National Provident Fund Final Report [Part 23]
Below is the twenty-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 2002/3.
NPF Final Report
This is the 23rd 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 2E Continued
In October 1996, ANZ approved full interchangeability between the two facilities. In reaching this decision, it reviewed NPF’s progress during the last quarter but still did not conduct an in-depth analysis.
The review was expressly based on two unjustified assumptions:-
- that there would be no major changes in the nature of NPF’s proposed investments; and
- income sources would remain stable over the year.
The review did not consider the obvious business risks NPF would face relating to changes in interest rates, exchange rates and market movements.
ANZ’s review of its loan facilities to NPF in September 1996, was superficial and flawed in that it did not consider several obvious risk factors.
Non-disclosure to the NPF Board
Even though ANZ had approved the important variations to the loan agreement on 4th October granting full interchangeability between the Kina and AUD facilities, Mr Wright and the NPF management did not inform the NPF Board about this or the requests Mr Wright had been making to ANZ. These were serious breaches of duty as the transactions between NPF management and ANZ were significant. For instance, on 23rd October 1996, NPF delivered share scrip to ANZ, without the NPF Board’s knowledge or approval.
Equity portfolio is progressively pledged as security for debt
From June to December 1996, as NPF’s loan-funded share acquisitions continued, more and more share scrip was pledged to ANZ as security, as shown.
Equity Portfolio Pledged as security to ANZ Loan – June 1996
Value pledged to ANZ Bank – K36,313,162
Value not pledged to ANZ Bank – K66,195,420
Total Equity Portfolio = K102,508,582
Equity Portfolio Pledged as security to ANZ Loan – September 1996
Value pledged to ANZ Bank – K59,600,940
Value not pledged to ANZ Bank – K48,300,207
Total Equity Portfolio = K107,901,147
Equity Portfolio Pledged as security to ANZ Loan – December 1996
Value pledged to ANZ Bank – K95,518,096
Value not pledged to ANZ Bank – K72,870,007
Total Equity Portfolio = K168,388,103
During this time, the levels of debt rose and fell as maturing IBD’s were used to reduce debt and as further acquisitions were made.
At the 104th NPF Board meeting on 9th December, the various loan agreements for the K40 million and A$20 million were eventually tabled. There was no discussion on the subject even though this was the first time the Board had been notified about the extra K20 million facility.
A$20 million increase in AUD facility
This increase in the AUD facility was resolved by the Board by way of circular resolution as the basis of a short and inaccurate management paper, which provided no reasoned analysis why the increase was required. It enabled management to pursue its aggressive investment strategy without having to seek Board funding approval for each transaction.
(a) In the last quarter of 1996, NPF management continued to drawdown on the ANZ facilities and to pledge securities without Board knowledge or authorisation. ANZ permitted this without sighting all the necessary Board resolutions.
(b) Throughout this period, NPF management failed its duty to inform the NPF Board and obtain the necessary authority for its use of the ANZ facilities.
(c) The Trustees failed in their fiduciary duties to the members by not requiring management to report effectively and by failing to reprimand management when management’s unauthorised actions became known.
(d) ANZ granted further facilities to assist NPF in its endeavour to acquire K32.25 million worth of Orogen shares, despite its growing concerns about NPF’s aggressive investment strategy.
(e) Management provided false and misleading information to the NPF Board by way of circular resolution dated 20th December 1996, in order to obtain approval of an additional A$20 million facility. It failed in its duty to brief the Board with expert objective assessments about the risks of increasing the AUD facility.
(f) The Board of Trustees failed in its fiduciary duty to the NPF members by not maintaining broad control over management and by not directing that management keep the Board informed.
(g) Having obtained full interchangability for the K40 million and A$40 million facilities, NPF management was able to pursue its aggressive risky investment policy, abetted by a compliant Board of Trustees.
USE OF ANZ FACILITIES – 1997
Communications between NPF management and ANZ officers
During 1997, NPF made extensive use of its ANZ facilities to continue with its aggressive investment strategy, all of which was discussed with ANZ officers who were very supportive of NPF but vigilant to protect ANZ’s 150 percent security coverage.
There was constant communications between NPF management and ANZ officers for the release of shares for sale, for pledging additional securities, to execute deeds and for releasing securities. There were discussions about NPF’s strategy to sell off 42.5 million HGL shares and purchase 50 million HPL shares.
These transactions involved the use of the loan facilities and various devices to retain the 150 percent security coverage.
There were also detailed discussions about Mr Wright’s plan to combine with other PNG institutions and sell off their Lihir Gold Limited (“LGL”) shares in order to buy into Vengold with the intention of obtaining a stronger, indirect stake in LGL.
Failure to inform NPF Board
When the Board met on 27th February, there was no mention of these important developments in the use of the ANZ facilities. The Board did, however, approve Messrs Wright and Kaul as signatories to execute drawdown notices. This provided further freedom for management to use the ANZ facilities without obtaining NPF Board approval.
a) Management breached its duty to the Board by failing to provide the Trustees with relevant, timely and adequate information concerning key aspects of the Fund’s borrowings and its financial position.
b) The Trustees breached their fiduciary duty to the members by failing to inquire from management about NPF’s facilities with ANZ. Where information was so clearly deficient, the Trustees should have vigorously sought that information from management.
ANZ’s management of the facility
In order to approve drawdowns or the transfer of one security in exchange for another, ANZ was frequently required to assess the companies concerned and the value and stability of their shares (e.g. Vengold was considered by ANZ to be a risky investment to be marked-to-market on a daily basis and closely monitored (paragraph 6.5)). When NPF sought to hold the proceeds of sales off shore for its own purposes, ANZ was vigilant to ensure BPNG approval was obtained or to find other legal solutions. On occasions, ANZ was required to seek approval from its parent, ANZ Australia, before seeking BPNG approval to lend to NPF in excess of BPNG prudential guidelines. ANZ was also required to ensure that the approvals of the NPF Board and the Minister for Finance had been obtained for transactions as required, before granting approval.
These normal banking activities are described in paragraphs 6.1-6.4 with regard to LGL, HPL and Vengold.
Failure of NPF Board to monitor ANZ Facilities
NPF management was in breach of their duty in not keeping the NPF Board informed of the state of the ANZ facilities, but the Trustees must also be criticised for never inquiring and for failing to criticise, restrain and reprimand management when instances of management exceeding their power, came to light.
At the NPF Board meeting on the 5th May 1997, Mr Wright gave wrong information on the funds available in the facility.
Investment in Cue Energy
ANZ approved a drawdown of K1.75 million to invest in Cue shares and options in May 1997 and ANZ’s records show that it sighted both the NPF Board and the Ministerial approval for this investment. ANZ is unable to produce its file but there is no other evidence that Board approval was obtained.
NPF’s loan-funded investment buying spree during 1996 and the first half of 1997, occurred during favourable economic conditions and without regard to the possibility of an inevitable down turn. This down turn occurred in June / July 1997 when the value of resources stocks began to fall sharply, interest rates began to rise steeply and the value of the Kina increased its rate of decline.
In July 1997, ANZ managers noted the fall in gold prices but felt that ANZ was secured against any adverse effects this may have on NPF. The same month it reviewed NPF’s financial statements for 1996, analysing NPF’s strengths and weaknesses. One of the strengths noted, was that Minister Haiveta was guided by NPF chairman David Copland.
ANZ encourages further AUD Borrowings
In its review ANZ noticed that NPF was under-utilising its K40 million facility as current drawdown was only K8,649,000 whereas the AUD facility was fully drawn. ANZ therefore set in motion the transfer of K20 million to the AUD facility.
At the time of promoting this further incentive for NPF to borrow course, ANZ had already identified the economic trends which would make further borrowing for investment by NPF foolhardy.
The transfer of K20 million to the AUD facility was approved by BPNG on 25th November 1997. ANZ facilities available to NPF were then K20 million and A$40 million.
ANZ fails to assess the risks of investing in HPL
In 1997, NPF sold its HGL shares in order to finance a K50 million investment in HPL. ANZ, which held the HGL shares as security, allowed their release, and accepted the newly purchased HPL shares as security. ANZ then approved a drawdown of A$15.75 million for the purchase by NPF of the balance of the HPL shares which were then also pledged to ANZ as security for the loan.
The value of HPL shares never took off. The fall in value was so steep and so continuous that less than one year later, ANZ was refusing to accept HPL stock as security, relegating it “junk” status.
Release from Negative Pledge
By this time, in October 1997, ANZ also released NPF from its “negative pledge” to allow it to borrow K50 million from PNGBC to finance the construction of the NPF Tower. ANZ’s decision enabled NPF to seriously over-commit itself as a borrower and dramatically reduced its ability to service its ANZ loan facilities.
Use of the extra A$20 million facility
As soon as BPNG approved the increase of the AUD facility to A$60 million, NPF immediately gave drawdown notices for the following investments:-
Orogen & STC- shares – A$ 658,000
STC – A$ 44,403
HPL – A$ 573,895
Orogen – A$ 358,303
Vengold – A$ 511,289
CXL – A$ 11,033
(a) Throughout 1996 and 1997, ANZ allowed NPF to make drawdowns on the Kina and AUD facilities to purchase high-risk PNG resource stock. Although it was uneasy about the situation, it continued to encourage NPF to increase its borrowing (paragraph 9.1). ANZ protected its own position by ensuring the security provided by NPF, in the form of share scrip, was “marked-to-market” on a daily basis, to ensure the debt / security ratio did not inadvertently fall below 150 per cent.
(b) ANZ’s decision to release NPF from its negative pledge to enable it to borrow from PNGBC for the construction of the NPF Tower, endangered ANZ’s own security position, as it encouraged NPF to grossly over-commit itself as a borrower.
(c) Throughout 1996 and 1997, NPF management completely failed to keep the NPF Board involved in how the ANZ facilities were being managed; what drawdowns were being made and for what investment; and what scrip was pledged against what loans. There was no practice of reporting on the state of the ANZ facility. This was a gross breach of duty by Messrs Wright and Kaul who frequently exceeded their authority in the agreements they reached with ANZ.
(d) The Trustees failed to insist that management keep them informed about the use and state of the ANZ facility and this was a serious breach of the Trustees fiduciary duty.
(e) During a period when interest rates rose sharply, the value of the Kina fell and the value of NPF’s share portfolio plummeted, management did not provide and the Trustees did not seek, a professional assessment of NPF’s investment. No one calculated the huge unrealised losses, which were occurring.
TO BE CONTINUED NEXT WEEK