Massive fraud scandal hits Dimension Data

January 20, 2022 Siyabonga Mtangana

The Campus in Bryanston is the centre of an investigation into alleged fraud involving former senior executives at Dimension Data

Several former executives at Dimension Data are caught up in a fraud scandal following a forensic probe into the December 2019 sale of The Campus, its iconic head office in Bryanston, Johannesburg.

The developments have created a crisis for Dimension Data, putting the sale of The Campus in jeopardy. The company also risks losing its broad-based black economic empowerment (B-BBEE) rating.

This comes after Dimension Data’s parent company, Japan’s NTT, appointed the international law firm Herbert Smith Freehills to conduct a forensic investigation into allegations brought forward by a whistle-blower, TechCentral has learnt.

According to an anonymous source who leaked the details of the investigation to TechCentral earlier this week, the evidence from the whistle-blower was compelling enough to prompt NTT to appoint Herbert Smith Freehills to probe the matter.

It’s understood from the source that the report, which followed numerous interviews and a forensic analysis of hundreds of e-mails, has implicated several former Dimension Data executives in an allegedly unlawful enrichment scheme.

The developments are likely to prove a big test for newly appointed Dimension Data CEO Werner Kapp, who took the reins from the long-serving Grant Bodley on 1 April 2021.

Speaking to TechCentral on Thursday, a Dimension Data spokesman declined to name the executives concerned. However, the company said the former executives had failed to disclose their personal financial interest in the sale of The Campus. This has created a crisis for Dimension Data – and for parent NTT – because this disclosure is required under the Companies Act and “could affect the validity of the transaction”, it said.

TechCentral’s anonymous source said that if the transaction is reversed, it would also affect Dimension Data’s B-BBEE rating and its ability to attract clients as a result.

‘Defrauding NTT’

The source said: “The e-mails uncovered by Herbert Smith Freehills show how the implicated executives conspired to sell The Campus to [Identity Property Co] at a price well below its market value. Simultaneously, the implicated executives secured their participation in a separate but related entity that would see them profit handsomely from the undervalued sale of The Campus. Simply put, this amounted to the defrauding of the ultimate owner of The Campus, that being Dimension Data’s parent company, NTT.”

The Campus was sold to Identity Propco, a black women-owned firm led by Sonja de Bruyn, a well-known businesswoman who sits on the boards of companies including Remgro and Discovery Group. The Dimension Data spokesman said the Herbert Smith Freehills report did not implicate De Bruyn in any way.

A non-executive director of Dimension Data at the time – she resigned following a recent restructuring – De Bruyn recused herself from all matters related to The Campus transaction, the company spokesman said.

Asked whether Dimension Data intends seeking civil damages from the former executives and/or pursuing criminal charges against them, the company said: “We are in the process of taking legal advice that may affect other parties, including potentially the relevant executives. As such, we cannot divulge any further details of the report at this stage.”

For this reason, the company is also not prepared to name the former executives fingered in the report, he said.

In a holding statement issued exclusively to TechCentral following the publication’s enquiries into the matter, Dimension Data said it is “currently working closely with Identity PropCo to find a solution which achieves the original objectives of the transaction while preserving the interests of Dimension Data and Identity PropCo”.

Dimension Data said it first became aware of the former executives’ dealings when discussing the alignment of the company’s governance structures to what is in place across the parent group. “We have and will continue to make any statutory, regulatory or other necessary disclosures in consultation with our legal counsel,” it said.

The background

TechCentral conducted a detailed interview with former Dimension Data CEO Grant Bodley on 4 December 2019, in which he set out the complex details of the sale of The Campus and the associated empowerment transaction.

As part of the transaction, Dimension Data agreed to set aside 15% of its equity in its South African business, called Dimension Data Investments South Africa, for a new empowerment-based staff share scheme, which would also include selected white and black senior managers of the IT group.

The deals together would give Dimension Data 51% black ownership recognition under convoluted empowerment rules (though parent NTT would continue to control the asset). This would put the group in a stronger position to bid for major contracts, especially in government and the financial services sector, Bodley said in the interview.

Dimension Data agreed to allocate share option units to qualifying staff, which would vest in three years and pay out in seven years, subject to growth in equity value. Outside selected top managers, only black staff would be able to participate. The scheme was vendor-financed at a discounted rate.

“This is not a remuneration scheme. It’s part of our commitment to transformation,” Bodley said in the December 2019 interview.

The transaction resulted in Dimension Data climbing the B-BBEE scorecard rankings, from a level-4 to a level-2 contributor. But getting there was highly complex. This is how Bodley explained it:

In 2016, the generic B-BBEE codes were amended to provide for, among other things, something known as “continuing consequences”, which dealt with the so-called “once empowered, always empowered” principle.
Continuing consequences state that a company can claim 40% of ownership points from previous black ownership transactions after the shares have been sold by the black shareholders, but only for a period totalling the same name of years that the shares were owned by the black shareholders and provided that the shares were owned by those shareholders for a minimum period of three years and that value was created in their hands.
Dimension Data’s 2019 ownership scorecard benefited from previous transactions, which were concluded in 2004 and in 2012.
Then, under the “ownership” element of the BEE scorecard, there is something called the “flow-through principle”, which traces ownership measurement through the chain of ownership to a natural black person (and not a black-owned company).
A modified version of the flow-through principle, known as MFP, applies to a black-owned or -controlled company (the MFP company) in the ownership structure of a measured (broad-based BEE-verified) entity and allows for the participation of individuals that are not black at one tier of the chain of ownership and enables the MFP company to be treated as if it was 100% black owned — provided that the MFP company is at least 51% black owned and the MFP principle is applied only once in the chain of ownership.
Fifty-one percent of the participants in the Dimension Data employee share option plan would always be black employees, thus qualifying the scheme to be treated as if its participants are 100% black.

Then, on the sale of The Campus, Bodley explained in the interview that the BEE codes cater for the sale of shares to qualify for ownership if certain criteria are met, and these include a sale-of-assets transaction. This must:

Result in the creation of viable and sustainable businesses in the hands of black people;
Result in the transfer of critical and specialised and managerial skills and productive capacity to black people;
Involve a separately identifiable related business that has a) no unreasonable limitations or conditions with regard to its clients and b) clients or suppliers other than the seller;
Be an arm’s-length operational or outsourcing arrangement between the seller and the separately identifiable business; and
Be subject to a valuation by an independent valuation expert.