National Provident Fund Final Report [Part 34]
Below is the thirty-fourth 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 34th 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 4B Continued
In October 1997, Mr Wright wrote in his investment report: “The board needs to give some consideration to how much we want to spend to push the price up at the end of the year”.
The commission recommends that this matter be reported to the Australian Stock Exchange for consideration as possible illegal share ramping (paragraph 6.9).
During October 1997, NPF management again purchased shares for $A2,959,967 also without board authority:
During this period, Mr Copland and Mr Kaul purchased HPL shares without disclosing this to the NPF board. As they continued to participate in NPF discussion and decision-making on the HPL investment, they were both in a conflict of interest situation and of improper conduct.
(a) Mr Copland failed to disclose to the NPF Board of Trustees, that he owned 273,000 shares and 125,000 options in HPL. This was improper conduct;
(b) The proposal by Mr Wright for the board to buy shares at year end 1997 and the subsequent purchases of seven parcels of shares in October totalling 3,718,361 shares for $A2,959,967, a strategy designed expressly to increase end of year profits, constituted improper conduct and may amount to illegal share ramping;
(c) When Mr Copland and Mr Kaul participated in the decision to “buy into” HPL shares for that purpose on the October 28, 1997, that decision would also increase the value of their shareholding in HPL. Their failure to disclose to the NPF board their own shareholdings and options in HPL and their participation in the vote, was improper and a breach of their fiduciary duty to members.
On December 11, 1997, the NPF almost formalised the incipient take-over of board functions by management when it resolved: “To approve management’s discretionary buying of shares in HPL between December 11, 1997 and December 31, 1997”. (Exhibit H60)
The resolution did not impose any limit as to quantity or price and really amounted to a licence to buy until the end of the year.
Management took full advantage of this virtually unfettered discretion, to buy up HPL shares by purchasing 4,330,635 HPL shares over 15 days to December 31, 1997, at a cost of $A3,540,036. By increasing NPF’s end of year profits in this way, management increased the size of the senior management onus under the staff bonus scheme.
Investment in HPL – 1998
Between February and June 1998, NPF management continued to purchase HPL shares without board authority, long after the end of year licensed buying spree had ended.
By this stage, NPF held approximately 70 million HPL shares representing an investment of approximately $A60 million.
The price had dropped from $A1 in June 1997 to 61 cents in June 1998, yet Mr Wright was still presenting a rosy future to the trustees. Because of the huge size of the HPL investment, the fall in share value represented an unrealised loss of over $A20 million on the HPL investment. This loss was compounded by the facts that the investment had been purchased largely with borrowed funds and that interest rates on the loan were steadily rising.
Both management and the trustees were seriously failing in their duty and fiduciary duties by not calling for any independent expert opinion on how to handle this situation.
(a) Mr Wright continued to give one- sided overly optimistic reports to the NPF board about HPL’s immediate and mid-term prospects and failed to initiate a revaluation of the huge investment in light of falling share prices.
(b) Mr Wright and NPF management repeatedly acquired shares for NPF with no reference to or approval of the Board of Trustees. This constituted breaches of duty by management as well as a failure by the trustees to supervise and control management;
(c) NPF trustees failed in their fiduciary duty to contributors by not directing management to report on the changing values of NPF’s major investments or seeking independent advice; and
(d) Both Mr Wright and the then trustees may be personally liable for losses incurred by NPF because of these breaches of duty. It is unlikely that a defence of “acting in good faith” would succeed.
Appointment of Mr Fabila – May 5, 1998
Mr Fabila replaced Mr Kaul as managing director on May 5, 1998. He obtained a report on NPF’s investment portfolio from Deutsche Securities, which pointed out the extreme bias towards PNG resource stock and PNG businesses. Mr Fabila chose to ignore this report and not disclose it to the NPF board.
This was a serious failure of Mr Fabila’s fiduciary duty to the members of the fund as it deprived the board of its last chance to minimise the losses, which were soon to become realised.
Termination of Appointment of Mr Copland and Mr Aopi
On August 1, 1998, Mr Copland’s appointment as a trustee was terminated and shortly afterwards Mr Aopi resigned from the NPF board.
Both continued, however, as “independent” directors of HPL and a struggle to have them replaced by NPF representatives, ensued. Both had been receiving K50,000 per annum in directors fees which were payable to NPF if they represented NPF on the HPL board. Legal proceedings are occurring regarding this aspect.
In October 1998, Herman Leahy finally spoke out, critically examining the value of this loss-making, non-dividend producing investment to NPF.
Both Mr Copland and Mr Aopi had also been allocated options by HPL. The directors fees and options issued to them were as follows:
Directors Fees Findings
With regard to the benefits received by Mr Copland and Mr Aopi, the commission has found at paragraph 7.9:
The commission finds that the names of Mr Aopi and Mr Copland were submitted by NPF to HPL for appointment on the HPL board of directors. The understating between NPF and Mr Aopi and Mr Copland was that they would act as NPF’s representatives on the board. As such, they were obliged to pay any remuneration or benefits received to the account of NPF. Their failure to account to NPF for benefits received as directors of HPL, was illegal and improper.
Appointment Of Mr Fabila And Mr Maladina to HPL Board
After Mr Maladina was appointed as chairman of the NPF board on January 27, 1999, he and Mr Fabila were appointed as NPF’s representative directors to the board of HPL in May 1999.
Wilson HTM Assessment Of NPF Portfolios
In February 1999, Ben Semos of Wilson HTM, at the request of Mr Fabila, reported on NPF’s portfolio. With regard to HPL, he noted:
$A Average Net Entry Price: 0.9393
$A Current Price: 0.22 – 0.23 $A
Total cost: 69,402,748
$A Market Value: 16,033,101
$A Net Loss: 53,369,647
It showed an unrealised loss on HPL of $A53.3 million.
Mr Semos recommended against selling because of the size of the loss which would be realised and in the hope that Ramu and Frieda River would produce results, saying that they: “Present incredible long term upside and phenomenal benefits to PNG’s future growth.” (Exhibit 96)
He also said that a sell-off would provoke a corporate takeover, which “would not be in the interest of PNG”.
Wilson HTM and Mr Semos in particular, failed in its duty to “know its customer” and carry out a reasonable investigation upon which to base its recommendations regarding NPF’s massive investments in HPL. It should have advised that the investment strategy regarding HPL was completely inappropriate for NPF.
On the advice of PwC, NPF then sold off its entire holding of HPL shares. As at December 31, 1999, with the sell-down still proceeding, NPF had realised a loss of $A27,332,554 on sale and an as yet unrealised loss of $A1,8974,100 for a total loss of $A46,296,654 million on its HPL investment.
The evidence shows that NPF’s nationalistic, so called “gutsy” play to lead the other PNG institutions to block Placer Dome’s take-over bid for HGL and turn it to the advantage of NPF and the other PNG institutions, was master minded and controlled by Mr Copland and Mr Wright, with the support of Mr Aopi and Mr Kaul and the enthusiastic support of Minister Haiveta.
The NPF trustees allowed NPF to be led into this huge, high-risk and speculative investment, without question or protest. With the exception of Mr Taureka, when provided with a circular resolution committing NPF to a $A50 million investment, they simply signed on without seeking expert advice, relying on their faith in Mr Copland and Mr Wright.
Thereafter, the trustees stood by silently while NPF management acquired more and more HPL share to peak at 72.9 million shares at a cost of $A69,402,748. These acquisitions were usually in parcels worth less than K1 million to avoid the need for Ministerial approval (and DoF scrutiny).
As these unauthorised acquisitions became known, the trustees, including the DoF representative public service trustees, failed to question or criticise management for acting in excess of their authority.
As the HPL share price continued to fall from $A1 to 30 cents a share and below, both management and trustees seemed paralysed, doing absolutely nothing to try and save the members of the fund from the financial catastrophe, which was clearly approaching.
During this period, NPF suffered from a lack of responsible leadership.
Until August 1998, its chairman was Mr Copland who masterminded and continued to support the investment until the termination of his appointment in August 1998.
He was followed by the well qualified and efficient Brown Bai whose honest attempts to restructure NPF’s investments stopped after a few months when he stood down at then Prime Minister Skate’s direction.
His successor Jimmy Maladina has been found by the commission to have been dishonest, fraudulent and not acting in the interests of the members of the fund.
When Mr Bai stood aside as chairman and acting on the direction of the Prime Minister nominated Mr Maladina as his successor, Mr Bai remained as a trustee. However, in dereliction of his fiduciary duty to the members, he simply absented himself from attending meetings while the fortunes of NPF plummeted.
The board’s other DoF trustee, Vele Iamo, also continued his long-standing practice of not usually attending NPF board meetings. This was a serious failure of Mr Iamo’s fiduciary duty to the members.
On the management side, for most of this period the manager was Mr Kaul who gave evidence that he was unable to control Mr Wright and had difficulty communicating with Mr Copland.
In full knowledge of what was happening with this and other investments, Mr Kaul went along with the initiatives of Mr Copland and Mr Wright. He was party to and supported Mr Wright’s repeated purchases of HPL shares without board approval.
This was a breach of fiduciary duty by Mr Kaul.
TO BE CONTINUED