National Provident Fund Final Report [Part 35]
Below is the thirty-fifth 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 35th 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
When Mr Kaul was replaced as managing director by Mr Fabila, there was some initial inquiry into NPF’s investments and borrowings but then Mr Fabila found himself unable to exercise control over Mr Wright, who was so close to Mr Copland.
Mr Fabila lost his initiative until he was able to bring about the termination of Mr Copland and the resignation of Mr Wright.
By then, Mr Fabila was being manipulated by Mr Leahy and Mr Maladina regarding HPL and other investments. In the falling market, the management seemed paralysed until PwC was called in and the sell-off began.
The loss of approximately $A50 million from the HPL investment was the largest single loss NPF suffered from its investments.
It was compounded by the fact that the investment was largely financed from funds borrowed from ANZ, so interest payments and bank fees need to be included in assessing the total loss to NPF.
Looking back, it is tempting to speculate what might have happened had Mr Taureka’s sole dissenting voice had been heard at a properly constituted board meeting. In that forum, he may have pressed his view that the money from the HGL take-over should be invested in a safe income bearing investment rather than being invested, together with further borrowed funds, in the risky HPL venture.
Executive Summary Schedule 4C
The National Provident Fund’s investment in Cue Energy Resources NL (Cue) was typical of its investment policy between 1995 and 1999.
In 1995, when NPF made initial investments in Cue totalling $A3 million, it did not carry out any proper due diligence and did not seek independent expert advice.
It ignored obvious risk factors, especially Cue’s weak financial position.
NPF management was negligent in failing to provide adequate briefings to the board. In general, the Department of Finance (DoF) failed to undertake an independent analysis of investment proposals submitted by NPF and the NPF board failed to make proper inquiries and failed to direct management to present proper briefs.
When the DoF did eventually recommend a halt to further investment in Cue, the advice was ignored.
On occasions, the Minister for Finance approved unwise NPF investments without seeking departmental or other expert independent advice.
As Cue’s financial position began to weaken, NPF provided further capital by underwriting Cue’s share placements and by standing guarantor for Cue with the Bank South Pacific Limited (BSP). NPF actually borrowed from the Australia & New Zealand Banking Group (PNG) Ltd (ANZ Bank) in order to on-loan to Cue. Time and again, NPF management acquired Cue shares, gave undertakings or pledged NPF assets for Cue’s benefit without the approval or authority of the NPF board.
Time and again, the NPF board failed to reprimand management when these unauthorised dealings belatedly came to the trustees’ attention.
Other irregularities included entering into substantial contractual commitments before (or entirely without) Ministerial approval.
These events occurred during the period that David Copland, NPF trustee and board chairman, unbeknownst to the board, considered himself to be an independent director of Cue (and therefore not appointed to represent NPF’s interest) and held substantial shares and options in Cue in his own name.
At the same time, Robert Kaul, NPF trustee and managing director, was also a Cue director holding Cue shares and options in his own name. Mr Wright also held Cue shares while he was deputy managing director of NPF.
Rather than cutting its losses early and selling off its non-performing and non-income producing investment in Cue, NPF management led the NPF board to support Cue in ventures in Indonesia and in attempting to buy the Indonesian assets of Saga Petroleum ASA (Saga).
By 1998, NPF had invested $A11,703,040 in Cue and had made unrealised losses as at October 31, 1998 of $A9.105 million (Exhibit CU776A). It held 20 per cent of Cue’s shares and its investment was so massive that it was impossible to sell off without drastically reducing Cue’s share value even further.
Facing extreme financial pressures from other sources as well, NPF was eventually forced to sell 100 per cent of its Cue shares as part of a general sell-down strategy to reduce its crippling debt burden. In all, NPF suffered a loss of $A7.4 million from its foolhardy investment in Cue.
The investment in Cue was clearly inappropriate in the first place. It was high risk, non-income producing and speculative in nature. Cue did not have sufficient cash resources to fund an exploration and appraisal program. Also, it did not have any exploration interests with commercially proven reserves.
Any expert due diligence would have disclosed this but none was performed (see details in paragraph 4.3 of the Cue Report).
Management’s failure to provide adequate investment advice to the board was a breach of duty and the trustees’ failure to seek such advice was a breach of their fiduciary duty to the members. The DoF advice to the Minister lacked any independent analysis; it merely uncritically summarised the submissions made by NPF’s management.
Without waiting for the Minister’s approval, NPF proceeded with the investment anyway, in breach of the Public Finances (Management) Act 1995 (PF(M) Act).
The commission’s detailed findings on the initial investment in Cue, are set out at paragraph 4.4 of the Cue Report as follows:-
(a) According to the relevant board minutes and report, NPF management, (specifically Mr Kaul and Mr Wright) did not present the board with any independent advice or critical appraisal in respect of the investment in Cue;
(b) NPF breached Section 61 of the PF(M) Act by signing a sub-underwriting agreement for $A3 million without the prior approval of the Minister;
(c) Mr Kaul and Mr Wright failed to properly discharge their duties in that they failed to disclose to the board of trustees sufficient relevant information to enable the trustees to properly assess the investment;
(d) The trustees failed to critically assess the investment proposal that management put to them and sought no specific guidance in relation to this investment;
(e) Mr Kaul and the trustees failed to provide the Minister for Finance full and adequate information, which was necessary in order to properly assess the investment;
(f) The DoF failed to critically appraise NPF’s investment in Cue;
(g) Management (Mr Kaul and Mr Wright) failed their common law duty to the NPF board to provide expert investment advice;
(h) The trustees were in breach of their fiduciary duty to contributors of the fund by failing to ask for and obtain expert investment advice; and
(i) The Secretary for Finance and relevant senior officers failed in their duty to critically appraise the proposed investment in Cue and to give competent advice to the Minister.
As early as January 1996, Cue was already seeking working capital from NPF (and from other sources). As a member of the board of Cue, Mr Kaul was privy to the full details of Cue’s financial position but he did not fully convey this information to the NPF board. The fact that NPF owned a large parcel of Cue shares was used as the basis to justify NPF lending $A1 million to Cue to get it out of trouble. This was the next step in a cycle whereby NPF allowed itself to become increasingly ensnared in Cue, investing more and more in order to protect the unwise investments already made. Further falls in Cue share prices stimulated more purchases by NPF (paragraph 6).
NPF actually used its own high credit rating to borrow the funds from ANZ in order to on-lend $A1 million to Cue (see paragraph 6.1).
Mr Kaul and Mr Wright and all NPF trustees in office at the time, compounded their failure of duty to the NPF members, by advancing this loan (see the detailed findings in paragraph 6.1 of the Cue Report). As this injection of support for Cue was not sufficient to resolve its difficulties, Cue actively sought other sources of funds. It suffered many rejections until finally at the end of May 1996,
Mr Kaul committed NPF to support Cue’s application to the BSP for a loan of $A1 million, without any authorisation from the NPF board. Mr Kaul committed NPF to maintain a minimum of K32 million in cash deposits with BSP, as security to guarantee Cue’s $A1 million loan from BSP. The commission considers that Mr Kaul, who, as a member of Cue’s board of directors participated fully in Cue’s discussions, was losing sight of his primary and fiduciary duty as an NPF trustee to NPF members.
(a) The Cue budget prepared (Exhibits CU70-CU71 and CU134-CU136) and provided to the Cue directors and Mr Kaul, showed a shortfall in the working and development capital on both a short and long-term basis;
(b) Mr Kaul failed his common law and fiduciary duty to adequately disclose Cue’s funding problems to the NPF Board of Trustees;
(c) Without the short-term loans of $A2 million from BSP and NPF, Cue would not have been able to meet its commitments. Mr Kaul never fully disclosed Cue’s inherently weak financial position to the NPF board. This was a material fact that should have been made known to the board when it was assessing any investment decision regarding Cue;
(d) Mr Kaul pledged NPF’s IBD assets of K32 million as security with BSP for Cue’s loan facility with BSP, without the express authority of the NPF board and without financial consideration for NPF. He may be personally liable for losses suffered by NPF resulting from this breach of his fiduciary duty, unless he can establish that he was “acting in good faith”;
Cue bids For MIMPEX’s PNG Assets
Cue then sought a massive increase in the amount of funds to finance their bid to purchase MIMPEX assets in PNG. It attempted to raise $A43.2 million by issuing a mixture of ordinary shares and convertible notes using ANZ Corporate Services and Wilson HTM as underwriters.
Mr Kaul recommended to the NPF board that it should participate in the issue in order to maintain its current 15 per cent equity in Cue.
He did not advise the board that management had already increased NPF’s percentage of Cue shares to 19.78 per cent by a recent unauthorised purchase of two million more Cue shares. The NPF board then resolved to purchase 16.4 million shares at K6.4 million in order to maintain 15 per cent equity in Cue.
Mr Kaul then misled the Cue board when he referred to the two million share purchase as a strategy by NPF to maintain 17.58 per cent equity in Cue and by falsely claiming that the NPF board had resolved to seek a second seat on the Cue board, when no such resolution had been made.
Continuing with his duplicitous conduct, Mr Kaul concurred by tacit acquiescence at the Cue board when Mr Jacobs wrongly stated that “NPF had agreed to provide $A3 million equity and $A5 million in convertible notes”.
At the next NPF board meeting on August 27, 1996, the board, deceived by Mr Kaul’s duplicity, agreed to maintain NPF’s current 19.88 per cent equity by approving and ratifying management’s previous purchases “up to this current level of holding”.
(a) The minutes do not indicate any concern raised by the trustees that between February 1996 and June 1996, NPF management had, without the approval of the board, purchased on market 3,156,500 shares at a total cost to the members of $A310,759;
(b) The resolution at the earlier meeting provided discretion to management to purchase “any number” of convertible notes, if no other investor took up an interest;
(c) No apparent consideration was given by management or the trustees about the increased investment in Cue with regard to:
* The risk of investing where it is clearly speculative;
* The risk of another large investment holding in stock because NPF already held a number of other PNG resource based stocks; and
* Complying with investment guidelines
(d) NPF’s commitment had changed from K6.4 million approved by the NPF board at the 101st Board meeting to more than K8.1 million (A$8 million);
(e) Mr Kaul made misrepresentations to the NPF board and to Cue;
(f) Management (Mr Kaul and Mr Wright) were in breach of their duty to the NPF board and Mr Kaul was also in breach of his fiduciary duties to contributors; and
(g) Mr Kaul’s false representations amounted to improper conduct.
Investment Of $A25 Million In Convertible Notes
Failing in its endeavour to raise funds in Australia, Cue sought the support of NPF and POSFB to take up $A25 million of convertible notes with an option to purchase between $A2 million to $A8 million more shares. This was linked to a proposal to appoint Mr Copland as chairman of the Cue board (paragraph 8.7).
Mr Kaul and Mr Wright sought approval by way of circular resolution for NPF to take $A25 million of the convertible notes. The management paper merely plagiarised Cue’s own promotional material and made no attempt to analyse Cue’s very real financial and other difficulties.
The circular required the trustees to respond the next day. Without waiting for the expected favourable response, Mr Kaul sought the approval of Minister Haiveta under Section 61(2) of the PF(M) Act. The Minister gave his approval for this totally inappropriate resolution without seeking any advice from the DoF.
(a) The convertible notes were unsecured, unrated and convertible to high-risk shares in Cue;
(b) Mr Kaul Mr and Wright provided misleading information to the NPF board in order to get a favourable resolution and were in breach of their duty to the board and of their fiduciary duty to the members. It was improper conduct and in Mr Kaul’s case, may amount to an offence under the Leadership Code. He should be referred to the Ombudsman Commission for them to investigate this aspect;
(c) The trustees failed their fiduciary duty to the members in approving this investment and in not seeking independent expert advice.
(d) Mr Haiveta’s conduct in granting approval without seeking DoF advice was improper conduct.
Mr Kaul Agrees To Sub-Underwrite The Cue Share Issue
During the first week of September, Cue, Wilson HTM and ANZ Securities strove to get the underwriting agreement into place and to persuade MIMPEX that Cue was a serious and funded bidder for the assets. Mr Kaul sent a Cue-drafted letter of support for Cue to MIMPEX.
Then with breathtaking disregard for his lack of authority to do so, Mr Kaul sealed an irrevocable offer by NPF to sub-underwrite 17 million shares ($A2.04 million) and 23 million 5:1 convertible notes ($A23 million in the placement), without any consultation with or approval from the NPF board (paragraph 8.11).
When POSFB withdrew its participation, because its board had very properly declined approval, the chance to purchase MIMPEX assets began slipping away, as MIMPEX imposed a deadline on Cue to get its offer together.
Mr Kaul participated actively with Mr Cleary of Wilson HTM and Mr Jacobs of Cue, to bring pressure on Rupa Mulina, who was Secretary for Finance and chairman of both POSFB and DFRBF, to drum up PNG institutional support for Cue’s share placement, using somewhat dubious means to try and by-pass some of the reluctant POSFB directors.
Just when it looked as though the underwriting and sub-underwriting agreements were in place, which would have committed NPF to a huge financial risk, Wilson HTM withdrew and MIMPEX accepted another offer for the assets. NPF was thereby saved from a massive $A25.04 million exposure.
Although this particular misguided investment did not take place, because of outside circumstances, the attempt by Mr Kaul to get NPF involved (which was strongly supported by Mr Copland and Mr Wright), included incompetence, professional negligence, misrepresentation, role confusion and conflict of interest.
It saw Ben Semos of Wilson HTM, as broker for both NPF and Cue, ignoring Wilson HTM’s duty to know its client, NPF. Far from warning NPF of the inappropriateness of investing in the high risk Cue placement, Wilson HTM was actively struggling to hold the deal together, with NPF as a major player in an underwriting transaction, from which Wilson HTM would benefit financially as underwriter of the transaction.
The commission finds that Mr Kaul’s conduct was improper and so was Wilson HTM’s involvement and failure to warn NPF that the large investment in Cue was inappropriate for a superannuation fund. The trustees approval of the investment was a failure of their fiduciary duty to the members of the fund. The full details of this amazing attempt by NPF to risk the members’ funds to help Cue acquire MIMPEX assets, are set out in paragraphs 8 to 8.15 of the Cue Report.
(a) Mr Kaul made unapproved variations to the amount to be underwritten by NPF, in respect of Cue’s share issue;
(b) Mr Kaul was in a conflict of interest situation because he was an active fully participating director of Cue as well as being the managing director and a trustee of NPF.
TO BE CONTINUED