Steinhoff and Barak Fund Management (Barak) are two home grown examples.
Steinhoff a household investor name in the South African market lost an estimated USD 7 Billion amid allegations of severe accounting fraud,
four years on, no one in the Steinhoff scandal has been arrested and brought to justice.
Barak Fund Management has recently attracted headlines as a classic Ponzi scheme, taking investor money, misappropriating it, and replacing it with new money. The scheme is built on the notion that one would raise more new money than redemptions made by existing investors
Barak tried to do exactly this, they raised money promising investors attractive stable returns citing a gap in the trade finance market as their core business model.
The money they raised, they lent to companies predominantly in the African space as trade finance and bridge capital.
Perhaps their intentions were correct, but this quickly eroded into a myriad off financial fraud, loans extended to nonexistent companies, housing non-performing assets in different portfolios to conceal loses, falsifying returns, and corruption
On 6th April 2020, the fund suspended all subscription and redemptions citing the impact of Covid -19 on the underlying portfolio of transactions.
The truth is far more sinister Covid-19 had hardly any impact. Malpractices fueled by personal gain had become the order of the day.
Unexplainable loans, totally without financial merit were made to companies that could never repay, savanna group and multiple haulers in Kenya and a coal company in South Africa are examples of such reckless lending. There is extremely low possibility of recovery from these entities.
Corruption was rampant, allegedly Prieur Du Plessis the firm’s chief investment officer received cash and the use of a Mercedes Benz in exchange for a loan, Barak’s internal investigation resolved the matter by issuing a warning, but no external investigation was done in this matter that clearly had criminal overtones.
The institutional investors of Barak had a duty of care to see that proper due diligence was done while making their investments. The man on the street that invested in Barak would have taken comfort from the fact that institutional investors had capital in Barak and therefore it was a safe investment.As early as 2017, Barak’s financial misconduct was whispered about in financial circles, yet Barak continued to raise money from institutional investors.
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No investigation was conducted to determine whether investor due diligence processes were flawed, or alternatively other forces were in play.
The regulatory authorities failed to pick up irregularities early on to prevent an escalation into this crisis. Additionally, one needs to question the regulatory framework behind such institutions which are effectively governments and financial banking institutions.