National Provident Fund Final Report [Part 22]
Below is the twenty-second 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 22nd 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.
Continued from yesterday
(f) It was improper for management to seek Ministerial approval to accept the ANZ facility before the NPF Board had even been consulted. (g) DoF failed its responsibility to brief the Minister before he approved NPF obtaining the ANZ loan facility.
(h) Minister Haiveta should not have approved such a significant request as borrowing K20 million and A$20 million, without taking expert advice from DoF or some other independent expert source.
(i) Mr Herman Leahy failed in his duty as NPF’s legal counsel by not proactively advising the Board about the statutory constraints on NPF’s powers, that it had no power to borrow and that the Minister’s approval (which Mr Leahy seems to have drafted) was invalid.
The fees due on the facilities were:-
ADDITIONAL K20 MILLION FACILITY
On 22nd March 1996, without notifying the NPF Board and without its approval, NPF management then sought Minister Haiveta’s approval for an increase of the Kina facility to K40 million, which he granted on the same day (paragraph 4.2). DoF was not consulted. It seems that the sudden need for the extra K20 million was related to an opportunity to acquire CXL and STC shares for A$39.7 million which was payable to POSF and DFRBF by 10th June 1996.
ANZ made a detailed review of NPF’s situation at this stage but did not conduct an in depth analysis of the various risks NPF faced by financing such investments on borrowed funds, without considering factors such as the impact of an adverse macro economic environment. ANZ approved the K20 million increase on the strength of the Ministers approval, without sighting an approval from the NPF Board.
(a) ANZ’s assessment of NPF’s request for an additional K20 million in its loan facility was shallow.
(b) Minister Haiveta approved the increase in the ANZ facilities without sighting any resolution from the NPF Board and without advice from the DoF. This was improper conduct by Mr Haiveta and poor banking practice by ANZ.
(c) Management failed its duty to seek NPF Board approval for an increase of K20 million in the loan facility.
USE OF ANZ FACILITIES – 1996 Purchase of CXL and STC shares
On 31st May 1996, the NPF Board resolved to partly fund the purchase of CXL and STC shares from the ANZ facilities and Mr. Wright sought a A$6.6 million drawdown on the facility for this purpose. There was difficulty getting Bank of Papua New Guinea (“BPNG”) foreign exchange approval as Mr. Popoitai wanted time to consider it. He was however, over ruled by the Governor of the BPNG, Mr. Tarata, at the request of ANZ.
Purchase of Highlands Gold Limited shares
NPF management also received notice from brokers Wilson HTM on 6th June 1996 that NPF would be expected to find A$6,085,650 by 11th June to honour its sub- underwriting agreement to cover the shortfall in a Highlands Gold Limited (“HGL”) share placement. There was no NPF Board approval for the purchase of these HGL shares but ANZ allowed the drawdown after sighting only the Minister’s approval, which was dated after the date of the contract.
On the 14th June 1996, representatives of NPF, ANZ and BPNG met to sort out drawdown procedures. As of 14th June 1996, NPF’s pledged assets for the FCL were:-
The assets pledged represented 159.7 percent security coverage.
During those NPF Board discussions concerning the ANZ facility, management did not mention to the Board that the Kina facility had been increased by K20 million.
Purchase of Macmins shares
On 26th June 1996, Mr. Wright organised a A$2.4 million drawdown to buy 10 million shares and 5 million options in Macmin. Once again, there was no NPF Board approval of the proposed purchase. ANZ diary notes indicate that Ministerial approval had been sighted (but the relevant ANZ file is lost).
Once again, NPF management did not account to the Board for this drawdown or the 1.35 million Niugini Mining Limited (“NML”) shares that had been pledged as security. After NPF had drawn down to pay for its CXL and STC purchases on 13th June 1996, NPF’s approved drawdown in respect of the K40 million facility then stood at K35,800,000 against which it had pledged the following IBD’s:-
Poreporena Freeway loan – Transfer from AUD to Kina facility
On 26th June 1996, Mr Wright wished to drawdown K5 million to on-lend to the National Government to help finance the Poreporena Freeway project.
As there was only K4.2 million available in this facility, ANZ agreed to the temporary transfer of K1 million from the AUD facility and for the security to be share scrip maintaining a 150 percent coverage. Until then, the Kina facility had been secured by cash (IBD) in accordance with the loan agreement.
Pledging shares to the Kina facility was a variation of the loan agreement and 5.99 million STC shares were so pledged.
Mr Wright authorised these security transactions without reference to the NPF Board and beyond his authority.
Failure to notify NPF Board
At the 101st Board meeting on 28th June 1996, Mr Leahy tabled various documents relating to the K10 million and A$20 million facilities. However, he still did not disclose the existence of the additional K20 million facility nor mention the “rapid fire” drawdowns during June, nor the securities pledged.
Both management and the Trustees were negligent in not providing and demanding (respectively) an update as to the use of the facilities. By 2nd July 1996, the facilities were almost fully utilised as follows:-
The shares pledged as security were 14,351,000 HGL shares, at the market value of A$8.8 million and 9,000,000 LGL shares with a market value of A$18.2 million (Exhibits B1275-B1276).
The same diary note records that NPF repaid K1.5 million of the Kina facility, which enabled ANZ to reallocate the temporary transfer from the AUD facility to the Kina facility.
In July 1996, NPF paid two K500,000 cheques as well as K4.1 million from its BSP IBD towards the facilities.
(a) Management’s failure to notify the Trustees at the 30th May 1996 meeting that the Minister had approved an additional K20 million to be added to the ANZ loan facility, was deceptive and disrespectful to the Trustees as well as being a breach of their duty to the Board members.
(b) The Minister’s approval for the A$6 million drawdown to purchase HGL shares was granted without Board approval and amounted to improper conduct by Minister Haiveta.
(c) ANZ breached its own internal policy by not sighting the NPF Board resolution before allowing the drawdown of A$6 million requested by NPF in order to purchase HGL shares.
(d) Mr Noel Wright acted without NPF Board authority when he asked ANZ to allocate K1 million to the AUD facility and when he pledged STC and CXL shares as security for a K5 million drawdown in June 1996. This was improper conduct and a breach of his duty to the NPF Board.
(e) NPF management failed in their duty to advise the Board of the transactions to which the drawdowns related – particularly the pledging and transferring of assets as security for the drawn down loan.
(f) The NPF Trustees failed their fiduciary duty by not directing management to keep them regularly informed with regard to drawdowns, the pledging of assets and the state of the loan facilities account with ANZ.
ANZ reviews NPF facility
On 31st July 1996, ANZ reviewed NPF’s financial performance for the previous quarter and found it satisfactory (paragraph 5.12). The Senior Credit Inspections manager expressed caution that he “would not like to see hard core borrowing emerge from the Fund gearing up, particularly against security of a small number of largely mining shares”.
His warning seems to have gone unheeded.
In August 1996, NPF repaid K500,000 on the Kina facility and prepared to transfer the proceeds of K4 million maturing IBD’s to ANZ to reduce debt. Further, CXL and STC shares were also pledged to secure the debt.
Relaxation of Kina borrowing against Kina security rule
When NPF sought to drawdown K15 million to on-lend to the Government to fund the Poreporena freeway construction, it did not have sufficient Kina security, as required under the loan agreement. ANZ obliged by relaxing the rule and accepting Government inscribed stock as security for the K15 million drawdown. ANZ was now considering whether to allow full interchangeability between the Kina and AUD facilities.
Meanwhile, Mr Wright approached ANZ to discuss borrowing A$150 million to fund the purchase of 50.4 percent of NML to be then resold for profit by means of a structured selldown. Although ANZ diary notes record the high-risk of this strategy, ANZ managers participated in discussions with Mr Wright aimed at progressing the strategy.
On 10th September 1996, in approving Mr Wright’s request to drawdown K5 million to on-lend for the Freeway construction, ANZ accepted Australian registered scrip as security for part of the loan as follows-
The pledging of these shares was in order to maintain the 150 percent security to loan ratio though it actually amounted to a ratio of 550 percent.
There were frequent discussions between Mr Wright and ANZ Bank officers on the question of maintaining the ratio, as the levels of drawdowns and the value of the securities altered.
One way to maintain the 150 percent security level was to reduce the level of debt. With this in mind, the following debt repayments were made by NPF in September 1996:-
During discussions, Mr Wright committed NPF to use K9.9 million of maturing IBD’s to retire debt and promised another K10.5 million from a maturing loan to Ramu Sugar.
This is an example of how involved ANZ’s managers had become involved in NPF management’s decisions regarding the loan facilities. In some ways ANZ was more involved than the NPF Board, as the NPF management did not inform its Board about the arrangements for drawdowns and transferof securities it had made
(a) One of the rationales for following the path of borrowing was that NPF would be able to retain its high yielding IBD’s and finance investments by obtaining cheap loans from ANZ. Instead, however, as early as September 1996, NPF began retiring its IBD’s when they matured, in order to clear outstanding debt.
(b) In their place, NPF invested in equity stocks, which included investing in companies such as CXL, STC, Macmin, NML and HGL. All of these are reviewed in separate schedules to the Commission’s Report.
(c) It is obvious that NPF’s investment decisions were driven by Messrs Wright and Copland. Mr. Robert Kaul had minimal input. It is also clear that NPF management and the chairman of the Board, had a close working relationship with the Minister for Finance, Mr Haiveta, who regularly used an office in the NPF building and who was consulted early about proposed investments.
(d) DoF’s role was minimal as it was not asked by either the NPF or the Minister to advise on the use of the ANZ facilities to acquire these investments.
(e) NPF management did not report to, consult or seek the authority of the Board regarding the management of the ANZ loan facilities throughout 1996.
(f) ANZ’s willingness to lend many millions of dollars to NPF for high risk investments, sometimes without sighting an NPF Board approval, was a breach of its duty to its client. To ANZ’s knowledge, NPF was a provident fund controlled by Trustees who had an onerous fiduciary duty to the Fund’s members.
Wrong advice about NPF’s power to borrow
In September 1996, Carter Newell lawyers incorrectly advised ANZ that NPF had power to borrow. ANZ was remiss in not seeking advice from senior counsel on this important matter.
(a) Although ANZ obtained legal opinion from Carter Newell regarding NPF’s power to borrow, there was a lack of clarity on the face of the opinion. In view of the magnitude of the sums involved, ANZ should have obtained a second opinion.
(b) Carter Newell’s legal advice to NPF was wrong in circumstances that could amount to professional negligence. The wrong advice led to very serious consequences, particularly for NPF. As the advice was not prepared for NPF however, (and Carter Newell was not at that time advising NPF on other matters) it is probably not actionable at the suit of NPF.
TO BE CONTINUED