Dealstream debacle wipes out Vox shareholders

Paul Vecchiatto
By Paul Vecchiatto, ITWeb Cape Town correspondent
Cape Town, 29 Oct 2008

The debacle surrounding the collapse of derivatives broker Dealstream Securities has wiped out the individual shareholdings of Vox Telecom CEO Doug Reed and director Jacques du Toit. However, analysts say the company's operations should be unaffected.

Vox now expects its headline earnings per share (HEPS) to be between 45% and 55% lower for the year ended 31 August, compared to the 7.67c reported last year.

The independent telecommunications operator says should the Dealstream events not have happened, HEPS would have been 20% to 30% higher than the previous year.

A trading update issued by Vox yesterday showed the extent of the damage done by Dealstream's demise after Rand Merchant Bank (RMB), a division of First National Bank, placed the derivatives house in default after it had failed to post margins with RMB in respect of open trades. RMB did this in terms of Johannesburg Stock Exchange (JSE) rules and in its capacity as a clearing member of the SA Futures Exchange, which is part of the JSE.

The statement says Vox has appointed an independent auditor and its legal team is investigating the alleged misappropriation of 27 300 000 shares that were issued by the company as a management incentive scheme.

Dealstream's portfolio is now being managed by RMB, and the Financial Services Board is investigating the company. RMB now holds a significant portion of Vox shares.

Lost gears

Originally, Reed held the equivalent of 26 710 000 shares in single stock futures (SSF) and another 5 167 219 in the form of contracts for difference (CFD). Du Toit held 22 993 493 in single stock futures contracts. Both now own no shares at all, a loss of hundreds of millions of rands based on today's share price. Other directors, such as Tony van Marken, have seen their holdings being reduced substantially.

SSFs and CFD are derivative instruments that trade on the underlying share. The initial share holdings are used as a margin, or deposit, and if the share price rises to an agreed level, then the holder can exercise a right to take control of more of the underlying share. However, if the price falls to below the margin, then the holding can be wiped out.

"What we have to look at here is that the operations of the company have been unaffected,” says Irnest Kaplan, MD of Kaplan Equity Analysts.

“However, there are two issues that we have to question. Firstly, the placing by individuals of such a large portion of their holdings into geared instruments, and secondly, the use of a new and 'unestablished' brokerage such as Dealstream."

Kaplan says the big problem with so many senior management people having had their incentives wiped out, is how shareholders are going to boost these people's morale.

Vox's trading statement says a new incentive scheme will be announced when it releases its year-end results around 19 November.

"It was a risky thing for those people to put their shares into such a position, but this should not affect Vox's overall ambitions to become a viable alternative telco," Kaplan says.

Vox could not comment further on the issue, as it is in a closed trading period. However, Reed previously said the company had emerged stronger from the collapse of Dealstream.

“Our fundamentals remain solid and unchanged and we're keeping focused on the work. This will in no way affect our delivery of services to our customers," he added.

According to I-Net Bridge, Vox's shares were trading 10c higher at 80c in midmorning trade, with more than 4.9 million shares having changed hands. The share price hit its annual low on 31 October 2007 of 61c.