trade and Industry I am of the opinion that a proper investigation was not conducted. I have noted my comments under each aspect of the terms which are repeated for convenience below;

83.1 To investigate the affairs since in inception of the original entity in the Corpcapital Group

Comments:1. The documentation presented to me indicates that illegal

overseas structures were established to hold undisclosed interests and false statements were made by executive directors.

2. A computer word search of the Inspectors report failed to reveal any references to pre-listing statements and circulars of Southgo being reviewed nor that share registers in respect of Southgo had been referred to. Based on the word search I can only conclude that this aspect of the mandate was not investigated.

3. A computer word search of the word “Moss” in relation to Peter Moss revealed no references. I can thus only conclude that the Moss evidence of illegal overseas trusts and undisclosed shareholdings were for some inexplicable reason ignored.

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83.2 The manner in which Cytech/Netainment was valued and whether such values were unjustifiably inflated to boost profits artificially and possibly fraudulently inflated to boost profits artificially and possibly fraudulently.

Comments:1. The documentation presented proves conclusively that the

profits were unjustifiably inflated to boost profits and that the overstatements were deliberate.

2. Had the Inspectors applied their minds they would have known that the Exchange Control authorities would not have approved a short term overseas investment and the whole basis for the treatment of Cytech/Netainment as “held available for sale” would have fallen away. The revaluation surplus (“profit”) would then under no circumstances have been capable of being brought to account

83.3 Whether profits in turn were used as the basis to pay bonuses and restraint payments.

Comment:Profits were a basis for the determination of share options and bonuses.

83.4 The appropriateness of the accounting treatment applied to Cytech/Netainment.

Comments:1. The accounting treatment was inappropriate as the

investment was an Associate over which the company had “significant influence’.

2. The executive directors were aware that it was always their intention to hold the investment for the long term as stated in their application to the Exchange Control Authorities whom they knew would not permit a short term overseas investment. To state that the investment was “held available for sale” facilitating its revaluation surplus being included in income was false and misleading.

3. If it was in fact being “held available for sale” there should have been evidence of attempts to sell the investment. There is no

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evidence that attempts were being made to sell the minority unlisted interest in Cytech/Netainment during 1999, 2000 and 2001 nor any evidence that a minority stake in an unlisted start up could have been sold at 100 times its cost a short time after its establishment.

83.5 The adequacy of disclosures made about the investment to directors, audit committees and ultimately to shareholders.

Comments:1. The failure to disclose the materiality and sustainability of the

“profit” was misleading and contrary to GAAP. There is in my opinion no basis upon which the revaluation surplus could ever have been legitimately included in income or as an addition to the value of the investment.

2. Both the illegal inclusion and the adequacy of the disclosure was wholly inadequate.

3. The inspectors concluded that inadequate disclosure had been made to non executive directors.

83.6 The issues relating to the Merger of Corpgro, Old Corpcapital and Corpcapital Bank particularly in relation to the swap ratios and any possible inherent conflicts of interest that might have existed in the merger process

Comment:1. The research and documentation presented to me confirms that

the swap ratios were of advantage to executives and detrimental to minority shareholders.

2. The investigation did not appear to have dealt adequately with the this aspect and I could find no evidence that financial statements, post the merger had been analysed as they should have been to establish if in fact the ratios were fair or not. The evidence was available.

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3. As the executives were large shareholders in Corpcapital and had no disclosed shareholdings in the Bank it is obvious that a conflict of interest did arise and they should not have had a major role in determining the swap ratios.

4. Both Myburgh and Payne received documentation from Kelly Starke and African Merchant Bank relating to their unhappiness about the swap ratios.

83.7 Any possible prejudice to the investing public as a consequence of the Cytech/Netainment overvaluation.

Comment:1. Every outside shareholder who acquired shares in the

Group companies from early 2000 was prejudiced as were all Bank shareholders.

2. Both the Inspectors and Payne appear to have determined that the valuation was not fraudulent. The Inspectors incorrectly assumed that the investment was “held available for sale” and thus failed to determine that the investing public had been prejudiced.

83.8 Inadequate disclosure to shareholders and the adoption of inappropriate accounting policies

Comment:Based on the documentation and reports provided to me disclosure to shareholders was inadequate there were inappropriate accounting policies.

83.9 Did the Payne Report into the affairs of Corpcapital, produced by Mr Nigel Payne create a false impression that all is well at Corpcapital, to the possible detriment of shareholders and the investing public.

Comment:In my opinion the Payne report probably resulted in a false impression being created.

83.10The possibility that the financial statements of the Corpcapital Group did not comply with GAAP or with the Companies Act.

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Comment:The financial statements did not, in my opinion, comply with GAAP and the Companies Act.

83.11Possibility that the non-executive directors, did not properly discharge of their fiduciary duties and responsibilities.

Comments:1. It would appear to me that the non-executive directors

failed in their fiduciary duties and responsibilities especially in relation to the preparation of the mandate, the actual investigation and the time spent and the control of the investigation itself into the allegations made by Frangos.

2. Prior concerns about the integrity of the CEO were not taken into sufficient account.

83.12The possibility that the management did not properly discharge their duties and responsibilities.

Comment:In my opinion the entire fraudulent scheme was perpetrated by certain of the executive directors.

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T. OPINION

In my opinion there was no joint venture, the Cytech/Netainment investment was “not held available for sale in the near future” and the Exchange Control authorities did not, nor would they, have authorized such an investment.

The inclusion of unsustainable and grossly inflated “valuation surpluses” in profits was a fraudulent misrepresentation of earnings, to the prejudice of the investing public.

Based on the above I am of the opinion that Frangos had valid concerns and that a proper investigation of the evidence should have revealed the facts. I am also of the opinion that certain of the executive directors benefited from the fraud committed against the investing public.

In my opinion, the Inspectors failed to do their duties or properly fulfil their mandate.

CHARLES A STRIDE

23 November 2007

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Annexure 1

PROFESSIONAL EXPERIENCE

1. I qualified as a Chartered Accountant in 1964 and was a partner in public practice from 1966 to February 1991. I retired as the senior partner of Fisher Hoffman Stride in 1991 to become Deputy Chairman of Allied Electronic Corporation Limited.

2. Whilst in practice I became one of the founding members of the South African Auditing Standards Committee, an alternate member of the Public Accountants and Auditors Board and one of the external advisors to the South African Reserve Bank on exchange control matters.

3. I have appeared as an expert witness in a number of professional negligence cases, in claims for defamation, arbitration matters and revenue claims.

4. I have held a number of non-executive appointments to the boards of financial institutions such as Central Merchant Bank Limited (Senbank), Bankfin Limited, Societe Generale (SA) Limited (as Deputy Chairman), the Export Credit Insurance Corporation of South Africa and numerous appointments to boards of companies listed on the Johannesburg Stock Exchange and to boards of companies listed on the London and Nasdaq Exchanges.

5. From February 1995 to November 1996 I was the Special Advisor to the Minister of Finance.

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