Huge directors fined R10m

The Johannesburg Stock Exchange (JSE) has dismissed Huge Telecom's objections, saying two of the company's directors will have to pay a R10 million fine, in their personal capacity, for trading breaches.

Following a heated and protracted battle - which included threats by Huge to delist from the JSE - the bourse says it has considered the objection lodged by the directors, executive chairman Anton Potgieter and CEO James Herbst, and dismissed it.

On 7 November 2008, the JSE found that Huge's acquisition of 80 445 single stock future (SSF) positions constituted a repurchase of the company's securities and ruled that the transaction was concluded with related parties. The JSE also ruled that the acquisition was in contravention of section 85 of the Companies Act and fined the directors R5 million each.

The transactions in question took place between July to October last year, when Huge bought contracts for difference (CFDs) and SSFs representing 12.3 million ordinary shares in the 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.

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.

The JSE says it informed Huge of its final decision on 4 March 2009 and invited the company to make representations regarding the findings and an appropriate penalty.

On 9 March 2009, Huge informed the JSE that it accepted the JSE's final decision and, on 25 June, the JSE decided to impose public censure on Huge as a result of the breaches.

At the same time, Herbst and Potgieter questioned the time it took the JSE to pick up on the contraventions - asking why there was no word from the JSE during the initial four-month period.

Potgieter and Herbst also questioned the regulatory area in which the JSE based its ruling. They argued 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 had not looked at everything in its entirety, they claimed.

Herbst and Potgieter then informed the JSE on 17 April 2009 that they objected to the JSE's decision to impose a R5 million fine. Huge maintained these transactions did not constitute a related party transaction or a repurchase of shares, but rather a purchase of exposure to derivative instruments.

A final submission was sent on 30 September detailing the directors' objections, which the JSE dismissed today.