Vox Telecom CEO Doug Reed accused by Leigh of gambling with shareholders' money, and worse.
After yesterday’s broad questions, Russell Leigh invited more in-depth discussion. I took the opportunity to dig deeper into the biggest financial scandal of 2008 with the man who until now hasn’t been prepared to engage in a public forum. What he is alleging is dynamite. Leigh’s version of the truth paints Vox Telecom in a most unflattering light and uncovers a default by Regiments Capital and provides inside information on roles of the Financial Services Board, Ernst & Young, Simmers and others.We’re still in e-mail only discussion. So what follows are Leigh’s answers to a list of questions. I’m expecting that we will engage in some follow ups over the next few days. For those only now stumbling onto the story, Dealstream was a derivatives trader that went into liquidation three years ago, with losses for thousands of clients running into hundreds of millions of rands.
HOGG: After the collapse the FSB claimed that it had instructed Dealstream to stop making misleading claims. If so how many times was this done and what sanction was threatened?
LEIGH: I remember the FSB speaking to us once, we explained the situation to the tee, implored them to come and visit us, do a full audit and sit on our desk and go through our processes (I have all this in email exchanges). They called us back saying they approved everything as we were a SAFEX derivatives broker regulated by JSE. They had been prompted to call us from a complaining client, a lawyer who owed us money on a margin call and was trying to attack validity of our claim. They had asked us to stop trading in unlisted securities without an FSB license and when we explained our situation they gave us approval.
HOGG: After the collapse it emerged that Dealstream’s registration with the FSB as a financial advisor had been cancelled. Were you aware of this and if so when?
LEIGH: We never actually ever made an application to become an FSB financial advisor, we were intending to open up a new line of business for which it was required. When you tell the FSB that you want to apply, they give you an application number and send you the documents. Due to volatility of financial markets from mid-2007 onwards, we never expanded our offering from being a SAFEX regulated derivatives broker and we never submitted an application.
HOGG: The FSB claims since its formation in 2004 no financial accounts were prepared by Dealstream. When was the most recent set of audited accounts produced?
LEIGH: Never. Although we had signed off provisional accounts from our auditors for the first two years. I don’t know why they were not submitted by them as final. Our systems actually gave us a real-time picture of the company’s financial situation, so they were easily enough done.
HOGG: In its report the FSB said R134m was “missing” from Dealstream clients’ accounts. What happened to these funds?
LEIGH: Absolutely all clients’ funds at Investec went out to RMB’s SAFEX clearing account.
HOGG: Vox Telecom says cash of R30m held in trust on its behalf also disappeared. Its MD Doug Reed said in a recent interview with me that the losses were “R60m maybe more….” How was this money lost?
LEIGH: Vox gave us cash and shares to in their words, “boost your capital” as a result of a margin call against various Vox directors, staff and their family as a result of their own trading and failure of the Vox share price below 212c. A margin call is lost money paid to replenish lost equity. The capital was also given to Dealstream to finance a share buy-back program that was losing money for them. Did anyone ever ask them this question or ask them why DS had that money?
HOGG: Did the Vox executives lose their money gambling on other shares? How did the relationship with Vox’s executives work? Was there a similar relationship with the executives of Simmers?
LEIGH: Vox and Simmers are really two very different stories.
Vox executives, staff and their families lost all the excess capital we wanted them to hold with us as a condition for us leveraging their Vox shares by trading many other shares and their own shares in the market.
Simmers was just one share in which many of our non-Vox clients and many Vox executives, employees and their family lost their capital. Simmers was introduced to us by ex-VOX FD, Mike Von Holdt. His father Chris Von Holdt had initially made a lot of money buying Simmers at Dealstream and instructed Mike to buy some. On the day Mike instructed us to follow his father and buy Simmers, he made maybe hundreds of thousands and possible millions on the transaction. That presumably hooked all his Vox colleagues in because they all bought and that’s partly how they lost their capital. In 2008, Investec share price halved, Anglo American had a R300 trading range so losses were made everywhere by Vox people.
HOGG: Doug Reed says that you met with him on the day you left the country, assuring him everything was fine. What is your version of events?
LEIGH: I told him that the Friday before I had met with RMB and that they had agreed to allow us time to try and collect on our debtors and Vox needed to come through on the commitments to recapitalise their positions with DS. He asked me what I needed and I explained that to start, he needed to pay for a parcel of 12m Vox shares, which he agreed to do at 190c the next morning. By the way, the curator told me this transaction was not booked to Vox and it has been therefore been apportioned to the loss that DS clients have had to absorb. He understood that the money he had sent us to recapitalize his positions with us was spent money and sitting at RMB. He knew that his shareholder Regiments Capital had defaulted to us causing us extreme pressure and he knew we were working through the weekend with Regiments’ Eric Wood and Litha Nyhonyha so that they could make a payment to us. He knew we both faced a very fluid situation based on his share price and that the share price was hanging at a precipice – if he intimated to you that we had a meeting where everything was solid and fine then he is delusional because it’s a matter of record that above 200 he was solvent and below that everyone known to anyone at Vox was insolvent.
HOGG: RMB’s report states that on September 2, 2008, Dealstream was unable to meet its margin call. Yet the bank only put Dealstream into default on September 22nd . What happened in these three weeks?
LEIGH: During the period you mention we were given time to collect from our debtors, there had been some big positions on SAFEX which were going to be refinanced by the owners. We were also given time to unwind our positions on SAFEX thereby reducing risk. As I mention above, DS’s solvency status was extremely fluid depending on live market prices, we were given time by RMB to bring risk into acceptable levels and to collect on debtors.
HOGG: What was Saul Cohen’s relationship with Ernst & Young at the time that he was sitting next to you every day (as you explained yesterday). Ernst & Young claims that it sold out its minority stake in Dealstream before the collapse. If so when? And if that was the case why was Saul still so closely involved with Dealstream?
LEIGH: I am not sure about Ernst & Young’s sale of its stake in the fund or the fund manager. IDC and Ernst & Young where shareholders in the Argil-IDC fund that owned 50% of Dealstream. As I understood, Saul Cohen was an owner of the fund manager that managed the fund. In any event he was a non-executive director of Dealstream.
HOGG: After the collapse Saul claimed “We (presumably E&Y’s Argil VC fund) were always under the impression that clients’ positions were protected and their funds segregated. You rely on what you are told. ” Why would he have believed this? Were Dealstream clients’ trust funds were lumped together in a pool or segregated?
LEIGH: He could only mean that he believed that client money that RMB was holding in the SAFEX margin account as a result of their daily margin call against DS would be protected and segregated by RMB at close out.
HOGG: Please could you explain how the Dealstream clients’ trust accounts functioned? They were opened in the client’s name but did Dealstream have carte blanche over the funds?
LEIGH: Opened in a client name, we had a mandate to pass the funds over to SAFEX margin account at our clearing bank RMB or other such accounts that we had at Peregrine Securities at earlier some stage.
HOGG: Reports after the collapse state Dealstream had 2 700 clients. Roughly what percentage had exposures to Vox and Simmers? Were they all long?
LEIGH: I don’t know this number. By close of business we had been given time to unwind positions and reduce risk as I said above, so at close our book was left with that which was taking longer to unwind. Vox was held by directors and we were having a lot of trouble executing a close out on the FD, MD, CEO and every other key person at Vox.
HOGG: Why was Dealstream and its clients so heavily exposed to Vox and Simmers? What was it about the fundamentals of these companies that made them so appealing?
LEIGH: Simmers: we had numerous investor presentations about how it was under valued based on the value of it’s reserves and the value of their listed uranium subsidiary in Toronto. Every quarterly result came with a promise of hitting better production on the next and the potential there was significant. However, it’s not as much as what we thought of Simmers as to what our clients thought. Many of them came from people who knew the Watsons. When our clients are wrong, DS is liable for their margin call by 12pm and we’re left chasing them for it. As far as I can remember, Barry Sergeant wrote a report about some mining asset where the reserves and reserve model was very wrong but he liked Simmers. Whatever the case, Simmers was theoretically supposed to be able to produce a lot more than they were doing.
I don’t think Dealstream had anything to do with the internal situation at Simmers. I believe it really had to do with the fact that the pile of rock or the hole they owned didn’t amount to any real value in the time frame investors needed to support the share price. Management were also frustrating shareholders by executing zero cost collars which resulted in a flow of equity into the market on delta, that provided excess liquidity to a planet that was under a liquidity crisis.
Vox: I never really understood the business at all and initially I was always short or trying to be short of it. If I bought it ever, it was based a short term trading buy. There is an old saying in banking, when you owe the bank R1m they own you and when you owe them R1bn, you own them. When Vox universe of people suddenly owed DS hundreds of millions of rand I decided to engage management as to what was going on with it. Thereafter, I had a very close relationship with Tony Van Marken and Douglas Reed for two years. I had a single track mind with them irrespective of the business I didn’t really understand: I wanted to see them improve the quality of their shareholders. Regiments Capital approached me to try and get a significant (-+10%) stake of Vox in the 212c placement and Mvelephanda also bought in. At the same time Regiment brought along the PIC and the IDC. TVM spoke to me a lot about how other Stellenbosch based investors were wooing him and how Vodacom Business was always eyeing them and there were opportunities with Didata who could have been convinced of a strategic alliance of a voice business to compliment their 100% data business. TVM convinced another wealthy individual to buy a stake. We understood the PE was high but new earnings were going to bring it down and its client base and infrastructure were becoming more and more valuable and impossible to replicate. When the PIC bought Vox we decided to put some client money into it where we had a mandate to do so – it was a leap of faith. However, as I said what DS did with Vox is immaterial in respect to what our clients own holdings in Vox and how they spent their equity with us which was supposed to be used to protect their holdings in Vox.
HOGG: At the time of the default on September 22, how many of Dealstream’s clients had positive balances in their trading accounts? Did any get back funds from their trust accounts?
LEIGH: I have tried to find out but I don’t know the status of this at all, the liquidators are not communicating with me at all since meeting with me in 2009. I really wanted to work with them and the curator from day one as there were debtors who could have under moral suasion alone agreed to pay what they should have. There are debtors who know their debts and who are some of the wealthiest people in South Africa today and some of the biggest sports heroes and they are in default today. Part of the irrationality of the FSB and JSE I alluded to yesterday is based in the fact that once they became aware of DS’s solvency issue and our unpaid margin, there was no crisis meeting to try and avoid the melt down that occurred. They went straight for our throat. The JSE even divulged to a private client of ours what our liquidity position was while RMB was working with us to help improve our liquidity. This caused the panic that resulted in the client bringing a mob to the office, assaulting staff and causing us to close down at a time RMB apparently wanted us to try improve our risk profile through normal operations. From them on, they never asked me for anything more, they wanted their bad guy and did not want to talk to me.
HOGG: There are a number of reports stating that Dealstream traded in CFDs. Was this the case or did you only trade in Single Stock Futures?
LEIGH: All of DS’s business was in listed JSE single stock futures. DS business was a trading system that allowed clients to execute via DMA into the JSE and book all transactions as Futures!
Let me explain: the single stock future price of Anglo American looks very different to the Anglo American share price because of financing and dividend assumptions in the future’s price. Also, there is almost zero trade in SSF’s on Safex. All trade is in underlying shares on the JSE which are then changed into a future by essentially changing the delivery date to a future date on the JSE transaction. Trade occurs on JSE and then a transaction is booked as a future in SAFEX. SAFEX rarely actually transacts futures with buyers and sellers. This mechanism works very well except for the fact that a future price takes into account a dividend assumption. If a company changes its dividend, the broker (DS) or the future underwriting bank can be very exposed to each other for that change in dividend. DS had to sign a supplementary dividend swap agreement with its broker which gave mutual protections to each other. This is not efficient so SAFEX starting allowing us to book the two components of the future separately: the underlying share price future and the dividend future. This is effectively a CFD. This is how our website marketed our CFD’s. Gist was that we advertised that trades were DMA into the JSE and booked as SSF’s and which the client could have the option of viewing in our systems as a CFD with the underlying share price, dividend and interest components of the SSF viewed as separate items – which is essentially a CFD.
HOGG: On last night’s radio show David Shapiro said Dealstream’s administration was in a mess. Your comment?
LEIGH: That’s a cheap shot because it doesn’t matter how good administration is if its 2008 when market volatilities where at unprecedented levels and we have 1000 margin calls before lunch, worth a multiple of our capital base. DS was a spectacular failure only because it was first a great success because DS offered a good service. David had no insight into DS operations but I do understand where he is coming from. When I was trying to put DS together a mutual friend tried to ask David to join DS as a founding partner. In all our meetings, David had said that one thing that was important was to get administration right and it was a central theme to him. I think he is and was saying back in 2004 that with all the best of intentions you are going to fail if administration is bad. DS was set-up with the best of intentions and I think dealing with 3000 clients with a staff of under 20 we did very well in terms of administration. We knew our exposure every second of the day. We executed hundreds of transactions every day and which were booked, matched and margined. It was a fireable offense for our staff to leave the day without a completely matched trading day. We were dealing in complex instruments which required a formula to calculate their value and rounding off something to five decimal points rather then 2 had the difference of millions of rands. From mid 2007 until late 2008, financial markets faced a continuous tsunami of unprecedented volatility that broke every model for risk management. The issue was that we would close the day as a highly solvent concern and open the next day with 500 clients being under margin call and by lunchtime 1000 and we would close any day at various states of liquidity. As long as the margin call came in we were liquid and the week after the weekend Merrill Lynch collapsed the volatility became too much. It wasn’t as much as an administration issue as it was an issue of risk management with a book geared up too much on illiquid stocks in a liquidity crisis that took out most global brokerage houses.
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If anyone knows the whereabouts of Russell Owen Leigh in Israel - kindly let us know. There is a reward available for his capture.
hopefully after Osama Bin Laden and Gaddafi, this one wont be too difficult to hunt down.
www.twitter.com/dealstreamfraud
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