FINAL REPORT

IN RE: INVESTIGATION IN TERMS OF PROCLAMATION R59 OF 1998,

PUBLISHED IN GOVERNMENT GAZETTE NO. 18950 DATED

2 JUNE 1998, WHICH INVESTIGATION WAS EXTENDED BY

PROCLAMATION R31/2000 PUBLISHED IN GOVERNMENT

GAZETTE NO. 21210 DATED 19 MAY 2000

INDEX

PAGES

1. INTRODUCTION 2 – 7

2. DIVISION OF INVESTIGATION 7 – 8

3. THE SCOPE OF THE INVESTIGATION 8

4. THE HISTORY OF THE SPECIAL RESERVE FUND 9 – 12

5. THE LAWFULFULNESS OF THE SPECIAL RESERVE FUND 12 – 17

6. THE UNIT’S APPROACH REGARDING RECOVERY OF THE FUND 17 – 19

7. THE SCOTT ASSET MANAGERS DEBACLE 20 – 24

8. THE PRESENT POSITION OF THE STATE THEATRE 24 – 25

9. ADMINISTRATION OF THE SPECIAL RESERVE FUND 25 – 26

10. LIABILITY OF VARIOUS PARTIES 26 – 35

11. POSSIBLE CRIMINAL ACTION 35

12. WINDYBROW 36 – 38

13. CONCLUSION 39 – 40

14. LIST OF ABBREVIATIONS 41

 

1. INTRODUCTION

This matter first came to the attention of the Special Investigating Unit (hereinafter referred to as the Unit) in March 1998 when one of the Unit’s former investigators was informed by Mrs Meridy Wixley and Mrs Arlette Franks of certain irregularities at the Performing Arts Council of the Transvaal (hereinafter referred to as PACT). These two women, both former Board members of PACT, had earlier identified irregularities at PACT and had by then already reported the matter to the Public Protector’s Office and to the Office of the Auditor-General. They are regarded as whistle blowers in this matter and have pursued the investigation of the issues at hand with perseverance and tenacity.

In a world where the tendency is for people not to become involved these two women did, often at own expense, stick to their guns and continued with their quest to have the matter properly resolved. This sort of public spirit should be highly commended and they are thanked for their considerable contribution during this investigation.

The Unit required a Presidential Proclamation before it could investigate the matter and in order to obtain such a Proclamation substantiated allegations were required. The required substantiated allegations were obtained from Mrs Wixley and Mrs Franks and ultimately on the 2nd June 1998 Proclamation R59/1998 was published in Government Gazette No. 18950. This Proclamation read as follows: -

"Special Investigating Units and Special Tribunals Act, 1996 (Act No. 74 of 1996).

Referral of matters to existing Special Investigating Unit and Special Tribunal.

WHEREAS allegations as contemplated in Section 2 (2) of the Special Investigating Units and Special Tribunals Act, 1996 (Act No. 74 of 1996), have been made in respect of the affairs of the Performing Arts Council of Transvaal as mentioned in the Schedule,

AND WHEREAS I deem it necessary that the said allegations should be investigated and justiciable civil disputes emanating from such investigation should be adjudicated upon;

NOW THEREFORE, I hereby, under Section 2 (1) of the said Act, refer the matters in the Schedule for investigation to the Special Investigating Unit and for adjudication of justiciable civil disputes emanating from such investigation to the Special Tribunal established by Proclamation No. R24 of 14 March 1997 and determine that, for the purposes of the investigation of these matters, the terms of reference of the Special Investigating Unit are to investigate as contemplated in the said Act, any –

(a) serious maladministration in connection with the affairs of the Performing Arts Council of Transvaal;

(b) improper or unlawful conduct by employees of the Performing Arts Council of Transvaal;

  1. unlawful appropriation of expenditure of public money or property;
  2. intentional or negligent loss of public money or damage to public property;
  3. corruption in connection with the affairs of the Performing Arts Council of Transvaal; or
  4. unlawful or improper conduct by any person which has caused or may cause serious harm to the interests of the public or any category thereof, which has taken place between 1 January 1985 and the date of publication of this Proclamation.

SCHEDULE

1. The unlawful, unauthorised and / or irregular establishment and administration of trust funds by the Performing Arts Council of Transvaal.

2. The failure to disclose trust funds, trust moneys and / or other cash assets in the accounting records and / or annual financial statements of the Performing Arts Council of Transvaal.

3. The unlawful and / or irregular concealment of surplus funds by the Performing Arts Council of Transvaal.

4. The unauthorised and / or irregular increase of salaries in respect of employees of the Performing Arts Council of Transvaal.

5. The irregular administration of retrenchment packages in respect of employees of the Performing Arts Council of Transvaal".

It was apparent from the beginning of the Unit’s investigation that the Department of Arts, Culture, Science and Technology (hereinafter referred to as DACST) had instructed Deloitte and Touche to conduct a Forensic Investigation into the allegations surrounding PACT. In June 1997 Mrs Wixley and Mrs Franks had also already referred the matter to the Office of the Public Protector for investigation.

In dealing with its investigation the Unit did not find it necessary to investigate each and every aspect related to this matter independently and relied to a large degree on the Deloitte and Touche Forensic Report dated 8 June 1998 (as well as their subsequent Clarification Report), information received from the Public Protector and in particular information received from Mrs Wixley and Mrs Franks. In addition to this the Unit conducted further investigations which included the gathering of a large volume of documents as well as the questioning of a large number of witnesses. These questionings took place in terms of the provisions of Section 5(2) (b) and (c) of the Special Investigating Units and Special Tribunals Act, Act 74 of 1996. (hereinafter referred to as the Act).

After the Scott Asset Managers debacle (which will be dealt with more fully later in this report) the scope of the Unit’s investigation was extended by Proclamation R31/2000 published in Government Gazette No. 21210 dated 19 May 2000. The contents of this Proclamation read as follows: -

"SPECIAL INVESTIGATING UNITS AND SPECIAL TRIBUNALS ACT, 1996 (ACT NO. 74 OF 1996): REFERRAL OF MATTERS TO EXISTING SPECIAL INVESTIGATING UNIT AND SPECIAL TRIBUNAL

WHEREAS allegations as contemplated in Section 2(2) of the Special Investigating Units and Special Tribunals Act, 1996 (Act No. 74 of 1996), have been made in respect of the affairs of the Performing Arts Councils of Transvaal and the Free State (hereinafter referred to as "the Councils");

AND WHEREAS I deem it necessary that the said allegations should be investigated and justiciable civil disputes emanating from such investigation should be adjudicated upon;

NOW THEREFORE, I hereby, under Section 2(1) of the said Act, refer the matters in the Schedule for investigation to the Special Investigating Unit and for adjudication of justiciable civil disputes emanating from such investigation to the Special Tribunal established by Proclamation No. R24 of 14 March 1997 and determine that, for the purposes of the investigation of these matters, the terms of reference of the Special Investigating Unit, which has the powers, duties and functions assigned to or conferred upon it by the Act, are to investigate as contemplated in the said Act, any –

(a) Serious maladministration in connection with the affairs of the Councils;

(b) improper or unlawful conduct by employees of the Councils;

(c) unlawful appropriation of expenditure of public money or property;

(d) intentional or negligent loss of public money or damage to public property;

(e) corruption in connection with the affairs of the Councils; or

(f) unlawful or improper conduct by any person which has caused or may cause serious harm to the interests of the public or any category thereof,

which has taken place between 2 June 1998 and the date of publication of this Proclamation.

Given under my Hand at Cape Town this Seventeenth day of May Two Thousand.

SCHEDULE

(1) The unlawful, unauthorised and / or irregular conclusion of agreements by the Councils with various investment broker companies.

(2) The irregular investment of public money by the Councils through various investment broker companies.

(3) The financial losses suffered by the Councils in respect of the investment of funds with various investment broker companies.

(4) The failure by the Councils to ensure the protection of public money invested with various investment broker companies.

On the 9th October 2000 the Unit forwarded a Preliminary Report to the Office of the President. This report was regarded as confidential, but after its contents became known to a number of people the Unit allowed input as to the accuracy of the report as well as the approach adopted in the Preliminary Report. Mrs Wixley and a Mr J Seroke made their input in this regard.

It has taken some time initially for the Preliminary Report to become available and now also for the final report to be prepared. The reasoning behind this is directly linked to the delay brought about by the liquidation of Scott Asset Managers and Investcorp. The Unit believed that it would only be possible to form a complete view as to the actual loss once it became clear whether the liquidation proceedings would produce any returns. That situation has now been reached and therefore the report can be finalised.

Proclamation R31/2000 also refers to losses suffered at PACOFS. That aspect is not covered in this report and will form the subject matter of a separate report. It will also be noted from what follows hereafter, that the issue of possible litigation against various parties, including the South African Futures Exchange (SAFEX) or its successor in title, may still follow.

2. DIVISION OF INVESTIGATION

The allegations relating to irregularities at PACT had already been referred to the Office of the Public Protector in June 1997. The potential therefore existed that a duplication of investigations could take place. At a meeting on the 19th April 1999 at the offices of the Public Protector in Pretoria this issue was addressed in a spirit of co-operation. The meeting was attended by Doctor Schutte and Advocate G Pienaar of the Office of the Public Protector, Mr Johan Jooste, Internal Auditor at DACST, forensic investigators from Deloitte & Touche and members of the Unit. It was agreed at this meeting that the Unit would investigate matters relating to the Special Reserve Fund (to which this report will refer to in due course) whilst other issues relating to alleged irregularities are PACT would be dealt with by the Office of the Public Protector. The reasoning behind this was that the issue of the Special Reserve Fund was more likely to lead to civil litigation whereas the Office of the Public Protector could deal with the other issues and if civil litigation was necessary it could be handed to the Unit to deal with. This division of investigation was done in the spirit of Section 5 (6) (b) of the Act which reads as follows: -

"(b) The Head of a Special Investigating Unit may refer any matter which, in his or her opinion, could best be dealt with by the Public Protector, to the Public Protector and the Public Protector may, if he or she deems it appropriate, refer any matter which comes to his or her attention and which falls within the terms of reference of a Special Investigating Unit, to such Unit".

3. THE SCOPE OF THE INVESTIGATION

The Unit’s investigation focussed on the following areas: -

(a) The Special Reserve Fund (this covered points 1, 2 and 3 as contained in the Schedule to Proclamation R59/1998), and

(b) After 19 May 2000 the investment of funds with Scott Asset Managers and Investcorp and the subsequent loss of such money (this covers points 1, 2, 3 and 4 as they appear in the Schedule to Proclamation R31/2000).

(c) Points 4 and 5 as contained in the Schedule to Proclamation R59/1998 are not dealt with in this report as those issues were referred to the Public Protector as stated in the previous paragraph.

4. THE HISTORY OF THE SPECIAL RESERVE FUND

The history of the Special Reserve Fund is to a large degree common cause and it can be summarized as follows: -

(a) The Special Reserve Fund was created by PACT in 1989. Throughout its existence PACT was not able to generate sufficient funds to support its own operations. It was heavily dependent on grants from the State and received such grants from the former Transvaal Provincial Administration and the Department of National Education up till the financial year ending March 1995. As from the financial year ending March 1996 PACT received grants from DACST. During the period 1989 – 1995 PACT, unsure of the adequacy of future grants from the State, accumulated funds in the Special Reserve Fund, which fund could be regarded as a "slush fund";

(b) The Special Reserve Fund was accumulated from funds received from the State Institutions mentioned in paragraph (a). From 1989 until 1995 the Special Reserve Fund was not reflected in the annual financial statements of PACT. Although it was under the control of the PACT Board, the Special Reserve Fund was administered separately and in a manner which can be regarded as secretive;

(c) The grants by the predecessors to DACST, i.e. the Transvaal Provincial Administration and National Education were based upon the needs of different Performing Arts Councils. In awarding different grants to different Performing Arts Councils, these entities had to take into account the financial position and requirements of the various Performing Arts Councils in the country. By not reflecting the sizeable balance of the Special Reserve Fund in its annual financial statements PACT painted an untrue picture of its own financial position. As a result of this misrepresentation larger grants were paid to PACT than what would have been paid if the true picture were known. This process continued until DACST came into being. When DACST came into being and became responsible for the grant to PACT for the financial year ending March 1996, it continued paying the larger grant to PACT despite being aware of the fact that there was a Special Reserve Fund. A total amount of R24 341 248.00 (including R7 643 854.00 in interest) was received in the Special Reserve Fund.

(d) In November 1994 the Minister responsible for DACST, Doctor Ben Ngubane, met with PACT Directors. Minister Ngubane was informed of the existence of the Special Reserve Fund, which was described as an undisclosed "Retrenchment Financial Contingency". It was agreed that PACT would provide the Minister with a full audit of its affairs. Minister Ngubane subsequently waived the offer of the audit. At the end of the financial year ending 31 March 1995 PACT again did not reflect the Special Reserve Fund in its annual financial statements.

(e) In April 1995 PACT’s Directors secretly transferred the "Retrenchment Financial Contingency" fund into two secret funds, namely a "Senior Fund" and "Employee Fund".

(f) In approximately September 1995 DACST granted PACT its full subsidy, despite the fact that the Minister had been informed of the existence of the Special Reserve Fund as set out in the previous paragraph.

(g) In November 1995 new PACT Directors were appointed by Minister Ngubane. The new directors were not informed of the existence of the Special Reserve Fund. In February 1996 Mrs Wixley and Mrs Franks, two of the new Directors, uncovered the existence of the Special Reserve Fund, which at this stage was in the form of the "Senior Fund" and "Employee Fund" and had a balance of approximately R14 million. Between June and October 1996 the PACT Directors twice rejected draft annual financial statements which did not reflect the existence of the "Senior Fund" and "Employee Fund". In November 1996, at PACT’s Annual General Meeting, the Directors approved PACT’s audited annual financial statements for the financial year ending 31 March 1996. These statements showed the existence of the "Senior Fund" and "Employee Fund", amounting to more than R14 million. DACST received the annual financial statements to check that the subsidy granted to PACT had been appropriately spent and to assess PACT’s future needs. DACST did not query the existence of the sizeable amount of the two funds that had not been reflected in previous years’ statements and the Department did not appear to take this into account in granting PACT its subsidy for the year ending 31 March 1997.

(h) This Special Reserve Fund was, as indicated above, created during times of uncertainty and was intended to be used as a "rainy day fund". The purpose was therefore to use the Special Reserve Fund if tough financial times were to fall upon PACT. The decision in April 1995 to transfer funds from the Special Reserve Fund into the secret "Senior Fund" and "Employee Fund" resulted in a totally new use of these funds. These funds were now used to finance voluntary severance packages for PACT employees.

(i) It is quite disturbing to note that PACT’s auditors for several years allowed a situation to continue in terms of which the annual financial statements did not accurately reflect the financial position of PACT as did not make any reference to the Special Reserve Fund. The matter was referred to the Public Accounts and Auditors Board (PAAB) and the Unit has been informed that the auditors involved have been reprimanded. The Unit is of the view that the circumstances present here should have warranted a more severe sanction and that it does seem rather surprising that the auditors escaped with what could be perceived to be only a "slap on the wrist".

(j) In October 1996 DACST appointed Deloitte & Touche to undertake a Forensic Investigation into the source of the "Senior Fund" and "Employee Fund". It would appear that the PACT Directors were not initially informed of this appointment.

(k) In April 1997 the remainder of the "Senior Fund" and "Employee Fund" reverted to PACT. The value at this stage was approximately R16 Million, with the increase due to interest. In July 1997 the majority of the PACT Board reached a decision to invest the R16 Million remainder in an Endowment Scheme, with the anticipation that the R16 Million would show substantial growth within a year.

(l) In June 1997 PACT Directors Mrs Wixley and Mrs Franks reported the matter to the Office of the Public Protector.

  1. During the second half of 1997 PACT’s name was changed to "The State Theatre".
  2. In November 1997 PACT, or The State Theatre as it was now known, reflected in its financial statements for the year ending 31 March 1997 that the "Senior and Employee Funds" had reverted to PACT. This information was made available to DACST but it appears that the additional R16 Million at the disposal of PACT was not used as a reason for reducing PACT’s grants for the following financial year.
  3. In April 1998 the State Theatre’s Board of Directors was dissolved.
  4. On the 2nd June 1998 the Special Investigating Unit was instructed by Proclamation R59/1998 to investigate the matters referred to earlier in this report.

5. THE LAWFULNESS OF THE SPECIAL RESERVE FUND

The institution that became known as The State Theatre and which was earlier known as PACT, is a company incorporated in terms of Section 21 of the Company’s Act (Act 61/1973). This section reads as follows: -

"Incorporation of Associations not for gain.

(1) Any Association:-

(a) formed or to be formed for any lawful purpose.

(b) having the main object of promoting religion, arts, science, education, charity, recreation, or any other cultural or social activity or communal or group interests;

(c) which intends to apply its profits (if any) or other income in promoting its said main object;

(d) which prohibits the payment of any dividend to its members; and

(e) which complies with the requirements of this Section in respect to its formation and registration, may be incorporated as a company limited by guarantee.

(2) The memorandum of such Association shall comply with the requirements of this Act and shall, in addition, contain the following provisions:-

(a) the income and property of the Association whensoever derived shall be applied solely towards the promotion of its main object, and no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise howsoever, to the members of the Association or to its holding company or subsidiary; provided that nothing herein contained shall prevent the payment in good faith of reasonable remuneration to any officer or servant of the Association or to any member thereof in return for any service actually rendered to the Association.

(b) Upon each winding-up, deregistration or disollusion the assets of the Association remaining after the satisfaction of all its liabilities shall be given or transferred to some other Association or Institution or Associations or Institutions having objects similar to its main object, to be determined by the member of the Association at or before the time of its dissolution or, failing such determination, by the court"

In terms of the Memorandum of Association of PACT the main object is described as follows: -

"To take over the assets and assume reliabilities of the Board of Governors of the "National Theatre Experiment"’ and to take over and carry out the programmes and foster the ideals, aims and objects of the Board of Governors of the "National Theatre Experiment" and accordingly to present, produce, manage, conduct and represent at any theatre, musical, or place of entertainment and at any place whatsoever such plays, dramas, comedies, operas, burlesques, pantomimes, reviews, promenades and other concerts, musicals and other pieces, ballets, shows, exhibitions, variety and other entertainment, professional or amateur, and without any restriction as to the nature and type of entertainment, and as the Company may from time to time think fit".

Section 24 (a) (i) of the Articles of Association states as follows: -

"The control and management of the company shall be served by a Board of Directors consisting of not less than fifteen directors".

Section 25 of the Articles of Association reads as follows: -

"The Board of Directors shall carry on the work of the company in such manner as it may think necessary and proper, subject, however, to the general policy of the company and to any special instructions as may be laid down from time to time by the Minister of National Education".

Section 28 of the Articles of Association reads as follows: -

"The Board of Directors shall have the power on behalf of the company:-

(a) To collect and receive money by way of requests, donations, grants, collections or in any other manner, that to use and employ such funds in accordance with the object of the company".

In their Forensic Report, Deloitte & Touche expressed the view that in terms of Section 21 of the Companies Act and the Memorandum of Association of PACT, the company was not authorised to apply any of its income towards the setting up of the "Senior and Employee Funds". The view was expressed that in terms of the Memorandum of Association all income and property of the company, whensoever it arrived, should have been applied solely towards the promotion of the objects of the company as set forth in the Memorandum of Association. The view was accordingly expressed that the setting up of Trust Accounts for the payment of retrenchment and severance packages, which included voluntary resignation packages, does not fall within the parameters of the Memorandum of Association nor of the Companies Act.

The conclusion reached was that the setting up of the Senior and Employee Funds was beyond the powers of the company and thus ultra vires. The obvious inference is thus that the Special Reserve Fund in its amended format was unlawful.

The view that the Special Reserve Fund was unlawful can be supported without qualification. In addition to what is said in the previous paragraphs one must also accept that it was a secretive slush fund not reflected on the annual financial statements of the institution and thus of fraudulent nature. Grants received from State Institutions were not reflected in the Annual Financial Statements which accordingly materially misrepresented the true financial position of PACT. It would obviously not be wrong for a normal commercial enterprise to build up a Reserve Fund for difficult times it may foresee. The situation is, however, undoubtedly very different if one deals with the body of the nature of PACT. One must always keep in mind that PACT was a body which was to a large degree dependent on funds received from the State. As such it functions with public money and it can be expected of such an entity to treat its finances in the appropriate spirit. PACT did, however, treat the Special Reserve Fund as a secretive slush fund and by not reflecting it on its Annual Financial Statements, misrepresented its financial position. The Annual Grants payable to PACT by DACST and its predecessors (the Transvaal Provincial Administration and Department of National Education) was of course dependent on the financial position of PACT and PACT’s needs. By misrepresenting its financial position through the exclusion of the millions of rands in the Special Reserve Fund from the Annual Financial Statements, PACT influenced the grants they were to receive and as a result thereof bigger grants were given to PACT than they would have received if their true financial position had been properly presented.

To further illustrate the clear unlawfulness of the Special Reserve Fund, the situation could be compared to a State Institution such as the Special Investigating Unit building up a secret fund which is not revealed to the Government. In our hypothetical example, the Special Investigating Unit would take funds received from a variety of sources, including the State, and with the full knowledge of its auditors deposit it into a secretive fund not revealed to the Department of Justice or the President for that matter. Such a secretive fund could in this hypothetical comparison then ultimately be converted to a voluntary retrenchment package for the employees of the Special Investigating Unit.

This hypothetical example is quite clearly improper and unlawful and in the Unit’s view what happened to PACT is no different. The Special Reserve Fund and in particular its final format of a voluntary retrenchment fund, was an unlawful fund, improperly used to misrepresent the financial position of PACT and to condone it would certainly send all the wrong messages to other State Institutions. To ratify the fund and say that no harm was done would send a message to other institutions that they could build up secret funds, not disclose it to the State that provides them with financial support and then use it for their own benefit at a later stage.

There can therefore be no doubt that this fund is unlawful and that civil litigation for repayment of funds improperly handled, would have been successful.

6. THE UNIT’S APPROACH REGARDING RECOVERY OF THE FUND

Once it was established that the Special Reserve Fund was unlawful the question arose as to how to go about recovering the funds. Should litigation have been necessary at that stage it was quite clear that the Unit and DACST would be Plaintiffs claiming repayment from the State Theatre as the Defendant. The representatives of DACST did, however, express concern regarding the possibility that a repayment by the State Theatre could possibly end up in the National Revenue Fund and that that would amount to a loss to the already under-funded Arts community. The said Department was of the view that an impact study had to be conducted in order to determine the effect of repayment of the Special Reserve Fund on the viability of the State Theatre as a going concern. DACST did not dispute the approach that the Special Reserve Fund was unlawful, but was merely concerned about the manner of recovery and the possible impact thereof. The fear from DACST that funds would be lost to the Arts community is based on the legislative requirements in the Exchequer Act (Act 66/1975) replaced now by the Public Finance Management Act, (Act 1/1999) that any funds recovered by a Department must be repaid to the National Revenue Fund if the recovery occurs in a year subsequent to the year for which the funds budgeted.

The State Theatre’s subsequent conduct show that they did not dispute this approach. It was willing to participate in this viability study and in fact in a rather dubious way (as we will see later) agreed to keep the Special Reserve Fund separate until such time as the viability study was completed. DACST then embarked on a tender process in order to obtain the services of an institution to conduct the impact study. Ultimately the tender was awarded to Gobodo Incorporated.

In anticipation of the viability study, the Unit informed DACST on the 28th September 1999 that it would be prudent to keep the Special Reserve Fund in a separate account. DACST in turn informed The State Theatre in writing that the Special Reserve Fund must be kept in a separate bank account. As would be apparent later in this report, the Special Reserve Fund was at this stage already with Scott Asset Managers and playing with words, the State Theatre thereafter acknowledged to DACST that the Special Reserve Fund would be "kept separately". The Special Reserve Fund was not kept in a separate banking account but as would appear hereinafter remained with Scott Asset Managers.

The position was thus that all roleplayers were in agreement that a viability study should be conducted in order to look at the impact that repayment of the Special Reserve Fund would have on The State Theatre. The position was therefore such that there was no justiciable dispute amongst the various institutions and that the only variable was the manner in which repayment was to take place. In terms of Section 8 (2) of the Act a Special Tribunal, before which the Unit would have to institute legal proceedings, shall only have jurisdiction to adjudicate upon any "civil dispute" brought before it by a Special Investigating Unit or any interested party. In this matter no such "civil dispute" existed and therefore the Special Tribunal would not have had jurisdiction.

There was another compelling reason not to institute civil litigation in order to freeze the Special Reserve Fund pending the outcome of the viability study, which weighed heavily on the mind of members of the Unit. This reason was highlighted in a letter to the Minister responsible for DACST on 15 February 2000, a date that preceded the Scott Asset Managers debacle that will be referred to under the next heading. This reason has its roots in the provisions of Section 31 (3) of the Constitution of the Republic of South Africa (Act 108/1996). This sub-section reads as follows: -

"An organ of State involved in an inter governmental dispute must make every reasonable effort to settle the dispute by means of mechanisms and procedures provided for that purpose, and must exhaust all other remedies before it approaches a court to resolve the dispute".

In Section 239 of the Constitution an Organ of State is defined as follows: -

"(a) Any Department of State or administration in the National, Provincial or local sphere of government; or

(b) Any other functionary of Institution:-

  1. exercising a power or performing a function in terms of the Constitution or a Provincial Constitution; or

(ii) exercising a public power or performing a public function in terms of any legislation, but does not include a court or a judicial officer".

DACST is clearly an Organ of State in terms of this definition, the Special Investigating Unit is also clearly an Organ of State in terms of this definition and the State Theatre clearly also falls under this wide definition of an Organ of State as it involves the exercising of a public power and / or performing of a public function in terms of legislation.

7. THE SCOTT ASSET MANAGERS DEBACLE

Scott Asset Managers (Pty) Ltd and its associated concern, Investcorp Closed Corporation were both under the control of a certain Mr Keith Scott. Scott Asset Managers (hereinafter referred to as SAM) conducted a business of a brokering member of SAFEX (South African Future Exchange). Prior to registration of SAM as a member of SAFEX, Scott, the sole director, conducted the business of an investment advisor to various individuals. Sums received from certain individuals were deposited into the banking account of the closely linked Investcorp. Investcorp was never appointed as an investment manager in terms of Section 5(1) of the Financial Markets Control Act, nor is it or was it ever a member of SAFEX. After the admission of SAM as a member of SAFEX all derivatives trading on behalf of clients were conducted through various banking accounts of SAM. Notwithstanding the fact that SAFEX terminated its relationship with SAM in October 1999, Scott continued to invest monies on behalf of various investors. Investors were duped into believing that the returns on their investments were substantial. In fact, Scott sent notes to various investors, more particularly the State Theatre, showing huge gains on the investments and generally painting a very rosy picture as to the success of the investments. In fact, so impressed was the Financial Director of the State Theatre, Mr Johan van der Berg, that he entered into a commission agreement with Scott and besides investing some of his own funds in SAM, he also referred some 154 other investors to SAM, earning a commission of approximately R690 000,00. These commissions were paid from Scott’s personal account in some instances, and in other instances, it would appear that investors’ money was used to pay the commissions. In certain instances when business required the investment to be paid, other investors’ money was used to repay investors their so-called profit. The fact of the matter was that the whole operation was a shambles and a nefarious scheme orchestrated by Scott in which only Scott benefited and investors lost millions of rands.

The Financial Director of the State Theatre, Van den Berg, became aware of SAM and its alleged successes in the investment field through discussions with a State Theatre employee, Mr Laurent. Mr Laurent had previously invested money with Keith Scott and had considerable returns on his investment. He advised that investing money with SAM was a good investment. At the time there was a considerable fear at the State Theatre that the grants that they received from DACST and the income they had from other sources would not be sufficient to meet their financial needs. There was a general approach amongst management and the Board that funds should be invested at the best possible rate in order to let the money work for itself. It was against this background that Van den Berg and the Chief Executive Officer of the State Theatre, Mr Allan Joseph, decided to put an initial amount of money with SAM and to see how the investment went. After being satisfied with the "success" of the initial investment, the State Theatre, through Van den Berg, made further investments with SAM and / or Investcorp, as can be seen from the following "statement" received from SAM showing deposits, payments to the State Theatre and alleged growth of the investment:-

 

 

 

DATE

INSTRUMENT DESCRIPTION

CAPITAL INVESTMENT

APPRECIATION DEPRECIATION

 

TOTAL

01/08/98

Capital input

R 800 000.00

   
 

Derivative Trades – Sept ’98 Indi Contract

R 297 872.00

R 1 097 872.00

15/09/98

Capital input

R 4 000 000.00

   
 

Derivative Trades – Dec 98 Indi Contract

R 1 307 855.00

R 5 307 855.00

26/02/99

Capital input

R 10 000 000.00

   
   

R 1 900 000.00

   
     

R 1 487 000.00

 
       

R 16 687 000.00

 

Cash Available

 

R 266 845.00

R 266 345.00

31/03/99

Withdrawal

   

R -2 000 000.00

   

R 16 700 000.00

R 6 359 072.00

R 18 059 072.00

 

Capital input

R 16 000 000.00

   
 

Additional Cash

 

R 16 206.00

R 327 551.00

 

Withdrawal

   

R -4 000 000.00

 

Derivative Trades – Mar/June 99 Indi Contr.

R 5 388 760.00

 
 

Withdrawal

R 32 700 000.00

 

R -3 000 000.00

30 June 99

     

R 32 509 038.00

 

Sundries

   

R 117 492.00

 

Capital Input

   

R 7 000 000.00

 

Withdrawal

   

R -3 500 000.00

 

Derivative Trade – Sept. 99 Indi Contr.

R 8 290 741.00

 
 

Withdrawal -September

   

R -3 500 000.00

 

Withdrawal - October

   

R -4 500 000.00

 

Withdrawal - November

   

R -1 500 000.00

 

Capital Input

   

R 7 000 000.00

 

Withdrawal - December

   

R -3 500 000.00

         
 

Derivative Trades – end Dec. 99

Indi Contr.

 

R 2 866 735.00

       

R 41 284 006.00

 

The Board of the State Theatre did not give any formal approval for the initial investments with SAM and in fact it was clear that the Board members were never fully informed of the risks that go with an investment of this nature. Derivative trading on the futures market is regarded in the market place as an extremely high risk investment. Van den Berg signed the contract with SAM for the investments and this contract is accompanied by a document containing a number of disclosures. These disclosures set out the huge risk of investments of that nature and in particular warns the investor that the investor might lose his entire capital and sometimes even more than that. These disclosures were never revealed to the Board members. At each Board meeting Van den Berg reported to the Board how the investments with SAM performed and the fact that the State Theatre’s money was invested with SAM was never concealed to the Board. Various attempts were thereafter made to get Scott to make a presentation to the Board in order to explain the full extent of the investment concerned. Ultimately Scott made a presentation to the Board in September 1999. As is apparent from the schedule above a large amount of money had already been invested at that stage. Mr Scott, a wheelchair bound man, according to all reports made a superb presentation to the Board, convincing them of the safe nature of the investment. It was clear that he left everybody with the belief that he was a financial wizard who could make money whether stock markets fell or rose. After this presentation the Board approved investments with SAM.

In October 1999, SAM ceased to be a member of SAFEX. This information was, however, never conveyed to the State Theatre until well into the year 2000. In fact, SAFEX kept the name of SAM on its web site giving out that SAM was still one of its members. The result was that even after SAM ceased to be a member of SAFEX, the State Theatre invested more money with SAM – as appears from the statement above.

Scott continued to send statements to the State Theatre showing excellent growth in their investments. In fact, the last statement received from SAM reflected a balance of R41 million – (See statement above). These statements were blatantly fraudulent and deceived Van den Berg and others at The State Theatre to believe that its investment was doing well whereas in truth quite the opposite was the case.

The balance in the Special Reserve Fund (approximately R16 Million) was part of the State Theatre funds invested with SAM. Whilst the impact study referred to in previous paragraphs were still ongoing, a situation arose that a cheque for R3 Million bounced. That is when the bubble burst and it appeared that SAM and Investcorp were not doing as well as they professed to do. SAM and Investcorp were thereafter placed under the control of a curator who ultimately reported that their financial situation was hopeless and both SAM and Investcorp were then placed in liquidation. It became apparent that a large number of other people also invested their money in SAM and Investcorp and that the State Theatre was just one (albeit the largest) of a large number of investors who appeared to have invested a total of more than R100 Million in SAM. The present position is that the liquidators are in the process of tracing assets and it will probably still take quite a while before the liquidation of SAM and Investcorp are finalised.

8. THE PRESENT POSITION OF THE STATE THEATRE

The aftermath of the Scott Asset Managers debacle was that The State Theatre was "mothballed". Although the State Theatre, as a Section 21 company, has not been liquidated as such, it does find itself in a serious financial predicament. It is dependent on financial grants from DACST to meet its financial commitments. The State Theatre Board resigned and Mr Siki Kajee from Gobodo Incorporated is in charge of the affairs of the State Theatre. Mr Kajee fully accepts that the Special Reserve Fund was accumulated in an unlawful manner and accepts the civil liability stemming from this. There is no dispute as to this issue and it is therefore not necessary to go to court or to the Special Tribunal for an order to repay the Special Reserve Fund. The Unit is informed that a new Board is now operative and that with the assistance of Spoornet the State Theatre wishes to perform a service to the community.

The question that arises relates of course to the financial position of the State Theatre. The real risk existed that the liquidators of Scott Asset Managers and / or Investcorp could attempt to recover withdrawals by the State Theatre from their "account" in the last six months prior to liquidation on the basis of such withdrawals being undue preferences. I am informed that this risk has been avoided by The State Theatre reaching a settlement with the liquidators in terms of which the liquidators would abandon their claim for undue preferences if at the same time The State Theatre abandons its claim against the corporate entities in liquidation. The nett effect of this is that one can now accept that the money invested in Scott Asset Managers has actually been lost. This leaves one with the possibility of DACST still pursuing its civil claim against the State Theatre for the value of the Special Reserve Fund. Such a claim would be in the region of R24 million and would undoubtedly drive The State Theatre into liquidation. It is not the Unit’s belief, nor am I informed is it the belief of DACST, that it would be in the public interest to drive The State Theatre into liquidation and therefore the Unit would not wish to pursue such litigation.

In some sense this investigation and the Scott Asset Managers debacle did result in the forced recovery of the Special Reserve Fund from The State Theatre. The State Theatre has always been dependent on grants from DACST to sustain its existence and any attempts to recover the Special Reserve Fund from The State Theatre would inevitably have resulted in future grants to The State Theatre being reduced until such time as the Special Reserve Fund was repaid. The mere fact that The State Theatre was "mothballed" for a period of time had the practical effect that a large amount of funding was withheld from The State Theatre. After the reopening of The State Theatre, its operations and more particularly its staff complement has been reduced to a large extent and the grant it receives from DACST is substantially lower than what it was before the Scott Asset Managers debacle. The effect of the measures taken is therefore the same as that of any formal recovery, which inevitably would have taken place in the form of repaying the Special Reserve Fund by reducing future grants from DACST.

9. ADMINISTRATION OF THE SPECIAL RESERVE FUND

As was mentioned above the Special Reserve Fund was not reflected on the Annual Financial Statements of the State Theatre from 1989 – 1995. The Special Reserve Fund was administered separately and had its own accounting records. Quite interestingly one of the people responsible for the accounting of the Special Reserve Fund was the same Mr J Van den Berg who later became Financial Director of the State Theatre. Van den Berg administered the Special Reserve Fund through his business, Wesrand Secretarial Services. He administered this fund from 1 March 1992 – 31 March 1995. Throughout the relevant period this business acted on a consultancy basis for Furter, Carstens, Wohlitz and Partners, the auditors of PACT.

It would appear that no financial statements were ever prepared for the Special Reserve Fund by PACT or the two administrators (Van den Berg and his predecessor Angela Gaghan). No income statements, balance sheets or cash flow statements were available. It appears from the Deloitte & Touche report that supporting documentation was incomplete, that summaries prepared were incomplete and incorrect, and that no proper reconciliation of movement between bank accounts of the Special Reserve Fund was kept. Accordingly as a result of the lack of proper audit trail a nett amount of R741 000.00 was initially unaccounted for. Further clarification was later sought from Van den Berg regarding these unaccounted funds and he provided the required clarification for all but a small amount of money.

Quite surprisingly audit certificates were issued by the PACT auditors, giving an opinion as to the correctness of the Special Reserve Fund for the relevant years. This created an implied expression of an unqualified opinion on the correctness of the Special Reserve Fund, which is quite surprising in the light of the shortcomings that have been pointed out above. This adds to the problems relating to the failure of the auditors to comment on the omission of the Special Reserve Fund from the published PACT annual financial statements and makes it even more surprising that the auditors in this matter could get away with a mere slap on the wrist for what appears to be highly irregular conduct.

10. LIABILITY OF VARIOUS PARTIES

  1. The Minister responsible for DACST
  2. The Unit has been urged quite strongly by certain individuals to make a finding that either Minister Ngubane or Minister Mtshali, (who replaced Minister Ngubane as Minister responsible for DACST between September 1996 and February 1999, when Minister Ngubane again became the Minister responsible for DACST) or both of them should be responsible for the loss of the Special Reserve Fund. These two Ministers were at various times between 1994 and the present the Ministers responsible for DACST. In particular, it was argued that Minister Ngubane should be held responsible because he was the Minister responsible for DACST in 1994 and knew about the Special Reserve Fund since 1994. Despite this, he did not secure it at that time, nor did he do so after he assumed this position again in February 1999. Therefore he as Minister and the person with the powers that go with that position should be held responsible for the ultimate loss of the money. The argument goes further that the Minister is mentioned in the Articles of Association of the State Theatre and as such has certain responsibilities. (The relevant Section 25 of the Articles of Association is quoted earlier in this report). In short the argument is that for several years Minister Ngubane and for that matter Minister Mtshali, knew about the Special Reserve Fund, did nothing about it, left it with the people who initially acquired it unlawfully and ultimately the money was lost. Although some people would agree with the moral impact of the above argument, the Unit is of the view that there is no basis in civil law to hold the Minister responsible for any losses that might have been suffered, for the following reasons: -

    1. The State Theatre is a Section 21 Company and as such has its own legal personality. Although it is dependent on DACST for a substantial grant in order to meet its financial needs, it is not part of DACST, but a separate corporate entity. The State Theatre had a high profile board which had to look after the affairs of the company (I refer to Section 24 (a) (i) of the Articles of Association quoted earlier in this report). Although logic would suggest that the Minister as political head of the Department holding the key to the purse needed to meet a lot of The State Theatre’s financial commitments, would have some say in the affairs of such a company, the situation demands a certain "hands off" approach and the reliance on the Board to do its job. The Minister is not the accounting officer of DACST, but held the position as political head of that Department. As such the Minister is answerable to Parliament and to the public and the sanction for failure to comply with his duty is the possibility of losing his position and not financial liability. The position of the various role-players in relation to The State Theatre can thus be summarised as follows: -

- The Minister responsible for DACST must be seen as politically responsible. In that sense, his accountability rests in the political arena and therefore he is accountable and answerable to Parliament and the electorate;

- The Director-General of DACST is the accounting officer of DACST. He is not the accounting officer for The State Theatre where the responsibility rests with the Board. The Director-General is thus responsible for funds being challenged to The State Theatre and as such should to see to it that The State Theatre gets a proper grant;

- The Board of The State Theatre is responsible for the control and management of the affairs of this Section 21 Company.

  1. It is the Unit’s view that Section 25 of the Articles of Association of the State Theatre gives the Minister the power to lay down special instructions from time to time. The control and management of the company falls squarely within the ambit of responsibility of the Board of Directors as set out in Section 24 (a) (i) of the Articles of Association. Nothing in Section 25 of the Articles of Association can be construed to render the Minister civilly liable for any losses incurred by the company. As indicated before, if the Minister’s knowledge of the Special Reserve Fund since 1994 and the subsequent events as set out in this report are regarded as improper behaviour, it is for Parliament and the electorate to sanction the Minister and the Unit would have no prospects of success should it wish to embark on any civil litigation against the Minister. This was confirmed by an opinion the Unit obtained from Senior Counsel.
  2. In assessing whether the Ministers should be sanctioned in any way one must remember that mere awareness of the Special Reserve Fund does not imply full knowledge as to its unlawfulness and the need to recover it. It should be remembered that the Minister was in fact the Minister of the Department that requested the Forensic Report by Deloitte & Touche and which department ultimately had the matter referred to the Special Investigating Unit in order to investigate whether the fund was unlawful and whether it could be recovered. This process was still on-going and the outcome of the Impact Study regarding repayment by the State Theatre was still pending when a new twist of events, blatantly fraudulent acts by Scott Asset Managers, resulted in the present position.

Under the circumstances the Unit does not believe that there is any basis for civil action against either Minister Ngubane or Minister Mtshali (as he then was).

  1. The various Directors General of DACST
  2. During the existence of the Special Reserve Fund DACST had two Directors General namely Mr Jardine and Doctor Adam. At the relevant times they were the accounting officer of DACST. As such they are, of course, accountable for the finances of their own departments.

    At all relevant times the State Theatre was a separate legal entity, being a Section 21 Company. The State Theatre had its own duly appointed Board that was legally responsible to take care of its affairs including the responsibility for taking care of its finances. The Unit is of the view that the accounting officer of DACST cannot be held liable for a separate legal entity. The accounting officer of DACST would only be responsible to see to it that in fact money was channelled to The State Theatre and no Director General of DACST would therefore be held liable for the loss of the Special Reserve Fund.

    In this regard it is also important to remember that it was DACST that obtained the services of the Forensic Section of Deloitte & Touche to do their report and that ultimately requested the Special Investigating Unit in to investigate the matter. It cannot therefore be said that they not attempt to deal with the Special Reserve Fund as these steps are indicative of a desire to investigate all aspects relating to such fund and to take the appropriate decision as to how to handle the money remaining in such fund. This should be read together with the above argument that in a sense the Special Reserve Fund was recovered.

    The Unit is therefore of the view that it would not be possible to institute civil action against either Mr Jardine or Doctor Adam.

  3. The State Theatre Board

There is no doubt that the funds of an entity such as the State Theatre must be treated with extreme care. A large portion of the funds of the State Theatre comes through DACST and as such is public money. Public money is the property of the community at large and it is in the public interest that it should not be handled in a fashion that could be regarded as reckless and ultimately be lost.

This is part of the reasoning why State Institutions normally operate under very strong financial control. Part of this control is the relationship with the Office of the Auditor General who as the watchdog of public money keeps a close eye on the financial affairs of State Institutions. If the State Theatre was a normal State Institution with the normal financial controls, quite obviously the situation described above would never have arisen. However, because the State Theatre was a Section 21 company, it did not have to comply with the normal financial controls relating to State Institutions and it was not subject to audit by the Auditor General. The State Theatre operates under the Companies Act and therefore has to comply with the normal conditions applicable to private concerns. The inherent danger is quite obvious. Public funds is placed with an Institution which does not have to subject itself to the financial controls that practice has dictated as necessary when dealing with public funds. What happened in this instance is a graphic illustration of the inherent danger when a State Institution operates as a company without strong financial controls protecting public funds.

If one now looks at the manner the Board members of the State Theatre handled the investment with SAM, the following is apparent: –

The Board members appear to have accepted the discretion of Van den Berg without questioning the transactions themselves. The investments with Scott Asset Managers were regularly reported at Board meetings and the increase in value of these investments were always part of such reports. Despite the risk of investing public funds in this manner, the Board never resolved that this was an improper way of handling public funds. Ultimately when Scott made a presentation to the State Theatre Board, the Board resolved in favour of investments of this nature and effectively ratified previous investments. This was done without independently verifying the risk involved in investments of this nature. This should be seen in the light of the disclosures (referred to above) made by SAFEX members when entering into contracts of this nature. It is a well-known principle that high returns are accompanied by high risk. The returns on investments reported to the Board was very high (this was of course based on the fraudulent statements forwarded by Scott). A reasonable Board member would therefore conclude that an investment with such high returns must be accompanied by some element of risk. At best therefore for the Board members they ought to have realised that the investment was a risky one. More care must be exercised when dealing with public funds. Under the circumstances one would have expected Board members dealing with millions of rands of public money, not to rely solely on the advice of Van den Berg and the quality of the presentation by Scott to approve investments of this nature.

Section 423 of the Companies Act (Act 61 of 1973) reads as follows: -

"Delinquent directors and others to restore property and to compensate the company: -

(1) Where in the course of the winding-up or judicial management of a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present director or any officer of the company has misapplied or retained or become liable or accountable for any money or property of the company or has been guilty of any breach of faith or trust in relation to the company the Court may, on the application of the Master or of the liquidator or of any creditor or member or contributory of the company, enquire into the conduct of the promoter, director or officer concerned and may order him to repay or restore the money or property or any part thereof, with interest at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retention, breach of faith or trust as the Court thinks just.

 

Section 424 (1) of Act 61 of 1973 reads as follows: -

"424. Liability of directors and others for fraudulent conduct of business:-

(1) When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct".

From what has been stated above it would appear that the Board members of the State Theatre find themselves in a position where their conduct fall within the ambit of what was envisaged by Section 423 and 424 of Act 61 of 1973. Although this is not a conclusion that can lead to the Special Investigating Unit instituting action in the Special Tribunal, it is recommended that DACST considers action in terms of the provisions of these two Sections against the Board members of the State Theatre in order to recover the losses suffered.

(d) Van den Berg and Joseph

Mr J Van den Berg has had a long and interesting relationship with the Special Reserve Fund. His business Wesrand Secretarial Services worked on a consultancy basis for PACT’s auditors Furter Carstens Wohlitz. From March 1992 – March 1995, Van den Berg was the administrator of the Special Reserve Fund. On the 1st September 1996 he again emerges after being appointed the Financial Manager at PACT. The evidence also showed that he played a strategic role in the investment with Scott Asset Managers. It was his function to advise the Board on financial issues and as such the Board relied heavily on him. It must be remembered that many of the Board members had no financial background and as such relied heavily on the input of the financial manager. Van den Berg was the person who orchestrated investments with Scott Asset Managers and in fact signed the SAFEX agreement on behalf of the State Theatre. Evidence showed that the disclosures of high risk contained in this agreement was not made available to Board members. Van den Berg was further instrumental in having huge sums of money invested with Scott Asset Managers even prior to the Board approving such investments after hearing a presentation by Keith Scott.

Mr Joseph was the Chief Executive Officer of the Section 21 Company and was involved with investments in Scott Asset Managers from the first day. Like Van den Berg he was fully aware of the high risk involved in this investment but continued with such investment and increased the amounts involved which ultimately resulted in serious losses.

Although it is apparent from the investigation that Van den Berg and Joseph were deceived by the fraudulent acts of Mr Scott, their actions would appear to be negligent. It is one thing to risk your own money in a high risk venture, but the Unit is of the view that it was negligent to invest public funds in a way that simply had to have a high risk potential.

It is recommended that DACST must consider acting against these two men as envisaged by the provisions of Section 423 and 424 of Companies Act.

(e) SAFEX

Evidence revealed that Scott Asset Managers (Pty) Ltd had its membership with SAFEX terminated in October 1999. Several Board members testified under oath to the Unit that the fact that Scott Asset Managers was a SAFEX member was an important issue for them when they approved investments with Scott Asset Managers. They indicated quite clearly that if they had been made aware of the fact that Scott Asset Managers had its membership of SAFEX terminated, they would not have invested further funds in Scott Asset Managers. The State Theatre was not notified that Scott Asset Managers was no longer allowed to trade as a SAFEX member and in fact Scott Asset Managers continued to be listed as a member of the SAFEX website until February 2000. In December 2000 the State Theatre, not knowing that Scott Asset Managers was no longer allowed to trade as a SAFEX member, invested a further R7 million in Scott’s enterprises.

The Unit intends to pursue the possibility of a civil claim against SAFEX (or its legal successor in title).

(f) Scott

There’s no doubt in the Unit’s mind that Scott acted fraudulently and in a criminal fashion in defrauding The State Theatre out of a large amount. It is recommended that criminal action against Scott be pursued vigorously. A criminal case has already been opened and the criminal investigation is on-going. A copy of this report will also be submitted to the National Prosecuting Authority for its consideration.

11. POSSIBLE CRIMINAL ACTION

A copy of this report will be forwarded to the NPA to consider the possibility of the institution of criminal action against various parties. This Unit is not in a position to prescribe what criminal action should be taken, but it is recommended that at least the following should be considered: -

  1. Criminal action against Keith Scott as set out earlier in this report, and
  2. (b) Criminal action against the Directors and Auditors of PACT who were involved in the publishing of false financial statements and / or the falsifying of financial statements with intent to defraud or deceive. These possible criminal actions which are to be considered are contraventions of Sections 250 and 251 of the Companies Act.

    12. WINDYBROW

    The Unit was also urged by the whistleblowers in this matter to look into the issue of certain irregularities at Windybrow. Windybrow used to operate as a playhouse under the control of PACT, but presently operates as a separate Section 21 Company. The Unit was asked to look into irregularities that allegedly took place whilst Windybrow was still answerable to PACT.

    The Unit focussed its investigation into the Windybrow affairs solely on one transaction which was allegedly irregular. This transaction related to a deposit into the bank account of Mr Walter Chakela, the Executive Artistic Director of Windybrow. This deposit was made by a Norwegian arts company called Nordic Black Theatre.

    Investigation into the allegations relating to Windybrow has not been an extensive one for a number of reasons: -

    (a) A reading of Proclamation R39/1998 (which is quoted earlier in this report) shows no reference to Windybrow. Even though whistle blowers in this matter contend that it was one of the earlier complaints brought to the attention of the Unit, no reference is made to Windybrow in the schedule to the Proclamation which has limited the Unit’s terms of reference in this regard.

  3. If indeed Nordic Black Theatre was defrauded, it would be a financial loss suffered by an entity which is not a State Institution and therefore the Unit would not be able to become involved in recovering the money.

The Unit therefore adopted the approach that its investigation would focus on whether indeed an amount of money was paid into the account of Chakela and, if so, the reason for such a deposit. The investigation would then further establish whether such funds were in fact meant for PACT, or more particularly, Windybrow.

The Unit’s investigations revealed the following: -

(a) On the 10th October 1996 an amount of R43 868.00 was deposited into the banking account of Chakela by Nordic Black Theatre;

(b) On the 17th October 1996 an amount of R44 000.00 was transferred from Chakela’s current account to his credit card account;

(c) On the 3rd December 1996 an amount of R2 846.00 was deposited into Chakela’s account by Nordic Black Theatre;

(d) On the 6th June 1997 an amount of R29 910.00 was deposited into Chakela’s banking account by Nordic Black Theatre;

(e) Again on the 17th June 1997 a further R29 910.00 was deposited into Chakela’s banking account by Nordic Black Theatre;

(f) On the 7th July 1997 there was a cash deposit of R20 000.00 into Chakela’s banking account.

During a questioning in terms of Section 5(2)(c) of the Act, Chakela was confronted with these deposits. The following explanations were received: -

(a) The three transactions in 1996 referred to above in paragraphs (a) to (c), were grants from Nordic Black Theatre to Chakela for airline tickets to Norway to attend productions in terms of an art exchange agreement. Nordic Black Theatre deposited the amount in Mr Chakela’s account, he transferred it to his credit card and purchased several airline tickets for himself and others in his party, with this credit card;

(b) The other three deposits (which total close to R80 000.00) were grants by Nordic Black Theatre for a production Nordic Black Theatre were to stage at the Grahamstown Arts Festival. At the time Windybrow did not have its own banking account and all deposits had to go through The State Theatre accounts. Nordic Black Theatre did not wish to deal with The State Theatre (or PACT as it then was) and asked Chakela to use his banking account in order to facilitate the payment of disbursements for this production.

The Unit thereafter approached Mr Jarl Solberg, the Administration Director of Nordic Black Theatre. The Unit did not think it would be money wisely spent to actually travel to Oslo, Norway to investigate a matter which related to relatively small amounts of money. The Unit therefore communicated with Solberg by way of telephone, facsimile and e-mail. The purpose of the communications with Solberg was in order to verify the information received from Chakela, as well as determining whether any of the deposits made were in fact destined for the benefit of PACT.

Communications with Nordic Black Theatre confirmed that indeed no deposits were ever meant for the benefit of PACT. Nordic Black Theatre confirmed the version of Chakela and set out the disbursements actually paid from Chakela’s account. Nordic Black Theatre was satisfied that their money was spent properly and that proper receipts were provided to account for the expenditure of the deposits made into Chakela’s account. Similarly, the Unit was not able to find any proof that Chakela claimed reimbursement from PACT for any of the expenses paid for by Nordic Black Theatre. The Unit was therefore not able to find any evidence proving that Chakela enriched himself by receiving money from PACT for service already paid for by Nordic Black Theatre.

The Unit was therefore not able to find substantiated proof that Chakela was either bribed or stole any money destined for a State Institution.

13. CONCLUSION

It is the Unit’s belief that many of the problems dealt with during its investigation are linked to the undesirable situation of a State Institution (or Organ of State for that matter) operating as a company and thus finding itself in a position where it is regulated by the Companies Act and not by the normal measures applicable to State Institutions. This allowed for a situation where the Board and / or individuals advising the Board could make the type of investments that we found in this matter and which should not be associated with the handling of public funds. The facts of this matter show the advantages of legislation such as the Public Finance Management Act to ensure proper control when dealing with public funds. It is indeed a bitter pill to swallow that in this matter not only the secretive Special Reserve Fund but also other funds of the State Theatre were irretrievably lost. Certain reactive steps against individuals and organisations are suggested in the body of this report and will be pursued, but the most important issue is to ensure sufficient control measures to prevent a recurrence of the events the Unit had to investigate. Due compliance with the Public Finance Management Act should in the future be strictly monitored and the distasteful series of events would in the future then not be possible.

The Unit also discovered in other investigations that the anomaly of Organs of State operating as Section 21 Companies can lead to serious difficulties. In its investigation into Agri-Eco (Pty) Ltd, an agricultural and eco-tourism entity in the Free State Province, the Unit found that an organisation which operated as a company but who relied heavily on grants from the State, presented serious headaches for the State. This ultimately culminated into the ludicrous situation that the Board of Agri-Eco brought an application before the High Court to have Agri-Eco liquidated, under circumstances where the State itself was never consulted on this issue and where the State was against such a procedure. In that matter the State had to oppose this application and had to provide substantial guarantees in order to have a provisional liquidation order set aside. The scenario again highlights the anomaly of institutions largely dependent on financial support from the State, operating as companies.

It is the recommendation of this Unit that State Institutions, and particularly State Institutions which are dependent on financial assistance from the State, should not operate as companies unless the Public Finance Management Act is applicable to them. The control measures contained in that Act would be essential in ensuring that the interests of the State are properly protected. In addition it is strongly recommended that whenever such companies are created, newly appointed board members must explicitly be made aware of their responsibilities and such boards must include persons with strong financial backgrounds. It is lastly recommended that consideration should also be given to including measures in the Articles of Association to measures that would give the State certain powers to ensure that the Board does not act in a manner which is contrary to the interests of the State. It should, for example, not be possible for the Board of a company, which receives material financial aid from the State, to institute liquidation proceedings without the prior approval of the State.

The subject matter of this investigation, namely the creation of the Special Reserve Fund and the subsequent Scott Asset Managers debacle, has had an extremely negative impact on The State Theatre itself and the arts community as a whole. The hope is expressed that the lessons learnt from this experience, would be utilized to an extent that an environment is created in which these unfortunate events cannot be repeated.

 

__________________________

W A HOFMEYR

HEAD OF THE UNIT

 

 

 

 

 

LIST OF ABBREVIATIONS

 

Unit – Special Investigating Unit

PACT – Performing Arts Council of the Transvaal

DACST – Department of Arts, Culture, Science and Technology

SAFEX – South African Futures Exchange

SAM – Scott Asset Managers (Pty) Ltd