Rita threw away nearly $1b on overpriced shares, says expert

An expert witness has contended that “flawed” accounting used by Cornerstone caused businesswoman Rita Humphries-Lewin to waste US$6 million on “overpriced” shares in the investment company.

At the average exchange rate for September 2021, US$6 million would have been equivalent to approximately J$900 million

Chartered accountant John Bell, who retired in 2004 after 24 years as a partner in global accounting giant PricewaterhouseCoopers, said the $J2 billion (US$15 million) that Humphries-Lewin paid to acquire 1.4 million shares in Cornerstone represented an “imprudent” decision.

Bell’s professional opinion was submitted by a committee managing Humphries-Lewin’s affairs. The committee is opposing a Supreme Court application by Cornerstone for two controversial transactions in 2021 to be declared legal and valid.

Cornerstone United Holdings Jamaica (CUHJ), Cornerstone Financial Holdings Limited, their founder and president Paul Simpson and Chief Investment Officer Jason Chambers filed the application in May.

They sought the court’s intervention following accusations by Humphries-Lewin’s niece, Deborah Mordecai Edwards, that the transactions involved fraud; that they knew she had dementia, and that her aunt did not get independent legal advice.

They have rejected those allegations.

Bell said he is not connected to any of the parties in the claim, has “no interest” in the matter or its outcome and that he was approached by the Humphries-Lewin committee.

“This affidavit reflects the independent product of my expertise and is uninfluenced as to form or content by the demands of litigation,” he said in the document, which was filed on September 15.

He was asked to comment on the two transactions in September 2021, though he drew on details of the deal in 2018 in which Humphries-Lewin, 87, sold her majority stake in Barita Investments to Cornerstone. She kept a minority shareholding.

The first involved an additional private offering (APO) made to Humphries-Lewin, who bought 1.4 million Cornerstone shares at US$10.80 per unit.

In the second transaction, Humphries-Lewin sold 28.2 million of her remaining shares in Barita to cover the US$15 million price tag.

Regarding the first transaction, Bell said he was asked to give a professional opinion on whether the US$10.80 price was appropriate and justifiable and was not overpriced, and whether it was financially prudent for Humphries-Lewin to invest in Cornerstone.

Bell referred to a pricing explanation in Simpson’s affidavit.

Chambers, Cornerstone’s chief investment officer, also gave an explanation in his affidavit. He said the price was guided by a price-to-book valuation that was conducted at the time.

The price-to-book ratio valuation measures whether a business is worth more on the stock market than in the real world. It does this by the comparing market value of all shares against the capital of the company. During good economic times, companies are worth more on the stock market than their capital.

The price-to-book ratio is used by investors to identify potential investments.

Chambers explained that Cornerstone closed the 2020 financial year with a combined book value of US$7.02 per share. He said comparisons were done with five other similar financial institutions.

The final price of US$10.80 offered to Humphries-Lewin represented a discount of approximately five per cent, he said. But Bell is arguing that the calculation was flawed because the market value of Cornerstone companies’ investment in Barita was already reflected in its balance sheet and the book value of Cornerstone companies’ shares.

He said the computation was “double counting, flawed and a departure from established principles”.

Bell contended that the market value of the Cornerstone shares at the date of the APO in September 2021 was US$6.45 and not US$10.80, and concluded that the Cornerstone shares were “overpriced”, resulting in Humphries-Lewin paying in excess of US$6 million.

To make a determination on whether the transaction was prudent, Bell revisited the 2018 sale of Barita to Cornerstone by Humphries-Lewin.

In that transaction, Humphries-Lewin sold approximately 75 per cent of her stake in Barita to Cornerstone for $3 billion (US$22 million). She kept 54 million shares in Barita.

Bell said the US$15 million worth of Barita shares that Humphries-Lewin sold to pay Cornerstone in the 2021 deal represented 68 per cent of the money that Humphries-Lewin made from selling her Barita stake in 2018, and 40 per cent of what she had left.

The chartered accountant argued that in the transactions of 2021, Humphries-Lewin exchanged a US$15-million investment in Barita for a US$15-million investment in the Cornerstone companies.

He said it was an “exchange” because Cornerstone’s main asset was a 75 per cent holding in Barita, which also represented 96 per cent of the Cornerstone companies’ total investment asset.

“Effectively, what the APO meant in real terms is that at the correct fair value of US$6.45 per share for the Cornerstone companies’ shares, Humphries-Lewin would have been exchanging direct Barita shares for indirect Barita shares via an investment in the APO,” Bell said.

Any price charged in excess of what he claims to be the true value of the Cornerstone shares “would render no value to Humphries-Lewin but would simply have resulted in her giving away her money”.

It is on that basis that Bell asserted that “it would have been imprudent for Humphries-Lewin and/or any other experienced investor, armed with the necessary information and conducting proper enquiries, to invest in the APO”. About US$6 million out of the US$15 million invested was “wasted”, he said.

‘THIS WOULD MAKE NO SENSE WHATSOEVER’

Humphries-Lewin is considered a pioneering Jamaican businesswoman, having founded Barita in 1977 and later becoming the first woman to chair the Jamaica Stock Exchange.

Bell further argued that there were other risks to Humphries-Lewin participating in the Cornerstone APO.

He said the shares that Humphries-Lewin owned in Barita and which were sold to facilitate her participation in the Cornerstone APO “were all free and clear of debt”.

But the Barita shares owned by the Cornerstone companies, he said, “are wholly or partially pledged to lenders to secure approximately US$106 million of debt owed to several corporate bondholders and banks”.

“This represents an additional substantial risk to the shareholders of Cornerstone which would not accrue to the Barita shareholders. I cannot overemphasise that this would make no sense whatsoever,” Bell said.

He said assuming the plan is for Cornerstone to take Barita private, with Cornerstone taking its place as a publicly listed company, through a share exchange, “it would be financially prudent for any Barita shareholder who wished to participate to wait until such time as they would be in a position to evaluate the offer”.

jovan.johnson@gleanerjm.com

EDITOR’S NOTE: Cornerstone, its senior executives Paul Simpson and Jason Chambers, along with Barita, have filed a lawsuit against The Gleaner alleging defamation associated with the coverage of the matters filed in court.