National Provident Fund Final Report [Part 31]
Below is the thirty-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 31st 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 4A continued
(a) Throughout 1997, NPF management acquired shares in Vengold on numerous occasions without prior approval or subsequent ratification by the board in clear breach of duty. Those responsible were Mr Wright and Mr Kaul. Mr Kaul either knew or should have known of Mr Wright’s actions and controlled him. For Mr Kaul, this amounted to a breach of his fiduciary duties as a trustee;
(b) The acquisitions were recorded in the portfolio schedules attached to the board papers and the trustees were negligent in not noting those records and querying them with management;
(c) As the price of gold fell, the trustees were in breach of their fiduciary duties by not instigating a reassessment of their investment in Vengold;
(d) DoF representatives on the NPF board failed in their fiduciary duties to members by not playing a proactive role and questioning the investment strategy regarding Vengold and also in not monitoring management’s unauthorised activities;
(e) All trustees who breached their fiduciary duties in these ways may be personally liable for any loss suffered because and it is unlikely that a claim of “acting in good faith” would succeed.
Vengold Investment In 1998
TABLE: A Figure 2: Vengold purchases – 1998
In 1998, Mr Wright continued to direct brokers Merrill Lynch and Wilson HTM to acquire shares in Vengold through various Vengold share issues. The aim seems to have been to maintain NPF’s 20 per cent interest in Vengold’s issued capital and to retain NPF’s seat on the Vengold board.
The details of the acquisitions are shown on Table A above.
In February 1998, NPF management was involved in unauthorised selling and buying of several million Australian dollars (paragraph 6.2). The reasons for these transactions are not recorded and NPF board approval was not sought or given.
Placer Dome Buys into Vengold
In May 1998, Placer Dome bought in to a new Vengold issue and gained a seat on the Vengold board. This share issue diluted NPF’s interest in Vengold’s issued capital from 20 per cent down to 15 pe cent.
At the 112th NPF board meeting on May 6, 1998, the board directed management to “wait and see”. Despite this direction, management continued to make unauthorised acquisitions and bought 503,600 Vengold shares at $A1.50 per share without board approval.
Wilson HTM Report
Wilson HTM reported that Placer Dome was expected to seek a full takeover of Vengold and the NPF board voted to acquire more Vengold shares to take the holding back up to 19.9 per cent. This resolution occurred at a time when NPF had just been advised of a K22 million loss for the quarter to July 1998.
NPF was being badly hurt by the failing value of the kina and the failing value of its equity portfolio, particularly the failing value of the resource stock, including Vengold.
Reading Mr Wright’s investment report of June 1998, it seems he was basing his recommendation to hold onto Vengold, entirely on his assessment of potential corporation take-over plays involving Placer Dome, Niugini Mining, Battle Mountain and Rio Tinto.
Vengold Directors Share Options Offered to Mr Fabila
In July 1998, Mr Fabila, as NPF’s representative on the Vengold board, was offered options under Vengold’s directors incentive plan. To his credit, Mr Fabila wished to ensure that the benefit of the options would be for NPF and he sought legal advice form Carter Newell where partner Jimmy Maladina gave correct advice, confirming that any such benefit offered to Mr Fabila must go to NPF.
Vengold Acquisition of 61.3 Million LGL Shares From Orogen
In July 1998, the Vengold board took the major decision to increase its LGL holding to 19 per cent of LGL’s issued capital. This decision put Vengold at risk because of the volatile nature of LGL shares. If this caused Vengold to default on its loan covenant with the ANZ Bank, ANZ, as a secured creditor, would take preference over NPF.
Mr Fabila was aware of and participated in this decision but failed to notify or discuss it with either the NPF management or the board. This failure was a breach of Mr Fabila’s fiduciary duty to NPF members, as any risk to Vengold was also a risk to NPF.
(a) NPF management carried out the following transactions without the required approvals (see Table B above)
(b) Despite the failing price of gold and resource stocks, including Vengold and LGL, the failing value of the kina against the Australian dollar and substantial unrealised losses incurred by NPF, the strategy of holding and continuing to acquire Vengold shares as an indirect investment in LGL, was not reassessed by the NPF board and outside independent advice was not obtained (Wilson HTM with its own commercial interests involved, was not “independent” or “objective”). This was a failure by both management and the trustees to exercise their duty and fiduciary duty, respectively, to the NPF’s members;
(c) Mr Fabila failed in his fiduciary duty by not notifying the NPF board and seeking its instructions before voting, as a Vengold director, in favour of Vengold purchasing Orogen’s LGL shares;
(d) Management’s failure to brief the trustees on the effect of Vengold purchasing Orogen’s LGL shares was a failure of their duty to the NPF members. The management and trustees also failed their duty and fiduciary duty, respectively, by not reassessing NPF’s investment in Vengold after this purchase, which enabled Vengold to become the largest shareholder in LGL;
(e) The options issued by Vengold to Mr Kaul and Mr Fabila were not disclosed nor written into NPF’s account record. This was lax as the options were really to the potential benefit of NPF. Neither Mr Kaul nor Mr Fabila exercised the options, however;
(f) Wilson HTM’s advice (if given) for NPF to acquire a 20 per cent interest in Vengold was inappropriate advice for a provident fund;
(g) The trustees who breached their fiduciary duties by failing to ensure that independent expert advice was obtained before NPF made these further investments in Vengold are personally liable for any losses incurred by NPF members as a result of the investments. It is unlikely that a claim to have been “acting in good faith” would succeed.
Although Vengold had achieved its aim of becoming the largest shareholder in LGL, it had done so using funds borrowed from ANZ. With the price of LGL shares failing steadily, Vengold could not service or retire its debt and was facing a major cash crisis. The NPF management and the board seemed unaware of the disaster looming.
Vengold Issues More Stock Options To Its Directors
Despite Vengold’s cash crisis, Vengold moved, in January 1999, to increase the value of options to be given to its directors. This was not reported to the NPF board.
Also in January 1999, Mr Wright was forced to resign from NPF and on February 8, 1999, Mr Maladina chaired his first NPF board meeting.
Shortly afterwards, PriceWaterhouse Coopers was appointed to report on NPF’s equity portfolio and financial crisis. PwC reported to Mr Maladina that the situation was extremely serious and recommended the immediate sale of stocks, including 4.2 million shares in Vengold at $C0.40 a share.
Instead of acting on that advice to sell Vengold, NPF held on for a further four months. Meanwhile, Mr Maladina insisted Mr Fabila must resign from the Vengold Board and that M. Maladina himself be appointed.
Mr Maladina’s appointment to the Vengold board occurred in May 1999 and Mr Maladina thereby became entitled to directors fees. Unlike Mr Fabila, Mr Maladina accepted both the directors fees (totalling $C3000) and the options for his own benefit.
Mr Maladina attended his first Vengold meeting by telephone on December 8, 1999 and his second and last meeting on December 16, 1999, when he collected his directors fees in cash. Consequently, when NPF began to sell off its first parcel of Vengold shares in June 1999 at 9 cents Australian, NPF had lost its direct communications link at the Vengold board level.
The chronology of these events is clear from the following diagram:
TO BE CONTINUED