National Provident Fund Final Report [Part 26]
Below is the twenty-sixth 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 26th 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
11. The trustee’s breached their fiduciary duties by failing to:
- inquire from management the status of the ANZ facilities;
- properly understand the risks inherent in NPF’s investment, as it was funded by debt;
- consider whether NPF management was appropriately qualified and competent in the field of investment and provident fund management;
- react appropriately to the clear warning signals in late 1997 and early 1998 when interest rates, exchange rates and share market prices all adversely impacted on the fund.
The roles of NPF management, the trustees, the Minister for Finance and of the ANZ managers have been examined in detail in this report because the approval of the ANZ facility and the way it was used to fund NPF’s disastrous investment strategies were very significant factors in the financial downfall of the NPF.
Executive Summary Schedule 2F Attempts to issue $A Bond
The possibility that the National Provident Fund (NPF) might issue an Australian dollar bond ($A bond) was first discussed in April-May 1994 when NPF’s finance and investment manager Noel Wright raised the matter with Dr Jacob Weiss, a World Bank advisor to the PNG Government.
At that stage Mr Wright floated the idea of offering the opportunity for NPF’s employer companies to buy transferable NPF bonds, earning tax-exempt interest. He felt this may be a cheaper way for NPF to raise funds to finance investment opportunities which may be attractive to NPF’s employer companies.
It was an ill-considered concept, which Dr Weiss did not encourage.
The concept surfaced again in 1997 with the apparent support of trustees Mr Copland and Mr Aopi. Mr Wright placed the matter before the NPF board on October 28, 1997. The proposal was to issue a $A54 million bond with a 14.67 per cent coupon rate (interest) maturing in 9 years. It was linked to a proposal to make a loan of K54 million to the State at 14.67 per cent interest for constructing the Poreporena Freeway.
The management paper which recommended that such a bond issue would be profitable for NPF was simplistically argued and was prepared without expert advice. It ignored some significant risk factors, particularly the risk that profitability could be eroded by unfavourable movements in the kina/$A exchange rate.
Without insisting on obtaining expert advice, the Board resolved to approve the issue of the bond subject to the approval of the Bank of Papua New Guinea (“BPNG”) and the Department of Finance (“DoF”). Making such a poorly advised decision constituted a breach of duty by management and the Trustees. NPF sought the views of the BPNG Controller of Foreign Exchange, Mr Benny Popoitai (paragraph 4.1). Mr Popoitai expressed strong concerns that the proposal could expose NPF to heavy loss if the value of the Kina fell in relation to the Australian dollar, as NPF would be paying interest in Australian dollars.
It is possible to “hedge” against such a risk by holding substantial Australian dollar assets, which would be appreciating in value if the exchange rate moved against the Kina and this was argued by Mr Wright. Mr Popoitai and other experts pointed out, however, that NPF’s Australian dollar assets were concentrated heavily in PNG resource stock, which are subject to dramatic fluctuations in value. If the value of these assets plummeted, which they did during late 1997 and 1998, the exchange rate hedge would be ineffective and NPF would be in serious financial difficulties if the value of the Kina fell against the Australian dollar. Mr Popotai’s warning was disregarded by NPF management and not put before the NPF Board.
Mr Popoitai’s concerns about the exchange rate risks were valid and Mr Wright’s explanation was over simplistic and failed to recognise other risks that would negate the effectiveness of the “natural” hedge, which impacted on the exchange rate movement.
ANZ BANK VIEW
Australia & New Zealand Banking Group Ltd (“ANZ”) diary notes of 1st December 1997 show that ANZ was approached by Mr Wright to help market the bond but decided not to get involved because it felt the bond issue would be commercially impractical.
No reputable investor would purchase a bond issued by an unknown institution like NPF unless performance of the bond conditions was guaranteed by a reputable government or financial institution.
ANZ was also concerned that this would be the first such bond issue in PNG and that NPF management lacked any experience or expertise in this area.
NARA INVESTMENTS (J. RYAN) AND WARRINGTON INTERNATIONAL
Making no progress in finding a reputable investor to buy the bond, Mr Wright turned to Mr Jai Ryan a Canadian living in Port Moresby associated with Ambusa Copra Mill, who quickly identified Warrington International as a potential buyer for the bond.
Mr Wright, without consulting the NPF Board, offered Mr Ryan a commission of .05 percent which would net him a sum of $270,000 or $385,000 depending on how the ambiguous “informal” commission agreement was interpreted. Mr Wright authorised an advance of $15,425 to Mr Ryan, also without NPF Board authority and in contravention of the agreement, which specified payment only on successful completion.
Warrington was incorporated in Antigua and its representative was another Canadian, Mr Rudi Cooper. The terms of the agreement for Warrington to purchase the bond were quickly prepared. Without performing due diligence on the unknown and dubious Warrington and still with no expert professional advice, the NPF Board agreed to issue an AUD54 million bond with a 9 year maturity date and a coupon rate of 14.6 percent to be purchased by Warrington International.
Mr Wright and NPF management had withheld the critical comments of Mr Popoitai and the ANZ Bank from the NPF Board. The Trustees accepted management’s positive but shallow recommendations and did not insist that management perform due diligence on Warrington or obtain expert advice.
(a) The failure of Mr Wright and Mr Kaul to brief the Board on these matters was a breach of their common law duties to the NPF. For Mr Kaul it was also a breach of his fiduciary duty as a Trustee.
(b) On the other hand the Board of Trustees’ failure to inquire about these matters and/or to insist that management undertake due diligence on Warrington was a breach of their fiduciary duty to the members of NPF.
FALSIFICATION OF DOCUMENTS AND WITHHOLDING INFORMATION FROM NPF BOARD
In certifying the Board resolution, Mr Leahy, the corporate secretary and senior legal counsel, falsely included additional provisions authorising management to approve and execute all necessary documents which had not formed part of the resolution.
NPF prepared a very optimistic application for Ministerial approval. Two briefs for the Minister were prepared in DoF. One simply recommended approval. Another, prepared by Mr Tim Curtain, a World Bank consultant employed within the DoF, was a detailed and expert critique, which set out the commercial impracticality of the proposal and the serious risk of financial loss to NPF.
Mr Curtain’s brief was never put before the NPF Board. Mr Vele Iamo, the Deputy Secretary, DoF and a Trustee on the NPF Board, was aware of the critical brief but failed to ensure it was placed before the Trustees.
(a) Mr Vele Iamo’s failure to advise the NPF Board of Mr Curtain’s severely critical expert assessment of the proposed bond issue was a serious breach of Mr Iamo’s fiduciary duty to the NPF members.
b) The Commission finds that it is unlikely that he could successfully claim he was “acting in good faith” as a defence and accordingly he may be personally liable for any provable losses incurred because of his breach of fiduciary duty.
Mr WRIGHT WITHHOLDS CAUTIONARY EXPERT ADVICE FROM THE NPF BOARD AND MAKES COMMITMENTS WITHOUT BOARD’S AUTHORITY
The similar concerns of the BPNG were also not put before the NPF Board.
NPF briefed Clifford Chance, lawyers in Paris, France, to advise on the terms of the agreement. As it was to be a bearer bond, Clifford Chance recommended it would be necessary to appoint an independent Security Trustee to hold NPF’s securities for the bond on behalf of NPF, with authority to release them to Warrington if NPF defaulted on the bond conditions.
In February 1998, there were wrangles between Warrington and NPF over the securities to be provided by NPF as cover for the bond. Mr Wright offered $A72 million in share scrip, without any authority from the NPF Board, in an endeavour to expedite settlement.
When Warrington sought evidence that interest it received on the bond would be tax free, Mr Wright was sensibly advised to obtain a ruling from the Tax Office. Instead, he recklessly guaranteed on NPF’s behalf to meet any taxes that might be levied. This potentially costly guarantee was without Board knowledge or authority.
(a) Mr Wright’s guarantee that NPF would cover tax charges in PNG did not have the Board’s approval. Had the bond come into existence, this representation potentially exposed NPF to a heavy PNG taxation liability because PNG tax could be payable on the income earned from the bond. This was a serious breach of Mr Wright’s duty to the NPF.
(b) The Commission finds that Mr Wright had no relevant experience in corporate finance, especially in securing finance through bond issues. It is worthy of note that as far as we are aware, no bond has ever been issued in PNG.
(c) The Commission of Inquiry finds that Mr Wright and the NPF management team were unqualified to handle such a transaction and should have taken note of the professional and specialist assistance provided by the DoF, the BPNG, the ANZ Bank and Clifford Chance, instead of potentially exposing NPF to great risks.
(d) Mr Wright acted beyond his authority in exposing NPF to grave risks. Mr Kaul’s supervision of Mr Wright was inadequate.
(e) The Trustees also failed in their fiduciary duty to ensure that proper advice was obtained where it was obvious to the Board (or should have been) that NPF management did not have the appropriate in-house capabilities.
Foreign Exchange Controller Popoitai commissioned his own inquiries into Warrington and became increasingly concerned that it was not a reputable and financially secure company and that it may be connected with money laundering operations. He delayed foreign exchange approval while seeking further information and guarantees.
Clifford Chance also advised caution because of Warrington’s method of negotiating and about the security conditions being sought by Warrington.
Minister Lasaro was given only the DoF favourable recommendations and the NPF optimistic request for approval. He was not shown the critical report prepared by Mr Tim Curtain, which also queried NPF’s power to issue such a bond in foreign currency. Consequently, the DoF failed its duty to provide proper advice to the Minister and he gave his approval as recommended by DoF.
(a) The Commission finds that the NPF had no power under any law to borrow money by way of bond issue or otherwise. This topic is dealt with in detail in the separate report on Borrowings.
(b) The Commission finds that DoF failed in their role to properly scrutinise NPF’s submission seeking approval under Section 61 of the PF(M) Act. The DoF failed to properly advise the Minister of Finance.
Mr POPOITAI’S SUSPICIONS ABOUT WARRINGTON INCREASE AND Mr WRIGHT MAKES FURTHER UNAUTHORISED OFFERS ON BEHALF OF NPF
In January 1998, Papua New Guinea Banking Corporation (“PNGBC”) was prepared to provide a $A77 million bank guarantee to Warrington (covering principle and interest) but required specific details from Warrington to establish its credentials (Warrington failed to provide this information). PNGBC also required a 150 percent security cover from NPF for its guarantee.
A 150 percent security cover was beyond NPF’s capability as Mr Wright had already pledged huge volumes of scrip to ANZ as security for NPF’s loan facilities with ANZ. Instead, Mr Wright offered Warrington share scrip to the value of $A77 million as security (paragraphs 11.2 and 11.3). He had no NPF Board authority to make this offer and was therefore acting beyond his authority.
By March it was apparent that Warrington was suspiciously reluctant to provide details of its credentials and of its financier (NationsBank).
When Mr Wright finally provided Mr Popoitai with a company profile of Warrington it raised more concerns as it portrayed Warrington as a secretive organisation registered in Antigua, providing cheap loans to third world countries, using innovative funding methods. The profile did not allay fears that Warrington could be involved in money laundering activities for its anonymous owners and no reputable banker was listed as a referee.
Mr Popoitai expressed concerns about the lack of tender procedures in the appointment of Mr J. Ryan as agent and the selection of Warrington as the purchaser of the bond. He sought details of the specific purposes for which the proceeds of the bond would be used. Mr Popoitai also expressed concerns about the commercial practicality of the bond proposal and called for the coupon rate to be significantly reduced. Mr Wright’s replies misrepresented the facts and were deceitful.
(a) The terms of the purchase agreement with Warrington and the surrounding circumstances strongly suggest it was not a normal commercial transaction.
(b) Mr Wright’s explanations about the purpose to which the hoped for bond funds would be put were unsubstantiated late inventions, of which the Board had not been advised and which it had not approved.
(c) Mr Wright gave misleading information to Mr Popoitai in order to gain BPNG approval to issue the bond.
(d) The NPF Board approved the issue of the bond on the basis of clearly inadequate information and advice, in breach of the Trustee’s fiduciary duty to the members.
(e) In failing to direct management to provide essential details of the bond and any risk to the Fund, the Trustees were in breach of their fiduciary duties to the NPF members.
The Commission finds that the views and conduct of the BPNG Foreign Exchange Controller were proper as he correctly expressed concerns regarding fundamental issues, which had not been addressed by NPF management, or the Board of Trustees.
In reviewing the correspondence referred to above, the Commission finds that Mr Wright misrepresented to Mr Popoitai the advice from Clifford Chance regarding security arrangements as Clifford Chance was still far from satisfied and was sending warning signals to NPF. He was also deceitful about the Board’s view in relation to reducing the coupon rate of the bond. The Board did not discuss the issue.
Mr COPLAND PERSUADES BPNG GOVERNOR TO INTERVENE AGAINST Mr POPOITAI
Mr Popoitai continued to withhold Foreign Exchange approval until BPNG Board member and NPF Acting chairman, Mr Copland, exerted extreme pressure on the Governor of the BPNG, Mr Koiari Tarata.
Responding to this pressure, the Governor bypassed Mr Popoitai and personally signed the approval for NPF to issue the bond to Warrington. Mr Popoitai then gave approval for NPF to transfer the shares required as security from the PNG Register to the Australian register.
TO BE CONTINUED