The FSCA has welcomed the Financial Services Tribunal’s decision to uphold the reduced fine of R20 million, plus interest, imposed on former Steinhoff chief executive Markus Jooste for insider trading.
In a statement on Friday, the Authority said the decision related only to its insider-trading investigation. The FSCA will inform the public in due time of the outcome its enforcement process relating to alleged publication of false statements by several persons linked Steinhoff.
In its decision to dismiss Jooste’s reconsideration application, the Tribunal said: “There can be little doubt that the contravention of section 78(5) is as serious as it gets. Mr Jooste was not only the CEO of Steinhoff, a multi-national company, but he was also Steinhoff. He knew Steinhoff and the rights and wrongs within the company. If he, uninvited, advises three friends to dispose of their Steinhoff shares and to destroy his advice SMS’s, it shows, as Mr Marcus [counsel for the FSCA] submitted, that his actions were deliberate, premeditated, and calculated.”
In December 2021, the FST set aside the fine of nearly R162m the FSCA imposed on Jooste for contravening section 78(4)(a) and section 78(5) of the Financial Markets Act (FMA).
On 30 November 2017, Jooste sent an SMS to four people, advising them to sell their Steinhoff shares immediately. The SMS was sent days before Steinhoff alerted shareholders of its accounting irregularities and that Jooste had resigned, causing its shares to crash.
The FST found that Jooste did not contravene section 78(4)(a) because the information he provided in the SMS was “vague and imprecise”. But the Tribunal agreed that Jooste had contravened section 78(5) with respect to the messages he sent to three of the recipients.
The Tribunal also found that the R162m fine was inappropriate and ordered the FSCA to reconsider it.
Read: Tribunal overturns Markus Jooste’s R162m fine
A year later, in December 2022, the FSCA announced it had reduced the fine to R20m, which was some 88% lower than the original penalty.
Read: FSCA has another go at fining Markus Jooste
The Tribunal, in its decision handed down last week, said it accepted the submission by the FSCA’s counsel that one must “consider the likely effect on investor confidence if the CEO of a listed company can intentionally send a warning SMS to a few friends and associates, encourage them to sell their shares, tell them to delete the message, and yet escape serious consequences.
“Conduct of this kind, by its nature, undermines public confidence in financial markets and leads the general public to believe that the system is rigged and unfair. A penalty that is too lenient would result in investors concluding that South African markets are inadequately regulated and, therefore, vulnerable to abuse and manipulation.”
Jooste is unemployed
Counsel for Jooste argued that the FSCA had not given sufficient weight to his current circumstances. It said the Tribunal should consider that Jooste was last employed in December 2017, when he resigned from Steinhoff, and he has not earned an income since.
“While he was well paid when Steinhoff’s CEO, those days are long gone. Mr Jooste’s personal wealth was heavily tied-up in the fortunes of Steinhoff. It does not appear to be in dispute that MrJooste’s career in business is at end, having been replaced by a raft of well-publicised legal problems,” the decision quoted counsel as saying.
Jooste’s counsel also submitted that the FSCA should have given more weight to the “once-off” nature of Jooste’s contraventions; that he did not personally benefit from his conduct; and that it had no impact on the market. “Plainly, Mr Jooste is not a predatory inside trader habitually taking advantage of inside information in order to make a profit.”
The Tribunal said although Jooste did not benefit financially from sending the warning SMSs to his friends, two of them did benefit.
“This, by implication, caused loss and damage to others. Indeed, those persons who were ignorant as to the problems at Steinhoff, and who therefore purchased the shares sold by the two recipients, suffered substantial losses when the share price dropped dramatically. In other words, what they gained, the purchasers of their shares lost.”
The FST said some of Jooste’s submissions were “cynical in the greater context of things, such as that he is married and has one child living at home”.
Despite being invited to disclose his financial position, Jooste referred only to his last after-tax income from Steinhoff, which exceeded R100m for the tax year, the Tribunal said.
“Whether his legal problems and the destruction of his business career were self-inflicted or due to external factors over which he had not control are matters we are not called upon to speculate, since Mr Jooste did not enlighten us.”
Tribunal’s ‘reconsideration’ powers
Most of the Tribunal’s decision is not taken up with considering Jooste’s past contraventions and current circumstances. Instead, it deals extensively with the nature of the Tribunal’s “reconsideration” powers in the context of the Financial Sector Regulation Act, the Promotion of Administrative Justice Act, and case law.
The gist of the matter is captured at the end of the decision. Counsel for Jooste submitted that the FST was in as good a position as the FSCA to determine an appropriate penalty. But the Tribunal said that possibility could arise only if it believed the penalty was inappropriate, “but we have concluded that it is not – in fact, we consider it to be appropriate because it falls within the range of penalties that we would in any event have imposed”.
Earlier, the FST stated: “If the Tribunal were to conclude on a merit review that R19m or R21m were more appropriate, and decide to remit the matter, what is the Authority to do? One cannot rationalise any of these assessments. What one can rationalise is an interference based on a finding that the decision-maker did not act for substantial reasons, exercised its discretion capriciously, or exercised its discretion upon a wrong principle.
“The Tribunal must be able to inform the decision-maker, the applicant, the review court, and the public where the decision-maker had erred. Put somewhat differently, the Tribunal is not presented with blank page, and what it does is it ‘reconsiders’ the appropriateness of the imposed penalty.”
Dispute over the calculation of the maximum penalty
The decision also addresses whether the fine imposed on Jooste was appropriate considering the Tribunal’s advice to the FSCA – in its December 2022 decision – that the prescribed maximum penalties do not set a benchmark.
Jooste argued that the Authority did not heed the FST’s advice because the determination of the maximum penalty “was unduly prominent in its analysis” and the maximum was incorrectly calculated.
The Tribunal rejected the first submission, saying the FSCA did not use the maximum as a benchmark but determined the maximum permissible penalty. “It would hardly have made any sense if the Authority first determined an appropriate penalty and then sought to determine whether it could have imposed that penalty. It would be circuitous.”
Section 82(2) of the FMA states sets out how the maximum penalty for a contravention of section 78(5) should be calculated.
The first aspect of the calculation, in the context of the sale of Steinhoff’s shares occasioned by Jooste’s SMS, is the loss avoided by the recipients of the insider information.
Two of the three recipients of the SMS acted on the information. The FSCA calculated the losses they avoided by using the closing prices of Steinhoff’s shares on 4 December and 6 December 2017.
The Authority arrived at a maximum penalty of R24 352 318, which, the Tribunal said, was incorrect. The maximum should be R27 442 188.
Counsel for Jooste said that because there had been intraday trading in Steinhoff’s shares, the Authority should have used the average prices on the two days. In the result, the maximum penalty should have been R23 501 424.
The Tribunal said the difference between the FSCA’s R24.3m and Jooste’s R23.5m was “inconsequential” for the purposes of determining the maximum.
“These calculations relate to the legality of any penalty imposed or to be imposed, always bearing in mind that because a penalty is permissible, it does not mean that it is appropriate because, as we said in the first decision, the prescribed maximum penalties do not set a benchmark.”
Click here to download the Tribunal’s decision.
Another reconsideration application pending
Jooste has lodged a separate application with the FST for the reconsideration of two fines of R7.5m imposed on him by the JSE for breaching its Listings Requirements. The Tribunal heard the matter this month, and its decision is pending.
Will Jooste be extradited to Germany?
News24 reported in August that the judicial authorities in Germany were working on a request for Jooste’s extradition.
In June, the Regional Court in the city of Oldenburg issued a warrant for Jooste’s arrest after he failed to appear for the start of trial in April. He is charged with two counts of fraud.
Jooste lost his appeal against the warrant.
His German lawyer tried to convince the court that although Jooste wanted to attend the trial in person, he feared being arrested if he tried to leave South Africa. He argued that Jooste had promised South African authorities in late 2017 that he would not leave the country without their express permission.
The South African government has denied it had blocked Jooste’s passport.
According to News24, lawyers have warned that it will be an uphill battle for the German authorities to extradite Jooste without his co-operation.
The report went on to state:
While South Africa and Germany are both members of the European Extradition Convention, neither country generally extradites its own citizens.
Dr Julius Hagen, an attorney at German law firm Schlun & Elseven, told News24 that the extradition of a SA national to Germany would violate the principle of reciprocity.
“The principle of reciprocity states that the country requesting extradition also grants it to the requested country in similar cases,” said Hagen.
“Due to the fact that the German constitution prohibits the extradition of its own nationals to non-EU-countries, Germany would not grant a corresponding request of South Africa.
“Germany would be asking South Africa for a favour that would not be returned,” he added.
