National Provident Fund Final Report [Part 21]
Below is the twenty-first 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 2002/3.
NPF Final Report
This is the 21st 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 former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 2c Continued
The commission recommends that all trustees be referred to the Ombudsman Commission to investigate whether breaches of the Leadership Code have occurred.
With regard to the “Government” loans and Treasury Bill investments, both the Minister and DoF staff had very serious conflicts of interest. The DoF and the Minister were responsible for controlling the State’s finances but were also obliged to take account of the best interests of NPF and its members.
This conflict may have contributed to the failure of DoF to warn NPF about the mismatch between NPF’s borrowing and on-lending arrangements. The conflict was again exposed when the financially ailing and debt-burdened NPF was directed to use its BSP loan facilities to drawdown K15 million to purchase Treasury Bills to aid the Government’s urgent cash flow crisis.
Executive Summary Schedule 2d
See the report on NPF Proposed Borrowing from Leveraged Equities for on-lending to Cue Energy Resources N.L. (Schedule 2D) for the full details and findings regarding this investment.
The short report at Schedule 2D describes a situation in March 1996 when Cue Energy Resources N.L. was apparently in urgent need of short-term funding of $A1 million and Mr Copland (the NPF chairman and Cue Board member), Mr Kaul (the NPF managing director) and Mr Wright (the NPF investment advisor/deputy managing director) agreed that NPF would borrow the money in order to on-lend to Cue.
Arrangements to source the loan from the ANZ Bank were going to be too slow to satisfy Cue’s immediate need.
They reached agreement with Cue as to the terms of the on-lending and claim to have reached agreement with Leveraged Equities for NPF to obtain a loan at exceptionally favourable terms which would enable NPF to on-lend to Cue very profitably.
They then put these arrangements up for board approval by way of circular resolution and sought Ministerial approval before obtaining a valid board resolution.
In any event, the contractual relationship with Cue had already been entered into without being made subject to obtaining the required approvals.
Minister Haiveta was pressured into giving his approval without seeking Department of Finance advice and the terms of the NPF board resolution presented to Minister Haiveta, had been altered by corporate secretary Herman Leahy before certification. The Minister was then hurried into granting approval before seeking DoF advice. After approval had been granted, DoF then gave advice to the Minister recommending approval without making any critical appraisal of NPF’s submission.
The whole process was rushed and did not follow the proper sequence of procedures.
It resulted in breaches of the Public Finances (Management) Act 1995 and breaches of duty by management and Mr Copland.
Whether or not the alleged agreement with Leverage Equities was ever genuine is not known as very little documentation pertaining to this transaction has been found. In any event, the transaction did not proceed.
In order to provide Cue with urgently required funds, NPF management simply by-passed all procedures and arranged the funding by illegally using off-shore funds held by NPF in its trading account with its brokers Wilson HTM.
Instructions were given to Wilson HTM to transfer $A500,000 to Cue from this account.
The commission is unable to say who actually gave the direction, though it was normally Mr Wright who gave directions to Wilson HTM. The commission has found that Mr Copland, Mr Kaul and Mr Wright were fully aware and approved of this illegal transaction.
(a) Due to the dearth of available documents the commission is unable to ascertain what, if any, direct contact NPF had with Leveraged Equities. There is no documentary evidence that NPF carried out any due diligence in relation to Leveraged Equities;
(b) NPF managing director Robert Kaul, exceeded his authority in writing the letter dated March 19, 1996, to Cue without making the loan offer conditional on both the approval of the NPF board and the Minister. Both of these approvals were required and subject to the approval of the Bank of Papua New Guinea under the Banking (Foreign Exchange) Regulation;
(c) Each of David Copland, Robert Kaul and Noel Wright were remiss in not ascertaining and advising the NPF Board of Trustees that NPF was not authorised by the Ministerial investment guidelines to make short-term loans of the nature sought by Cue – only long-term development loans are permitted under such guidelines. Herman Leahy was likewise remiss in not so advising Mr Kaul and Mr Wright and the board when he prepared the documentation for the circular resolutions on March 25, 1996;
(d) NPF management in the persons of Mr Kaul, Mr Wright and in particular Mr Leahy as corporate secretary, were remiss in their duty in not advising the NPF board that the only method of board decision making prescribed by the NPF Act is a resolution passed in a properly convened board meeting; that the circular resolution process was extra legal and that such process as used:
(i) Risked pressuring trustees into making decisions in isolation based on minimal and inadequate information;
(ii) Deprived trustees of the benefit of face-to-face discussion and dialogue with all fellow trustees before decisions were made which would be acted upon by management;
(iii) Was of no legal effect unless the opinions expressed in response to “circular resolutions” were confirmed and the subject matter of the same ratified by formal resolution in the prescribed decision making forum.
(e) Mr Leahy was remiss in his duty as corporate secretary in preparing an extract of the “circular resolution” regarding the borrowing from Leveraged Equities and signing a document which differed materially from the terms of the “circular resolution” agreed to by the seven responding trustees.
(f) Mr Kaul acted improperly in meeting with Minister Haiveta on March 27, 1996, and prevailing on the Minister to approve the loan arrangements in respect of Cue without the Minister having the benefit of advice from his line department;
(g) Hon Chris Haiveta acted improperly in:
(i) Meeting with Mr Kaul on March 27, 1997, and approving the loan arrangements in respect of Cue without the benefit of advice from his line department
(ii) Not informing his department of such approval and thereby occasioning wasted time and effort in the consideration of Mr Kaul’s letter preparation and processing of a brief and preparation consideration and execution by his Vice Minister of a second letter of approval all after such matters had been rendered futile by the Minister earlier signing an approval letter on March 27, 1996.
(h) NPF management acted in excess of its delegated financial and other delegated authority in authorising payments of $A400,000 and $A100,000 to Cue from funds held in NPF’s share trading account with Wilson HTM in Australia:
(i) Without approval of the NPF board.
(ii) Without approval of the Minister (who only approved a borrowing and on lending).
(iii) Without the requisite approvals of the BPNG.
(i) On the evidence, the commission is satisfied that Mr Kaul, Mr Wright and Mr Copland were fully aware of the arrangements made to obtain funds from Wilsons HTM, which by-passed the legally required approvals.
Executive Summary Schedule 2E
This is a summary of the report on ANZ Banking Group Ltd (Schedule 2E) which is set out in Schedule 2E of the commission’s report.
The NPF Fund’s new and aggressive investment policy was introduced in late 1995.
It involved putting more emphasis on equity holdings. The aim was to obtain significant holdings in PNG resource stocks with a view to obtaining representation on the companies boards of directors and consequently a measure of control over their policies and activities.
It also involved obtaining a controlling interest in Steamships Trading Company Limited (STC) and Collins and Leahy Holdings Limited (CXL) with the intention of merging and managing the two companies.
The new policy envisaged NPF becoming a player on the Australian Stock Exchange, buying and selling as favourable opportunities arose and involving itself in “corporate plays”, particularly as sub-underwriter of share placements and in corporate takeover strategies.
The aim of the new strategy was to manage the NPF portfolio in a way that would return more profit on the investments for the benefit of the fund’s members.
There seems also to have been a belief that it would be beneficial to Papua New Guinea for NPF to own significant interests in companies that held major interests in PNG’s mineral resources.
How this would directly benefit NPF members was never spelt out.
As far as STC and CXL were concerned, it was thought that NPF members would benefit if the fund owned a controlling interest in those companies as they employed a large number of the members and also contributed significantly to employers contributions to the fund.
Again, how these factors related to the best interests of NPF were never spelt out.
Decision to Fund Share Purchase with Borrowed Funds
To fund this investment strategy, chairman David Copland, investment manager Noel Wright and managing director Robert Kaul decided to approach the ANZ Banking Group Ltd (ANZ) to establish kina and Australian dollar loan facilities.
Without prior discussion with the NPF board, Mr Kaul entered into detailed discussions with the ANZ to establish loan facilities.
This initiative was followed up by Mr Wright who carried on the negotiations with ANZ, briefed the Department of Finance and the Minister and presented the pre-arranged package to the NPF board.
ANZ responded enthusiastically as NPF seemed potentially to be an excellent client and within days, the details of a K20 million and an $A20 million facility were presented to Mr Wright by ANZ (paragraph 3.2).
The interest rate was to be variable at the indicator lending rate (then 15 per cent) and security was to be full cash cover for the kina facility and Australian listed scrip for the Foreign Currency Loan (FCL), ensuring 150 per cent security cover at all times.
NPF was to sign a negative pledge (with an obligation not to borrow from another institution without ANZ’s approval).
There were other covenants to protect ANZ’s interest, but at that stage all were negotiable. During discussions, Mr Wright outlined how NPF intended to take “a more pro-active approach to managing its security portfolio through trading of securities rather than the current more passive approach of the Buy and hold strategy”.
ANZ’s Due Diligence
ANZ management must have been aware that it was unusual for a provident fund to fund an investment program by borrowing. Perhaps for this reason, ANZ obtained a legal opinion from Carter Newell Lawyers to confirm whether NPF had power to borrow.
Carter Newell advised that the National Provident Fund Act Chapter 377 (NPF Act) was silent on the subject but that the power to borrow could be inferred from the Public Finances (Management) Act 1995 (PF(M) Act). This was incorrect advice, which even on its face indicated a degree of doubt. ANZ should have sought a second opinion from senior counsel on such an important matter.
NPF Board Resolution April 26, 1996
ANZ sent its detailed offer to Mr Wright on April 19, 1996 and Mr Wright briefed Minister Haiveta in writing on April 25, 1996, copying his letter to the Secretary for Finance.
At the NPF board meeting of April 26, 1996, Mr Wright provided the board with a short brief regarding the tax advantages of borrowing and tabled ANZ’s detailed offer of K20 million and $A20 million facilities.
Mr Haiveta was in attendance when the board resolved to accept the ANZ facilities offer, subject to Ministerial approval. There was no information or discussion about the way the facility was to be used or of the risks involved.
Ministerial Approval of K20 Million and K20 Million Facility
Minister Haiveta did not seek or receive DoF advice but approved the facilities on May 10, 1996, invoking the wrong section of the PF(M) Act in the process.
$A1 Million Drawdown as Investment Loan For Cue Energy
During negotiations with ANZ regarding the facilities, Mr Wright, without the authority of the NPF board, agreed with ANZ that $A1 million would be drawn down on the FCL facility for NPF to on-lend to Cue Energy Resources NL (Cue). Mr Wright wrongly signed off on this.
(a) The paper from Mr Wright on borrowing for tax purposes and the presentation to the board by chairman Copland at the 100th NPF Board meeting on April 26, 1996, regarding the proposed ANZ Facility, contained only a limited, simplistic and one-sided analysis. Although borrowing may, at that time, have been a cheaper source of finance, it exposed the fund to serious risks which should have been mentioned;
(b) the NPF had no power under the NPF Act or the PF(M) Act to borrow (See report on Structure – Schedule 1). Ministerial approval was given under the wrong section of the PF(M) Act;
(c) Management made no attempt to negotiate better terms with ANZ despite there being some room for negotiation;
(d) Mr Kaul and Mr Wright should have sought board approval before holding in-depth discussions with ANZ that led to ANZ’s letter of offer;
(e) ANZ should have taken more care to “know its client”, given the fact that NPF was a superannuationfund whose trustees owed a fiduciary duty to the contributors to manage the fund prudentially and withinGovernment investment guidelines. ANZ was aware that NPF intended to use the money lent to finance an aggressive and inappropriate investment program.