Gold Fields' Shares Drop amid Various Allegations

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Gold Fields' Shares Drop amid Various Allegations

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• As the JSE's all share index has claimed record
  highs almost weekly since the beginning of the
  year, shares in mining company Gold Fields have
  halved in value on the back of a struggling gold
  price and heightened labour tensions.
• But besides these factors, which affect the gold
  industry as a whole, Gold Fields, Africa's
  second-biggest miner, is also trying to fight off
  the US Securities Exchange Commission's (SEC)
  investigation into alleged corruption and bribery
  activity related to a black economic empowerment
  (BEE) deal concluded three years ago.

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• Last week the SEC, which regulates companies
  listed on the US stock exchanges, confirmed that
  it was investigating whether Gold Fields was in
  contravention of the US Foreign Corrupt Practices
  Act (FCPA) after the company awarded R2,1bn worth
  of shares and cash payments to senior leaders of
  the ANC, as well as members of parliament and
  people linked to President Jacob Zuma, as part of
  a BEE deal announced in 2010.
•  
• The act authorises the prosecution of entities
  and individuals suspected of making payments to
  "foreign government officials to assist in
  obtaining or retaining business", says the US
  department of justice on its website.
• The law, passed by Congress in 1977, has
  jurisdiction over companies based anywhere in the
  world that do business in the US - including
  having a listing or raising funds.

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Sibanye Gold's empowerment deal

• Gold Fields has American depositary receipts
  listed on the NYSE Euronext, which falls under
  the regulatory authority of the SEC, and
  consequently the anti-bribery provisions of the
  FCPA.
•  
• Gold Fields unbundled most of its SA assets into
  Sibanye Gold earlier this year in a move meant to
  hedge the company from the risks associated with
  operating some of the world's deepest, most
  dangerous and labour intensive gold mines.
•  
• The only SA operation to survive was South Deep,
  a mechanised mine with about 66 of the group's
  minerals in reserve. Gold Fields' other
  operations are in Ghana and Latin America.

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• It is alleged that the company awarded shares to
  people connected to the SA government to secure
  mining rights in SA.
• Gold Fields announced the BEE deal early in 2010,
  and in August that year received its new-order
  mining rights for its South Deep assets.
•  
• Members of the BEE consortium were awarded free
  shares and an upfront "dividend" of about R73m as
  part of the deal. The BEE deal was a prerequisite
  of the SA government for the granting of
  new-order mining rights to South Deep mine, which
  is about 45km south-west of Johannesburg.

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Politicians getting benefits

• The company recently admitted that ANC chairman
  Baleka Mbete holds a stake worth R25m in the
  Invictus Gold consortium, which owns 9 of Gold
  Fields' largest asset, South Deep.
•  
• Mbete served as SA's deputy president for a year
  until May 2009 and as speaker of parliament from
  2004 to 2008.
•  
• At least two other members of parliament at the
  time of the deal - or their proxy representatives
  - were named as beneficiaries of the R2,1bn deal,
  as was Jerome Brauns, a lawyer who had
  represented Zuma in court. The son of Mendi
  Msimang, the ANC's former treasurer-general Dudu
  Myeni, the executive chairman of the Jacob Zuma
  Foundation and deputy president Kgalema
  Motlanthe's life partner are also listed as
  beneficiaries.

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• In addition, Gold Fields hired Gayton McKenzie
  and Kenny Kunene, who had been convicted of
  robbery and fraud respectively, to organise the
  transaction, paying them millions in shareholder
  funds for doing so.
•  
• The SEC has fined large international companies
  billions of dollars for corrupt behaviour.
  German-based Siemens has been fined in the past
  and it now has drug makers Novartis and
  GlaxoSmithKline in its spotlight for alleged
  corrupt practices in China, where they are
  accused of hiring relatives of influential
  politicians to improve their chances of doing
  business in that country. Retailer Walmart is
  also being investigated for its business
  practices in Mexico.

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Pressure placed on Gold Fields says Holland

• Earlier this year senior executives at Gold
  Fields seemed to acknowledge that they might have
  engaged in activity that would not pass FCPA
  scrutiny, or even SA's own Prevention and
  Combating of Corrupt Activities Act.
• Former Gold Fields chairman Mamphela Ramphele
  told Business Day in March that government had
  "shoved the list of some" Invictus shareholders
  down Gold Fields' throat "with an ultimatum that
  if the preferred individuals were not taken on
  board, it would be denied a mining licence".
• Chief executive Nick Holland, who declined to be
  interviewed by Financial Mail, has also said the
  company was under pressure to include certain
  people in the deal.

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• Holland told Business Day there were certain
  people at the department who had decided they had
  a lot of power and authority and were going to
  wield it. "We got into a position where we were
  delayed being granted the mining right." Gold
  Fields had to go along with the demands to
  continue being in business.
•  
• Though the spotlight has fallen squarely on the
  company's management team, questions remain about
  what role the board of directors played in
  landing Gold Fields in such a predicament.

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Questions remain unanswered

• Did the independent board members, whose job it
  is to oversee management, ask the right questions
  and sufficiently scrutinise the deal? Whose
  interests were they looking out for when they
  recommended that investors approve the
  transaction? Did they exercise the due care and
  diligence vested on them by the Companies Act
  when they approved the transaction? And why did
  they agree to hide the names of most of the
  beneficiaries of the deal from the public,
  including the company's own investors?
•  
• The Companies Act clearly states that the board
  must place the interests of the company above
  anything else, including that of management.
•  
• But the deal's inclusion of parliamentary policy
  makers and senior politicians, including those
  linked to the presidency, had the potential to
  severely undermine the country's BEE policy and
  carried moral and legal risks for the company -
  something the board of directors should have
  flagged and scrutinised.

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• The company's chairman, Cheryl Carolus, sent the
  FM a statement through public relations company
  Brunswick, saying that the board, when examining
  the BEE deal, received information from a range
  of sources and advice from a number of legal and
  other advisers who collectively influenced its
  decisions.
•  
• "The board has acted deliberately and
  appropriately and in full compliance with the
  law," says Carolus.
•  
• The paradox is that she, like Ramphele, made a
  name for herself as a freedom fighter and
  political activist who championed clean
  governance and transparency.
•  
• The FM sent Gold Fields a list of questions
  inquiring whether individuals with
  well-publicised histories of fraud, robbery and
  corruption were deemed to be best qualified to
  handle billions of rand in investors' money. The
  FM also asked the company to name the government
  officials who allegedly forced it to choose
  certain beneficiaries for the deal and to state
  the benefit or contribution those individuals
  brought to the company.

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Payments questioned

• Also, why did Gold Fields deem it necessary to
  pay out R73m in cash to these beneficiaries in
  2010 when they had never contributed financially
  to the company in any way?
• The only response was the press release from
  Brunswick and the fact that neither the board nor
  management was prepared to speak to the FM
• The SEC probe raises further uncomfortable
  questions on whether the board was complicit in
  the alleged corrupt activities for which the
  company is now being investigated.

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• Some investors are willing to give the company
  the benefit of the doubt. "It is important to
  remember that the SEC accusations against Gold
  Fields are accusations at this stage there is no
  proof yet," says David Couldridge, a senior
  investment analyst at Element Investment Managers
•  
• Regarding Holland's claims of having been
  pressured by government into accepting
  politically connected people into the deal,
  Couldridge says shareholders are never privy to
  the goings-on behind the scenes, where
  negotiations for licences happen. "You don't know
  what pressure is being put on management. As a
  miner, if you have no mining rights, you have no
  business," he says.
•  
• The department of mineral resources has
  consistently denied any wrongdoing by its
  officials. "The department participated and
  co-operated fully during the investigation by
  Gold Fields' independent attorneys, and
  articulated the role of the department, as well
  as the administrative processes that were
  followed to convert Gold Fields' old-order mining
  rights in respect of its South Deep mine," says
  spokesman Ayanda Shezi

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• Making no attempt to answer the FM's questions
  sent to the department, Shezi said "all the
  questions" being asked by the media were put to
  the department during the investigation by a US
  law firm hired by Gold Fields to probe the deal.
• "Nothing untoward has been found by the
  appointed law firm in relation to the
  department's role, or any of its officials, in
  the conversion process," says Shezi.
•  
• Last year, however, Holland named individuals in
  the department, including former deputy
  director-general Jacinto Rocha, as those who had
  unfairly pressured him into what now seems
  illegal activity. Rocha told Business Times this
  week that the department "never dictated to them
  on the nature of the deal and who to include".

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• Couldridge says that the legal and moral
  challenges facing Gold Fields will "now
  hopefully, at the end of it all, encourage a move
  towards a more sustainable form of BEE, where
  people who really need the empowerment benefit".
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