- Former CEO Leon Kirkinis allowed to ‘dominate’ bank’s board
- Goldman Sachs paid 192 million rand to underwrite rights issue
Leon Kirkinis, the former chief executive officer of African Bank Investments Ltd., was unrepentant after the lender he created failed in August 2014, wiping out billions of rand for investors, according to the findings of an investigation into the bank’s collapse.
Kirkinis, 56, felt the company, known as Abil, had a “rosy future” and that it was wrongly placed under administration by South Africa’s central bank, having survived other crises in the past, John Myburgh, who led the probe, said in a report published on the South African Reserve Bank’s website on Thursday.
“In considering the personality of Kirkinis the word ‘hubris’ comes to mind,” Myburgh said. “Kirkinis believed that he was right, everyone else was wrong,” including the bank’s auditors Deloitte & Touche LLP, according to the report. Kirkinis didn’t immediately return a message left at his Johannesburg office seeking comment, and his lawyer didn’t immediately respond to a message at her office or an e-mail.
Kirkinis was allowed to dominate Abil’s board, with the company’s directors found to have failed in their duties while some weren’t qualified for their roles, Myburgh said. The investigation was commissioned by the central bank a month after South Africa’s largest provider of unsecured loans collapsed and the report was submitted in February last year.
Drunk Risk Officer
Under South Africa’s Companies Act, directors may be held liable for breaches of their fiduciary duties and any losses, damages or costs sustained by the organization. The central bank asked Myburgh, a lawyer, to probe the company for reckless, negligent or fraudulent behavior, while also investigating management practices and disclosures. Abil failed as bad debts soared and funding dried up.
“The directors of the bank acted in breach of their fiduciary and other duties,” and business was conducted “negligently” in some respects, Myburgh said. Unsecured loans to its furniture-retail business Ellerine were reckless.
The lender’s Chief Risk Officer, Tami Sokutu, who has since died, wasn’t qualified for the job and battled a “severe drinking problem,” even admitting to drinking before being interviewed by the commissioners, Myburgh said in the report.
“There was no evidence that the business of the bank was conducted with the intent to defraud” any depositors or creditors, Myburgh said.
Kirkinis and his family trust made 286 million rand ($19 million) in dividends from Abil, according to the report. Sokutu made 89 million rand selling share options, Myburgh said.
When Abil collapsed, shareholders lost all of their money and bondholders, with more than 40 billion rand at stake, were forced to take haircuts. The lender’s remaining viable assets were rescued and new debt instruments started trading last month as African Bank Ltd.
Abil hired Goldman Sachs Inc. in August 2013 to help raise capital and hasten the sale of Ellerine, which had been a drain on its cash resources since the bank bought the company in 2008. Abil paid Goldman 192 million rand to underwrite the 5.5 billion rand rights issue, without which the bank wouldn’t have survived, Myburgh said.
Six months later, Abil hired Goldman Sachs and JPMorgan Chase & Co. to help with another effort to raise capital. The managers were initially of the view that the company would need to raise as much as 10 billion rand, which Kirkinis said was too much, the report said. The sale never happened.
Coronation Fund Managers Ltd., a Cape Town-based money manager with 606 billion rand in assets, lost 3.5 billion rand holding stock in Abil on behalf of its clients, and another 32 million rand on Abil’s debt, the Myburgh report said. Stanlib Asset Management’s clients incurred an aggregate loss of 707 million rand and 4.8 million rand on its preference shares, while the Public Investment Corp., which manages pension fund money for South African government workers, lost 4 billion rand, it said.
“The PIC believes that the failure of the bank was as a result of aggressive loan growth that was done at the expense of disciplined credit-risk management, resulting in massive credit losses,” Myburgh said. Stanlib blamed the granting of bigger loans over a longer period to customers as conditions for consumers deteriorated, along with the distraction from the Ellerine acquisition, he said.
Allan Gray estimated its equity clients lost about 893 million rand and bondholders about 250 million rand. Abil’s black investors, which included 13,000 employees, former employees, the general public and depositors who had been provided with stock to redress years of economic oppression under apartheid, lost a combined 2 billion rand.
“Thousands, if not hundreds of thousands, of ordinary South Africans invested their savings in Abil shares through asset managers,” the report said.
Having held a combined 4.9 percent of the bank, two groups of black shareholders filed court papers in December, claiming that Abil’s directors acted recklessly and misled investors. Ten of Abil’s former directors, including Kirkinis, have said in court documents that they aren’t liable for the 2.03 billion rand damages claim lodged by the black investors in shares schemes called Eyomhlaba and Hlumisa.
In Kirkinis’ view the demise of Abil should be seen in the context of a weakening economy, the National Credit Regulator’s proposed fine on the bank and “devastatingly negative and unfair statements by the press and various regulatory and government voices decrying lenders,” Myburgh said. Kirkinis also blamed strikes at platinum mines in 2012, which eventually culminated with the deaths of 44 miners, for turning sentiment against unsecured lenders after it emerged many of the workers were over-indebted due to the high interest rates they were paying, he said.