FBC, investors in fraud storm

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In the eye of a storm ... FBC Holdings offices in Harare.

FBC Holdings (FBCH) — a listed investment vehicle which owns FBC Bank and five other financial services subsidiaries — is in the eye of a fraud storm involving a disputed US$3,4 million in management fees and allegations of overstating financial statements by over US$10 million, documents seen by the Zimbabwe Independent show.

Elias Mambo/Bernard Mpofu

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This has triggered a bitter row between the financial services group and one of its foreign investors.

Noel Hayes, an investor in FBCH and Turnall Holdings, through his investment vehicle LHG Malta Holdings, is also accusing FBCH of “misrepresentations, fraud and material non-disclosures” which resulted in him suffering serious financial prejudice.

Documents show Hayes is accusing FBCH, which controlled a significant stake in Turnall before disposing of its 58% equity, of violating the Securities Act and Zimbabwe Stock Exchange listing requirements.

As a result, he is demanding compensation equivalent to 76,1 million share price, on top of 18% interest for the over US$1 million loss he has incurred.

FBC Bank, the flagship unit of the financial services group, in 2010 acquired 58,32% equity investment in Turnall through realisation of pledged security on a non-performing loan. After restructuring, the bank eventually held 10,42% shareholding of Turnall with the remainder being held by the group.

The Securities and Exchange Commission of Zimbabwe (SECZ) is investigating the allegations which pose a serious reputational risk to the bank.

LHG, a Maltese-domiciled company, became one of the majority shareholders after it bought significant shareholding in Turnall held by FBCH. The banking group had a management contract with Turnall. The National Social Security Authority (Nssa) is the majority shareholder in FBCH.

After acquiring a major stake in Turnall, LHG got a seat on the manufacturing firm’s board. However, the deal later went sour. Hayes said afterwards he discovered fraudulent activities by FBCH and Turnall. This led to the current fallout. In the aftermath of that, Hayes unleashed his lawyers on FBCH.

In a letter to FBCH chief executive John Mushayavanhu, LHG lawyers, Mtetwa & Nyambirai Legal Practitioners, said the case basically amounted to fraud.

“All these failures were compounded by the material misrepresentations and non-disclosures in the two companies’ published financial statements and our client believes that a fraud has been perpetrated on him as he would not have invested in the new companies had he been aware of the true financial state of each company,” Hayes’ lawyers wrote in the letter dated October 2016. “It is our client’s view that the blame for these misrepresentations, fraud and material non-disclosures lies squarely on FBCH as the entity that was responsible for the management of Turnall and whose directors sat on the Turnall board and did nothing to stop the haemorrhaging of Turnall.”

FBCH spokesperson Priscilla Sadomba last night dismissed Hayes’ allegations.

“The allegations that have been raised by Mr Hayes are not true. The matter has been registered with SECZ and they will be able to shed more light on that,” Sadomba said in a written response.

However, Hayes has insisted that there was fraud perpetrated in the deal by FBCH.

“The payment of a dividend in specie (payment of shareholders by means other than cash) using almost valueless Turnall shares was also clearly prejudicial to those shareholders whose shares in FBCH became diluted as a result.

The means through which FBCH disposed of its shares in Turnall, which was clearly designed to mitigate its losses of close to ten million United States dollars would, in our view, be of interest to the Securities Commission as in our view, it contravenes provisions of the Securities Act in particular Section 97(1) thereof,” the letter says.

In another letter addressed to FBCH lawyers Dube, Manikai & Hwacha, Hayes, through his attorneys, accused FBCH of fraudulent conduct when it released its 2014 financials.

“We are also instructed that you are the legal practitioners of record for Turnall and that part of your mandate includes pursuing some of the directors through whom the frauds and misrepresentations were committed during the period when your client had management control of FBCH. These include a director who was on the audit committee with your client’s CEO when the 2014 interim financial statements with overstated $10 million were signed off,” the letter, dated November 8 2016, said.

According to the Securities Act Section 97, no person shall induce another person to trade or deal in securities on a registered securities exchange: a) by making or publishing any statement, promise or forecast which he or she knows to be false or misleading; or b) by any dishonest concealment of material facts; or c) by recklessly or dishonestly making or publishing any statement, promise or forecast that is false or misleading.

In yet another letter to the FBCH board, dated June 6 2017, Hayes said: “I am an international investor who has been investing in Zimbabwe and Sub-Saharan Africa for more than two decades.

“Through FBC Securities I have been managing US$3 million Zimbabwe portfolio and amongst the stocks purchased through them has been a 5,3 million shareholding in FBCH and a 78 million shareholding in the bank’s formerly 58% owned subsidiary, Turnall Holdings Ltd.”

Hayes also said despite deploying their internal auditors whose detailed report of June 25 2015 unearthed fraud and misrepresentations, FBCH ignored their findings.

“The report quoted US$1,7 million of non-existent raw material quarantine stocks. US$864 563 of dump stock that was showing on the stocktake valuations was also found to be an over valuation of stock which in turn resulted in overstatement of profits. Thus, the FBCH directors on Turnall’s board knew that Turnall’s accounts were materially overstated,” he said in the letter. “In a most serious breach of International Financial Reporting Standards, SEC and stock exchange rules, Zimbabwe Companies Act and the Zimbabwe Banking Act, the need for US$10 million impairments was apparently not disclosed to the Reserve Bank of Zimbabwe and certainly not to Turnall’s or FBC’s shareholders or other stakeholders until more than six months later.”

Hayes said he had been misled and prejudiced by FBCH due to non-disclosures and financial irregularities.

“Thus, I have been deliberately misled as an investor in both Turnall and FBCH. The bank sold me its shareholding in Turnall with the full knowledge that financial statement irregularities had taken place at Turnall, for the purpose of inflating the bank’s reported profits on consolidation,” he said in the letter. “FBCH and certain of its directors are now potentially exposed to class action and other claims from Turnall and FBCH shareholders who purchased shares from 2012 onwards, by deliberately and knowingly publishing overstated results for the years 2012, 2013 and the first half of 2014.

“I have become a shareholder in FBCH believing, as is my legal right, that its accounts showed a true and fair view in all material respects and that its executives and directors adhered to the corporate governance statement of compliance.”

However, FBCH has since responded through its lawyers Dube, Manikai & Hwacha Legal practitioners, urging Hayes to approach the courts if he thinks he has a case.

“For the avoidance of doubt our client (FBCH) has denied the allegations raised by your client (Hayes),” wrote Dube, Manikai & Hwacha on December 2 2016. “If your client is of the view that it has a case then by all means, proceed to court. There is no basis for your client to continue maligning our client’s good name in the market.”

However, Hayes, through his lawyers, has refused to back down and continues fighting.

“In all these circumstances, we are instructed to demand, as we hereby do, that you refund to our client his investment at the rate that he proposed, to include his legal and other costs including compound interest on the investment and that agreement to refund him be reached without delay but not later than the 31st October, 2016,” his attorneys wrote.

The case has spilt into 2017 with letters flying back and forth between FBCH and Hayes through their lawyers.

SECZ chief executive Tafadzwa Chinamo, in a letter addressed to Hayes’ legal representatives, dated February 2 2017, said investigations were still ongoing.

“We advise that the commission is still in the process of investigating the matter which involves getting the responses of FBCH and Turnall Holdings Limited,” Chinamo wrote. “The commission shall advise you of its findings once the process is fully completed.” Efforts to get comment from Chinamo last night failed.

5 thoughts on “FBC, investors in fraud storm”

  1. Kufandada says:

    Everything at First Bank smells of fraud.Let the NSSA chairman decend on them.Heads must roll.

  2. Gandanga says:

    This is interesting, great reporting!! thank you for lifting the lid on this story team Independent. We want more below the surface reporting

  3. shumbasamaita says:

    Its an interesting read. The likes of Mushayavanhu, Nhemachena, Mhishi, were stealing money from NetOne through Firstel by delaring dividends on overstated financial statements. Apa netone vasingabhadhare. And you hear kuti Kangai is being accused of defrauding NetOne alone, terrible. You just wonder why the economy is in this sorry state.Governance at FBC leaves a lot to be desired to say the least. NSSA chairman, Robin Vela says they are happy with FBC with such dirty being uncovered.

  4. Illicit Financial flows says:

    The investor should include the reporting auditors in the net coz by saying the financial statements were true and fair when inventory was inflated in broad day light like this complicity cant just be ruled out. I totally agree with those calling for the heads to roll at this entity. In developed economies such cases to the prejudiced are very easy to win in a court of law, they are dead rubber.

  5. Scams says:

    What a Stinker for Deloitte to Qualify their year ended Financial statments of being truly fair and representative. It would be great for the write of this to merge what Deloitte is saying vs what the investor alleges. It would be great if the investor also publishes his/her findings. Great work Independent.

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