SMASH-‘N-GRAB AT INVESTEC



So you think Investec Bank is one of the few remaining kosher operations in SA banking, where a culture of smash and grab has otherwise come to prevail? Think again.

Investec does, of course, do everything possible to create that impression. So, when in 1998 various senior staff members of Investec’s R1-billion Cape Property Finance division were suspended, fired or took sudden “early retirement”, every effort was made to cover it all up. But behind the scenes, allegations of fraud and summonses were flying. To sort out the mess, Investec unleashed Lenny “the Liquidator” Katz from their more-than-close attorneys Sonnenbergs Hoffman & Galombik. Lenny set about liquidating the division’s clients, in bulk!

Apparently only noseweek found that odd – if not just a little bit shady. We still don’t know if the idea was to generate some fees for friends at Sonnenberg or keep the bank’s insurers happy – or both. Whatever. It appeared for a while that Investec had solved their problem quickly and quietly, and the bank’s public image remained untarnished. That, it seems, was most undeserved.

One of the bank’s clients at the time of the crisis was Midtown Building Systems cc, developer of a hotel and apartment complex at the mouth of the Keurbooms River just outside forever fashionable Plettenberg Bay. Midtown was owned by Justin Lewis, an entrepreneurial Villiersdorp fruit farmer and family man, with a degree in agriculture from Stellenbosch.

The Keurbooms mouth is the ideal spot for a resort: with the lagoon to the front, the beach a 100-yard stroll away, and across the bay a spectacular view all the way to the Beacon Isle Hotel. It’s far enough from Plett to be relaxed and tranquil, but close enough catch the buzz if you choose.

Lewis was ambitious. Not only was his complex of 76 two- and three-bed-room apartments effectively to be the largest hotel (managed by Protea) on the Garden Route; his own profit in the development was to take the form of 30 apartments that Midtown would retain for an international vacation club that he was setting up with a group of European hotels. Empires are built on such beginnings.

Lewis decided to approach Investec to finance his project. In May 1997, letters of grant detailing the precise terms of two Investec loans to Midtown were signed by Lewis and by Laetitia Peyper, then head of Investec’s Cape Property Finance division.

In terms of the agreements the development would be carried out in two separate phases: Phase One had to be completed and fully paid for before Investec would advance the second loan for Phase Two.

The letter of grant for Phase Two states as much in its first clause: “It is a condition of this loan that before any monies are released from this loan, that the loan account pertaining to letter of grant CT DB 664/97 dated 9 May 1997 [the loan for Phase One] be repaid in full.”

The agreements also stipulated that R19m-worth of apartments had to be sold off-plan (prior to construction commencing), and that these sales had to be approved by Investec’s lawyers. A fixed-price contract was concluded with the builders – Group 5 – for each phase.

Loan One was for R14m, from which Investec was to pay Group 5 the contract price of R11m plus interest estimated at R1.3m (because the construction company would only be paid on full completion of the phase). Another R1.7m of the loan was to cover costs such as architect’s and legal fees, giving a total of R14m. The R19m from sales was to be applied first to the loan from Investec, and only what was left was to be used to pay the balance Lewis still owed on the Midtown land. Again the letter of grant is very specific: any amounts above the R14m owed to Investec were “payable only out of proceeds of sales”, in other words not by incurring further debt with Investec.

Loan Two was much simpler. Only a single, R7.5m payment was authorised: to Group 5 for the completion of Phase Two.

All income from deposits, sales and rent was to go directly to Investec. All payments due on the project – including payments of Investec’s fees – were to be disbursed by Investec on Midtown’s behalf. Lewis naturally expected that Investec, as responsible bankers, would make the payments in terms of the carefully negotiated agreements.

Construction of the development began in mid-1997, and was completed on schedule a year later. Soon thereafter Lewis was introduced to Robert Gottlieb, the new head of the Investec Property Finance department. Laetitia Peyper, he was told, has “moved on”. Lewis was aware that Midtown had not been receiving monthly statements from Investec, but Gottlieb told him that the bank had taken its profit-share on Phase One – expressed as share of “net profit” in the agreements – confirmation, surely, that all was well financially.

However, between August 1998 and early the following year, Gottlieb became increasingly insistent that there were serious financial problems at Midtown. Lewis was very doubtful. There had been R19.6m in sales vs R14m in authorised borrowings on Phase One. So how could there be a problem? What did complicate matters somewhat was that there had been a delay in the transfer of some of the sold apartments. This meant that the payments were taking longer than expected. Lewis was embarrassed by the delays at the time and did not feel in a position to argue with Investec while they were still outstanding.

However, in May 1999, a few months after the final transfers had gone through, Lewis received two letters of demand from Gottlieb claiming that Midtown was in arrears on both Loans One and Two, and that the company owed Investec a total of R12m (including the R7.5m advanced for Loan Two) – payable immediately.

Lewis was shocked and confused. He had been certain he owed only the R7.5m plus interest on Loan Two. After all, in terms of the agreements Loan One had to have been settled before Loan Two could have been incurred.

What was going on? He wanted the bank to explain. Gottlieb simply insisted that Midtown owed the sums he claimed, but was curiously uncooperative when Lewis asked for access to the financial records for Midtown.

For example, in June Lewis sent a fax to Gottlieb asking for the detailed accounts. In response he received a communication which started with what Investec claimed was the “opening balance” on Loan One, in May, of R4.4m and went on to list a few subsequent interest charges. Clearly what Lewis was asking for was an explanation of that R4.4m opening balance! When Lewis pointed this out, Gottlieb became increasingly hostile, he says.

At the end of July it became clear that Investec had a couple of pretty devious plans up their sleeve [see next edition]. When Lewis arrived at Investec’s Cape Town offices to discuss the situation he found that Gottlieb had already prepared the lengthy documents necessary for the provisional liquidation of Midtown. Also present was a man introduced to Lewis as Lenny Katz – yes, “The Liquidator” himself – from Sonnenbergs, who urged him to sign the liquidation documents.

Lewis refused. The discussions carried on over a few days, during which time, Lewis says, Gottlieb became aggressive and insulting. (Gottlieb denies this). Eventually, still without a clear picture of the financial situation, Lewis agreed to sign the forms consenting to the liquidation – partly because Gottlieb had offered to limit his personal suretyship, partly because Gottlieb explained, Lewis says, that he would be able to buy the assets out of liquidation [see next edition]. Mostly it was because he was simply exhausted by the endless battle with Investec.

Robert Walters of St George’s Trustees, a firm with which Sonnenbergs has long and close ties, was appointed liquidator. Shortly before Midtown was finally liquidated in November 1999, Lewis desperately wrote to Gottlieb (with a copy to Walters) disputing the bank’s claim against his company. Lewis’ letter is short on detail but conveys one simple point very well: Loan One was for R14m. R19.6m had been received in sales proceeds. Therefore, if the account had been properly managed, there was no possibility that Investec could have a legitimate claim in terms of Loan One.

Lewis got no reply either from Gottlieb or Walters, and the liquidation order was made final on Nov 25, 1999.

Investec was still legally obliged to prove its claim against Midtown before a meeting of creditors held before a magistrate, all the more so – one would think – because the bank and the liquidator knew that Lewis was disputing the claim. However, when the meeting took place at the Stellenbosch magistrate’s courts on December 22, no one other than Lewis and magistrate Danie van Niekerk showed up. The only account provided was a brief outline in liquidator Walters’ report, which was useless to Lewis.

Magistrate van Niekerk scheduled another creditors’ meeting for May the following year. Once again no one other than he and a forlorn Lewis appeared. But by then the issue was in any case moot. Lewis brought with him to the meeting copies of advertisements for apartments at the development that the new owner had placed in the newspapers. “I found it strange,” he says, “that the same apartments that Gottlieb told me six months earlier were hardly worth R50 000, were now being advertised for sale at R500 000”.

His dreams for Midtown smashed, Lewis headed back to Villiersdorp to recuperate. He felt that he had let the apartment owners down, and was aware of various unpleasant rumours about his role in Midtown’s demise. So shaken had he been by the ordeal that he signed up for some inspirational seminars run by American-based guru Deepak Chopra.

Whether thanks to the break or to Deepak, Lewis had made enough of a recovery to be in a fighting frame of mind in Dec 2000, when Investec brought an application for his personal sequestration on the basis of sureties he had issued for Midtown.

Previously Lewis had been rather naïve in his approach to legal representation. Now he assembled a no-shit legal team: advocates Alasdair Sholto-Douglas and Roelof van Riet S.C.

On their advice Lewis decided to oppose the application, whereupon he became entitled to demand “discovery” of Investec’s detailed accounts for Midtown – the same accounts he had unsuccessfully asked for so many times previously.

A mere formality, one would have thought. After all, banking is supposedly the very model of probity and thorough record keeping.

Yet even now the bank seemed strangely reluctant. A month later, Lewis’s attorney Okkie Kruger was compelled to write to Sonnenbergs threatening a high court injunction unless Investec provided the full accounts for Midtown’s financial affairs.

Eventually, in May, Investec supplied Lewis’s attorney with the Midtown accounts. Gottlieb would later argue – extraordinarily for a banker – that the accounts had been supplied “without prejudice”, and that Lewis was therefore not entitled to use them as evidence in court. We have sympathy for Mr Gottlieb. Maybe he should have had a fire in the records room. What Lewis discovered in the Midtown accounts was quite astonishing.

Gottlieb’s letter of demand for Loan One claimed that it was in arrears by R1.3m and that a total of R4.4m was still owed to the bank. Lewis thought that the investment had made a profit and that the assets bonded to secure the loan should have been released by Investec and been available to secure further borrowing if necessary. (He had in fact arranged for a R7m ABSA facility against those assets to be made available as soon as the bond was cancelled.) So Lewis knew that if Loan One had been repaid then Midtown would have been in the clear.

The accounts showed that, shortly before Gottlieb had sent out the letters of demand, Investec had made a secret, unauthorised transfer of R1.3m from the account for the loan on Phase Two to that for the loan on Phase One (which otherwise would have had no outstanding balance). In fact, Lewis says, in all the time he was battling to understand the account balances, Gottlieb had somehow neglected to mention this rather salient point. This was quite apart from the fact that the transferred amount was an overcharge of interest on Loan Two! The accounts further confirmed to Lewis that Investec had made payments to other Midtown creditors totaling R2.5m – payments which, in terms of their agreement, could only have been made once they were themselves owed nothing.

Lewis calculates that just the interest bill is overstated by some R2m.

There was also a charge to the account for Loan One of R600 000, supposedly for Investec’s share of “net profit” on Phase One, plus a charge for a further “profit share” of R400 000 – on Phase Two! This certainly seems a bit rich in view of the bank’s later argument that, far from making a profit, the company was hopelessly in the red.

In court Adv van Riet pointed out that while the agreements specified that Group 5 was to be paid R11m for completion of Phase One, plus a budgeted R1.3m in interest, making a total of R12.3m, the accounts show payments of R15.2m to Group 5 on Phase One. Group 5 told Lewis that the interest had in fact been only R800 000; so that should make a total payment of only R11.8m on Phase One. Where did the extra R3.4m go to – and why? Lewis doesn’t know. We asked the fearless Gottlieb, but the only response was from Investec’s lawyer Brian Biebuyck (of Sonnenbergs) who told us that the answer to that question, and the whole matter, was sub judice. Aha.

In addition, Lewis’s legal team argued in court, there are various charges to Midtown that are not supported by any form of authorisation or record whatsoever. And of course interest has been charged on all these debits to the account (including the “profit share”). Lewis calculates that just the interest bill is overstated by some R2 million.

On the basis of Investec’s accounts for Midtown, Lewis argued in court that neither of Midtown’s facilities had been in arrears when Gottlieb issued his letters of demand and that the bank had conducted the Midtown account in contravention of the agreements that governed them and in such a way as to endanger Midtown. Obviously, Lewis argued, the bank was not entitled to enforce securities for a company whose liquidation had been caused by the bank’s own negligence and misconduct.

After what judge BR Griesel described as “skilful argument by Lewis’ counsel,” he ruled in October last year that Lewis’s defence was both reasonable and made in good faith, and that this was sufficient for him to deny Investec’s application. The bank would have to issue summons and prove its claims in court.

It was now abundantly clear to Lewis that Investec had done the dirty on him. But he still couldn’t figure out: Why?
To be continued.

Keywords:
Investec
Sonnenbergs
Ens
Edward Nathan Sonnenbergs
Robert Walters
Leonard Katz
Liquidation
Justin Lewis
Midtown
Building Systems
Laetitia Peyper
Robert Gottlieb
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