‘Çontinued listing of shares a clear danger’

A battle of two years between Trustco Group Holdings Ltd and the JSE over the Namibian company’s financials might come to a head this week, resulting in the group being kicked off the South African bourse on Friday.
Trustco on Wednesday filed an urgent application with the High Court of South Africa in Pretoria for interim relief to prevent the JSE from enforcing a decision to suspend its listing.
On Thursday, the JSE hit back with a counterclaim, disputing the urgency of the matter. Trustco’s urgent application “is simply the last roll of the dice in an extended strategy to avoid having to provide accurate financial information to the investing public”, the JSE said in its heads of argument.
“This is a case about a company, Trustco, whose financial statements cannot be trusted,” the JSE said.
Trustco’s shares, dual-listed on the Namibian Stock Exchange (NSX), ended Friday at 40c a piece, about 30c lower than when it listed on the JSE in 2009. The group's shares have been falling steadily since early 2019 when they reached a high of R16 a share.
The issue with the JSE revolves around the waiver of two loans by Trustco’s majority shareholder, Quinton van Rooyen – one of N$545.6 million and the other N$1 billion – as well as certain of Trustco’s Elisenheim properties.
HUSO SPARKLE
Between 2015 and 2018, Van Rooyen loaned Huso Investments - a company with diamond business aspirations in Trustco’s resources segment - N$546 million.
In 2018, Trustco bought all of Van Rooyen’s Huso shares. He was “on both sides of the deal: he was Trustco’s CEO and majority shareholder, and he was Huso’s sole shareholder”, the JSE said in its heads of argument.
According to the JSE, Van Rooyen's loan was initially classified as equity, meaning it was recorded as money he invested in Huso as a shareholder. However, by the time Trustco acquired Huso, the loan had been reclassified as a liability, or money that Huso owed him.
The sale of shares agreement between Trustco and Van Rooyen has an earn-out mechanism for Van Rooyen. “The mechanism boils down to this: Dr van Rooyen gets shares in Trustco if Trustco meets stipulated profit thresholds,” the JSE said.
A few weeks after Trustco acquired Van Rooyen’s Huso shares, he forgave the N$546-million loan.
According to the JSE: “Because Trustco had recognised the loan as a liability, it reflected Dr van Rooyen’s generosity in its financial statements as a gain of N$546 million.
“And so after this quick stroke of Dr van Rooyen’s forgiving pen, Trustco’s financial statements were made to look like Trustco gained almost half-a-billion dollars. Dr van Rooyen’s good deed did not go unrewarded: Trustco’s gain triggered his earn-out mechanism in the sale of shares agreement.”
GIFT OF GIVING
In 2019, Van Rooyen advanced a second loan of N$1 billion to Trustco.
“A few months later, Dr van Rooyen’s generosity struck again, and he forgave this loan too, resulting in a N$1-billion gain that Trustco recognised in its financial statements (and resulting in another reward for Dr van Rooyen through his earn-out mechanism),” the JSE said.
Trustco owns properties in Elisenheim. In its financial statements, Trustco reclassified the properties from inventory to investment property, justifying the reclassification on the basis that a decline in demand meant that it did not anticipate selling the properties for the foreseeable future.
According to the JSE: “The reclassification resulted in the properties being revalued upwards, increasing Trustco’s profitability. Trustco reported a N$693-million gain in the profit and loss account in its financial statements (or revenue of N$984 million against a cost of sales of N$291 million).”
SPOT CHECK
At the end of 2019, Trustco’s financial statements were selected for review under the JSE’s proactive monitoring review process. “This is, in effect, a spot check: the JSE reviews the financial statements of every listed company every five years,” the JSE said.
The JSE reviewed Trustco’s group annual financial statements for the year ending 31 March 2019, and Trustco’s interim results for the six months ending 31 August 2018. It referred the issue of the two loans and the Elisenheim properties to the Financial Reporting Investigation Panel (FRIP) - an advisory body to the JSE, consisting of a panel of IFRS experts. IFRS is short for a set of global accounting standards called the International Financial Reporting Standards.
“After considering all relevant information, including submissions on each issue from Trustco, the FRIP advised the JSE that, in its expert view, Trustco’s reporting of the loan issue and the property issue did not comply with IFRS,” the JSE said.
In October 2020, and after giving Trustco an opportunity to comment on the FRIP’s report, the JSE decided that Trustco had not complied with IFRS in respect of the loan issue and the property issue. Trustco objected to the JSE’s decision.
In November 2020, the JSE dismissed Trustco’s objection and directed the company to take corrective action by restating its financial statements.
According to the JSE: “Said differently, the JSE directed Trustco to reverse the gains it reflected in its financial statements after Dr van Rooyen waived the loans and after it reclassified the Elisenheim properties.”
Trustco then applied to The Financial Services Tribunal (FST) in South Africa to dismiss the JSE restatement decision. The FST dismissed the application in November 2021.
On 23 November, Trustco released a statement on the JSE, NSX and the OTCQX, saying it didn’t agree with the FRIP’s judgement. The OTCQX is the top tier of the three marketplaces for the over-the-counter (OTC) trading of stocks in the US.
Trustco had 180 days to bring a review application to the High Court in South Africa.
In its heads of argument last week, the JSE said: “Though Trustco is reviewing the JSE’s restatement decision and the Tribunal’s dismissal of Trustco’s first reconsideration application in its pending review, Trustco never applied for interim relief against the restatement decision (neither in the Tribunal nor in the High Court).
“The restatement decision thus has legal consequences unless and until it is set aside in the review.”
WARNING
Following the FST’s dismissal of its first reconsideration application, Trustco still refused to restate its financials.
On 13 December 2021, the JSE decided to suspend Trustco’s listing, to which the company objected.
According to the JSE: “Trustco indicated that its forthcoming financial statements, to be published about a month later at the end of January 2022, ‘would ... reflect the restatements that the JSE required’. With that assurance in hand, the JSE agreed to hold off on deciding Trustco’s objection.”
However, Trustco failed to restate the figures when it published its financial statements on 31 January 2022. The JSE accordingly dismissed Trustco’s objection to its listing suspension decision.
Trustco then went back to the FST, asking it to reconsider the JSE’s listing suspension decision, as well as for interim relief pending Trustco’s second reconsideration application. The next week Trustco also launched an urgent application in the High Court, asking it for interim relief too.
The JSE agreed that it would not suspend Trustco’s listing until the FST decided Trustco’s Tribunal interim relief application. With that agreement, Trustco put its urgent application in the High Court on hold.
On 13 July 2022, the FST dismissed Trustco’s Tribunal interim relief application.
“Having lost in the Tribunal, Trustco forum shops its way back to this [High] Court to resurrect its urgent application. Like urgent-court Groundhog Day, Trustco again asks for interim relief,” the JSE said Thursday.
The JSE stated: “Trustco lost that fight in the Tribunal. Res judicata means that Trustco does not get a do-over.” Res judicata is the principle that a cause of action may not be relitigated once it has been judged on the merits.
‘AVOID PLAYING OPEN CARDS’
Res judicata serves important purposes, the JSE said. It prevents the repetition of law suits between the same parties, the harassment of a defendant by a multiplicity of actions and the possibility of conflicting decisions by different courts on the same issue.
Trustco’s second bite at interim relief imperils each, the JSE said. “It ‘repeats’ the same law suit that Trustco lost before the Tribunal, it forces the JSE to meet and defend a ‘multiplicity’ of litigation fronts in Trustco’s determined effort to avoid playing open cards with the market, and it risks ‘conflicting decisions’ between the Tribunal (refusing interim relief) and this Court (granting interim relief).”
According to the JSE, Trustco’s chance to restate its financial statements has “now come and gone; the horse has bolted”.
“It follows that there is nothing left to interdict. For this reason alone, Trustco’s interim relief is incompetent.”
The heads of argument further stipulates a myriad of technical reasons why Trustco’s urgent application should be dismissed.
‘WORRYING’
According to the JSE, “Trustco has, at every turn, ignored and disregarded the authority of the JSE and the authority of the Tribunal”.
“The message that Trustco’s conduct sends to the market is as clear as it is worrying: listed companies can, through brute litigation trench-warfare, thwart their regulator and thwart the Tribunal, and continue offering their shares to the market despite non-compliance with IFRS,” it said.
Instead of correcting numbers, Trustco added words, the JSE said. “It buried some commentary about the JSE’s decision in the notes to its financial statements. But this is a regulated stock exchange, not a second-hand car dealership; buyer beware is not enough.”
“Financial statements are there to give the market reliable financial information to inform investment decisions. Trustco’s financial statements do not do that,” the JSE continued.
The stock exchange concluded: “The continued listing of Trustco’s shares on the JSE is a clear danger to the proper functioning of the market and to the investing public. The JSE is entitled to exercise its discretionary and polycentric statutory power to suspend Trustco’s listing.”