About 1 400 foreign investors, mostly of Orthodox Jewish persuasion, have been left holding the can after R740-million they invested in South African and Namibian diamond mines went astray in the hands of high-flying Pretoria businessman Michael van der Merwe and his Pure Africa Mining (PAM) group of companies.
Van der Merwe, a former Armscor manager, and his disgraced accountant Sybrand Hanekom have for the past month been facing down liquidators of Wextrust Capital, a Chicago-based investment fund closed down last August by the Securities Exchange Commission for running an illegal pyraÂÂmid or Ponzi investment scheme.
Liquidators appointed by a New York federal court found Wextrust had raised $313-million in 70 separate offerings between 2003 and 2008, but had used the money raised from later investors to repay earlier investors. Wextrust’s principals Steve Byers and Joe Shereshevsky were arrested on August 5 last year and face several criminal charges.
About $74-million of the $313-million was to be invested in diamond mines PAM had acquired outside Lichtenburg in South Africa and on Namibia’s Skeleton Coast and the Orange River.
But only $40-million (about R400-million) reached PAM; the rest appears to have been siphoned by Van der Merwe into a crow’s nest of front companies controlled by himself and his family and cronies, sources close to the case say.
Details of the alleged embezzlement emerged from court applications filed in New York, Pretoria and Windhoek by US lawyers seeking to seize control of more than 30 companies set up by Van der Merwe and Hanekom.
The pair are facing a Section 417 inquiry — set up in the event of bankruptcy under suspicious circumstances — held in Pretoria before the master of the high court.
The inquiry came after Van der Merwe refused to cooperate with the US authorities, instead liquidating PAM himself in an attempt to put its assets beyond the reach of the Wextrust liquidator, Chicago lawyer Timothy J Coleman of Dewey & LeBoeuf.
As a result, Coleman successfully applied for the winding up of at least 30 companies Van der Merwe had set up between 2005 and 2008.
Former associates said Van der Merwe had ”spent money like it was water”, acquiring dozens of luxury properties such as houses and game farms, which were registered in the names of members of Van der Merwe’s family.
Van der Merwe, a former Armscor manager, Hanekom and lawyer Chris Lombaard now face interrogation from a 13-strong team of Wextrust lawyers over the whereabouts of the R400-million.
All have denied culpability, but all could face criminal charges of fraud — Hanekom, for one, was disbarred from his profession in 2001 for embezzling R1-million from a client, official records showed.
Wextrust, starting in 2005 when Shereshevsky joined Byers in business, had offered seemingly watertight investments in US real estate and, starting in 2007, investments in diamond mines outside Lichtenburg as well as the Toscanini diamond mine on the Skeleton Coast and Block III on the Orange River.
Most of the money was raised by Shereshevsky from Orthodox Jewish communities in the US and Israel, which had considered him to be an upstanding member as the son of a former rabbi.
Evidence obtained by the US Securities and Exchange Commission suggested that Shereshevsky and Byers hoped the diamond mines would produce the kind of profits that would cover their mounting losses back home, running at about R10-million a month by middle 2008.
”Under the worst [—] scenario, I got to get enough money out of the diamond mines to pay the other investors,” Byers wrote in an internal email dated June 26, which was intercepted by the FBI.
But production at the mines faltered after an initial good start, mostly because of Van der Merwe grossly overcharging for labour he had hired out to PAM, a former employee said.
Of the R400-million Wextrust had transferred to PAM, only a fraction reached the mines, documents showed. For example, Wextrust had raised about N$110-million from individual investors to invest in Block III, but former managers said only a fraction of that amount was ever committed to exploration and production.
At the same time Van der Merwe had acquired several game farms, houses and a fleet of BMW sports cars — some of which were bought well after Wextrust was closed down.