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Posts Tagged ‘Brown Bai’

How the elite profit while a nation suffers their incompetence

February 19, 2018 2 comments

Port Moresby, a city where the elite profit while the rest suffer the consequences of their incompetence

Imagine a company that is in debt, heavily in debt and still racking up more losses.

Imagine a company that in 2016 alone lost over K354 million.

Imagine a company where the total liabilities exceed the total assets by more than K218 million.

Imagine that this is a company set up by the government to manage a nation’s interests in its abundant mineral resources.

Now imagine no more and say hello to Kumul Minerals Holdings Limited, formerly Petromin PNG Holdings Limited.

The two numbers above are from Kumul Minerals Holdings latest Annual Return, which is for the 2016 financial year.

How could a company that, according to Statute, is supposed to be the commercial enterprise that participates in mineral exploration, development, production, processing and marketing activities on behalf of the State, be run into near bankruptcy?

But never fear, the Directors, the people responsible for this appalling state of affairs, are still profiting handsomely.

While the company was racking up losses of K354 million in 2016 alone its Board members were still taking a handsome pay packet:

Director

Remuneration

Brown Bai

K 159,759

Ian Goddard

K 211,337

Jerry Wemin

K 126,227

William Searson

K 102,654

Richard Tengdui

K 99,809

Issac Lupari

K 68,232

Peter Pokawin

K 23,959

Arunavu Basu

K 182.816

Peter Graham

K 59,028

Stanley Lira

K 33,129

Richard Kuna

K 34,379

In total K1,101,329 paid to eleven men [yes, all men, no room here for gender diversity let alone equality] many, if not all of whom, already occupy other well paid jobs.

K1.1 million paid for overseeing losses of over K354 million, losses that were almost three times greater than in the previous year, 2015 (K133 million).

And the excess does not end there. In addition to the Board remuneration, Kumul Minerals Holdings had 10 staff who earned more than K100,000 each in 2016.

One of those staff earned over K920,000, two more over K620,000, another over K450,000 and one over K300,000. Two more earned over K270,000.

In total, Kumul Minerals Holdings paid its staff just under K9 million in 2016 and spent a further K1.5 million on consultancy and professional fees.

Who is ultimately responsible for this negligent mismanagement of our nations mineral wealth, and the looting of an empty pot?

Well it has to be the trustee shareholder does it not? The person who effectively owns the company on behalf of the nation, who is none other than one Peter O’Neill.

It seems our trustee is not doing a very good job!

Govt needs to explain huge difference in mine sale prices

July 14, 2016 1 comment
Tolokuma

The Tolokuma mine, sold by the government for K80 million in November 2015, is now being traded for K670 million…

In November 2015, Petromin sold the Tolokuma mine to a foreign speculator, Singapore businessman Philip Soh Sai Kiang, for a reported K81.35 million [US$25 million]. Soh Sai Kiang acquired the mine using a Singapore registered front company, Asidokona Mining Resources.

The mine has been closed since April 2015 when Petromin shut down gold production claiming it could no longer cover the mining costs. 

At the time of the sale in November 2015, Petromin Chairman, Brown Bai said the decision was based on commercial considerations and refuted claims of ‘political overtones’. He said the Petromin Board had sole responsibility for the decision to sell. 

Mining Minister Byron Chan said the buyer, Asidokona Resources, was “reputable, committed, has integrity and capacity” (LOL).

Now, just eight months later and with the mine still mothballed, another Singapore outfit, LifeBrandz, an entertainment company that owns six nightclubs, bars and restaurants is reported to be paying US$212 million  [K670 million] to acquire the mine.

How can a State asset sold by the government for K80 million in November 2015 now be worth K670 million? That represents a huge profit of around K590 million for a Singapore based company, Asidokona Mining Resources, and its owner Soh Sai Kiang.

And why is Petromin House the registered address in PNG for Asidokona!

asidokona

National Provident Fund Final Report [Part 52]

October 16, 2015 1 comment

Below is the fifty-second 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 52nd 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 5 Continued 

(f) MARIANO Lakae and Iori Veraga charged fees at approximately double rate to give grossly inflated valuations for the NPF Tower and the Waigani land;
(g) Authorisation for payment was given by general manager Henry Fabila, well in excess of his financial delegation and without consultation with or authority from the NPF board;
(h) The two valuers each paid Mr Maladina K30,000 commission on the fees paid to them by the NPF for valuation of the Waigani land. They each paid a commission of K87,500 to Mr Maladina from the fees received for valuing the NPF Tower.
(i) There was a conspiracy between Mr Leahy, Mr Maladina, Mr Lakae and Mr Veraga and possibly including Mr Fabila to obtain inflated valuation fees from NPF;
(j) Mr Maladina, Mr Leahy, Mr Veraga, Mr Lakae and Mr Fabila should each be referred to the Commissioner of Police to consider criminal charges, including conspiracy in relation to the valuations and valuation fees (See paragraph 19.9.2 for referral).
(k) Mr Fabila was in breach of his fiduciary duties as an NPF trustee and should be referred to the Ombudsman Commission in relation to this matter to consider possible breach of the Leadership Code.

On the face of the Carter Newell records, the 50 per cent of the valuation money was received by Carter Newell as legal fees for division in accordance with the partner’s profit sharing arrangement. As it was grossly excessive considering the minimal service provided by Mr Maladina that amount of remuneration was improper.

However, the commission made further investigations to see what actually happened to those valuation fees after they were received into the Carter Newell Trust account. It found the fraudulently obtained valuation fees were laundered through Carter Newell trust account and general account and paid largely for the benefit of Mr Maladina and Mr Leahy and their corporate entities. Angelina Sariman, Mr Leahy’s wife, was clearly involved and cashed and reinvested several of the cheques.

The commission traced the payments of these moneys to their end destinations as far as possible and these transactions are depicted diagrammatically in chart 1 attached as an appendix to this report (It deals with both the Waigani land and the NPF Tower valuations) (see paragraphs 17 and 19).

Findings 

(a) There is strong evidence that the arrangements between Mr Lakae, Mr Veraga, Maladina and Mr Leahy and Ms Sariman involved a conspiracy to cheat and defraud the NPF and that the conduct of these people was criminal in nature;
(b) Cheating is an offence under Section 406 of the Criminal Code Act as is conspiracy to defraud under Section 407. Misappropriation is an offence under Section 383A of the same Act and knowing receipt of property obtained by means of an indictable offence is an offence under Section 410 of the same Act;
(c) The commission recommends to the constituting authority that:
(i) each of Mr Maladina, Mr Leahy, Ms Sariman, Mr Veraga and Mr Lakae should be referred to the Commissioner of Police for investigation with a view to criminal prosecution; and
(ii) each of Mr Maladina, Mr Leahy and Ms Sariman, as lawyers, should be referred to the Papua New Guinea Law Society for investigation with a view to examining whether their respective conduct was unprofessional;
(iii) each of Mr Veraga and Mr Lakae should be referred to the Papua New Guinea Valuers Registration Board and the Papua New Guinea Institute of Valuers for investigation with a view to examining whether their respective conduct was unprofessional; and
(iv) Mr Maladina should be referred to the Ombudsman Commission for investigation whether he has committee offences in breach of the Leadership Code.

Attempts by Mr Maladina and Mr Leahy to persuade the NPF board to resolve to acquire a 100 per cent interest in the Waigani land were firmly rejected by the NPF board at its meeting on December 22, 1998, despite the preparation of false and misleading briefing papers for the Board (See paragraphs 13, 15 & 18).

Findings

(a) Attempts were being made, simultaneously, to sell off all or part of the Waigani land through the sale of shares in Waim No. 92 / WCC Ltd to POSF, MVIT, DFRBF and NPF;
(b) Pacific Capital was retained to prepare investment memoranda for the proposed sale to POSF and DFRBF. False information was included in the memoranda, which had been provided by the client, notably that the Valuer General had valued the land at K15 million whereas the actual Valuer General’s valuation had been K2.866 million;
(c) Mr Maladina was heavily and directly involved in briefing Pacific Capital in the preparation of the two memoranda of information;
(d) Mr Maladina was also directly involved in proposing to the NPF board that NPF should purchase 100 per cent of the shares in Waim No. 92, known as Waigani City Centre Ltd (WCC Ltd) for K10 million;
(e) Mr Maladina had an interest in WCC Ltd, which he was deliberately concealing;
(f) Mr Leahy was conspiring with Mr Maladina to sell off the interest in Waigani land to NPF and the other institutions; and
(g) These activities were serious breaches of Mr Maladina’s fiduciary duty as a trustee and of Mr Leahy’s contractual duties to NPF.

When Prime Minister Skate succeeded in obtaining the appointment of Mr Maladina as chairman of NPF in January 1999, Mr Maladina directed that the Waigani land deal be put back onto the agenda for the NPF board meeting scheduled for February 1999. Mr Leahy “doctored” the minutes of the December board meeting to create the impression that the board had left open the possibility of acquiring the land.

Prime Minister Skate appointed new trustees to replace those whose terms were expiring. By postponing the February meeting by a few days, Mr Leahy, supported by Mr Fabila (who was himself one of Mr Skate’s appointees) manipulated things so that Mr Paska, Mr Koivi and Mr Nana had no current appointment as trustees, so they were barred from attending the February meeting. With virtually a new board, Mr Fabila and Mr Leahy provided false information to the new trustees who then resolved to acquire 100 per cent of the shares in WCC Ltd (see paragraphs 20 & 21).

Findings 

(a) There were clear and obvious manipulations of the minutes of the 117th NPF board meeting, to reduce the role of Mr Maladina in the NPF Tower discussions and to hide the fact that he arranged, with Mr Leahy’s help, that negotiations to settle a claim by Kumagai Gumi be taken over by NPF management so as to achieve the increased ceiling of K54 million (See Schedule 6);
(b) There are also clear and obvious manipulations of the minutes regarding the Waigani land item to attribute to Mr Fabila, remarks which were actually made by Mr Maladina; to add in a fabricated recommendation attributed to Mr Fabila and to add additional resolutions which had not actually been passed;
(c) The additions to the evolving drafts of the minutes purported to empower an acting managing director to execute documents. This was intended to empower Mr Leahy to sign the contract and other documents during Mr Fabila’s absence from PNG when he attended a Cue Energy board meeting; and
(d) Further additions made after the meeting purported to expand the financial delegations of the corporate secretary and managing director to K50,000, falsely referring to the distribution of a paper which was not distributed at the meeting.

Using Patterson Lawyers as solicitors for WCC Ltd (to hide the involvement of Mr Maladina and Carter Newell), a contract was prepared and signed on behalf of NPF by either Mr Fabila or Mr Leahy and a cheque for K80,012 was drawn for stamp duty (see paragraph 22).

Mr Leahy and Mr Fabila provided false and deceitful information to obtain Ministerial approval.

Findings 

(a) The submission to the Minister seeking approval for NPF to purchase shares in WCC Ltd was knowingly deceitful and dishonest on Mr Leahy’s part because he drafted and asked Mr Fabila to sign the submission;
(b) If Mr Fabila read the submission before signing it, he, too, was knowingly deceitful, dishonest. If Mr Fabila failed to read the submission, as he claims, he was merely negligent; and
(c) Mr Fabila was in breach of his fiduciary duty as a trustee.

On the eve of the final settlement in April 1999, the press broke the news of the proposed Waigani land acquisition by NPF and the participation of other PNG institutions.

It was clear the press had very detailed and authentic evidence.

Mr Skate directed that NPF and other institutions must withdraw from acquiring the Waigani land (see paragraph 24).

Mr Maladina Mr and Fabila publicly and falsely denied NPF had signed a contract or expended any funds, despite the valuation fees of K235,000 and the stamp duty cheque for K80,012 (paragraph 26).

After the scandal broke in the press in April 1999, Brown Bai, Secretary for Finance established an inquiry by the finance inspectors in June. By October 1999, the NPF board itself was actively inquiring into the Waigani land deal and other matters (paragraph 29). Mr Leahy and Mr Fabila were unco- operative and obstructive to the finance inspectors, which amounted to deliberate interference with their investigations. These inquiries led to the termination of Mr Maladina and Mr Leahy from NPF.

Findings 

(a) The commission, in the light of all the evidence available to it, fully supports the findings of interference listed in the finance inspectors report;
(b) The interference by Mr Leahy and Mr Fabila is evidence that they feared exposure of improper conduct; and
(c) If Mr Fabila is, as he claims, innocent of any wrongdoing except that he was tricked and misled by Mr Leahy and Mr Maladina, he should have welcomed and fully co-operated with the Inquiry.

In evidence given on January 31, 2001, transcript pp. 5113-4, Mr Fabila explained his earlier obstruction was caused by his ignorance of the legal powers of the finance inspectors pursuant to the PF(M) Act. His resistance continued for three months, however, despite clear warnings and directions from the Secretary DoF.

The commission does not accept his explanation. It is far more likely that this resistance was related to fear of what the inspectors might uncover.

By January 2000, working through Simon Ketan, of Ketan Lawyers, Mr Maladina (with Mr Eludeme as his representative director) negotiated a sale of the Waigani land to Trinco No.6 Pty Ltd (a member of the Rimbunan Hijau Group) for a drastically reduced price of K3.3 million (see paragraph 29). The sale was, however, subject to WCC Ltd arranging for variation of the existing lease condition and other conditions precedent being satisfied.

To satisfy these conditions precedent and enable the sale to Trinco No.6 to proceed, Mr Maladina entered into corrupt agreements with the then Minister for Lands Dr Fabian Pok and chairman of the Lands Board, Ralph Guise.

Pursuant to this corrupt agreement, there was, firstly, a clumsy attempt to falsify the record of an earlier Land board hearing — No. 2006 of March 1999.

The fabricated record made it appear as though an application by Waim No.92 had been dealt with as item 151 and that the Land Board had recommended and the Minister had approved, the grant of a lease which would satisfy all the matters required by Trinco No.6 as conditions precedent to purchasing the Waigani land from WCC Ltd (see paragraph 30).

In pursuit of this clumsy attempt, Mr Guise and Dr Pok were involved in fabricating and gazetting false documents, preparing and signing false Land Board minutes and signing false and fictitious approvals (see detailed findings below). These clumsy attempts to “rig” the false approvals purportedly given at meeting no. 2006 left a documentary trail and when it became clear that it would probably be discovered by the finance inspectors, it was dismantled by a further gazettal notice which admitted that item 151 had never been considered by the Land Board.

Mr Guise then participated in another corrupt activity by arranging for an application by WCC Ltd to be listed for the next Land Board meeting, No. 2017 to be held on November 24, 1999.

Without the formality of a hearing, Mr Guise then simply signed a notice that the desired variations of conditions had been recommended and Dr Pok gave the necessary Ministerial approval.

Mr Guise, Mr Pok and Mr Maladina were all involved in a criminal conspiracy to achieve this result for WCC Ltd. All received corrupt benefits for the part they played (see paragraph 31).

Findings

(a) Relevant files in the Department of Lands have been removed or concealed in order to cover up fraudulent activities carried out by Dr Pok, Mr Guise and possibly by other officers and Ministerial staff;
(b) Mr Guise prepared or directed the fabrication of false minutes of Land Board meeting No.2006 of March 1999, purporting to be pages 10 and 11 dealing with a fictitious item 151 — application by Waim No.92, in which the Land Board recommended granting an urban development lease to Waim No.92 with very favourable conditions;
(c) The then Minister for Lands, Dr Fabian Pok, on September 22, 1999, improperly requested the Government Printer to publish a corrigendum to Land Board meeting 2006, showing Waim No.92 as a successful tenderer in respect of Item 151;
(d) Minister Pok improperly signed notification of alteration of State lease dated September 28, 1999, purporting to grant Waim No.92’s fictitious application purportedly recommended at meeting 2006. Minister Pok was fully aware of the impropriety and illegality of this action and that it was designed to benefit the owners of WCC Ltd; and
(e) Mr Guise improperly caused a corrigendum to be published in Government Gazette G152 dated October 22, 1999, to assist the conspiracy relating to the sale of shares in WCC Ltd;
(f) Mr Guise fraudulently and improperly issued a notice of a Land Board approval, purportedly granted at Land Board hearing no 2017, on November 24, 1999, for Waim No.92, which had in fact not been considered or approved by the Land Board;
(g) Dr Pok received corrupt benefits for his actions in favour of Waim No.92. There is insufficient evidence to make the same finding against Mr Guise although it sees that at least K100,000 was expended from the proceeds of WCC Ltd share sales for “Land Board claims”; and
(h) There is ample evidence that Dr Pok and Mr Guise were party to a criminal conspiracy with Mr Maladina to fabricate false documents designed to favour WCC Ltd in its endeavours to conclude a sale of the shares of WCC Ltd.

Referral

Dr Pok, Mr Guise and Mr Maladina should be referred to the Commissioner of Police to consider whether criminal charges should be laid in respect of their activities in obtaining a lease for Waim No.92 on favourable terms to assist in completing the sale of WCC Ltd shares to Trinco No. 6 (Rimbunan Hijau).

The sale to Trinco No.6 went through and the sale price (after paying out money owed to the Lands Department and for other statutory requirements) was paid to Ketan Lawyers.

Mr Ketan deducted his fees of K40,000 and paid the balance of K1,417,643.69 into the Carter Newell trust account on January 21, 2000, a manual receipt was made out to Philip Eludeme allocating no file number. This receipt was then cancelled (see paragraphs 30.11 & 30.12).

In fact, the money was immediately credited to Carter Newell file no. 200055 (Global Halshaw Consultants — an entity of Mr Maladina’s). It was then paid out through the Carter Newell general account for Mr Maladina’s benefit in various ways or, at his direction, to the benefit of those who had assisted him in organising the Waigani land (or NPF Tower valuation) fraud. The beneficiaries included Mr Eludeme, Mr Mamando, Mr Leahy, trustee Mickey Tamarua, Ram Business Consultants, Viviso Seravo, Dr Pok, Jack Patterson and Mr Maladina’s company, Ferragamo and Dr Pok’s company Biga Holdings.

Peter O’Neill appears to have received a benefit of K60,000 paid on his behalf to Port Moresby First National Real Estate (see Schedule 6 and paragraph 32).

All these transactions are fully described in paragraph 32 of the report and are depicted on Chart No.2.

The tracing of these moneys provides extremely strong evidence in support of the commission’s findings regarding those who perpetrated and benefitted from the Waigani land fraud (and from the NPF valuation fees).

TO BE CONTINUED

National Provident Fund Final Report [Part 50]

October 14, 2015 1 comment

Below is the fiftieth 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 50th 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 4N Continued 

Preparation Of ACOM contract Involves Protracted Negotiations 

In his capacity as executive director of ACOM, Haro Mekere was in regular contact with Odata, which was calling for the release of “mobilisation costs” from ACOM even before there was a signed contract between ACOM and Odata.

Mr Mekere had been promised a trip to India paid by Odata to visit the company that would manufacture the mill. Mr Mekere put pressure on Herman Leahy, the NPF legal counsel, to draw up a simple turn key contract between ACOM and Odata but Mr Leahy insisted on briefing this out to Carter Newell lawyers to draw up a far more sophisticated and all encompassing document.

Mr Mekere then put forward a draft contract, which had been prepared by Odata for consideration. At Mr Copland’s insistence, Mr Mekere obtained a breakdown of Odata’s mobilisation costs in the form of an invoice.

Payments To Odata Through NPF’s Off-shore Account With WILSONS HTM In Breach Of Foreign Exchange Regulations 

The first payment of $A40,282.65 was paid on June 1, 1998 by using NPF’s account with its share brokers Wilson HTM to avoid the requirement for foreign exchange approval by BPNG. Mr Copland apparently authorised the payment, which was beyond his authority and Mr Wright gave instructions to Wilson HTM for payment from that account. Mr Wright and Mr Copland and also Wilson HTM should be referred to the Controller of Foreign Exchange to consider action against them for breach of BPNG foreign exchange regulations.

Mr Leahy refused to be rushed into the preparation of the contract and insisted that NPF’s initial equity contribution should be made subject to approval by the Minister for Finance, as it was now in excess of K500,000.

The commission finds that failure to seek and obtain Ministerial approval for the initial equity contributions was a breach by the board of trustees of section 61(2) of the PF(M) Act.

Misrepresenation To NPF Board Lead To Signing Of Contract Between ACOM And Odata Committing ACOM To Pay K1,500,000 To Odata 

Mr Wright also misled the board in November 1998, by setting a target date of early 1999 for pouring the first copra oil. At that time, there was no contract with Odata, no sub-contract for manufacturing the mill and no agreed funding in place.

By the beginning of November 1998, the contract was still not finalised (and negotiations were still continuing) and ACOM had not yet succeeded in obtaining a license from the CMB to export copra oil. On November 12, 1998, Mr Mekere advised the ACOM board that he held a completed contract document executed by Odata and sought approval for the chairman or a delegate to sign on behalf of ACOM.

Mr Mekere pointed out that the export licence had still not been obtained and that the contract should be made conditional upon the grant of that licence.

He also pointed out that ACOM had not yet obtained a bank loan to enable it to fund the project and meet the proposed commitments to Odata. He failed to recommend that the contract also be made subject to ACOM obtaining finance.

When the contract was signed by Mr Fabila on behalf of ACOM on about November 23, 1998, ACOM thereby became liable to pay Odata $US25,000 immediately and to find $US1,525,000 in the longer term. NPF met the first payment by cheque for K48,623.02 payable to Odata on November 25, 1998.

Breach Of Fiduciary Duty By Trustees And Mr Fabila and Mr Mekere 

It is likely that Mr Fabila and Mr Mekere, who witnessed the contract, are personally liable for losses suffered by NPF under this contract as it is doubtful they could claim “good faith” as they were clearly aware of the financial obligations being undertaken and of the lack of funds to meet it.

Likewise, all trustees in office at the time were in breach of their fiduciary duty by authorising management to execute this contract.

The trustees also face personal liability for all losses incurred by NPF as a direct result of entering into this contract.

Further Payments By NPF On Behalf Of ACOM To Odata Without NPF Board Approval 

On December 10, 1998, Mr Wright authorised the payment of a further K302,393 to Odata with no NPF board approval and well in excess of his financial delegation.

Mr Wright was in breach of his duty to the NPF board and could be personally liable for this amount. It brought NPF’s payments to Odata to K417,500 at that time. The NPF trustees may also be personally liable for not having controlled this unauthorised expenditure by Mr Wright.

On January 18, 1999, Odata claimed a further $US290,000, saying “we have already started implementing the project ahead of schedule”.

This amount was paid without question and with no project engineer in place to verify the work done.

There was no authority from the NPF board to advance this sum as “bridging finance” pending ACOM obtaining bank financing. NPF management and Mr Fabila and Mr Mekere were in breach of their duty and may be personally liable.

They must have known that the requisite NPF approval had not been given and they would not succeed in a “good faith” defence.

Similarly, the trustees failed in their fiduciary duty to the members of the fund to exercise control over management and this may expose each trustee to personal liability for this loss.

It is important to note that in January 1999, Mr Wright was forced to resign from the NPF and ACOM, amidst mounting criticism of his conduct as finance and investment manager for NPF. His position was filled temporarily by the unqualified and inexperienced Haro Mekere.

In his report to the ACOM board dated January 18, 1999, Mr Mekere understated the amount which had been paid to Odata (K417,000) by claiming only K380,000 had been paid.

On January 29, 1999, there was a further request from Odata, this time for K60,000 to be paid into the personal account of Odata director, Krishna Prasaad.

The amount was paid, without question, into Mr Prasaad’s personal account.

External funding: Bank Loan 

From February 1999, Mr Mekere sought the assistance of Deloittes to obtain a loan facility for ACOM, preferably from the Bank South Pacific (BSP).

Without any authority from the NPF board, he discussed a guarantee and the possibility of NPF providing security for the proposed facility.

Bridging Finance From NPF 

In April 1999, Odata demanded a further drawdown and threatened legal action.

In his April report to the NPF board, Mr Mekere sought board approval to advance between $US50,000 to $US100,000 by way of bridging finance for Odata to proceed with site preparation.

Request To PNGBC 

On April 15, Mr Fabila sought approval from PNGBC to advance K2.750 million to ACOM at ILR +2 per cent.

This was a time of extreme financial crisis for NPF itself, which was unable to meet its own massive borrower’s commitments to ANZ and PNGBC.

Mr Fabila’s uncritical support for this proposal was a gross breach of his fiduciary duties to the members of the fund.

Suspicions About Mr Mekere’s Motives In Supporting Odata

Mr Mekere’s continued active involvement to obtain funding for Odata is also highly questionable. At this time, it was not known that his own wife had been appointed to the board of the recently incorporated Odata (PNG) Ltd. The explanations given for this appointment are most unsatisfactory and Mr Mekere’s failure to disclose her appointment to either ACOM or NPF was improper conduct.

At this stage, Mr Mekere had become aware that Deloittes had revised cash flow projections for ACOM, which showed a clear cash deficit in the first two years and an overall cash deficit after six years. Mr Mekere’s failure to advise the NPF board of these unfavourable projections was another gross failure of his duty to give professional objective advice to the board. It again raises serious questions about Mr Mekere’s motivation.

NPF Board Guarantees BSP Loan Facility Of K3,150,000 T0 ACOM

On April 30, 1999, at a special meeting, the NPF board, without the benefit of any independent expert advice or professional analysis of the viability of ACOM and the copra oil process, resolved to guarantee a loan facility of K3,150,000 to be provided by BSP.

By passing this resolution at a time when NPF was in financial crisis, the board of trustees were in serious breach of their fiduciary duty to the members of the NPF.

At this time, the trustees had been well briefed about NPF’s acute cash flow problem and financial crisis.

The trustees were aware of the endeavours being made to sell off NPF’s investments to enable the repayment of the ANZ debt and of the attempts to reduce the burden of its crippling PNGBC loan facility.

The trustees must be severely criticised for following with such docility, the unsupported and fiscally irresponsible recommendation from Mr Fabila and Mr Mekere, to guarantee this BSP facility to ACOM, without seeking any independent investment advice.

The NPF sought Ministerial approval for this guarantee but it was “put on hold” by Secretary Tarata of the Department of Treasury.

Meanwhile, NPF paid an additional K157,977 to Odata on June 14, 1999, on the authority of Mr Fabila, without any board approval. Again, Mr Fabila faces personal liability for this breach of his fiduciary duty to safeguard the member’s funds. This brought the amount paid by NPF to Odata to K647,000.

Continuing Negotiations For BSP Loan Facility Without NPF Board Authority 

Throughout June and July 1999, Mr Mekere was involved in negotiations with BSP regarding the security that NPF would provide for the ACOM loan facility.

These discussions had no board authority whatsoever and were at odds with the endeavours of Rod Mitchell and PwC to stabilise NPF’s haemorrhaging debt problems.

The conditions imposed by the NPF board, as a prerequisite for providing bridging finance to ACOM pending finalisation of its proposed BSP loan facility, had not been met but Odata was continuing to ask for on-going funding.

Further Payments By NPF To Odata To Fund Construction Of The Mill 

At the NPF board meeting of July 29, 1999, the board approved payment of $US78,000 for Odata and the K31,500 loan processing fee for BSP. These amounts totalling K214,303, were paid by cheque to Odata on August 3, 1999.

ACOM Binds Itself In A Management Contract With Odata 

While the scramble to fund construction continued, with no project engineer to give independent verification of the funds being claimed by Odata, ACOM proceeded to bind itself into contractual arrangements with Odata for management of the project and marketing of the product.

At a special NPF board meeting on August 15, 1999, the ACOM management was authorised to “negotiate and finalise the contracts” for circulation to the board before signing.

This resolution was passed despite discussion among the trustees, which recognised the lack of expertise in either NPF or ACOM, to ensure the best price would be obtained.

This was another serious failure of the NPF trustee’s fiduciary duty to members of the fund and indicates their lack of awareness about the fiduciary duties they owed to the members.

By August 10, 1999, Mr Mitchell was expressing concerns about the project and successfully arranged for BSP to apply a strict deadline of August 31, 1999, for ACOM to satisfy the required conditions for granting the facility. The deadline was not met, although Mr Mekere attempted to obtain the loan facility, offering further securities to be provided by NPF, without board authorisation.

The documents in evidence indicate an increasing sense of urgency amounting almost to desperation, characterising Mr Mekere’s conduct.

BSP Loan Facility Negotiations Discontinued 

On October 28, 1999 Mr Mekere gave in, and on instructions, notified BSP that ACOM was not able to proceed with the loan facility.

NPF Withdraws Construction And Odata Sues ACOM 

On November 3, 1999, Mr Mekere formally advised the directors of ACOM that the NPF board “withdrew its commitment to construct the proposed 30 tonne per day copra processing facility . . .”. The letter also alleged that Odata was in breach of its contractual obligations to ACOM and that if this was redressed “NPF may revisit this investment in six months time”.

Odata subsequently claimed $US612,000 from ACOM for costs incurred under the contract. This was not paid and court proceedings have been instituted.

Findings In Accordance With Terms Of Reference 

The commissions findings are set out in the text of the report on Ambusa and at Paragraph 11 of that report. In summary:

(a) Mr Wright, Mr Mekere and Mr Fabila were in breach of their duty to the NPF board by putting forward a recommendation for the board to invest as a joint venture partner with Ambusa Pty Ltd, without carrying out any due diligence on Ambusa or Odata or the personalities involved and without instigating an independent expert analysis of the business proposal put forward by Ambusa, Odata and Mr Valu, Mr Ryan and Mr Gavuli;
(b) The NPF trustees failed their fiduciary duty by approving this investment in principle in December 1997 and then approving its implementation and investment of K400,000 in February 1998; and
(c) Both the management and the trustees continued to breach their duty to the NPF members throughout 1998 and 1999 by continuing to meet progress claims by Odata prior to finalising the turnkey construction contract and without appointing a project engineer to verify the claim for payment.

On several occasions, management authorised these payment to Odata without NPF board approval, knowledge or authority.

The NPF board of trustees accepted management’s recommendation that ACOM should execute the contract with Odata knowing that it would obligate ACOM to pay $US25,000 immediately and to provide long term funding of more than K3 million, with no protective “subject to finance” clause in the contract.

As a result of this foolish and poorly managed investment, NPF suffered actual loss in terms of payments to Odata, board fees and expenses and legal fees of more than K1.1 million.

NPF also faces potential liability to Odata in the outstanding court proceedings.

The trustees in office during this period were Brown Bai, Henry Fabila, Michael Gwaibo, John Paska, Abel Koivi, Vele Iamo and Tau Nana, all of whom were in breach of their fiduciary duty to the members of the fund.

All face potential personal liability for the losses incurred by NPF because of their serious failure to seek even basic expert advice and their failure to reprimand or control management for making repeated unauthorised payments.

The officers involved were Mr Fabila, who, as managing director, had both a common law duty to the board and a fiduciary duty to the members.

The other officers involved were Mr Wright and Mr Mekere.

These officers face personal liability for losses suffered by NPF generally by entering into the investment on the basis of their woefully inadequate investment advice and for the various payments made to Odata on their unauthorised direction. It is unlikely they would succeed in a defence of “acting in good faith”.

Executive Summary Schedule 4O Plantations and Agriculture Investments 

Introduction 

This introduction covers NPF’s investments in New Guinea Plantation Holdings Limited (NGPHL), New Guinea Plantations Limited (NGPL) Walmetke Ltd (Walmetke) and New Guinea Islands Produce Ltd (NGIPL).

These investments were made well before the period covered by this commission of inquiry. Very few records are easily available about the initial investments, which is outside the time frame of the commission’s terms of references.

The early history of this investment has been put together on the basis of available documents and from evidence given by Mr Robert Bolling (Transcript pp.5763-8) who was previously the finance manager of the company Kina Gilbanks.

TO BE CONTINUED

National Provident Fund Final Report [Part 42]

October 2, 2015 1 comment

Below is the forty-second 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 42nd 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 4E Continued 

At the July 4, 1997 NPF board meeting, Mr Kaul accurately reported on the state of the Macmin investment of 21,876,409 million shares for a cost of $A4,369,999. NPF then showed an unrealised loss of $A1.85 million and he specifically invited the trustees to “air any views” they held.

No trustee is recorded as making any comment about NPF increasing its share holding in Macmin or about Mr Wright’s inappropriate focus on acquiring an additional seat on the Macmin board. NPF’s last purchase of Macmin shares occurred on May 6 and 7, 1997 when it acquired a total of 2,200,000 shares “on market” for a total of $A324,788. This was done without board approval and without Ministerial approval, which was required for the May 6 transaction only.

When these purchases were eventually disclosed to the board on July 4, 1997, the trustees did not criticise or reprimand management. Both management and the trustees were in breach of their duties.

Between August and December 1997, despite a massive fall in the gold price and in the value of Macmin shares, NPF management still failed to obtain expert investment advice or to present a proper analysis to the board. Nor did the board request such advice. All parties concerned failed in their duty to the NPF members.

1998 

The same trend continued throughout 1998 and still no analysis of this investment was made. During this period, Mr Fabila replaced Mr Kaul as managing director and Mr Copland left the NPF.

A period of management paralysis followed as the situation of increasing losses continued un-addressed. By May 1998, NPF’s unrealised losses in Macmin stood at $A2,542,959 and by June 30, 1998, the share price had dropped to 5 cents.

Brown Bai terminated the chairmanship of Mr Copland, who immediately criticised the Macmin investment as speculative and spoke out against a proposed $A3 million underwriting that was then being considered.

The board resolved not to participate in the underwriting. By September 30, 1998, NPF’s unrealised losses in Macmin had reached $A3,145,270.

The commission has found that throughout 1998 the trustees were failing in their fiduciary duty to the members of the fund and management was in breach of its duty, as follows.

Findings 

(a) The NPF Board of Trustees did not challenge the logic of continuing its Macmin investment;
(b) Mr Bai, the incoming chairman, expressly informed the trustees at the 1st September 1998 board meeting that NPF’s investment in Macmin was speculative. It had taken almost two years and nine months for a trustee to question the investment in Macmin and act in a prudent manner;
(c) The Board of Trustees did not adequately consider the implications of Macmin’s falling share price upon NPF’s investment portfolio. They should have
discussed, for instance, whether to hold or sell the Macmin scrip and also considered the effect (on its ANZ loan covenant) of the falling value of Macmin shares, held as security for NPF’s ANZ loan;
(d) The NPF trustees did not seek independent investment advice about the investment during this period;
(e) There was no independent and objective investment advice from NPF’s Investment Division, headed by Mr Wright; and
(f) The Investment Division had not performed a review of NPF’s future with Macmin as resolved by the board at the 114th Board meeting on September 1, 1998.

The failings of the NPF trustees in this regard was a failing to properly discharge their duties as trustees and a breach of their fiduciary duty to the members of the fund.

The failing of management was a breach of their common law duty to the NPF board.

The individual officers and trustees concerned may be personally liable for losses caused to the fund and its members unless they can establish that they “acted in good faith”.

Sell Down Of Macmin Shares 1999 

As the 1998 NPF audited financial statements showed a deficit of K71 million, something had to be done.

Mr Wright resigned in January 1999 and PwC was engaged to review the fund’s investment portfolio and formulate a strategy to table the fund’s mounting debt problems. They reported in March 1999.

The strategy to reduce NPF’s crippling debt burden was to conduct a massive sell down of its equity investments, including the sale of 100 per cent of its Macmin shares.

This occurred between April and October 1999 as follows:

npf 42 a

The sell down of Macmin shares occurred, despite advice from Mr Semos of Wilson HTM to hold on to the shares in the hope of a favourable exploration discovery because the selling price of Macmin was so low.

At the completion of the period under review, NPF was negotiating to sell its remaining Macmin shares under an option agreement.

Conflict Of Interest 

Noel Wright held 10,780,742 options in Macmin. This gave rise to a conflict of interest and his failure to disclose this situation to the NPF board, was improper.

Conclusion 

The investment in Macmin was totally contrary to NPF’s investment guidelines. It was an active (19.35 per cent ownership) participation in a non-dividend producing, high risk, speculative investment.

Throughout the period of this investment the management (specifically Mr Wright and Mr Kaul) routinely failed to give the board proper investment advice and acted frequently without the authority of the board.

The trustees failed to control management and maintained a docile silence in the face of serious adverse reports, plummeting share prices and mounting losses.

When made aware of management’s serious breaches of duty, the trustees took no steps to reprimand management and to direct the officers to act within their delegated authority.

In the opinion of the commission, such repeated instances of management and trustees failing to act in the interests of the members of the fund, amounts not only to serious breaches of their common law and fiduciary duty but also to improper conduct and misconduct in office.

They face personal liability for losses suffered by NPF from their breaches of duty.

Being subject to the Leadership Code, the trustees have also been referred to the Ombudsman Commission to investigate possible breaches of the Leadership Code.

Executive Summary Schedule 4F Niugini Mining Limited 

Introduction 

Niugini Mining Limited (Niugini Mining) was incorporated in Papua New Guinea and is listed on the Australian Stock Exchange (ASX).

Its largest shareholder was Battle Mountain Gold Company, a United States mining company, holding 50.5 per cent of the issued shares.

Niugini Mining was involved in the mining and exploration for gold and related minerals such as silver and copper. The company was the discoverer of the Lihir deposit and in the period under review Niugini Mining was the second largest shareholder of Lihir Gold Limited (the owner and developer of the Lihir project), holding 17.15 per cent of the issued shares.

As of early 2000, Niugini Mining no longer existed as Lihir Gold Ltd had acquired all Niugini Mining issued shares. In exchange, however, Lihir Gold Ltd issued Niugini Mining shareholders with Lihir Gold shares.

NPF’s initial investment in Niugini Mining occurred on December 5, 1995, when it purchased 100,000 shares through the brokers Wilson HTM.

NPF increased its shareholding through further “on market” purchases through Wilson HTM in 1996 reaching its highest holding in the company at July 8, 1996, at 1,570,000 shares at a cost of $A4,484,293, representing 1.34 per cent of the issued shares of Niugini Mining.

A sell down commenced in August 1996. Most of the sales occurred in January and February 1997 with NPF’s entire shareholding in Niugini Mining being sold by February 24, 1997, all through Wilson HTM. In January 1998, NPF acquired a small parcel of 32,300 shares and these were sold in the same month, again through Wilson HTM.

Unlike the equity investments in various other companies, the disposal of Niugini Mining shares was not a forced sale to retire debt.

Niugini Mining is one among a few of NPF’s equity investments which resulted in a positive return to the members. The realised gain was $A522,718 (K780,125) being 10.6 per cent on funds invested.

At the time of investing, it was known that in the near future Niugini Mining’s only income would come from its 17.15 per cent shares in Lihir Gold and that it would not be paying dividends in the near future. If the strategy behind the investment was to indirectly gain leverage in Lihir Gold, it was creating a significant bias in NPF’s investment portfolio as it already held 10 million Lihir shares worth K15 million and was already over exposed in the PNG Resource Sector.

Although Niugini Mining had generated revenue of $US91.5 million in 1995 its profit was recorded as $US5 million. In 1996, there was a loss of $US38.9 million as its Red Dome and San Cristobal mines headed towards closure and were written down to recoverable value.

Niugini Mining reported a profit of $US5.5 million in 1997 and a profit of $US4.4 million in 1998. It would have been prudent to analyse this investment prior to entering into it and management and the trustees failed in their duties to NPF board and members by not obtaining independent professional investment advice before making this investment.

Summary of NPF investments in Niugini Mining 1995-1999 

Table 1 Source: NPF accounting records / Wilson HTM records (Exhibit NM2-NM4).

npf 42 b

The movement in Niugini Mining share price in the period in which NPF held shares, closely corresponded to movements in the gold price.

Table 2 – Gold Price – Source: Bank of PNG Quarterly Economic Bulletin.

npf 42 c

Table 3 – Niugini Mining share price – See table Source: ASX (Commission Document 753)

npf 42 d

Initial Investment In Niugini Mining – 1995 

Solely on the strength of a Wilson HTM newsletter presented by Mr Wright, and without advice or expert appraisal, the NPF board resolved to purchase 200,000 shares and this resulted in 105,000 shares being purchased for $A253,638 in December 1995. Management (Mr Kaul and Mr Wright) breached their duty to the board and the trustees failed their fiduciary duty to the members in not seeking expert advice and professionally analysing this investment.

Investment – 1996

Throughout 1996, NPF purchased 156,500 Niugini Mining shares for $A4,620,000 as per the following table. Mr Wright undertook the purchases between May 3 and October 9 with Mr Kaul’s approval but without board authority.

TO BE CONTINUED

National Provident Fund Final Report [Part 40]

September 30, 2015 1 comment

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:

npf 40 a

(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:

npf 40 b

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.

Findings

(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.

Concluding Comments

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

Introduction 

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

National Provident Fund Final Report [Part 34]

September 22, 2015 1 comment

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:

npf 34 a

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.

Findings

(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.

npf 34 b

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.

Findings 

(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:

npf 34 c

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:

Holding: 72,877,733
$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”.

Findings

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.

npf 34 d

Conclusions

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