Home > Corruption, Land, Papua New Guinea > National Provident Fund Final Report [Part 3]

National Provident Fund Final Report [Part 3]

Today we re-publish the third part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002.

This is the third extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. the inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including for NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Approval to mount take-over attempt of STC and CXL

In early April 1996, Mr [Robert] Kaul and Mr [David} Copland met with Minister [Chris] Haiveta at the Gateway Hotel (Schedule 4D, paragraph 4.4.1) and obtained the Minister’s instant verbal approval to mount a campaign to buy a controlling interest in STC and CXL and to then amalgamate and manage the two companies. This would require the expenditure of approximately K40 million of funds borrowed from the ANZ to buy the STC and CXL shares then on offer from the DFRBF and the POSF.

Incredibly, the NPF board approved the purchase after only 30 minutes discussion. There were no briefing papers and the board took no expert advice.

The boards of DFRBF and POSF did not even meet face-to-face to discuss the proposed sale to NPF and Minister Haiveta approved the sales by DFRBF and POSF and the purchase by NPF without seeking or receiving DoF or other expert advice (Schedule 4D, paragraph 4.4.1).

It seems the Minister was not even given a written brief on these transactions, which he had already approved verbally at the Islander Hotel. Both POSF and DFRBF approved the sale by circular resolution and Minister Haiveta gave his immediate approval without even waiting for a request.

Clearly, Minister Haiveta was very proud of his achievement in promoting these transactions as demonstrated in his self-congratulatory letter to Prime Minister Sir Julius Chan on June 4, 1996, and in his explanation to Parliament on July 30, 1996 (Schedule 4D, paragraphs 4.4.5 and 4.4.6).

Minister Haiveta’s improper conduct and referral

The commission, however, finds that Minister Haiveta’s active role in these matters, his instant approvals and total failure to seek expert advice amounts to improper conduct and may constitute a breach of the Leadership Code. Similarly, the trustees who voted for this circular resolution to spend K39.7 million of borrowed funds, without seeking any independent expert advice, were guilty of a gross breach of their fiduciary duty to the members of the fund, for which they may be personally liable.

Breach of fiduciary duties by all Trustees

When considered together with their many other similar breaches of fiduciary duty, the commission has recommended that all trustees, with the exception of John Jeffery, who was only appointed late in 1999, should also be referred to the Ombudsman Commission to consider whether they were in breach of the Leadership Code (Schedule 1, paragraphs 10.5.5 & 18.5(c)). As trustees of the NPF board, they were subject, as leaders, to the Leadership Code. Some are still leaders in some other leadership position whereas some are no longer leaders. If any of the former trustees are being considered for subsequent leadership positions, however, their previous failure of fiduciary duty to the NPF members should be taken into account and assessed by the Ombudsman Commission.

Continued “on-market” purchases without Board approval

The NPF continued to purchase STC and CXL shares during 1997, often not informing the trustees.

In 1998, Mr [Noel] Wright continued to purchase STC and CXL shares on market. The STC purchases were frequently without board approval and totalled $A4.1 million. The CXL purchases which totalled $A793,839 did not require specific NPF board approval because of the its previous open-ended approval (Executive Summary 4D, paragraph 4.1).

Referral of Ben Semos and Mr Wright to ASIC

At Schedule 4D, paragraph 8.3, the commission recommends the referral of Mr [Ben] Semos of Wilson HTM and Mr Wright to Australian Securities and Investment Commission (ASIC) to investigate whether they acted to manipulate the share prices of STC and CXL.

During 1997 and 1998, NPF was the major buyer of CXL and STC shares on the Australian Stock Exchange (ASX) and no doubt helped to maintain the price above its natural level (Schedule 4D, paragraph 8.3.3).

Mr Wright fails to review investment as share prices fall

By July 1998, CXL performance was poor. At that stage, NPF owned 38 per cent of the equity in CXL.

Mr Wright should therefore, have reviewed CXL’s results and instigated a reconsideration of NPF’s takeover strategy.

In November 1998, CXL’s profits were still very low and falling. Instead of reconsidering the investment, Mr Wright purchased an additional 43,280 shares at $A5 per share.

By the end of 1998, NPF held 38 per cent of CXL’s share capital and 21 per cent of STC and the profitability of both companies was under pressure. Their share prices were being maintained by NPF’s own acquisitions. NPF management and trustees remained inactive despite CXL’s rapidly deteriorating performance. This amounted to a paralysis of management, which plagued NPF’s management regarding all its investments during this time of financial crisis.

In January 1999, NPF was facing up to its own serious unrealised losses caused mainly by the crippling burden of interest payments on its huge debts to PNGBC and ANZ, the fall in the value of the kina and in the value of its non-producing investments in PNG resource stock. Mr Semos recommended the sale of NPF’s CXL holdings and a partial sale of STC.

Attempts to sell STC and CXL shares as price falls

The hopeless march to take over STC and CXL was now put into reverse because of NPF’s own financial crisis. Having such large holdings in both these relatively small companies, however, was making it very hard for NPF to selldown without promoting a significant fall in the market share price. Meanwhile, John Swire and Sons (Swires), which owned STC and CXL, sat and waited until it could buy back NPF’s holdings in its companies at rock bottom prices. There seemed to be no other potential buyers.

In March 1999, NPF was under extreme pressure from ANZ to sell equities in order to repay debt, as it was repeatedly in breach of its agreement to maintain a 160 per cent security cover. By July 1999, NPF’s unsuccessful attempts to sell its CXL holdings had brought the price down and prompted a take over bid by John Swire and Sons at $A1.50 per share. NPF obtained an independent opinion from KPMG in favour of accepting the Swire offer. NPF then sold its CXL holdings to John Swire and Sons making a realised loss of $A16,322,647 as follows:-

Total shares acquired 8,236,179
Total shares sold 8,236,179
Cost of shares sold 28,676,916
Consideration received (12,354,269)
Total loss on sale $A16,322,647
(Schedule 4D, paragraph 9.7.6)

NPF experienced similar problems selling off its STC holdings. Its test of the market in September 1999, indicated a market price of $A2.50 per share.

By November 2000, NPF had sold all but 5 per cent of its STC shares to Lemex International Ltd for a realised and unrealised loss of $A9,552,968 as follows: (on the table below).

The sale to Lemex International Ltd attracted complaints by Mr Pratt of John Swire and Sons against Rod Mitchell for failing to accept a better price from Swires. These complaints are reported in Executive Summary 4D at paragraphs 10.5 and 10.6.

Responsibility for K25,875,615 loss

The commission finds that it was a combination of Mr Copland’s personal agenda against STC, Minister Haiveta’s misguided enthusiasm for the nationalistic “big picture” approach, Mr Wright’s egotistic and misplaced over-confidence and the trustee’s complacent reliance on Mr Copland’s reputation as an expert in commercial and financial matters which led NPF into this foolish and risky endeavour to acquire, amalgamate and manage STC’s multi-faceted trading enterprise, which caused a loss of K25,875,615 in NPF members’ assets.

Highlands Pacific Ltd – Schedule 4B

The heaviest single loss

NPF suffered a realised loss of $A27.3 million from its investment in HPL and an unrealised loss on shares still held at December 31,1999, of $A19 million for a total loss of $A42,296,654. It was NPF’s single biggest equity investment loss.

This investment was largely motivated by a misguided sense of PNG nationalism and was driven by Mr Copland, Mr Wright and Mr Kaul, with the very enthusiastic support of Minister Haiveta. These people formed a plan in 1995 to increase NPF’s small passive holding in Highlands Gold Ltd (“HGL”) with the hope of benefiting from an expected takeover bid for HGL by Placer Dome.

Evidence of share ramping

During its investigations, the commission uncovered evidence of share ramping in December 1996 directed at raising the price of HGL shares at year-end and thereby increasing the end of year bonus payable to NPF senior management. The commission recommended that this matter be referred to ASIC for investigation (Schedule 4B, paragraph 5.11).

In January 1997, during the takeover transaction, Placer Dome retained HGL’s Porgera interests and Oregon receivables and the new entity Highlands Pacific Ltd (“HPL”) was established to acquire and hold HGL’s other, less valuable and non-income producing interests.

NPF leads PNG consortium to acquire HPL

In January 1997, (Schedule 4B, paragraph 5.14.3) NPF led a consortium of PNG institutions to acquire HPL. NPF applied its takings from the sale of its HGL shares, together with $A22.4 million borrowed from its ANZ facility, to acquire $A50 million worth of HPL shares in January 1996. During 1996 and 1997, NPF purchased further HPL shares on-market for a total investment of $A69.5 million, despite the fact that the market value of HPL shares was steadily falling.

Possible liability of Wilson HTM for recommending high-risk HPL investment

This was an extremely high-risk, speculative investment, with no hope of any income return in the medium term future and it was acquired mainly with borrowed funds, which attracted a rising interest rate, as the ILR rose in succeeding years. It was a totally inappropriate investment for a superannuation fund and well outside the 1993 investment guidelines. The commission finds at Schedule 4B, paragraph 7.1, that NPF’s share brokers, Wilson HTM, who advised NPF to make this thoroughly unsuitable investment may have liability at common law or under Australian Security law, for not giving suitable advice to its client, NPF, which it knew was a superannuation fund.

table 1

Irregularities in acquisition of HPL shares

The initial investment of $A50 million in HPL was decided by the NPF board by way of an illegal circular resolution with only Trustee Taureka voting against it. No independent expert advice was given or sought by the trustees before this so called resolution (Had the matter been considered at a proper face-to-face board meeting, there is a chance that Trustee Taureka’s well founded reasons may have prevailed).

As described in Schedule 4B, many of the subsequent acquisitions of HPL shares were either without the NPF board’s knowledge or occurred prior to its approval. Mr Wright and Mr Kaul were in breach of duty in making these unapproved purchases. No expert investment advice was obtained (Paragraph 6.7, Schedule 4B).

Responsibility of Trustees and Minister Haiveta

The trustees passively acquiesced in these unauthorised purchases by management and failed to criticise, reprimand or endeavour to restrain management once they became aware of the unauthorised acquisitions after the event. They were thus in serious breach of their fiduciary duty to the members of the fund.

Once again, Minister Haiveta’s conduct in granting approval to massive expenditure on HPL shares, without seeking DoF or other expert advice, was improper conduct and, possibly, a breach of the Leadership Code.

All trustees who approved or acquiesced in these acquisitions without insisting that management obtain expert advice and who failed to control management’s unauthorised share acquisitions, were in breach of their fiduciary duty to the members (See Schedule 4B, paragraphs 4.3, 5.2 & 5.9).

Conflict of interest of Mr Copland and Mr Aopi

Initially, Mr Copland and Mr Aopi were appointed as NPF’s trustees on the board of HPL. They, however, took the view that they were appointed in their own right as independent directors. This placed them in a conflict of interest situation (Schedule 4B, paragraphs 6.4 & 6.5(a)). They both received directors’ fees and options which they improperly retained for their personal benefit (Schedule 4B, paragraph 6.8).

NPF’s acquisitions in HPL commenced at $A1 per share and the HPL share price fell steadily thereafter to a low of $A0.30 per share in 1999.

Management paralysis as value of investment falls

NPF management and trustees seemed paralysed in the face of this looming financial disaster. By the end of 1998, the HPL shares had so little value that the ANZ refused to accept them as security for the loan facility, describing them as having virtually “junk bond status” (Schedule 2E, paragraphs 12.3.1). In August 1998, Deutsche Securities reported very critically upon NPF’s unbalanced portfolio and concentration in PNG related investments, but no action was taken.

Sell-down at huge realised loss

In March 1999, PwC recommended the sale of NPF’s loss-incurring HPL shares and in May 1999, NPF sold one million HPL shares at 30 cents per share. The board attempted to sell a further 19 per cent of its HPL holdings but this proved very difficult to achieve (Schedule 4B, paragraph 13.11.2).

At December 31, 1999, NPF had suffered a net loss on HPL share sales of $A27,322,554 and an unrealised loss on HPL shares

table 2

Investment in Vengold

Foolish investment

This investment was one of NPF’s greatest follies.

It was driven by the desires of Mr Copland and Mr Wright and the easily persuadable Robert Kaul to place NPF in a position where it could benefit from a possible takeover bid by Placer Dome, which was trying to maximise its interests in the Lihir Gold Mining venture.

Advised and encouraged by Ben Semos of Wilson HTM, NPF swapped its LGL shares for shares in Vengold Inc, a small Canadian mining and mineral exploration company. NPF then invested heavily in Vengold by on-market share purchases.

Vengold held significant shares in LGL and this increased NPF’s LGL interests through its significant Vengold holding.

NPF acquired $A45 million worth of shares in Vengold between April 1997 and September 1998 (Schedule 4A, paragraph 6).

It thereby achieved and maintained a 19.9 per cent share of Vengold’s capital and a seat on the Vengold board of directors. NPF’s initial Vengold director was Robert Kaul who was followed by Henry Fabila. These directors very properly paid their directors fees into an NPF account.

When Mr [Jimmy] Maladina was appointed to the Vengold board in 1999, on his own insistence, he retained the directors’ fees and options paid to him and also exercised the options making an illegal profit of approximately $A852,183 and directors fees of K5000, which is recoverable by NPF (Schedule 4A, paragraph 8).

Trustees fail to reprimand management for unauthorised acquisitions

The NPF management’s acquisition of Vengold shares was often without the approval of the NPF Board of Trustees and, once again, the trustees failed to reprimand and control management for exceeding its authority and failing to keep the board informed (Executive Summary paragraph 8 and Schedule 4A, paragraph 5.16).

This continued into 1998, despite the falling gold price and falling value of Vengold shares (Schedule 4A, paragraph 6.12).

At no stage did management provide the NPF board with expert advice about this investment and the board failed to seek it, thereby breaching its fiduciary duty to the NPF members (Schedule 4A, paragraphs 6.11 & 6.12).

This investment advice was badly needed as Vengold was making share issues, which diluted NPF’s holding. Vengold also purchased 61.3 million LGL shares from Orogen, which increased the risk to Vengold because of the volatile nature of LGL shares.

Also during this period, Placer Dome bought heavily into Vengold. Despite all this activity regarding Vengold, NPF just adopted a “wait and see” attitude, when it really needed sound expert advice (Schedule 4A, paragraph 6.12(d)).

Mr Wright’s illegal trade in LGL options

During the period October 1995 to November 1997, Noel Wright illegally traded in LGL options through the Wilson HTM overseas account. He continued to do this even after a NPF board direction to cease the practice (Schedule 4I).

Mr Maladina’s profits from directorship of Vengold — referred to Police Commissioner

Mr Maladina was appointed chairman of the NPF board in January 1999 and he quickly arranged for himself to replace Mr Fabila as NPF’s director on the Vengold board.

By February 1999, Wilson HTM advised NPF to sell 4.2 million Vengold shares, then trading at $A0.50 cents. NPF held onto the shares for a further four months. During this period, Mr Maladina was appointed to the Vengold board but failed to attend several meetings and Vengold share value dropped to between 7 and 10 cents. The company was close to bankruptcy but paid directors fees and distributed options to directors, as it planned to change its focus from mining to an information technology company (Schedule 4A, paragraph 7.4).

Mr Maladina attended his first Vengold board meeting in December 1999. He collected his fees but failed to notify the NPF, which was desperately selling off its Vengold holdings at 7 to 8 cents, that Vengold was being transformed in a way, which may revitalise its share price.

NPF’s sale of the last of Vengold shares was at 27 cents per share, as the price was beginning to rise. Mr Maladina converted his options and then sold his shares when Vengold share price had risen to Canadian $4.50. He made a profit of K1.4 million from the sale, which he did not pass on to NPF. The money was banked to his company Ferragamo Ltd (Schedule 4A, paragraph 8).

NPF made a realised net loss of $A29,559,580 from its investment in Vengold (after taking account of the profits from selling off its LGL shares) (Schedule 4A, paragraph 7.11; Executive Summary paragraphs 15 and 15.1).

The commission has found that Mr Maladina’s conduct in these regards was criminal in nature and has recommended that he be referred to the Commissioner for Police for investigation (Schedule 4A, paragraph 7.11; Executive Summary paragraphs 15 and 15.1 and 16).

The full details of the Vengold investment are given in Schedule 4A which also has a comprehensive Executive Summary.


The other loss making equity investments were Cue Energy Resources Ltd (“Cue”) reported on in Schedule 4C and Macmin NL (“Macmin”) in Schedule 4E.

In both, these small companies, NPF made significant investments and obtained seats on the board of directors in order to influence company policy.

They were high-risk investments in non-income earning companies and quite inappropriate for a superannuation fund.

With Cue, NPF management went to extreme lengths to support the cash hungry company, even borrowing in order to on-loan to Cue.

Mr Copland, Mr Kaul and Mr Wright all held undisclosed interests in Cue. As Cue made unwise investment decisions in Indonesia, the NPF increased its support for Cue when it should have been selling down the investment in order to protect members’ funds.

At one stage, acting on the self-interested advice from Mr Semos of Wilson HTM, Mr Kaul exposed $A25 million of NPF member’s funds to help Cue acquire assets in Indonesia, by sealing an irrevocable underwriting offer (Executive Summary 4C, paragraph 2.5).



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