National Provident Fund Final Report [Part 40]
Below is the fortieth 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 40th 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 Investments – 1999
Concern About NPF’s Unrealised Losses – Termination Of Mr Wright
After Mr Wright’s employment with NPF was terminated in January 1999, he was replaced on the CXL board by trustee Nathaniel Poiya.
Mr Fabila reported in February on the CXL and STC results. Discussion centred on CXL, which showed a loss of K3.7 million, K2.5 million of which was attributable to a budget blow out in respect of directors’ remuneration. Although Mr Fabila wrote to the CXL chairman on this matter, he failed to provide the NPF trustees with an expert assessment of its CXL investment.
Advice from Ben Semos of Wilson HTM
By this time, NPF management had begun to realise the enormous unrealised loss suffered on NPF’s investments as interest rates on NPF’s huge debts rose and the value of the kina and of resource stocks fell. Ben Semos of Wilson HTM was asked to advise on NPF’s investments. On February 6, commenting on each investment in turn, he advised selling CXL shares rather than STC. Mr Semos forwarded a mandate document appointing himself as sole agent and broker on the sell down but on February 19, 1999, Mr Fabila wrote cancelling all authority for Wilson HTM to act as broker for NPF.
On March 12, Mr Semos wrote again urging his appointment as sole agent to handle the difficult job of selling off large parcels of shares in STC, CXL and HPL without causing a massive fall in share prices.
On March 16, 1999 at a special NPF board meeting, the board appointed Mr Fabila and Mr Leahy to negotiate the sale of all NPF’s holdings in CXL to the Swires Group for a minimum price of $A3.75 per share (9.3.4). These negotiations were unsuccessful.
Unsuccessful Attempts To Sell CXL Shares
By March 25, NPF chairman Brown Bai sought Ministerial approval to sell NPF’s CXL shares at $A3.75 and 50 per cent of the Tower Ltd. Unfortunately, Swires would not go beyond $A2 per share and Wilson HTM could only manage $A2.25.
Although Minister Lasaro had approved the sell down on March 25, 1999, his approval was not received by NPF until April 8.
Meanwhile, Mr Fabila had instructed Mr Semos to sell prior to receiving Ministerial approval and Mr Semos was actively involved trying to generate “good buying” for CXL, and for some other NPF holdings.
NPF Moves Away From Substantial Holdings Into Smaller Passive Holdings
By May 1999, the sell down of equities in order to reduce NPF’s debt to the ANZ Bank had still not got underway. On May 11, Mr Fabila wrote a long explanation to Minister Lasaro, explaining the history of NPF’s disastrous investment strategies of obtaining significant holdings in PNG resource stocks and obtaining controlling interest in CXL and STC.
He explained how this had been financed by massive borrowings from ANZ and he laid the blame squarely on the previous Board of Trustees and on Mr Copland in particular (The letter is quoted in full at paragraph 9.4).
On May 21, 1999, the NPF board resolved to move away from substantial shareholdings in a few companies in favour of passive minority interests and to reduce holdings in any company to 11 per cent of issued capital (except for HPL).
Trustee John Paska spoke against the proposal, particularly against selling STC shares, sensing some “political” motivation. On May 28, 1999, NPF’s investment team, headed by Rod Mitchell submitted an investment fact sheet on STC recommending that its value be reassessed to reflect its much lower true value.
Selldown Of CXL Shares NPF’s Selldown Prompts Swires Takeover Offer For CXL
On June 3, 1999, Mr Fabila instructed Mr Semos to sell off NPF’s holdings of 8,266,679 CXL shares at $A2.56 or better. This prompted Swires to make a take-over bid for CXL by offering to acquire all the issued shares in CXL at $A1.50 per share (paragraph 9.7). Mr Fabila was prompt to accept Swires’ offer and obtained NPF board approval by circular resolution on July 7, 1999. This was ratified by formal board resolution at the 119th NPF board meeting on July 29 and 30, 1999.
CXL Share Valuation
Before finalising the sale, NPF management obtained an expert independent opinion on CXL’s fair market valuation from KPMG which on July 8, 1999, stated:-
“Our valuation of CXL is prepared in order to determine a fair market valuation of each share. The valuation has been prepared using generally accepted valuation principles and is based on information provided to KPMG by CXL. This information has not been verified by KPMG. Based on the information provided, our valuation of CXL is K62,461,000. Given the 21,060,370 shares in issue this equates to a value per share of K2.97.
“Swire PNG’s offer of $A1.50, as set out in their take over notice, equates to K2.68 per share (exchange rate K1= $A0.56).
“When considering the merits of the offer, it is necessary to consider the following:
- Poor trading results for 1998;
- Projected poor trading results for 1999;
- Increasing cash flow requirements to fund trading losses and replacement of inventories;
- Technical breach of current banking covenants;
- Law and order issues in PNG;
- Political instability;
- The precarious nature of the kina currency; and
- The lack of alternative investors for a minority investment of the size and nature in question.
“Overall, we are of the opinion that the offer price is not unreasonable and represents a price that whilst not great provides an exit alternative to shareholders, thereby giving a level of certainty which may not otherwise exist.” (Exhibit S152)
Department Of Finance Recommendation On CXL Selldown
Mete Kahona of the office of Public Enterprises and Asset Management, wrote a brief to the Secretary for Finance supporting the sale of NPF’s CXL shares to Swires at $A1.50 per share. The brief highlights the problems caused by investing in a significant holding in such a company:
“NPF’s Acceptance of the Offer.
“The fund’s management supports the acceptance of the current offer by John Swire & Sons Limited and KPMG’s recommendation with the following argument:
- That CXL has been touted around the market by a number of stock brokers with no serious interest what so ever in the stock;
- That the CXL with a falling kina has suffer large diminution in value;
- NPF debt to equity ratio would be reduced to 20 per cent from 45 per cent;
- Failure to accept the offer means that NPF will breach current interest cover ratios required by the ANZ Bank; and
- Acceptance of the offer allows NPF to keep its strategic holding in Steamships Trading Company. NPF’s Board Position
“The board at its previous meeting discussed NPF’s debt problem and agreed to the sale of Collins & Leahy shares down to 11 per cent of its market capitalisation.
“It is for the above arguments that the NPF board supports to accept the current offer by John Swire & Sons for $A1.50 per share held in Collins & Leahy.
“For your information in this regard.” (Exhibit S153)
NPF’s Realised Loss On CXL Investment
The proceeds of the sale, $A12,354,269, were paid to ANZ Nominees, which held the shares as security for the ANZ loan facility and it went towards retiring NPF’s debt to ANZ. The loss suffered by NPF was:
(This does not include the effects of foreign exchange loss and bank fees).
Sell-Down Of STC Shares Negotiations With Swires
On September 17, 1999, through capital Stockbrokers Ltd, Mr Mitchell ascertained current market price for STC was $A2.50 per share.
He then negotiated a sale of NPF’s entire STC share holding (7.3 million shares) to Swires at $A2.25 per share ($A16.425 million).
This strategy was approved by the NPF board on November 29, 1999, which resolved on “the sale of 100 per cent of its share holding in STC at a price no less than $A2.25 per share net of all costs”. The following problems occurred arranging the actual sale.
Negotiations With Bromley Group (Lemex International)
After Mr Mitchell received Swires’ offer of $A2.25, he informed Mr Semos and asked him to contact Sir Michael Bromley to gauge if he was interested. This produced an offer from Lemex International Ltd of $A2.26 per share, which was then increased to $A2.28. Mr Mitchell then made an unauthorised decision for NPF to retain 5 per cent of its STC holding to see whether this would enable Lemex to go higher. On the morning of September 7, Lemex increased its offer to $A2.30 and Mr Mitchell said that he required time to consider the offer. He then left a message for Swires that an offer of $A2.30 had been received and then Mr Mitchell attended another meeting. Some time later, Swires left a message in Mr Mitchell’s office offering $A2.40 for NPF’s entire STC holding.
Acceptance Of Lemex Offer
Before returning to his office, Mr Mitchell accepted Lemex’s offer of $A2.30 per share for 95 per cent of the shares.
Realised And Unrealised Loss On STC Investment
At that price, NPF’s situation on its STC investment as at December 30, 1999, and November 3, 2000 was:
The realised loss on the sale of 5,762,023 shares as at December 31, 1999 was therefore $A7,160,677 and the unrealised loss on the retained 5 per cent of shares was $A1,315,526. By November 3, 2000, that unrealised loss had increased to $A2,392,291 – making a total realised and unrealised loss in November 2000 of $A9,552,968.
Complaints By Swires
After the sale to Lemex, the Swire Group expressed considerable bitterness that Mr Mitchell had accepted the Lemex offer without formally checking whether Swires had improved on it. Swires wrote a letter of complaint to the chairman of NPF and Mr Semos and others wrote in support of Mr Mitchell.
(a) Mr Fabila was acting without board authority in seeking to mandate Wilson HTM as sole broker;
(b) Mr Semos’ comments about CXL in his report of February 6, 19996 should have been made much earlier consistent with his duty to “know your customer” (NPF) when Wilson HTM was providing investment advice (Mr Semos’ statements indicate that on occasions, he had given investment advice although on other occasions, he simply executed client’s instructions without giving advice);
(c) Mr Mitchell’s decision to retain 5 per cent of STC was contrary to the board resolution of November 29, 1999, to sell off all NPF’s holding in STC;
(d) Mr Mitchell failed to maximise the price obtainable for the sale of NPF’s STC shares. Mr Mitchell failed to actively conduct a “Dutch auction” to bring forth Swires best offer before accepting Lemex’s offer of $A2.30 per share;
(e) Mr Mitchell was acting in stressful and difficult circumstances when trying to finalise a deal to sell off NPF’s shares in STC. The commission accepts that he was trying to act in the best interests of the members of the fund and that he had no ulterior motives. Nevertheless, his failure to seek out Swire’s last highest offer before accepting the lower Lemax offer was careless and unprofessional. It was a failure of his duty to NPF. At the time of this failure Mr Mitchell was acting managing director and was therefore also a trustee bearing all the onerous fiduciary duties of a trustee. He is therefore personally liable for the losses suffered by the contributors from his breach of fiduciary duty unless he can successfully raise the defence that he was acting in good faith. This would be a matter for a court of law and is beyond the scope of this commission.
The NPF’s large scale investment in STC and CXL was inappropriate for a provident fund which should concentrate on small passive, risk-averse equity investments.
By making an amateurish attempt to take over these companies, NPF was obliged to acquire large shareholdings (21 per cent of STC and 38 per cent of CXL) which was bound to motivate the companies’ powerful owners to resist the takeover attempt. This happened.
NPF’s acquisitions were funded by borrowed capital (drawdowns on its ANZ facility) and when economic circumstances made it impossible for NPF to service this debt, it was obliged to sell down its equity portfolio, including its investments in STC and CXL. It was unable to do so at competitive prices because of low demand for the shares. It was then left at the mercy of the powerful Swires Group, which could ensure that the price offered would be low.
Because of Mr Mitchell’s inexperience, NPF sold to Lemex International at 10 cents below Swire’s intended final offer but in any event NPF’s realised losses on these investments, totalling $A23,483,324 and unrealised loss of $A2,392,291 (for a total of $A25,875,615) made huge inroads into members funds. The main procedural short-comings regarding these investments included management’s failure to provide the board with expert investment advice and failure to keep the board advised of the on-market transactions, some of which exceeded management’s delegated authority.
Once again there was failure by the board to seek out proper investment advice and failure to exercise proper control over management.
There was also failure by DoF to provide critical comment on NPF’s strategies. There was improper conduct by Minister Chris Haiveta in enthusiastically approving Mr Copland’s misguided strategy of leading NPF into a K40 million strategy to take over, merge and manage two of PNG’s largest retail and manufacturing corporations, without seeking expert advice from DoF or elsewhere.
The main responsibility for leading NPF into the misguided attempt to takeover CXL and STC must be borne by Mr Copland, who conceived and inspired the policy, Mr Kaul and Mr Wright who implemented it and Minister Haiveta who gave it such enthusiastic and unqualified support without seeking expert advice.
The commission’s major findings in the context of the commission’s Terms of Reference are listed in paragraph 10 of Schedule 4D.
Executive Summary Schedule 4E Macmin NL
NPF was enticed into the Macmin investment by an address given to the NPF board by Macmin managing director Robert McNeil.
Macmin was a small or junior minerals exploration company. It was avowedly a high risk, speculative enterprise, which had interests in the Wapolu and Wild Dog projects in PNG.
Its aim was not so much to be the owner of a rich, income-producing mine as to be alert to bringing in joint venture partners to the early stage of a project with a view to selling its interest when there was a chance of a quick profit. For these endeavours it was chronically under funded. It was essentially a “father and son” corporation.
Mr Copland and Mr Wright and also Mr Kaul became enthusiastic about Macmin’s prospects and set out to obtain a significant interest in the company for NPF.
TO BE CONTINUED