The evidence, unless disproven, is compelling. From Moneyweb.
Fred Arijs, a former investment banker and one-time Belgian honorary consul in the Eastern Cape, has accused RMB and several senior bank executives of taking him to the cleaners, in a calculated scheme to defraud him and his business partners in two property deals gone horribly wrong.
In November last year the companies in which Arijs (pronounced Arish) was involved issued summons against RMB and several executives with some startling allegations. According to Arijs’s attorney, the bank this week sequestrated Arijs in the Cape High Court to reclaim sureties of R4.5 million.
What makes the case bizarre is that Arijs and his partners say they have spent close to R9 million in legal fees fighting the case over the years – and they’re not giving up, despite Arijs’s sequestration.
Arijs is a former investment banker and says once he started investigating how the property deal went wrong, he immediately recognised the outlines of a fraudulent scheme intended to line the pockets of the bank at his expense.
RMB has denied Arijs’s allegations and says it pulled out of the property deal for purely commercial reasons. The bank has not filed its reply to Arijs’s claims. Moneyweb will file a follow-up story once it does.
It is a long and involved case going back several years, with multiple court actions proceeding simultaneously.
The story began in 1998 when Arijs retired from European investment bank Ceneca in Belgium and moved to South Africa to pursue property development opportunities.
He teamed up with other Belgian investors and in 1999 launched the Whale Rock residential development, a landmark project in Plettenberg Bay.
Arijs and his partners were less interested in developing their commercial properties than squatting on them until they could be sold for a decent profit, but that all changed in 2007 when they were approached by Dawid Wandrag, then-head of the FirstRand property finance credit committee, who proposed setting up joint venture companies to codevelop two properties, both in Plettenberg Bay.
One was a 59-hectare plot the bank figured would be ideal for a hotel and residential complex; the second a 1.4-hectare piece of prime real estate that RMB, in terms of a feasibility study, proposed turning into a shopping centre, boutique hotel and residential development.
In 2009, two joint venture companies were set up to develop the properties: Shock Proof Investments and Lighthouse.
RMB set up a special purpose vehicle (SPV) called RMB Property Holdco 1 (Holdco) to take up a 50% equity stake in the two developments.
The bank appointed RMB employees as directors of Shock Proof and Lighthouse, as did Arijs and his South African partners, with the bank retaining overall voting control.
By this time Arijs had teamed up with some South African partners. They purchased properties from Whale Rock and injected these into the new deal with RMB, which was to be both funder and equity partner in the new developments.
The joint venture and shareholder agreements were approved on November 13, 2007 and signed off by Allan Pullinger (then RMB CEO), Willy Robinson, Theunis Bosch, Wandrag, Cindy Veres and other senior executives of the bank.
The bank invested equity of R6.3 million in Lighthouse, and a further R6.6 million in Shock Proof, to be supplemented with a loan of R4 million on a successful record of decision from the environmental authorities. Papers before the court show the bank committed to providing any and all funding required for the completion of the developments. RMB’s feasibility studies green-lighted the two projects.
At no time were either of the two JV companies in default on the loan agreements.
Arijs and his partners were servicing their share of the interest on the loans but, astonishingly, 50% shareholder RMB Property Holdco 1 was not – putting it in breach of the JV agreements.
This is admitted by Wandrag in a 2011 email to his colleagues wherein he laments the fact that the bank had not kept to its side of the agreement and recommends refunding Arijs’s contributions for professional fees so the project could avoid any further delays.
Arijs uncovers evidence of an unlawful preference share scheme
What was not known to Arijs and his partners at the time, they claim, is that RMB had converted its equity claims in Shock Proof and Lighthouse (along with several other similar property development companies) into preference shares, which it on-sold to investors for a profit.
In banking-speak, this is known as securitisation, where assets such as credit card debts, mortgage loans or preference shares are packaged together and converted into a bond, which can then be sold to investors. In terms of the Banks Act there is nothing wrong with this, provided the bank does not own shares in the securitisation SPV.
Securitisation allows banks to convert otherwise sterile or long-term assets into cash, to boost their balance sheets and continue lending. Banks use ‘bankruptcy-remote’ SPVs to securitise assets, since this insulates them against any contagion that might arise as a result of default.
Bank denies any links with its property development company
Here is the problem: Arijs’s affidavit suggests the bank has a direct share in Holdco (the SPV), which has a direct stake in Shock Proof and Lighthouse, and is therefore in breach of the Banks Act, the shareholders agreements and good corporate governance, since the preference share scheme was kept a secret from Arijs and his partners.
In the process of doing this, Arijs claims the land was fraudulently sold from under him.
That the bank never told him about the preference share scheme would also violate the Companies Act since any disposal of assets must be agreed by the board and 75% of shareholders.
He says he only found out about it through the process of discovery in his various court actions against the bank.
RMB claims it pulled out of the property deal for purely strategic reasons and Arijs initially believed this – until he started tripping up on documents that seem to suggest the bank had no intention of proceeding with the development, even before it started. Shock Proof and Lighthouse were liquidated around 2014 and the two properties sold for about R12 million.
Bear in mind, Arijs is saying RMB was liquidating companies in which it had overall control and was the sole creditor.
Arijs’s affidavit alleges that the bank’s plan all along was to securitise his land (by converting the shareholders’ loans into preference shares), sell these shares for a profit, liquidate the JV development companies, then claim sureties from the minority shareholders (Arijs and his partners) and walk away without a scratch.
In other words, Arijs is claiming that this was an elaborate land theft scheme. He is now claiming about R80 million in damages against the bank.
This forms the basis of his claim of premeditated fraud by RMB – a claim that has been denied by the bank (see below).
In several court cases related to the Shock Proof and Lighthouse matters, RMB’s then-head of credit recovery Jean du Plessis has denied any link between RMB Property Holdco and the bank. If true, then the bank is free and clear as far as the Banks Act is concerned.
Remember, a bank may not own shares in a securitisation scheme since this could expose its own balance sheet to contagion in the event of default.
But in the process of court discovery, Arijs came across a May 2014 email where Du Plessis appears to contradict his earlier testimony to the courts.
Writing to his debt-recovery colleagues, Du Plessis discusses various options for recovering the bank’s roughly R20 million exposure to both Shock Proof and Lighthouse. He proposes accepting an offer from Arijs and partners for R12 million for Shock Proof, adding that this should avoid any liquidations costs as well as any issues “in respect of us being a shareholder, director and creditor”.
That is an admission that the bank not only flouted the Banks Act, but also confirms the existence of a “composite agreement” that it had earlier denied existed, says Arijs’s affidavit.
The email appears to put the bank rather than the SPV (Holdco) at the centre of the scheme. It also looks like perjury, as Du Plessis claimed before various judges that there was no link between the bank and Holdco, and that there was no composite agreement. If there is a composite agreement, argues Arijs, then the sureties the bank is trying to claim are null and void.
No ‘composite agreement’
In previous court filings, the bank sought to demolish Arijs’s claim that there was a composite agreement comprising the Shock Proof and Lighthouse shareholders’ agreements, the JV and loan agreements between Arijs and the bank, and various other oral or tacit agreements. The argument claiming there was a composite agreement was thrown out by Judge Nichols in the Cape High Court in 2016, but this was before Arijs discovered the above-mentioned email and other documents that contradict its earlier claims before the courts.
Claims of oppressive conduct
Arijs also claims this fits the definition of “oppressive conduct” by a shareholder in terms of the Companies Act. He argues in his court papers that the bank contrived the preference share scheme behind the backs of the minority shareholders, which is the kind of conduct Section 163 of the Companies Act seeks to eliminate. One group of dominant shareholders may not act against the interests of others.
There are several other oddities surrounding the case.
Louis Schnetler and Theunis Bosch, at the time employees of FirstRand Bank (RMB’s parent company), purported to act as directors of the companies, though no resolutions or letters of appointment by the bank have yet surfaced. This in itself would be a violation of the Companies Act.
What later emerged in the process of discovery is that Holdco had issued preference shares and ceded the rights to wind up the property assets to its parent company, RMB Investment and Advisory, which owns 92.5% of Holdco (the other 7.5% is owned RMB Co-Investment Trust), establishing a direct line between the bank and the SPV – something the bank has repeatedly denied existed in various court cases. FirstRand Bank and RMB directors were discovered to be trustees of RMB Co-Investment Trust.
That the RMB directors are accused of concealing all of this from Arijs and his business partners suggests they are in violation of their fiduciary responsibilities to act in the best interests of the company, not to mention the multiple violations of the Companies Act, shareholders’ agreement and the Banks Act.
Delays in development
The bank is also accused of deliberately delaying the development of the two Plettenberg Bay properties, by demanding changes in design and contractors. This, argues Arijs, lends credibility to the claim that the project was never intended to get off the ground in the first place. In a September 2011 meeting, Arijs and his partners were rudely informed that the bank had taken a decision two years earlier to withdraw from the property market. Two years earlier means the bank would have decided to exit the property market around 2009, yet this was precisely the time it was green-lighting the Plettenberg Bay developments.
The question then arises, why did the bank not simply sell its 50% share in the two projects and move on? A reasonable person might conclude that the bank is entitled to change its mind and sell its interests in the projects, but it appears RMB was not keen on this either. Arijs approached Investec to sound it out on taking over RMB’s interests and loans in the project.
Investec was reportedly interested until it received an email from RMB’s Schnetler effectively spiking any prospect of selling its interests in the deals.
At this point, it appears RMB resolved to liquidate the property development companies. Arijs alleges that none of this makes any sense unless you understand the bank was trying to hide the existence of an unlawful preference share scheme intended to benefit senior bank executives.
RMB has yet to file its plea affidavit in the latest case. Moneyweb will file a follow-up when it does. RMB has also accused this writer of being exploited by Arijs to advance his “questionable intentions”. This allegation is denied.
The bank also suggests Arijs disrespected the court by failing to turn up at a hearing last year. This should be put in context: Arijs has had no fewer than four sets of lawyers over the years who deserted him at the steps of the court, citing different reasons including conflict of interest.
This is not an uncommon problem facing anyone challenging the banks and appears to have little to do with the merits of the case.
Arijs says RMB may be better positioned to explain why so many of his lawyers have run for the hills whenever a court date looms.
That his case has merit has been confirmed by three sets of lawyers, including senior counsel, who at various times were engaged by Arijs.
“Rand Merchant Bank (a division of FirstRand Bank Limited) is aware of the accusations made against the bank by Fred Arijs relating to property developments in the Plettenberg Bay area. These property developments never progressed for various commercial reasons.
“Mr Arijs is aggrieved about RMB’s decision at the time not to advance senior debt to the developments, after RMB made the decision that the projects were not commercially viable.
“Mr Arijs and RMB are currently engaged in litigation. The trial date was set for 9 May 2019 and Mr Arijs had the opportunity to testify publicly about his allegations but failed to attend Court. He was punished with a punitive cost order by the judge for his disrespect for the judicial system. His senior counsel also resigned a few days before the trial on the basis that Mr Arijs’s case had no merit.”
Arijs says he did not appear in court because he was dropped by his lawyers just before the case was to be heard.
He adds that the costs order issued was an ordinary costs order (which is normal in cases of non-appearance) and no punitive costs order was issued.
“RMB also conveniently fails to address the latest summons issued,” he says.
Timeline of events
- 2007: RMB approached Arijs and his partners with a view to codeveloping two properties in Plettenberg Bay. JV and shareholders agreements signed on November 13, 2007.
- 2009: Two JV companies, Shock Proof Investments and Lighthouse, were set up to develop the properties: 50% was held by Arijs and his partners and 50% (plus one vote) by RMB Property Holdco 1, an SPV set up specifically for these developments. Arijs signed surety for R4.5 million in respect of loans extended by RMB to Shock Proof. Arijs and another partner signed sureties of R6 million each in respect of loans extended to Lighthouse (this claim was later dropped by the bank).
- 2010-2011: There were delays on the project. FirstRand/RMB fell into in breach of the shareholders’ agreement by failing to service its portion of the loans. Arijs and his partners continued to service their portion of the loans.
- 2011: FirstRand notified Arijs that it had made a decision to exit property developments two years previously, around the time the projects were launched and agreements signed.
- 2012: FirstRand/RMB commenced liquidation proceedings against Shock Proof and Lighthouse. The loans were called up and Lighthouse was liquidated on June 21, 2012. FirstRand/RMB claimed R14.6 million and was the only creditor. In January 2012, the bank decided to write off its equity and loan facilities in Lighthouse – total value about R20 million – but decided to pursue recovery of its equity and loans in Shock Proof, so decided to claim R4.5 million limited surety from Arijs.
- October 2012: The Master of the Cape High Court convened a Section 417/418 inquiry in terms of the Companies Act to, among other things, determine whether any of the directors could be held liable for the demise of the company. Arijs and his partners were keen to interrogate bank officials about how the bank came to its decision to close Lighthouse down. Arijs’s attorney Fred van der Westhuizen was sanctioned by Judge Blignaut for meeting privately, and without the bank’s attorneys present, with the Master of the High Court, as this was deemed prejudicial to the bank. Judge Blignaut set aside the Master’s decision to convene a Section 417/418 inquiry, thereby forcing Arijs to pursue his case through the courts.
- 2014: Arijs brought an application in the Cape High Court, arguing that the loan agreements could not be separated from the other agreements (the loan, JV and shareholders’ agreements). He attempted to argue that all agreements with the bank should be consolidated and viewed as one, which would render his sureties null and void. Arijs contended that he was signing surety without the bank having disclosed that it had ceded the rights to wind up the companies to another bank entity called RMB Investment and Advisory. The bank denied any link between RMB Property Holdco 1 and the bank (which Arijs later found to be untrue). Arijs lost the court case.
- 2018: In the process of discovery, Arijs learnt of the existence of a hidden preference share scheme that his lawyers advised was unlawful. He applied to court to amend his pleadings reflecting this new discovery. Judge Nuku in the Cape High Court ruled that the matter was prescribed (out of time) and rejected the application.
- 2018: Arijs brought an action to compel the bank to supply documents related to the loans, including credit approvals, resolutions authorising the appointment of directors, and documents related to the preference share scheme. The bank supplied the required documents in phases between May and September 2018. Included in this bundle of documents is what appears to be an admission by the bank that it had misled the court about the link between Holdco and the bank (placing it in breach of various agreements).
- May 2019: Arijs instructed his attorney to amend the Shock Proof pleadings in light of the discovery of alleged perjury. The attorney, Michael Lombard, failed to file papers. The court awarded costs against Arijs to the tune of about R289 000 and then commenced sequestration proceedings against him.
- January 14, 2020: The Cape High Court sequestrated Arijs.
Arijs says he has never had an opportunity to argue the merits of his case, despite eight years of trying.