National Provident Fund Final Report [Part 44]
Below is the forty-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 44th 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 4G Continued
This was corrected by regazettal on April 15, 1996, but meanwhile all previous transactions in OSL or NML shares exceeding K500,000 between January 26 and April 15, 1996 were invalid, as they still required specific approval from the Minister.
In paragraph 4.4.6, the commission indicated that several of the sales of OSL shares in 1996 were without NPF board approval.
Furthermore, BPNG approval for the sales had been on the condition that the proceeds of the sale must be brought back into the country. This did not happen as Mr Wright authorised the brokers, Wilson HTM, to use the funds to purchase other ASX listed shares.
(a) THE sale on February 14 and 15, 1996 of 1,000,000 shares for $A1,316,288 and the three sales after May 27, 1996, totalling 1,000,000 shares were not authorised by the NPF board;
(b) MR Kaul and Mr Wright were responsible for these unauthorised sales in breach of their duty to the NPF contributors;
(c) THE NPF board contravened Section 61 of the PF(M) Act for any shares sold without Ministerial approval prior to April 15, 1996, where the value of the sale transaction was more than K500,000;
(d) THE NPF board contravened Section 61 of the PF(M) Act for any shares sold without Ministerial approval on and after April 15, 1996, where the value of the transaction was over K1,000,000;
(e) MR Kaul failed in his fiduciary duty to the members regarding sales not authorised by the board;
(f) MR Wright failed in his duty to NPF for his part in these unauthorised sales;
(g) NPF had clearly sold the two million shares before it obtained Internal Revenue Commission of Papua New Guinea (IRC) Tax clearance and the BPNG approval. This contravened the requirements of the BPNG and the IRC; and
(h) BASED on NPF’s Wilson HTM statement (Commission Document 748), the proceeds from the sale were used to purchase other ASX listed shares. The proceeds were not brought back into Papua New Guinea as directed by the BPNG.
Transactions In OSL Shares 1997-1999
In 1997, NPF held no OSL shares and there were no transactions.
On December 16, 1998, NPF management purchased 222,000 OSL shares through Wilson HTM and then sold them on January 17, 1999, for a loss. The NPF board was never informed about these two transactions. The transactions may have been required by Mr Wright to obtain share scrip as security for his unauthorised transactions in options, which were occurring at that time.
(a) THE NPF board did not approve the purchases and sales of 222,000 OSL shares in December 1998/January 1999;
(b) THE officers responsible breached their duty and may be personally liable for the loss, unless it can be shown that their actions were “in good faith”.
OSL paid dividends between 1992 and December 1999 of $A59.046 million. NPF received dividends of K49,500 in 1995 and K20,000 in 1996.
The main features of the NPF’s investment in OSL was the fact that it held a relatively safe and profitable dividend-providing investment in a large and proven PNG resource company.
Mr Copland, Mr Kaul and Mr Wright seemed driven to become in-volved in more risky smaller ventures in which NPF could have some control and in which there was a chance of a windfall from corporate takeovers and the like.
To fund such an investment with more “upside”, management decided to sell off the OSL investment. Making a grave error in judgment and without expert investment advice, management sought approval from the Board of Trustees, by circular resolution, to sell off the OSL shares and invest the proceeds of the sale by acquiring shares in NML.
In gross breach of fiduciary duty the trustees approved.
Thereafter, management set the pace for a total sell-down of OSL, often proceeding without board approval and sometimes without the board’s knowledge.
NPF management, particularly Mr Wright and Mr Kaul, and the NPF trustees, were in breach of their duties to the board and to the members of NPF in their handling of this investment.
Executive Summary Schedule 4H Orogen Minerals Limited
NPF’s investment in Orogen proved to be moderately profitable as shares purchased at $A29,487,447 (K32,241,239) were sold at $A30,809,481 (K42,229,956), resulting in a realised capital gain of $A1.32 million (K9.9 million). In kina terms, this represents an annualised return on capital of 10 per cent per annum for the period NPF held this investment. In addition, NPF received dividends of K2,506,627. Between April and June 1999, the investment had to be sold off to relieve NPF’s debt burden.
From start to finish, however, this investment was marred by NPF management’s cavalier approach to its obligation to properly brief the Board of Trustees about transactions being undertaken on behalf of NPF. Management also failed to obtain expert independent advice regarding its large initial investment in Orogen and subsequent “on market” purchases.
It also failed to seek such advice and provide it to the board when Orogen share prices fell steadily from 1997 onwards.
These breaches in management’s common law duties to the NPF board are dealt with in detail in the text of the report and in the list of findings in paragraph 8.
To some extent, the trustees were therefore “kept in the dark” about unauthorised transactions and management did not properly advised them about the risks and prospects of this investment.
Nevertheless, the trustees also failed in their fiduciary duty to maintain control of management and to challenge management over its failure to provide proper advice to the board.
The trustees also failed to criticise and reprimand management about those unauthorised transactions, which were subsequently disclosed to the board.
The trustees breaches of fiduciary duty to the NPF members are detailed within the text and in the list of findings at the rear of the report.
Investment In Orogen 1996
The most serious breaches of duty occurred at the commencement of this investment.
There were known risks associated with investing in Orogen as Orogen intended to invest in PNG resource stock, which is inevitably risky.
Despite these known risks the trustees approved an investment of K34,999,640 for 20 million shares in the initial share issue with very little discussion taking place and no expert investment analysis regarding the proposal. Management (Mr Kaul and Mr Wright) and the trustees all failed in their duty, in this regard.
The Department of Finance (DoF) analysis of this investment was very inadequate and it gave an unsubstantiated recommendation for the Minister to approve the investment. Although the full number of 20 million shares was cut back, management acted without board authority to purchase additional shares “on market” (through the stock exchange) at a higher price than the board had approved.
(a) MANAGEMENT (specifically Mr Wright and Mr Kaul), were in breach of their duty to the board by not providing independent expert investment advice before recommending an initial investment of K34,999,640 in Orogen, which involved significant investment risks;
(b) THE trustees failed their fiduciary duty to the NPF members by approving the investment of K34,999,640, without first seeking independent expert investment advice;
(c) THE NPF management did not obtain board approval before making additional transactions through book building or the additional “on market” transactions at higher prices than the board had approved;
(d) MINISTERIAL approval was obtained after NPF had contracted liability, which it had done so without board authority. The Minister failed to query or reprimand NPF about this breach of Section 61 of the PF(M) Act;
(e) WHERE NPF management acted in excess of their delegated authority and without the Board of Trustees approval, they were in breach of their duty to the NPF. If losses occurred, the officers concerned may be personally liable, unless they can successfully claim that they “acted in good faith”;
(f) THERE is no clear documentary evidence to conclusively show who initiated these transactions, however Yamyam Gire and Haro Mekere have given evidence (Transcript pp. 2558 – 2576 and 4104-4106 respectively) that during the period in question, Mr Wright usually gave instructions to the brokers. Mr Kaul has said that in most cases he was aware of Mr Wright’s transactions and would have approved, at least implicitly (Transcript p. 5090).
Other confidential evidence available to the commission confirms that it was usually Mr Wright who gave instructions to Wilson HTM;
(g) MR Kaul’s letter of the November 15, 1996, (Exhibit OR44), expressly showed that NPF requested Ministerial approval after liability had been contracted. Mr Haiveta’s response (Exhibit OR45) does not say anything in relation to this obvious breach by NPF. Mr Haiveta was remiss in not criticising NPF and demanding that Ministerial approval be obtained before NPF made acquisitions that required such approval.
Investment In Orogen 1997 Sales 1997
On May 5, the NPF board meeting resolved to “approve in principle as a matter of policy that where required a certain parcel should be realised where the need to use some cash arises in investment initiatives . . .”.
The minutes show that Mr Copland advocated this policy so that NPF could “realise some of the shares into cash and invest in areas where the board will have influence as a matter of policy” (presumably by obtaining a seat on an “policy” investee company’s board).
This resolution was wrongly taken by management as authorising it to sell Orogen shares without reference to the board to approve the sale.
The following sales occurred in 1997: See table 1 below.
Source : NPF accounting records/ Wilson HTM & Merrill Lynch statements (Exhibits OR11 OR13 ).
These sales did not have NPF board approval and were improper breaches of management’s duty to the board.
(a) MANAGEMENT (especially Mr Kaul and Mr Wright) directed Wilson HTM to sell 10 parcels of shares in June 1997, without the prior approval of the NPF board;
(b) MANAGEMENT, specifically Mr Kaul and Mr Wright, did not subsequently explicitly inform the board about these unauthorised “on market” share sales and the board’s ratification was not obtained. After September 1997 when the Orogen share price began to fall sharply from $A3.9 to bottom at $A1.6 in March 1999, NPF management failed to provide expert evaluation of this investment and the trustees failed to seek it. This was a breach of duty by both management and the Trustees.
Purchases in 1997
Throughout 1997, NPF management continued to acquire Orogen shares and did so without seeking the requisite NPF Board approval.
The purchases were as follows:- See table 2 below.
Sources: NPF accounting records/ Wilson HTM statements/ Merrill Lynch Statement — (Exhibits OR11-OR13).
There were references to some of these purchases in the equity portfolio schedules filed with the board papers but the references were out of date and inaccurate. They were sufficient, however, to have put the trustees on notice that unauthorised purchases were occurring. Failure by the trustees to observe these transactions and to reprimand management was a breach of fiduciary duty by all trustees holding office at the time. Clearly, the conduct of management, namely Mr Wright and Mr Kaul, was improper and they were in breach of their duties to the NPF Board.
(a) NPF management directed 12 “on-market” purchases totalling 1,087,973 shares for a total cost of $A3,917,879, without the requisite prior board approval;
(b) The purchases were later reported on the monthly equity schedules tabled at subsequent board meetings but the information was sometimes inaccurate and well out of time. The attention of the Trustees was not drawn explicitly to the equity schedules;
(c) MANAGEMENT, particularly Mr Wright and Mr Kaul, were in breach, respectively, of their duty and fiduciary duty to NPF members by this failure;
(d) THE trustees were in breach of their fiduciary duty in not monitoring management’s unauthorised activities and bringing them under control;
(e) THERE was a breach of Section 61 of the PF(M) Act with regard to the shares purchased on the October 2, 1997, as Ministerial approval was not sought or given.
TO BE CONTINUED