Home > Corruption, Papua New Guinea > National Provident Fund Final Report [Part 27]

National Provident Fund Final Report [Part 27]

September 10, 2015 Leave a comment Go to comments

Below is the twenty-seventh 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 27th 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 2F continued 

Henry Fabila And Herman Leahy Oppose Noel Wright And David Copland Over Bonds

As NPF’s Financial Position Worsens ANZ Nominees agreed to hold the securities in a custodian capacity for a single client, which was significantly different from the security trustee, which had been recommended by Clifford Chance.

By April-May 1998, NPF’s financial situation was deteriorating rapidly and Mr Wright was staving off action by NPF’s bankers by promising the imminent signing of the bond agreement, which would provide immediate cash, which could be deposited with the banks to rectify breaches in the loan covenants. NPF and Warrington signed an agreement but as Warrington failed to affix its seal, the first payments were delayed.

In June 1998, ANZ Nominees became alarmed at Warrington’s notification that it was assigning the bond securities, which NPF had lodged with ANZ, to the RH Foundation of Anacirema. ANZ felt this would endanger NPF’s securities and it withdrew from further involvement.

Mr Leahy and Mr Fabila attempted to persuade the board to terminate the Warrington agreement but Mr Copland and Mr Wright successfully opposed this move. Mr Leahy made belated attempts to check out the financial bona fides of Warrington and wrote a strong memorandum recommending immediate termination of the agreement with Warrington.

Findings 

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

The commission finds that Mr Leahy’s assessment of NPF’s perilous predicament at this advanced stage of negotiations was well grounded.

NPF Board Approves Appointments of Wilson HTM As Security Trustee – Mr Wright Transfers Shares Without NPF Authority 

At this stage in 1998, Wilson HTM agreed to be the security trustee. Desperate to finalise the agreement, Mr Wright (and Haro Mekere) signed an assignment of share scrip from ANZ Nominees to Wilson HTM.

This was done without the approval of the NPF board. At the 113th NPF board meeting, despite open conflict between Mr Leahy and Mr Wright, the board approved the appointment of Wilson HTM as security trustee and resolved that the sale of the bond to Warrington should continue.

Findings 

(a) Mr Wright and Mr Mekere authorised transfers of shares from ANZ Nominees to Wilson HTM without NPF board authority. This was a breach of their common law duty to the NPF Board of Trustees.
(b) The decision by the board to continue with the bond purchase and sale agreement, in full knowledge of these circumstances, was reckless and a breach of the trustees’ fiduciary duty to the member’s of the fund.

Gadens Lawyers Advises That NPF Has No Power To Borrow – Mr Leahy and Mr Wright Negligently withholds the Advice 

PNGBC was requested to seek an alternative buyer in Australia. As part of normal due diligence, potential buyers sought assurance that the NPF had the power to borrow money and issue bonds. Geoffrey Applegate of Gadens Lawyers advised, correctly, that NPF had no power to borrow. Mr Wright was advised of this oral opinion, as was Mr Leahy, but they ignored the advice which would have virtually demolished NPF’s entire loan financed investment strategy.

Findings

(a) It is absolutely clear from the documentary evidence that Mr Wright was aware of Mr Applegate’s advice that NPF lacked power to borrow. PNGBC noted that Mr Wright had referred the issue for advice but the commission finds no direct evidence of this.
(b) In failing to seek independent legal advice and failing to notify the board on this issue, Mr Wright was guilty of gross dereliction of duty. NPF’s power to borrow not only was material to this failed attempt to issue a bond, but it struck at the very heart of many of NPF’s investments and of its whole investment strategy which by then was based on borrowed funds. If Mr Leahy and/or Mr Kaul had notice of Mr Applegate’s advice and just ignored it, they bear the same responsibility.
(c) As evidenced in transcript page 1688, Ms Israel ceased her employment with PNGBC towards the end of 1998, leaving the file with a Mr Hersey.

Mr Cop;and Persuades BPNG Governor to Require Mr Popoitai to Grant Further Extensions 

Meanwhile, Mr Popoitai made another attempt to stall the execution of the bond by refusing to extend foreign exchange approval beyond the July expiry date. On July 17, 1998, after intervention by the new Governor of the BPNG Mr Vulupindi, Mr Popoitai granted a series of further extensions until October 31, 1998. Mr Vulupindi’s intervention followed upon further pressure being exerted by Mr Copland.

Findings

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

Desperate Mr Wright Makes False Statements And Acts Without Board Authority In Attempts To Save Bond Deal

Without seeking NPF board approval, Mr Wright purported to grant power of attorney to Allen Allen and Helmsly to appoint Commonwealth Custodian Services Ltd (CCSL) as security trustee. CCSL created a problem by seeking an assurance form NPF that all securities it would be holding would be unencumbered.

Such an assurance could not honestly be given because Mr Wright had been secretly pledging STC shares (which were intended as bond security) to ANZ Nominees to remedy breaches in NPF’s loan covenant to maintain a 150 per cent ratio between securities and borrowings. The assurances, which Mr Wright, nevertheless gave, was therefore untrue.

In September 1998, there was desperation in Mr Wright’s last efforts to finalise the agreement with Warrington. The hold up remained the appointment of a satisfactory security trustee. On September 1, 1998, without board authority to do so, Mr Wright transferred 6.4 million STC shares from Rubicon Nominees (a Wilson HTM company) to ANZ Nominees for transfer to CCSL. When this arrangement fell through there were last minute attempts to involve ANZ, Midland Bank and HKBA Nominees. Mr Wright repeatedly made false statements that the shares provided as security were unencumbered.

Findings 

(a) Mr Wright transferred 6.4 million STC shares on September 1 without the approval of either the NPF board or the Minister. This was a breach of his duty to the board as well as a breach of Section 61 of the PF(M) Act;
(b) Mr Wright misrepresented to HKBA (and probably also to Warrington) that shares in CXL, Orogen and STC were unencumbered;
(c) Again, Mr Wright failed to advise Mr Cooper, the NPF board or his own legal advisers that the STC shares were already transferred to ANZ nominees, as previously mentioned (Transcript p.1327).

Last Minute Proposal To Appoint Union Bank of California as Security Trustee But Brown Bai Leads NPF Board To Reject Bond Deal 

When all attempts to find a legitimate security trustee to hold unencumbered securities had failed, Jai
led, Jai Ryan proposed the unknown Union Bank of California (UBC) as security trustee. Documents were produced which Allens pointed out were dangerously flawed and would put NPF seriously at risk.

While Allens proceeded to deliver 30 crucial questions to Warrington on unanswered matters, Mr Wright was pressing to have the agreement executed before the expiry of the latest BPNG deadline of August 31, 1998. He failed to advise Mr Cooper, the NPF board or NPF’s lawyers that the STC shares nominated as securities had already been transferred to ANZ Nominees as security for NPF’s loan facilities.

The final showdown occurred at the 115th NPF board meeting on November 6, 1998, just as all arrangements were ready for an agreement to be signed in Australia. Under the firm chairmanship of Brown Bai, the board resolved to terminate the agreement with Warrington. This almost certainly saved NPF from a multi-million dollar disaster as the suspicions about Warrington’s bona fides were subsequently confirmed.

Financial Costs 

The financial cost to NPF of the attempt to issue the bond was K244,762 in addition to a vast amount of management time and energy.

Concluding Comments 

This attempted bond issue has been detailed at length. This is because, even though it finally came to nothing, it illustrates how the board chairman Mr Copland and Mr Wright, supported initially by former managing director Mr Kaul and corporate secretary Mr Leahy, took the NPF perilously close to a $A54 million commitment with Warrington to be serviced at 14.67 per cent interest over nine years. Neither Warrington nor Mr Cooper had an established reputation or reputable referee and were shrouded in suspicion (Exhibits AB634-635).

Mr Wright repeatedly exceeded his authority and kept the NPF board ignorant while he transferred and pledged NPF assets. He was also guilty of serious misrepresentation on several occasions. When Mr Leahy finally realised the dangers and turned against the project, Mr Wright and Mr Copland ignored his sound advice.

Similar advice and warnings from other experts in the DoF and BPNG and the NPF’s own consultants were also ignored by management and kept from the board. NPF management lacked expertise in these matters and dealt with investors, financiers and international bankers without adequate due diligence or references, putting NPF’s assets at risk.

Throughout this entire affair, the NPF Board of Trustees demonstrated an amazing lack of care and lack of inquiry, as they blindly and compliantly voted in favour of unsubstantiated motions and resolutions, taking NPF to the very edge of a financial precipice.

It is not even that there was a well-conceived plan for using the bond monies sought. Four possible projects were belatedly mentioned to justify the efforts, pledges and misrepresentations that were occurring and to complete the bond issue:

  • Government infrastructural programs;
  • Ramu Nickel project development;
  • construction of supermarkets for STC; and
  • other opportunities arising all the time (Exhibit AB129)

None of these projects were firm “in place” commitments and none were likely to bring in the income required to offset NPF’s interest commitment and make the bond issue profitable. In the later stages, there were plans to use the bond money to bail out NPF’s disastrous investment in Crocodile Catering and then merely to invest a substantial portion in ANZ deposits to secure NPF’s existing debts.

Information received from ICC – Commercial Crime Bureau (obtained by Benny Popoitai) indicated that the suspicions about Warrington and Mr Cooper were well founded.

Also, the so-called (and misspelt) “Banque de Fonds Prives E. Fiduciare de S.A.” in Antigua, which had acted as referee for Warrington, shared the same registered address as Warrington. It is not listed in the Bankers Almanac and is not an entity licensed and authorised by the Bank of England to conduct banking business or to even be a depository institution in the United Kingdom.

Allocation of responsibility

The commission has commented on the degree of responsibility of the main participants in this fiasco: Mr Wright, Mr Copland, Mr Leahy, Mr Kaul, Mr Iamo and all the trustees then in office must share the blame. The DoF also failed its duty by forwarding a bland, positive recommendation for Ministerial approval of the bond, despite excellent research by its technical officers who recommended strongly against recommending Ministerial approval. Similarly, the BPNG is criticised for giving and then extending foreign exchange approval for the issue of the bond despite the proper advice of its Foreign Exchange Controller and technical officers that issuing the bond would probably damage PNG and the NPF.

Executive Summary Schedule 3B 

Donations 

Introduction 

By the same process of reasoning and analysis, which led to the conclusion that NPF had no legal power to borrow funds, similarly, NPF had no power to make donations. There is no power under the NPF Act to give donations to charitable, sporting or religious organisations and to other individuals.

During Mr Kaul’s period as managing director of NPF, there was awareness that NPF had no specific power to make donations. This was Mr Kaul’s evidence, and it is supported by documentary evidence. However, during Mr Fabila’s period as managing director of NPF, there was a substantial increase in the use of members’ funds for donations.

Findings

NPF had no legal power to pledge or make donations.

Yearly record of donations – 1995 to 1999

The commission has examined the detailed income and expenditure statement as at December 31 of each year and the following is noted

1995 

NPF’s records examined by this commission showed that there were no donations made.

1996 

NPF’s records examined by this commission showed that NPF made no donation during this year. However, as is reported in Schedule 9 (Tenders, Procedures and Nepotism report), Minister Haiveta requested and NPF donated K1600 towards remuneration for sing-sing groups who performed during a scheduled NEC meeting at Vanimo.

Findings 

(a) Minister Haiveta’s request for K1600 to pay the sing-sing groups amounted to improper conduct and he should be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(b) Mr Kaul acted in excess of his authority in granting the request and in breach of his fiduciary duty to the members as he knew it was wrong. He would not be able to claim he was “acting in good faith” so he would be personally liable to repay this money. He should also be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(c) The payment of K1600 was beyond the powers of NPF;
(d) If Mr Copland advised Mr Kaul to pay the donation towards sing-sing groups in Vanimo, his advice was improper and also a breach of his fiduciary duty for which he may be personally liable.

1997 

NPF’s records examined by this commission showed that there were no donations made during this year.

1998 

The income and expenditure statement under “general expenses”, shows that NPF gave a total of K104,182 in donations during 1998. The major portions of the total donation were made to the Bougainville Children’s Fund and the Aitape Tsunami Disaster Fund.

The vouchers extracted from this and other sources totalled K113,500 and there could possibly be others the commission did not locate (Exhibit B814).

1. June 23, 1998: Bougainville Children’s Fund – K1500;
2. July 13, 1998: Bougainville Children’s Fund – K5000;
3. July 23, 1998: Aitape Disaster Relief – K100,000;
4. August 19, 1998: PNG Sports Federation- K2000;
5. October 9, 1998: Bougainville Children’s Fund – K5000

These donations were made towards worthwhile causes. However, what this commission is concerned with is that no-one at NPF checked to make certain that NPF had the legal power to make donations out of members’ funds, as this money donated was in a direct sense coming out of member’s pockets.

Request by Dr Fabian Pok – Aitape Disaster Relief 

Dr Fabian Pok called a meeting at the Telikom Rumana office where he sought financial assistance from statutory bodies. Mr Fabila approved a donation of K100,000 after this meeting.

TO BE CONTINUED

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  1. September 11, 2015 at 12:00 pm

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