The Nene short
How Gupta-linked Regiments Capital may have scored over R100m trading on Nenegate
Not only did Gupta-linked Regiments Capital allegedly use inside information to make millions, it seems to have made this money off its client, the Transnet pension fund
President Jacob Zuma’s surprise sacking of finance minister Nhlanhla Nene at the end of 2015 sparked economic panic: the rand plunged to a record low against the dollar and even the normally steady bond market recoiled.
New evidence, disclosed here for the first time, reveals how one investment company, little-known boutique operation Regiments Capital, raked in at least R133m by trading on the turmoil. Related deals under investigation may have raised the total profit to as much as R500m as SA cycled through three finance ministers in just four days.
This is especially concerning since evidence uncovered by the Organised Crime & Corruption Reporting Project (OCCRP), a research group, shows that Regiments probably knew for weeks that the respected Nene would be dismissed in December 2015.
The firing appeared abrupt to the rest of the world. But weeks before Nene was dismissed, Eric Wood, then one of Regiments’ three directors, called a meeting with a senior manager at his firm.
"Nene is going to get fired," Wood told Mosilo Mothepu, according to an affidavit submitted to the state capture inquiry under judge Raymond Zondo and obtained by OCCRP. Afterwards, Wood sent a follow-up e-mail outlining how Regiments could profit from the looming dismissal.
The knowledge, worth millions to Regiments, came partly at the expense of a vulnerable group: pensioners of the state-owned railway and transport company Transnet. At the time, Regiments managed one of Transnet’s retirement funds and leveraged that position to make money from Nene’s dismissal, while setting up Transnet’s 50,000 pensioners to take a corresponding loss.
This is how it worked.
Regiments’ inside information on Nene allowed Wood to capitalise on the inevitable fallout by setting up a trade that would pay off if bond prices fell.
The firm invested billions of rand on a bet that the future value of the bonds would fall on a specific day: the trade data listed December 9 2015 as the settlement date — the day on which Nene was dismissed.
To execute that trade, Regiments needed an investor on the other side, an individual or institution that would bet the bond futures would rise. In other words, Regiments needed a foil for its big short on SA’s economy.
Enter Transnet. Thanks to machinations over the preceding years, Regiments had been appointed to manage Transnet’s pension fund.
This meant that when it came to the Nenegate bond trade, Regiments was able to set the fund up on the losing side of the trade, a position that eventually cost the pensioners R133m.
It means that every rand Regiments made was one the pension fund lost. To add salt to the wound, the fund paid Regiments more than R220m in management fees for its services over a two-year period.
Until now, there has been speculation that Regiments Capital had made money on Nenegate by taking a "short" on the rand — in other words, betting the currency would fall against the US dollar.
The evidence uncovered by OCCRP shows it took a different tack. Wood’s tactic, it seems, was to trade in government bonds — instruments whose prices often move based on the perception of how strong an economy is. Firing a finance minister, for example, could cause such a sharp change.
Wood was well-versed in bond trading, as he previously headed Investec’s fixed income desk, where he was reputed to have earned the largest bonus in Investec history.
In particular, Wood focused on increasing Regiments’ holding of R186 government bonds, a general purpose debt instrument that was first issued in 1998.
Regiments bought those bonds for Transnet’s pension fund and a fund it managed for the City of Joburg. Combined, the total investment was worth several billion.
While Transnet and the City of Joburg would have gained from any increase on the price of the R186 bond, Regiments was the counterparty to that trade, so its profits would soar if bond prices fell.
Then late on Wednesday December 9 2015, Zuma put out a statement saying: "I have decided to remove Mr Nhlanhla Nene as minister of finance, ahead of his deployment to another strategic position."
The rand subsequently soared to more than R15 to the dollar, hitting R15.38 at one stage, while bond prices fell.
The Joburg fund would go on to lose hundreds of millions of rands. In November 2018, the city cut ties with Regiments, citing mismanagement. A representative says the city is still investigating and "we are unable to confirm at this time the amount of money" at issue.
So how did Regiments get its claws into Transnet’s pension fund in the first place?
The answer to that goes to the heart of state capture: Regiments owes its control of the Transnet fund to its relationship with Salim Essa, a well-known associate of the Gupta family.
As the Zondo commission has heard repeatedly over the past few months, the Gupta brothers Atul, Ajay and Rajesh have been accused of using their wealth, influence, and connections to Zuma, to enrich themselves. The Guptas have since fled to Dubai.
One aspect that the Zondo commission is investigating is whether the Guptas had prior knowledge of public appointments, such as that of Nene’s replacement, David Des van Rooyen.
This also includes scrutinising the role of Mohammed Bobat, a senior Regiments employee named as a special adviser to Van Rooyen during his three-day stint as finance minister.
Another Gupta ally who had previously served as director of one of Essa’s companies, Stanley Shane, helped Essa and Wood consolidate their influence over Transnet, where Shane was on the board of trustees.
Documents obtained by OCCRP show that a range of highly rated asset managers applied to manage Transnet’s pension fund. But Shane was in a position to ensure Regiments got the contract, giving it access to internal information.
After Regiments won the contract, Wood and Phetolo Ramosebudi, Transnet’s former treasurer, appear to have played a key role in handling Transnet-related matters.
When one trader asked why a certain bank was being used for Transnet-related activities given that better terms could be found, they were told to "ask Ramosebudi/ Wood", according to private correspondence obtained by OCCRP.
Once Regiments was in control of the Transnet pension fund, however, Wood and Essa began to use its assets — including for their huge wager on the R186 bond.
Regiments used Transnet’s pension fund to book seven trades on December 4 2015. The company bought and sold more than R7bn in bond futures, according to confidential trade data, private correspondence and investment portfolios obtained by OCCRP.
Short Selling: The Goldman Sachs option
Regiments Capital wouldn’t be the first to make immense profits betting against its own clients. The template was set years ago by US investment banking powerhouse Goldman Sachs.
Before the financial crisis of 2008, Goldman Sachs created instruments known as collateralised debt obligations (CDOs) made up of subprime mortgages, which it sold to its clients.
But unbeknown to clients, Goldman was at the same time betting against these mortgage-backed instruments — "shorting" them, in finance speak. In 2010, a US congressional committee estimated the firm made $3.7bn by doing so.
One such mortgage-backed product it sold, Timberwolf I, was described as "one shitty deal" by senior Goldman executive Thomas Montag in an e-mail. But at the time, Goldman sold $100m Timberwolf securities to Australian hedge fund Basis Capital.
The US Securities & Exchange Commission (SEC) also said that in 2007 Goldman was selling mortgage-backed securities to clients without disclosing that hedge fund Paulson & Co had helped pick the securities and planned to bet against it.
Even before this, in an internal e-mail in January 2007, Goldman Sachs vice-president Fabrice Tourre said: "More and more leverage in the system. The whole building is about to collapse any time now."
A few weeks later, Tourre e-mailed a Goldman trader, saying: "The CDO biz is dead, we don’t have a lot of time left."
In 2010, the SEC sued Tourre and Goldman Sachs, saying Tourre had structured an instrument "secretly designed to maximise the likelihood that it would fail, then sold it to investors".
In 2014, Tourre was found guilty by a US jury, and ordered to pay $825,000 for defrauding investors. In 2016, Goldman agreed to pay $5.06bn as part of a settlement with the US department of justice. As acting US associate attorney-general Stuart Delery said: "This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail."
The episode led to widespread opprobrium globally. For example, former British prime minister Gordon Brown accused Goldman Sachs of "moral bankruptcy".
In all those transactions, Regiments was listed as the counterparty while still managing the pension fund — setting itself up on the opposite side of a financial deal involving a client. It was an unusual and conflicting role for a fund manager.
This evokes comparisons with Goldman Sachs, the US investment bank which, in 2006, anticipating a collapse in US mortgage debts, began offloading its own mortgage investments onto its own clients.
In the case of Regiments, its trades were settled on December 9 2015, when the bond price fell and the corresponding yield increased from 8.8% to 10.4%.
An analysis of the trades reveals ideal conditions for insider trading. An instant increase in the bond yield, which is ordinarily slow and steady at best, provided Regiments with more than R130m in profits on a single trade.
The trades were recorded in an e-mail that copied Kennedy Ramosebudi, a Regiments employee whose brother is Transnet’s former treasurer.
In its 2016 annual report, the Transnet pension fund noted a year-on-year increase in the trade of derivatives from zero to 14%.
Regiments’ actions with respect to Transnet may violate laws that ban reckless trading, fraud, acting on insider information, and imposing unethical fee structures. These laws include the Public Finance Management Act.
Andrew Feinstein, executive director of Corruption Watch UK and a former ANC MP who helped draft the Public Finance Management Act, says Regiments’ actions sound like one of the clearest examples of insider trading he has come across.
"The fact that it was information about the manipulation of arguably the most important position in cabinet in order to benefit the architects and beneficiaries of state capture only makes this action more egregious," Feinstein says.
Regiments Capital was founded in 2004 by Wood, Litha Nyhonyha and Niven Pillay as a financial advisory firm, and soon landed some large contracts, including from government departments.
In 2012, it entered into a partnership with US consulting firm McKinsey to advise state-owned companies Eskom and Transnet.
But in March 2016, Wood fell out with Regiments and left to join Trillian Capital Partners, which was part-owned by Essa. Trillian then scored hundreds of millions in government contracts. In 2016 alone, Eskom paid Trillian R200m without a valid contract being in place.
In 2018, Nyhonyha said he would be closing down Regiments and hiving off individual assets.
"We felt if we don’t take this tough action, these other businesses that have the chance to succeed, we’ll jeopardise their chances to succeed because of, among others, their association with the Regiments brand given state capture issues," he told Business Times.
For this story, most of the protagonists either did not want to comment, or couldn’t be contacted by the OCCRP.
Neither Wood nor Essa could be reached for comment, while e-mails sent to the company’s official address were returned as undeliverable.
Regiments director Niven Pillay didn’t respond to questions sent to his e-mail address at the company.
Phetolo Ramosebudi, the former Transnet treasurer who allegedly co-ordinated with Wood on how Regiments handled the company’s pension fund, resigned in October last year because of his relationship with the Guptas.
The regulator, the Financial Sector Conduct Authority, also declined to comment.
But it turns out that the people who paid the biggest price for Regiments’ big short were the country’s pensioners.
Though Transnet runs a defined benefit fund (whereby pensioners are guaranteed a specific monthly sum), any shortfall in its obligations would have to be covered by the government.
Some of its pensioners feel they have already been shortchanged for years, with promised bonuses often delivered late or not at all.
"My husband worked as a train driver for 32 years," says one pensioner who has requested anonymity for fear of retaliation. "I don’t even get his full pension."
The average pensioner gets monthly payments of between R500 and R1,800.
Benita Swart, a 61-year-old Transnet pensioner, says the retirees "have no idea what was done with our money, how they invested it, how much was looted.
What it means
The act of setting itself up on the opposite side of a financial deal involving a client was an unusual role for a fund manager
"We will work for scraps until we die."
In September 2016, Transnet’s pension fund fired Regiments about halfway through its three-year contract. In 2017, it issued a summons for the repayment of R230m, which it says Regiments directed to a third party without authorisation.
In a judgment in July 2018, Judge Moroa Tsoka said: "It appears that Eric Wood perpetrated fraud against the fund to utilise [its] assets to pay for liabilities that have nothing to do with the fund."
These revelations — that Regiments made millions from betting against its own clients, including Transnet, based on inside information — suggest the picture is a lot grimmer than the pensioners suspect.