National Provident Fund Final Report [Part 39]
Below is the thirty-ninth 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 39th 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 4D Continued
1997 On-Market Acquisition Of STC And CXL Shares: Failure to keep NPF Board informed
In accordance with the board’s strategy to increase NPF’s holdings in STC and CXL, Mr Wright directed NPF’s brokers Wilson HTM to buy in small parcels. On many occasions, Mr Wright exceeded his K25,000 delegated financial limit and he seems not to have obtained Mr Kaul’s written authority to purchase up to Mr Kaul’s K100,000 delegated limit. This is demonstrated in the following tables. See table below.
Once again, management did not keep the NPF trustees informed of these transactions, nor apparently did the trustees examine the investment schedules and inquire into these transactions. Even when Mr Kaul notified the NPF board on October 28, 1997, that STC’s performance was poor, with profits down K3 million, no questions were asked.
CXL on the other hand, returned good profits during 1997.
By adopting IAS28 method of accounting however, the value of STC and CXL investments was reduced in the 1997 Financial reports by K3.5 million (see paragraph 5.3.3).
Fruitless Discussions On Purchase Of North Waigani Stop ‘n’ Shop
From October to December 1998, active discussions between STC and NPF were occurring for NPF to purchase for K6 million a Stop ‘n’ Shop store, which was being constructed by STC in North Waigani. It would then be leased back to STC for a very favourable rent.
Considerable research was done into what seemed a very promising, low-risk, income producing investment. The board, however, failed to approve it at its December 1998 meeting and the idea was dropped. (By comparison, in February 1999, with no research, the new NPF board was prepared to invest K8 million in the Waigani Land deal), which would require expenditure of an additional K3 million before there would be any hope of a return.
1998 On-Market Transactions: Unauthorised Purchases by Management
During 1998, Mr Wright continued to authorise purchases in STC and CXL, frequently exceeding his financial delegation. In those instances, he did not obtain written authority from managing director Mr Kaul. In the case of CXL shares, those purchases were covered by the previous open-ended board approval of April 10, 1996, but for STC purchases such open-ended board approval had not been given. The situation is set out in the following tables. See table below.
Once again, management did not expressly advise the NPF board about these transactions, which amounted to a breach of duty.
All but one of the above transactions were below the K1 million standing Ministerial approval of June 1995. The purchase of 185,538 STC shares on June 24, 1998, for $A933,701 exceeded K1 million and therefore required Ministerial approval. No Ministerial approval was obtained.
There is evidence that Mr Wright and Mr Semos may have co-operated to artificially maintain the price of STC and CXL shares at $A4.20 and $A4.85 respectively in order to maintain their value as security for the proposed $A bond (See paragraphs 8.3.1 and 8.3.2.). At paragraph 8.3.2, the commission recommends that this matter be referred to ASIC for investigation.
Failure to provide analysis of investments in 1998
During 1998, STC continued to record reasonable profits, although there was a worrying increase in foreign debt, which would cause problems as the value of the kina was falling. The previously profitable CXL, however, began to record losses.
Although these trends were pointed out to the NPF board, Mr. Wright and the recently appointed new managing director Henry Fabila completely failed to provide the board with an expert analysis of these two investments.
This was a serious failure of their duty to NPF as it was time to consider selling down NPF’s CXL holdings and to give careful thought to STC’s future profitability. Instead, NPF acquired an additional 43,280 CXL shares at $A5 per share (average).
Despite the poor performances, during 1998 the market share price of both companies remained high. The reason for this seems to have been that NPF continued to be the main purchaser, buying 57.6 per cent of all CXL shares traded and 82.7 per cent of all STC shares traded during 1998. The artificially high price was being maintained by NPF’s own trading in the shares.
(a) Mr Wright instructed the purchase of $A4,136,176 worth of STC shares in small parcels but without formally and explicitly notifying the NPF board. This was a breach of his duty to fully advise the board about investments;
(b) As CXL share prices fell consistently in 1998, Mr Wright and Mr Fabila failed in their duty to provide an expert assessment on the strength of this very large investment;
(c) The 1998 financial statements adopted IAS26 procedure for the first time and misrepresented that the accounting policies were consistent with previous years. The effect of the change in NPF’s asset valuation basis was not quantified; and
(d) It is likely that the STC and CXL share prices had been increased by NPF’s own acquisitions as it was by far the largest purchaser. The result was a market price created by supply and demand, which was in excess of NTA backing.
Directors Fees Paid To Trustee Gerea Aopi As A Member Of The STC Board
A conflict developed between trustee Gerea Aopi and the NPF in relation to directors fees of K18,000 paid to him between the date of his appointment to the STC board in May 1997 and the date of his resignation on August 28, 1998.
Trustee Aopi claimed he was appointed as an independent director by virtue of his own personal standing. NPF claimed he was appointed after it nominated him to represent NPF on the STC board and that therefore directors fees were payable to NPF. The same situation developed with regard to Mr. Wright’s directorship with CXL.
Mr Aopi and Mr Wright held their directorships in STC and CXL respectively as representatives of NPF. Accordingly, they are liable to account to NPF for any directors’ fees or other benefits received by them as directors.
TO BE CONTINUED