Did Adams & Adams Drop a R2.4 Billion Ball?

Ten years ago, we exclusively broke the story of a multibillion-rand rip-off engineered by an American father-and-son duo against South Africa's Technology Innovation Agency (TIA), an entity of the Department of Science and Technology. We assumed that story had a beginning, a middle and, eventually, an end. We were wrong. It had a sequel, and the twist is not the one we expected.

About three weeks ago, our editor stumbled across a social media post announcing that an arbitration process (one the American founders themselves had insisted on), to settle what they dressed up as a “shareholders’ dispute”  had awarded TIA some R1.2 billion. He summoned the original investigative team (that is us) for an emergency Zoom debrief.

Our first instinct was to celebrate. R1.2 billion is a long way from the R58 million TIA was talked into accepting eleven years ago; on its face, it looked like vindication. Then Miguel Garcia, our nerdy operator, did the arithmetic twice. The numbers didn’t add up. And when the numbers don’t add up, a journalist’s next move isn’t to pop the champagne; it’s to ask: what did we miss?

the decade-old fraud, revisited

For anyone joining us mid-story: what we, in 2016 internally dubbed ‘the Kapa Scandal’ involved American father and son founders Ronald and Paul McEwan, South Africa’s TIA, and Swiss pharmaceutical giant Roche Holding AG.

The scheme began in 2006, when the McEwans secured R24 million in seed capital from the Cape Biotech Trust (TIA’s predecessor) to launch a biotech venture called Kapa Biosystems in Cape Town. To land the funding, they presented Kapa as an established US business. Our investigation at the time found the American ‘parent’ company was, if anything, a step-sibling of the Cape Town entity: in fact an 11-day-old shell company with no assets, no operations, and no business being any entity’s parent. That R24 million bought TIA a 49% stake in Kapa Biosystems (Pty) Ltd.

By 2015, TIA’s own executives were somehow duped into sell that 49% back for a mere $4.93 million (roughly R58 million). The excuse offered was that Kapa Biosystems’ complex corporate structures were scaring off investors. Yes; that is what they reportedly told their 49% shareholder. So, suddenly, TIA’s presence in the company was cast by its American partners as a liability rather than an asset. Allegedly, certain TIA executives and consultants colluded with the founders to make sure the stake was worth just as much as was offered.

Our own reporting revealed that at the buyout talks, the initial R24m was calculated as a loan. Adding interest and factoring the inflation, the R58m figure appeared great on TIA’s books.

The ink was barely dry on the buyout agreement before the McEwans sold their shell, Kapa Biosystems Inc., to Roche Holding AG for $445 million, or R6.464 billion (based on 2016 exchange rates). That single manoeuvre cost South African taxpayers an estimated R3.2 billion in returns: enough, by our back-of-envelope mathematics, to build more than 37,000 RDP houses, or 8,000 school libraries. TIA got its money back. The country got neither the houses nor the libraries.

Then there is the intellectual property, which is where this story stops being merely outrageous and starts being almost architecturally elegant. Roche wasn’t interested in a Delaware paper company; it wanted the patents. Between 2009 and 2012, Kapa Biosystems developed and registered four major patents covering DNA polymerase technology, and the founders quietly assigned the exclusive US rights to themselves, personally, leaving Kapa Biosystems holding rights only for the rest of the world. If that structure holds up, Roche may have paid billions of Rand for a company that doesn’t actually own the American rights to its own core technology; potentially obliging it to keep paying the two American inventors, in perpetuity, for the privilege of using their own product in the world’s biggest market for the four products.

Confidential sources inside Kapa Biosystems (Pty) Ltd told us at the time that TIA’s leadership was out of its depth throughout the buyout talks, just as it had been in 2006, when they advanced the R24m. One source alleged that someone inside TIA’s legal department must have had a hand in the scheme, and said he had been warned to keep his “big mouth” shut when he tried to raise it with others in that department.

checking our work

Our 2016 reporting held up in our internal review. But before standing by it publicly, we owe our readers, and ourselves, an honest look at what the arbitrators actually had in front of them. Arbitrators, like cricket-match umpires, don’t bowl, bat or run; they only rule on what the players bring to the crease. So the question became: what did TIA’s attorneys actually present to the Arbitration table?

We requested the arbitration records from the office of TIA’s current CEO, Dr Titus Mathe. While we waited, we decided to call Attorney Thando Manentsa, one of the attorneys who represented TIA at the proceedings.

With the whole team listening in, Attorney Manentsa said he had no objection to us seeing the ruling, though he doubted we’d get the recordings or transcripts of the proceedings. Fair enough. What stopped us cold was what he said next, almost in passing: TIA, he told us, was only ever entitled to 10% of Kapa Biosystems Inc.

Sit with that for a moment; as God’s warning to His servant Job as documented in the book of Job from Chapter 38, ‘You ain’t seen nothing yet’. TIA had trusted this matter to Adams & Adams, routinely billed as the godfather of intellectual property law in South Africa, if not the continent, a decision we were comfortable with hence we never bothered to monitor how the arbitration process was proceeding. And now we are told the eventual award works out to roughly R2.1 billion less than what a straight reading of TIA’s actual stake should have delivered.

Did Adams & Adams drop the ball on a case with their own name practically etched into the trophy?

Thando

sending a Commercial Litigation specialist to an IP-intense fight!

Was Attorney Manentsa’s reluctance to the release of the proceedings’ records simple caution, or something closer to reluctance to have anyone check his homework? We can’t answer that yet. But we can ask the obvious question out loud: why would Adams & Adams, a firm that fields more than 100 patent attorneys, send a commercial litigation specialist to lead an arbitration that was, from day one, an intellectual property case dressed up as a shareholder dispute?

Pairing him with Attorney Jac Marais, a litigation and dispute-resolution specialist and director of Adams & Adams Forensic and Investigative Services, makes sense on paper; arbitration is, after all, dispute resolution. But if the matter was always going to hinge on patent ownership, why not spare even one patent attorney from a bench of a hundred to sit beside them?

Jac

Based on the call, it sounds as though TIA’s own attorney didn’t know, eleven years after the fact, that Roche’s real prize had been the Kapa Biosystems’ patents rather than the shell company itself. If that is genuinely how the arbitration was approached, then a R1.2 billion award looks more like a stoke of good luck and a consolation award and less like a true entitlement. [No wonder the Americans tried to appeal the award-editor]

Parent or Sibling?

the bait-and-switch that worked

Meanwhile, the Americans played a different game entirely. They retained Kim Rew of Webber Wentzel, an attorney whose specialty is insurance and commercial disputes, not intellectual property.

We can only imagine the reaction at Lynnwood Bridge on hearing that name: relax, they’ve hired an insurance lawyer, this isn’t an insurance case! If that thought crossed anyone’s mind, it was the thought of someone who had just swallowed the bait, hook included.

Until we get our hands on the actual arbitration record, this remains speculation — but speculation grounded in the numbers. Attorney Rew appears to have approached the case knowing that every rand she could shave off TIA’s claimed entitlement of $218.05 million was a win. At the end of the proceedings, she had managed to shaved off $145.19 million (R2.35b at current exchange rates). That is not a rounding error; that is most of the pie.

The apparent strategy: seems to have been to get everyone in the room looking anywhere except the patents. It is not as if the Americans didn’t know the patents were the issue, so why else retain a large corporate firm that doesn’t crack the Top 10 in South African IP practice? We’d be genuinely relieved to be wrong about this. But if we were ever in legal trouble ourselves, we know whose card we’d want in our wallet.

We reached out to Attorney Rew for comment. The call dropped. We will keep trying. But what we really wanted to as her was on her speciality, insurance. Our question which we didn’t get to ask before the call drop was, “as an insurance law specialist, can clients who can prove a loss due ineffective performance of his or her attorney make a claim from The Legal practitioners Fidelity Fund (LPFF) and if yes does the Insurance have a limit? In other words, would the LPFF manage to cover the R2.35b?

the document nobody seems to have read closely

Kim the Insurance law specialists who mopped the floor with the Lynnwood Boys

How does a legal team accepts, apparently without serious challenge, the claim that Roche bought nothing more than an empty shell? If a shell company was genuinely all Roche wanted, it would have been far cheaper to hire a registered agent and incorporate a fresh Delaware entity from scratch than to pay $445 million for someone else’s.

The least Attorneys Manentsa and Marais could have done was read the actual certificate of incorporation for Kapa Biosystems, Inc.: a document titled, in black and white, “Certificate of Registration of a Foreign Corporation.” Doesn’t that make Kapa Biosystems (Pty) Ltd the parent, not the other way around? We didn’t need an expert to spot that. We’re not sure why anyone billing by the hour would have missed it.

what we’re still owed

Dr Mathe’s office has not seen fit to clarify any of this for the public, nor given us any timeline for a response. So we’ve decided to go the adversarial route: we have filed a formal request for these records under Section 46 of the Promotion of Access to Information Act, and we intend to see it through.

We’ll keep asking the questions that matter most to our readers: was this decade of underperformance an honest oversight, or something considerably less innocent; and has anyone, anywhere in this chain, actually been held accountable for it? We’d love to be proven wrong. So far, nobody’s taken us up on the offer.

As we ready this piece for publication, Mr Kobus Louw, TIA’s Company Secretary and the individual responsible for processing PAIA requests, sent us an email acknowledging receipt of our application, with a caveat: “TIA will revert within 30 days with its decision.” To that we say thank you. We have set our countdown clock.

Adams & Adams should in the meantime edit Attorney Thando Manentsa profile on its website to include something like, ‘…he left R2.35 billion on the table for his client…’

• Additional data acquisition and processing by Miguel García of San Francisco, California