Multi-Billion Rand Investment Rip-off
how foreign inventors duped the Technology Innovation Agency
- For months, uSpiked Investigative Team examined how Technology Innovation Agency (TIA) lost out on R3.232 billion it could have earned from the sale of a gene technology company, Kapa Biosystems
- Kapa Biosystems was founded by American investors in 2006 with seed capital from TIA, a state agency tasked with supporting technological innovation in South Africa
- uSpiked’s investigation found that TIA, under dubious circumstances, offloaded its 49% shareholding in Kapa Biosystems for cheap shortly before Roche acquired the company in 2015
- Our journalists uncovered a convoluted web of corporate malfeasance by the American founders of Kapa Biosystems who colluded with some TIA officials to rob the public of billions of rands earned from the Roche transaction
- As TIA was being swindled, we have learnt that a senior local employee who only held 1% of the shares, got paid close to R30m after the sale
- Caught in his old lies during a telephone conversation with uSpiked’s editor, Kapa’s co-founder Paul McEwan said his lawyers would be best placed to respond to us
In March 2006, Americans Ronald and Paul McEwan concluded the purchase of a shell company owned by Sandra Karen of Cape Town to create Kapa Biosystems (Pty) Ltd. Based in Cape Town, the research, development and manufacturing facility claimed to have been owned by US-based gene technology company, Kapa Biosystems, Inc. Last August, the American ‘founders’ sold the company to Swiss multinational Roche Holding AG for an undisclosed amount.
After months of investigations, uSpiked Investigative Team can now reveal that South African taxpayers were shortchanged in a deal that saw Technology Innovation Agency (TIA), a public-funded agency, missing out on a multibillion Rand payout. The Americans so-called founders of Kapa Biosystems, Inc. sweet-talked their way to buy out TIA’s 49% stake for a mere $4.93 million (R58.27m – rounded off to R59m) when the former knew so well that Roche was ready to buy the entire operations for an eye-watering $445 million (R6.464b at the time’s exchange rate) – information they deliberately withheld from TIA.
TIA’s 49% shareholding would have earned the state agency some R3.17 billion. That’s enough cash to build 37,581 RDP houses. Or 8,080 standard school libraries, if we rely on data by Equal Education. The amount would easily have taken care of the estimated R1.983 billion that is required to provide library materials to all schools in South Africa. But this is just pie in the sky: a group of American schemers ensured that TIA - their core partner since 2006 – did not benefit from the profitable sale of Kapa Biosystems.
This is a tale of a convoluted web of secrets and lies; greed, manipulation, collusion and underhand tactics - it could not get any dirtier. In this case, the Americans, and possibly with their Swiss counterparts playing along, colluded with accountants and lawyers and some individuals at the state agency to cheat South African taxpayers.
The scheming that was conceived in the US, incubated and hatched in Cape Town is now the subject of confidential inquiries by various US Federal agencies.
While US Justice Department’s Fraud Section is neither confirming nor denying whether the Kapa-TIA-Roche deal is being investigated under Foreign Corrupt Practices Act, we have learnt that the Inland Revenue Services is keen to find out how much of the $445 million paid to the American directors was declared and in which bank accounts Roche’s payout landed. We have information that no American bank received the funds directly and definitely the money wasn't deposited in a South African bank.
Meanwhile, Security Exchange Commission is trying to rule out claimed non-disclosures that could have prejudiced other American investors since Roche’s securities are traded at the New York’s OTC Markets Group.
So, how did it all begin?
An American couple, Ronald Walter McEwan and Margaret J. McEwan had been living on-and-off Camps Bay area in Cape Town since 2001. Like most parents, Ronald and Margaret wanted the best for their children. Kevin McKernan, one of their son’s colleague and co-inventor at Whitehead Institute for Biomedical Research, had made it big in the technological world and in business after joining his brothers at Agencourt Bioscience Corporation.
In the fall of 2004 the McKernan brothers who their son Paul McEwan worked for landed a $30m grant from the US National Human Genome Research Institute. It seemed the McEwans wanted Paul to be equally successful.
The quest to ‘make’ Paul took shape in late 2005 when the senior McEwan somehow managed to get an audience with Dr Mark James Fyvie who run the then Cape Biotechnology Initiative (Cape Biotech Trust), an innovation funding trust created by the Department of Science and Technology to fund and incubate startups.
After a few meetings with Fyvie, Ronald McEwan got him to commit funding for his son to start a business in Cape Town.
People familiar with the technology and innovation startup-funding outfit prior to the creation of Technology Innovation Agency told our team that Fyvie was the moneyman. He could single-handedly sign off on multimillion-rand financing deals. And that is exactly what he did for the McEwans – he verbally assured them of a R24 million investment from state coffers.
However, their project was confused from the start. On the one hand it was a startup (a mandatory qualification for funding), but later on, the Department officials were made to believe the father and son enterprise was an established business and all they needed to do was set up a branch in South Africa.
The deal appeared simple; for the Cape Town operation, the Department of Science and Technology would provide R24 million in investment (not a loan) and acquire 49% equity via Cape Biotech Trust. The Americans would bring their innovative ‘brains’ and the remaining 51% financing, which we found out they didn't have. With the Trust’s R24 million pledge firmly secured, they approached US angel investors to join the party. The round of financing bagged R20 million (R4 million short of the amount invested by Cape Biotech Trust – the shortfall could be blamed on the exchange rates).
Once the state funding was in place, the Americans claimed they had had an established, successful business in Boston. The claim was deliberately reinforced to the extent a decade later it was assumed as the truth; the younger McEwan was even quoted saying they had considered Asia or Africa in the expansion drive. It was all a myth.
As our investigation can now reveal, the operation did not exist prior to the undertaking by the Trust (Fyvie). In fact, Kapa Biosystems Inc. only came to be after the verbal agreement with Fyvie.
Busting the myth
Kapa Biosystems (Pty) Ltd was created on March 1, 2006 from a shell company previously registered as Rowmoor Investments 627 cc on August 23, 2005 to Sandra Karen. While there is nothing wrong with the acquisition and renaming of an existing shell company, there is everything wrong with the claimed mother-entity, Kapa Biosystems, Inc. of Delaware or Boston.
The provided US postal address for the conversion - 275 Bunker Hill Street, Charlestown, MA 02129 - was, in fact, Paul McEwan’s 1,260 square feet three-bedroomed condominium in Boston.
Without highlighting the tax benefits offered by the US State of Delaware (otherwise known as the Mauritius or Panama of America), the claimed prior existence in Boston was fraudulent. Kapa Biosystems, Inc. we can authoritatively reveal was just an eleven (11) days old shell company registered with the sole aim of enforcing their claim of global reach and existence.
Kapa Biosystems, Inc. was incorporated on February 17, 2006 (11 days before the conversation on the South African so-called subsidiary). It did not have any physical presence in Boston as claimed. Additionally, the provided address 303 Congress Street, Boston, MA 02210 for the incorporation was the work of the incorporator, National Registered Agents Inc., to enable the registration as per General Laws (Chapter 156D, Section 5.02) of the Commonwealth of Massachusetts.
National Registered Agents Inc, a shell company specialist, proudly announces of its services thus; “Whether you call it Registered Agent, Resident Agent or Statutory Representation Services – it’s our DNA…”
IP attorneys and other investment experts who our team consulted attested that there was no way Kapa Biosystems, Inc. could claim to have had any operation that was not directly supported by the R24 million investment from the Trust. One attorney told us: “It’s like a marriage. Whatever you accrue during the marriage is jointly owned. Kapa Biosystems, Inc. cannot, therefore, claim to have had some intellectual properties that the African shareholder never had a stake in.”
But that’s not all. The first filing of an IP by executives of Kapa Biosystems was a Trade Mark for the words, ‘Kapa Biosystems’. Trade Mark No. 1157814, registered on August 6, 2007 provided the owners of the Trade Mark to be Kapa Biosystems, Inc., a Delaware corporation of Second Floor, Old Warehouse Building Black River Business Park, Fir Road, Observatory 7925, Cape Town, South Africa. If at all Kapa Biosystems had been in operation, why did the executives provide a South African address for such an important IP? And why so late in its operations?
The web domain kapabiosystems.com was also only created on February 16, 2006 by another of the entity’s American director, John Foskett, who for this registration provided a California postal address.
Additionally, Ronald McEwan who was incorporated as the President of Kapa Biosystems, Inc. and remained so until late 2014, was an employee of printing ink maker Sun Chemicals Corporation, whereat he had helped invent one of the company’s ranges of printing inks. His son, Paul, was a biotech engineer with Agencourt Bioscience Corporation (owned by the McKernan brothers). The only patent registrations traceable to both were owned by Sun Chemicals and Whitehead Institute for Biomedical Research respectively. Kapa Biosystems, Inc., contrary to how it was later peddled, had no IP to its name prior to South Africa’s taxpayers pumping in the R24 million seed capital [mainly because the company never existed].
Now, let’s fast-forward to nearly a decade later to 2014. Kapa, then a mature, successful company was on the radar of Roche Holding AG. The American directors, Ronald Walter (N) McEwan (67), Paul Jon McEwan (42), John Ferguson Foskett (42), Christopher David McGuinness (41) quickly saw the gullibility of their 49% stakeholders (Department of Science and Technology) and offered to buy-out TIA, the entity that had then taken over the operations of Cape Biotech Trust.
Without disclosing to the Agency’s officials that they were in advanced talks for a massive deal with Roche, numbers were crunched and a figure of $4.93 million was offered.
How was the figure of $4.93 million arrived at? uSpiked’s consulting economists told us that it was probably the easiest valuation (or devaluation) ever. Clearly, there was no due diligence done and no appraisals of the company’s worth. One consultant worked it out for us; “Take R24 million in 2006, factor in possible interest and inflation plus exchange rates fluctuations and you shall arrive at a figure of about R58 million. The problem is, you only apply this calculation to a loan, not an investment.”
The executives at TIA accepted the offer, on condition that no local jobs would be lost during the next ten years. By the time Barlow Manilal was taking over as the Chief Executive of the agency in April 2015, the Americans had ensured the scheme had received unquestioned approval from the previous leadership of the agency.
The Americans were then free to conclude the deal they had initiated with Roche.
Another consulting attorney told us what the Americans did was similar to hiding one’s assets from a spouse during a contested divorce. No wonder then that they had insisted on strict confidentiality on the details of the deal with Roche. The acquisition spending was not to be made public, and Roche agreed to the terms until our team started asking uncomfortable questions in January.
Indeed, confidential communication in our possession shows Manilal’s team had unsuccessfully tried to establish the sale value to Roche. A senior executive at TIA also confirmed to us that as recently as December 2015, top executives at the agency were still in the dark on the sale value. However, a senior legal officer at TIA seemed to have been in the loop. An informant who alerted him about the rip-off in late 2015 says, instead of acting on the information, he threatened the informant. Hence the question, did the agency’s legal department knowingly play a role in the rip-off?
Despite TIA’s buyout having been concluded in the financial year ending March 31, 2015, the announcement was only made nearly three months after the end of the financial year. According to confidential sources familiar with the transaction, the Americans could still not raise the TIA’s agreed buyout amount of $4.93 million and were waiting for a firm commitment from Roche in order to raise the money.
In the May statement announcing the buyout, it was claimed: “Kapa SA found itself in an aggressive growth phase that required further funding for sustainable growth and possible investors were less interested in an investment opportunity with a complex corporate structure.” This, we can confidently say, was a complete lie.
After going through heaps of data and records including audio recordings, our team has failed to identify any complexities in the ‘corporate structure’ that would have prevented TIA from being part of the acquisition talks with Roche.
In trying to understand why the state agency was talked into selling cheap, our team uncovered the lie that was told so repeatedly it became the truth, that Kapa Biosystems SA was just a small subsidiary of the bigger Kapa Biosystems, Inc. of Delaware. We have shown this was a blatant lie.
Our investigation revealed that the so-called global entity (Kapa Biosystems, Inc.) was a mere paper entity registered for the sole purpose of concluding the 2006 deal with Cape Biotechnology Initiative. Using the tactics employed by many of the companies named in the Panama Papers, Kapa Biosystems, Inc. came to being soon after the undertaking by Fyvie in late 2005.
The First Returns filed by Kapa Biosystems, Inc.
The Final Returns filed by Kapa Biosystems, Inc. before the sale to Roche.
While the South African state innovation agency may have initially failed to do anything about the dodgy scheme, the inquiries launched by US Federal agencies may force the Americans out of the Mother City where they have been enjoying some of the billions ripped off from South Africa’s taxpayers.
uSpiked’s editor telephoned Paul Jon McEwan to establish a few issues, for instance, which bank account did Roche Holding AG pay the $445 million? McEwan’s response was: “To the shareholders!”
The Kapa Biosystems’ chief scientific officer and co-founder went on to explain that an agent received the payouts on behalf of the shareholders. McEwan, however, declined to reveal the identity and location of the said agent.
If an agent was appointed to represent shareholders in the buyout, why did the Americans find it necessary to get rid of TIA shortly before the payday? “Roche was buying the American company, and that had nothing to do with TIA!” said McEwan.
He went on to insist that Kapa Biosystems, Inc. already had a very large operation going before the expansion into South Africa.
When our editor firmly put it to him that we have proof they lied and about the claimed ‘prior large operation’, McEwan finally admitted to what we already knew - that Kapa Biosystems did not exist prior to the double incorporations.
On why TIA was talked into offloading shares shortly before the big payday, McEwan said before terminating the call: “I don’t like where your inquiry is heading. You will have to talk to our legal representatives.”
What we know is that of the $445 million paid by Roche Holdings AG to the faceless American shareholders, $232.52 million (R3.366 billion) was paid for ‘goodwill’. We must also note that the total cash consideration of $445 million did not include ‘Deferred tax liability’ of $131.34 million (R1.901 billion)’. What is not clear from records obtained from Roche is to which tax authorities these were due, South African, American or Swiss? Maybe the respective tax authorities should take a number and wait their turn for crumbs to fall off the schemers' table.
- Additional data acquisition and processing by Miguel García of San Francisco, California