The Huge Group has come out firing against share repurchase allegations made by the Johannesburg Securities Exchange (JSE). The company has even threatened to delist, but the bourse has refused to be drawn into a war of words.
While the JSE has maintained the company has contravened its regulations, Huge states it single stock future (SSF) and contracts for deadline (CFD) transactions were “purchases of exposures to derivative instruments” and were, therefore, within JSE regulations.
The JSE's findings, on the other hand, state these repurchases constituted a related party transaction and are in contravention of its rules.
SSFs are futures contracts with the underlying assets being one particular stock. When purchased, no transmission of share rights occurs and they are traded on margin and so offer leverage. CFDs are contracts where the seller undertakes to pay the buyer the difference between the current value of an asset and its value at contract time.
Huge, which previously voiced its objections to the JSE's findings, has now taken its complaints further. CEO James Herbst says the JSE's actions amount to bullying and irresponsible behaviour.
“They'd effectively created a product with very little security, without the checks and controls and balances that one normally has with traditional debt. And I think they realised they had a problem and what they started doing was, in a perverse manner, trying to increase their security and, therefore, the call for 250% increases. And when this call came, we were then very aware of the various pitfalls.”
The transactions being questioned took place from July to October 2008, when Huge bought CFDs and SSFs representing 12.3 million ordinary shares in Huge Group, at an average of 360c each. In October, the company was notified the margins on its SSF contracts were being increased by 250% ‑ from 40c to 140c - and that it was being given 24 hours to provide the increased security.
Huge decided it could not afford the margins and its broker, Watermark, took possession of the shares. Watermark then took ownership of the shares, under the brokers' agreement, and - in turn - offered Huge the opportunity to buy back its shares following the conclusion of Watermark's transaction. Huge accepted the offer - acting under a mandate of the board to buy back its own shares. This resulted in Huge purchasing SSFs created from shares previously owned by Potgieter and Herbst.
No response
The JSE declined to respond to these allegations. Following the release of a statement by the JSE on its findings, the exchange stated that is all the information it would release “at this point in time”. The statement lays out the schedule of events which led to this point and stands by its earlier findings that Huge's transactions amounted to a share repurchase.
“The transaction constituted a specific share repurchase of the company's securities as defined in terms of section 5.69 of the JSE LR [listing requirements]. The transaction was concluded with related parties and the company's acquisition of the SSF positions is in contravention of Section 85 of the Companies Act.”
The statement also notes that, before deciding what action to take, the “JSE will invite the company and its directors to make representations regarding an appropriate sanction by the company and that action will be taken”.
Suspicious timing
Herbst and executive chairman Anton Potgieter question the time it took the JSE to pick up on the contraventions - asking why there was no word from the JSE in a four-month period.
Herbst states: “The JSE surveillance department is known as one of the best in the world, in terms of cracking share price. In that four-month period, we were never questioned at all about our trades in contracts for difference and that it was in breach of Section 85 of the Companies Act.”
Both Potgieter and Herbst are also questioning the regulatory area in which the JSE is basing its ruling. They argue the purchase of derivatives is not governed by Section 85 of the Companies Act and they were operating in a largely unregulated area - therefore, the JSE has not looked at everything in its entirety.
Herbst adds that findings by the JSE, and the manner in which investigations were conducted, would lead the company to consider delisting.
Huge shares
Huge maintains these transactions did not constitute a related party transaction or a repurchase of shares, but rather a purchase of exposure to derivative instruments.
“With no reasons why we shouldn't take the shares, as a company we took the shares. There was nothing abnormal about the price then. We have since obtained written opinion from senior legal counsel that supports the fact that this transaction was neither a related party transaction, nor a repurchase of shares.”
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Huge smarts from JSE rap
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