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National Provident Fund Final Report [Part 85]

November 30, 2015 1 comment

Below is the eighty-fifth and final 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 85th and final 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 9 Tender Procedures and Nepotism Continued

Findings

In paragraph 13.6.1.2, the commission has found that:

(a) The evidence before the commission clearly indicates that Mr Wanji’s conduct in his dealings with Laiks Printing, a company in which he was a shareholder, director and a cheque signatory, was improper. Mr Wanji stood to benefit from NPF, when he obtained quotes from Laiks Printing and recommended Laiks Printing to supply stationery and office supplies. This was not disclosed to the NPF by Mr Wanji;

(b) It is likely that moneys were paid to Laiks Printing well in excess of the fair value of goods and services provided by them

Warenam Office Supplies

There were 12 purchases from this company to a value of K80,982.26.

Mr Alopea, the proprietor and manager of Warenam Office Supplies, voluntarily provided details of 16 secret payments to Mr Wanji totalling K12,530 during the period May 3, 1999 to June 14, 2000.

However, in actual fact, Mr Wanji received only K11,280.

Due to a loss of records at Warenam Office Supplies, other payments to Mr Wanji prior to May 3, 1999 could not be ascertained. Mr Wanji has admitted, in his evidence to this commission that these payments were made to him, personally, by Warenam Office Supplies, before May 3, 1999.

Findings

At paragraph 13.6.1.5, the commission has found that:

(a) There was an agreement between Mr Wanji and Joe Alopea of Warenam Office Supplies that contracts would be awarded to Warenam in exchange for secret commissions paid by Warenam to Mr Wanji;

(b) On some occasions the secret commission was factored into the price paid by NPF;

(c) The relationship between Mr Alopea and Mr Wanji was criminal in nature. Mr Wanji received more than K11,280 from which he personally benefited. Mr Alopea and Mr Wanji should be referred to the Commissioner for Police for investigation.

Country-wide Business Supplies

The commission has found that Mr Wanji received commission from Christopher Enara of Country-wide Business Supplies.

Other companies

The commission inquired into Cando Investment and Stephens Enterprises. The investigations showed Mr Wanji received corrupt commissions from these companies.

Findings

At paragraph 13.6.2.1, the commission found that:

(a) Given the weak internal control procedures, Mr Wanji used to decide, almost at will, how much to buy and from whom during the period covered. These weak controls resulted in Mr Wanji obtaining benefits from suppliers including the purchase of stationery and office supplies from his company, Laiks Printing;

(b) The benefits Mr Wanji received from the suppliers were in fact “bribes” or “commissions” and not loans;

(c) The commission considers that there is sufficient evidence of criminal offences of the nature of conspiracy to defraud. The commission recommends that Mr Wanji be referred to the Commissioner for Police for further investigation.

Funds obtained from NPF housing advances scheme Cando Investments

Mr Wanji applied for and received K2200 from the NPF Housing Advance Scheme for repair and maintenance work to his house, to be carried out by Cando Investment, which had quoted for the work. However, this money was not used for the said work on the house.

Mr Wanji claimed he engaged another contractor to do the quote, which was completely different from the quote used to obtain the money.

He then requested and benefited from the refund from Cando Investments.

Findings

At paragraph 13.8.2.1, this commission has found that:

Simon Wanji dishonestly obtained the payment of K2200 from Cando Investments for his own benefit. The money had been provided by NPF to Cando Investment for a different purpose.

A similar situation occurred with two other NPF officers, Max Noah and Kanora Aua, who requested money from the Housing Advances Scheme and used the money for other purposes than they stated in the request form.

Findings

At paragraph 13.8.5, this commission has found that:

(a) NPF advanced the funds for specific work to be carried out by Cando Investments. However, Mr Wanji, Mr Noah and Mr Ava obtained the funds from Cando Investments and either used the funds for a different purpose or arranged for the work to be carried out by a different contractor or both, which was contrary to the purpose for which NPF advanced these funds;

(b) Cando Investments appears to have been a facilitator of these arrangements, taking a 10 per cent commission. The funds should have been reimbursed to NPF but Cando Investments failed to do this and in repaying funds to the NPF member, enabled that person access to his funds not available to other members;

(c) The payments from NPF to Cando Investments may have been made on false representation. Cando Investments may have facilitated obtaining from NPF under this false representation and later paid those funds (less commission) to the NPF member;

(d) The commission considers that there is sufficient evidence of criminal conduct and recommends referral of the following persons to the Commissioner for Police for further investigation as to whether the offence of obtaining money by false pretence or by fraud or conspiracy to defraud has been committed. Simon Wanji, Max Noah, Kanaro Ava and Pere Enara of Cando Investments;

(e) The following matters should also be referred to the Police for investigation:

  • Suspicious payments made by suppliers to Mr Wanji;
  • Mr Wanji’s dealings with Laiks Printing and Bubia; and
  • Mr Koae’s dealings with Bubia.

Concluding Comments

At paragraph 14, the commission concludes::

The commission’s investigations have shown that at the beginning of the period under review, there was some attention given to calling for tenders and seeking competitive quotations for procurement of some of the goods and services examined in this report.

As time went on, these frail attempts to comply with proper procedures lapsed and management increasingly ignored the concept of obtaining competitive quotations.

Management also ignored the need to keep the NPF board informed or seek its approval.

This gross laxity allowed the development of nepotism and criminal acts to defraud the NPF.

It is a very sad story for which NPF senior management is primarily to blame. The NPF trustees, however, had a fiduciary duty to ensure the fund was well managed and its finances were protected.

They failed this duty totally. The abuses were so noticeable that the trustees’ failure to notice and address it, constitutes a breach of their fiduciary duty to the members of the fund and may constitute a breach of the Leadership Code by all trustees who held office during the period under review. This matter should be referred for consideration by the Ombudsman.

Schedule 10 Exemptions:

On June 29, 1981, a general exemption was granted to all organisations which were engaged in:

(i) Agriculture industry organisations involved in production of crops or livestock;

(ii) Agriculture processing organisations (including veneer and plywood industries) who are involved in the first stage of processing of agriculture and livestock products, but excludes industries involved in the production and/or processing of fish and other forest products.

This exemption was continued by a series of extensions. On September 30, 1993, Sir Julius Chan exempted all coffee growing and processing establishments “until further notice”.

These general exemptions and extensions for these classes of establishments ignored the very different types of employees in the industries, which ranged from low paid casual rural workers to skilled managers and accountants. Under the exemptions all employees were precluded from joining and contributing to NPF.

Coffee Industry Corporation (CIC) proposes a superannuation scheme

This differentiation in types of employees was highlighted when CIC endeavoured to set up its own superannuation scheme for its skilled employees in January 1996.

The NPF board directed management to recommend that the Minister should lift the exemption in relation to the coffee industry so that appropriate employees could join NPF and so employer contributions could be enforced, but enforced fairly “noting the seasonal nature of the industry”.

Exemption lifted throughout coffee industry

Minister Haiveta lifted the exemption as it applied to all establishments in the coffee industry, without regard to the different classes of employees, leaving NPF to sort out with individual employers which employees would be covered.

This ad hoc decision-making was unsatisfactory and did not address the same problem, which applied to other exempted agricultural industries.

Findings

At paragraph 9.1.2, the commission found that:

(a) Because of the predominance of low paid seasonal rural workers and the low product prices, it was decided to grant relief to this sector by way of a general exemption to those organisations in the agriculture industry and processing. However, there were other employees who were employed by these agriculture establishments who were located and employed in urban areas and were receiving higher urban wages. When granting the exemption to the agriculture sector in 1993, this difference should have been taken into consideration so that those higher paid employees in urban areas are given the opportunity to contribute to the fund;

(b) When the exemption applying to the coffee industry was lifted in May 1996, the difference between permanent, urban, casual and rural employees was again not sufficiently addressed and the lifting of the exemption simply applied across the board to all establishments in the coffee sector. This led to ad hoc decision making and confusion in the application of the Act.

Specific Exemptions Already Granted

According to documents obtained from the Office of Legislative Counsel, the following establishments have been exempted by the managing director under Section 42 of the Act, as they had superannuation schemes at least as favourable as the NPF scheme and the Minister was satisfied the employees wished the exemption to be granted: Bougainville Copper Ltd exempted in 1984 and again in 1986.

Ok Tedi Mining Ltd was exempted in May 1991. From February 1994 until late 1997, the NPF board and management made half-hearted attempts to encourage the unions to lead the OTML employees into the NPF, as OTML management had expressed its willingness. It seems Mr Leahy, Mr Paska and Mr Leonard failed to follow through on this matter. Despite being exempted under Section 42 of the Act, OTML remained liable to report on its superannuation scheme as directed pursuant to Section 43. This was not followed up by NPF.

Findings

At paragraph 10.2.1, the commission found:

(a) The statutory instrument does not expressly exempt OTML from Section 43 of the Act; Management failed to advise OTML of this factor during their discussions;

(b) Trustee Leonard failed in his fiduciary duty to the board and NPF by not completing the task given to him by the board through a proper board resolution and his failure to advise the board on the progress or otherwise, about OTML staff move to join NPF.

(c) All trustees and NPF management failed in their duty to proactively pursue the possibility of engaging OTML employees in the NPF scheme.

(d) The exempted establishments remained bound by Section 43 to report to NPF as directed. NPF failed to follow through on this aspect.

____

Lack of action: We are all losers

THIS is the last update we will publish on the National Provident Fund Commission of Inquiry findings. Over the last 85 editions, the Post-Courier published 97 pages of extracts from the NPF Report as well as a Scoreboard on the referrals made to the various national institutions for further action.

The pages this newspaper had committed to the NPF Report amounted to a revenue of more than K224,000 which we did not collect.

That was the cost of bringing this report to the people of Papua New Guinea — more specifically thousands of contributors to the National Provident Fund who lost millions of kina in life savings they will never ever reclaim.

For them the only satisfaction will be to see justice done — that those responsible for this greatest scandal ever in the history of PNG face the law and answer for their actions.

We have no regrets at what may seem to be lost revenue. We did so in good faith and in the public interest because of our firm commitment to fight corruption at all levels in our society.

This may mark the end of the published extracts from the NPF Report but our commitment and resolve to rid corruption from this great nation remains as strong as ever.

We are committed to working in partnership with all our partners in the Community Coalition Against Corruption and the great Institutions of State to ensure justice prevails in PNG — for without it there is no future for our children and future generations.

We are committed to supporting all efforts being made to ensure our people live and enjoy the fruits of a just, open society with systems that ensure transparency and accountability in leadership at all levels.

A society where every man, woman and child is given an equal opportunity to realise their full potential as free citizens of this nation.

Corruption is a deadly form of cancer that is eating away at the social fabric of PNG. A major surgery is required to remove it before it engulfs the whole body and soul of our land.

There is a ray of hope out there in the community that gives us confidence that even if action on the referrals contained in the NPF Report is delayed, we know that there is a coalition of many individuals and groups in this country who have a voice loud enough to remind the institutions of State of their duties and responsibility to implement the recommendations of the report.

Today’s public forum asks the most pertinent question about the referrals: What action?

As this forum gets underway in Port Moresby, the final report of another commission of inquiry — the Commission of Inquiry into the Defence Force Retirement Benefits Fund will be presented to the Prime Minister.

We have yet to see one successful prosecution out of the NPF Commission of Inquiry Report and we have another report soon to be tabled in Parliament.

The contents of that report will remain secret until it is actually tabled in the House. Only then will we know what the inquiry has found.

Will there be another public forum to ask the same question: What Action?

Both reports are a sad indictment of the direction our country has taken in the last few years.

We say that the elite of this nation ought to feel guilty about not doing the right thing by their people. So much hope and confidence was placed on so many of our elite citizens but they have failed their people.

All of us are the ultimate losers.

National Provident Fund Final Report [Part 83]

November 26, 2015 1 comment

Below is the eighty-third 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 83rd 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 9 Continued

Ken Yapane & Associates

Ken Yapane & Associates were employed to refurbish an office on the ground floor of NPF’s Head Office. This work was not tendered and Ken Yapane was paid an exorbitant K40,000 contract sum in advance without any work being done on the office refurbishment. He paid half this amount back to Mr Maladina.

This same Ken Yapane was also involved in the NPF Tower fraud when Mr Maladina utilised Mr Yapane as a notional contractor and laundered money through his bank account to transfer money from Kumagai Gumi to Carter Newell’s office. 

Mr Maladina paid Mr Yapane a generous commission for his service. The similarities between Mr Yapane’s role in the Tower fraud and this office refurbishment contract are compelling. In both cases, the payment from Mr Yapane to Mr Maladina was laundered through the Carter Newell John Losuia account then paid to Mr Maladinas company, Kuntila No. 35 Pty Ltd.

The commission has found that the advance payment to Mr Yapane of K40,000 for work he did not do was improper, that Mr Leahy was knowingly involved and that the ultimate beneficiary was Mr Maladina.

Findings

At paragraphs 9.3.5 and 9.6.1, the commission has found that:

(a) The advance payment to Mr Yapane & Associates was improper. Management, and more specifically, Mr Leahy should be held responsible as he was the one responsible for authorising this payment;

(b) Mr Leahy was responsible for fabricating the minutes of a fictitious NPF board resolution increasing his financial delegation to K50,000 in order to enable him to authorise the payment of K40,000 to Mr Yapane;

(c) Mr Leahy should be held accountable for improperly paying K40,000 to Mr Yapane because no work had been or was done;

(d) Management failed in their fiduciary duties to properly tender this job and obtain board approval for this expenditure;

(e) The fact that Mr Maladina demanded and received at least K20,000 of the fees paid to Mr Yapane is grossly improper;

(f) The evidence of criminal interest and association coupled with the evidence of similar conduct in the NPF Tower fraud involving the same persons strongly suggests that there was a criminal conspiracy to cheat and defraud the NPF involving Mr Maladina, Mr Leahy and Mr Yapane which was successfully implemented; and

(g) MR Maladina, Mr Leahy and Mr Yapane should be referred to the Commissioner of Police to consider whether criminal charges should be laid against them.

NEC Secretariat

In September 1996, Hon. Chris Haiveta wrote to Mr Kaul and requested a donation towards the payment of sing-sing groups that were to perform at an NEC meeting in Vanimo.

Mr Haiveta has given evidence (Transcript p. 8477) that he asked NPF management if they could help.

He was not told that NPF was not able to help. He said (Transcript p. 8479) that at the time he requested NPF to help, NPF had previously given donations and sponsored other activities like golfing days.

Mr Kaul responded positively to this request.

Findings

At paragraph 9.7.1, the commission has found that:

(a) MR Haiveta’s request for K1600 was improper and he should be referred to the Ombudsman Commission to consider taking action for a breach of the Leadership Code;

(b) THE decision by Mr Kaul and Mr Wright to agree to the payment was a breach of their duty to the members of the fund and amounted also to improper conduct;

(c) AS Mr Kaul was subject to the Leadership Code, he also should be referred to the Ombudsman Commission.

Disposal Of Assets

During the period covered by this enquiry, NPF disposed of some office furniture and equipment through tenders restricted to NPF staff members and by “in-house” raffles to fund Christmas parties and the like. This action by management deprived members of the fund from realising maximum financial benefits from the sale of these assets.

Findings

In paragraph 10.3, the commission has found that:

The sale of NPF assets, such as the Kwila table and television and video deck, to staff without determining a reserve price for the items and without open tender, can lead to accusations of nepotism against NPF management. This method of disposal is also contrary to Government procedures on disposal of assets by organisations like NPF.

Procurement Of Computer Hardware And Software

It is relevant to note that the underlying data of members records were held in the Niugini Assets Management (NAM) operated system. At the February 18, 1993 board meeting, it was noted that NPF were in discussion with NAM to purchase NAM’s system. At the July 30, 1993 board meeting, the board resolved for management to explore other alternatives.

At the August 30, 1993 board meeting, the minutes show that management had negotiated a lease arrangement with McIntosh Securities in respect of computer hardware and software. Datec were appointed as advisers to NPF in late 1993, and undertook to review NPF’s software requirements. Datec recommended in their proposal, that following Datec’s development of the new software, NPF would be entitled to a 50 per cent interest in the proprietary rights, and that Datec would market the software to other clients.

At the June 29, 1995 board meeting, the minutes record that NPF had shifted over to the new computer system with effect from May 12, 1995. Datec recommended that NPF utilise an AS400 platform and that Datec would develop software tailored to NPF requirements. The suitability of this recommendation was not challenged by NPF.

Cost of computers

The decision to develop the company’s own software on the AS400 platform, came at a significant cost to NPF. 

As at December 31, 1999, the following computer costs, including consumables, had been expended:

npf 83 c

Software development costs between January 1, 1995 and December 31, 1999 were as follows:

npf 83 d
At no point did NPF management seek board or Ministerial approval for the extra expenditure, other than obtaining original approval to utilise K219,000 for the first phase of this project.

Computer hardware 1995

From the authorised auditors files, NPF had the following computer hardware as at 1st January 1995.

npf 83 a

1996

According to the fixed assets register, NPF only acquired one computer and disposed of two computers in 1996. The disposed computers were fully written down in the books. The commission has been unable to determine what happened to these two computers.

1997

The table below shows the status and value of computers held by NPF in 1997.

npf 83 b

The table below shows computers purchased in 1997.

npf 83 e
Findings

At paragraph 12.4.1.1, the commission has found that:

From the commission’s review of the pattern and manner in which NPF purchased computer equipment, we find that:

(a) The purchase of computer equipment was adhoc and did not comply with annual budgets or a specific IT plan;

(b) There is no evidence that NPF sought to negotiate better than normal prices with any supplier;

(c) From 1998 onwards, NPF purchased predominantly from Tanorama Limited and Datec, with no documented attempts to extract better prices from these suppliers; and

(d) Judging by the payment requisition records, the purchases from Tanorama Limited and Datec were made without reference to any comparison of prices from other suppliers.

1998

There are imperfections in NPF’s accounting records for the 1998 and 1999 financial years because the fixed asset register does not reconcile with the general ledger.

The following computer items “disappeared” from the register without explanation.

  • 1 Compliance Section PC;
  • 3 IBM PC’s from MD’s office; and
  • 1 UPS from operation.

With regard to the acquisition of other computers in 1997, NPF management obtained quotes from various suppliers before making a commitment to purchase the equipment.

There is no documentary evidence found by the commission that would suggest that NPF management or the trustees sought to establish a documented and formal purchase policy in respect of computer equipment.

The purchase of computer equipment, particularly at NPF where IT is a critical function, required careful scrutiny by management and the trustees, both in terms of enforcing an appropriate and proper functioning system, but also because of the high level of cost involved.

Computers purchased in 1998

Chq No 20953, 15-Sep, Datec (PNG) Ltd, K587,837.07(amount), K587,837.07 (capital), AS400 hardware, 9406-620-2175, approved by board, See ref 2, no other quotes attached;
Chq No 0952, 15-Sep, Tanorama Ltd K9301.67 (amount), K4789.50 (capital), two P166 multimedia packs for Ms Dopeke / J Sema, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K2220 (capital), one P166 mmx 15” monitor, approved by Ms Dopeke, within delegation and no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K695 9capital), HP Scan jet Desktop scanner, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20952, 15-Sep, Tanorama Ltd, K955.75, procurement plus set up, approved by Ms Dopeke, within delegation, no other quotes;
Chq No 20252, 27-May, Tanorama Ltd K21,060.86 (amount), 26,450.40 (capital), 12 P166MMX 16Mb RAM 2.5gb, 15”, approved by Mr Wright, see ref 1 below, no other quotes;
Chq No 20253, 28-May, Tanorama Ltd, K9146.40 (capital), four P166MMX 32Mb RAM 2.5gb, 15, no other quotes;
Chq No 20254, 29-May, Tanorama Ltd, K700.40 (capital), software, no other quotes;
Chq No 20255, 30-May-98, Tanorama Ltd, K1814.86 (capital), procurement charges, no other quotes;
Cheq No 20256, 31-May-98, Tanorama Ltd, K3840 (capital), set up costs, no other quotes;
Chq No 20256, 31-May-98, Tanorama Ltd, K169.65 (capital), sales tax, no other quote;
Chq No 19892, 27-Mar-98, Tanorama Ltd, 21,060.86 (amount), items detailed above, approved by Mr Wright, see ref 1 below, no other quotes
Chq No 19665, 26-Feb-98, Datec (PNG) Ltd K8667.56 (amount), K5065.54 (capital), two Datec Millennium internet and monitor, approved by Mr Wright, within delegation, no other quotes;
Chq No 2108, 24-Jun-98, Datec (PNG) Ltd, K64,129.97 (amount), K64,129.97 (capital), 10 per cent deposit on AS400 machine, approved by Mr Wright, see ref 2, no other quotes.
Total: K707,814.54

Purchase of AS400 machine

The purchase of the new AS400 computer hardware seems to have resulted from concerns about the “Year 2000 Bug” and the capacity and efficiency of NPF’s current computer system to cope beyond the year 2000.

Failure to seek analysis by an Independent expert

Quite glaringly, NPF did not seek independent advice about the AS400 machine. However, it is apparent that NPF relied on Datec’s recommendation. There is no evidence that NPF sought a second opinion on its proposal to purchase this AS400 machine from an independent computer consultant.

TO BE CONTINUED

National Provident Fund Final Report [Part 72]

November 12, 2015 Leave a comment

Below is the seventy-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 72nd 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 7b Continued 

Findings

(e) NPF management, specifically Mr Mitchell and Mr Mekere, were in breach of their common law duty to the NPF board in failing to obtain and provide this expert opinion;

(f) The NPF trustees were in breach of their fiduciary duties to the members of the Fund in failing to obtain this advice.

(g) The NPF management were remiss in not providing the Minister and the DoF with the contrary advice given by PwC and FPK that NPF would be better off continuing with the BoH assignment agreement;

(h) The DoF review and assessment was detailed but it followed NPF’s own line of reasoning closely and failed to address whether it might be best for NPF to retain the BoH agreement and (possibly) to sell the BSP shares separately;

(i) The Secretary of the DoF was in a conflict of interest situation as adviser to the State on the one hand, which would benefit if Finance Pacific gained from the deal. On the other hand, the Secretary also had a duty to ensure that the best interests of NPF and its members were safeguarded. The Secretary and his senior officers were remiss in not ensuring that independent advice, focusing entirely on NPF’s best interests, was obtained;

(j) The Minister, Sir Mekere Morauta, was also in a similar conflict of interest situation as he was required to consider the best interests of both the State (through Finance Pacific) and NPF. He was not advised that PwC and FPK had advised NPF against unwinding the BoH assignment transaction; and

(k) Sir Mekere acted in accordance with the NPF request, after considering a detailed brief from DoF in support of it. His approval was properly granted, in the circumstances.

Possible ulterior motives behind the Finance Pacific offer

At the time the Finance Pacific offer was being considered, the executive chairman of Finance Pacific was Peter O’Neill. The chairman of the NPF was Jimmy Maladina and the NPF corporate secretary/legal counsel was Herman Leahy.

The commission’s investigations into the NPF Tower fraud, which are reported upon in detail at Schedule 2, have disclosed a criminal conspiracy to defraud NPF to which these three persons were linked.

The conspiracy, in fact, succeeded in illegally obtaining K2.5 million from NPF and it was contemporaneous with this proposed purchase of Roadstock and BSP shares by Finance Pacific. The deal came to nothing because Mr O’Neill was terminated from Finance Pacific before it was completely in place.

In the light of the other evidence linking Mr O’Neill, Mr Maladina and Mr Leahy, the commission is very suspicious of the bona fides of this proposed purchase and of Mr Leahy’s role in ignoring the PwC and FPK reports and of his role in strongly advocating that NPF approve unwinding the BoH transaction sale, despite the negative expert advice.

As the sale did not eventuate, the commission did not pursue these inquiries any further.

Payment Of Interest And Management Fees To NPF Interest 

On the commission’s calculations, the State has honoured its obligations under the Freeway loans, in fact there has been a small over payment of interest of approximately K25,000.

Management fees 

For each loan agreement, an annual management fee of K10,000 was payable to NPF.

The State failed to pay and the NPF failed to collect these fees. At March 5, 2001, the NPF took action to recover the sum of K283,932.35 from the State.

Findings 

At paragraph 11.3, the commission found:

The failure by NPF management to seek payment of management fees, payable on each of the Freeway loan agreements, was a serious failure of duty.

Concluding Comments

The investment in the Poreporena Freeway loans turned out to be one of NPF’s more profitable investments as it returned a comfortable dividend of 14.67 per cent per annum plus management and line fees.

There have, however, been some very worrying features.

Firstly, there was the failure of NPF management and trustees to seek independent expert advice about:

(a) the structure of the loans which resulted in the mismatch between the interest rate and maturing conditions of NPF’s loan facilities with the banks from which it borrowed compared with the interest rate and maturing conditions of the on-lending to Curtain Burns Peak.

The mismatch left NPF in a losing situation during the period when the ILR interest it was paying to the lender bank, exceeded the fixed interest rate it was receiving from the borrower. As the period of the loan to Curtain Burns Peak was a fixed 10-year term. NPF was persuaded to assign the loans to the Bank of Hawaii at a considerable discount in order to extricate itself from this unfavourable situation;

(b) the “off balance sheet” revised funding arrangements whereby Curtain Burns Peak (instead of the State) became the borrower. Before seeking advice on this legally controversial arrangement, NPF had already lent K10 million’

(c) The Bank of Hawaii transaction proposal;

(d) The proposed sale of the Freeway (and other State loans) together with NPF’s BSP shares to Finance Pacific.

Secondly, the conflict of interest situation facing DoF senior officers who had “State” responsibilities to obtain funding for the Freeway Project and who also “put together” the loan arrangements with NPF and applied pressure on NPF to borrow the money to on-lend to the State (directly and through Curtain Burns Peak). The same officers were also involved in making recommendations to the Minister to approve NPF’s loan arrangements.

The conflict was particularly severe for officers like Vele Iamo who was also an NFP trustee with a fiduciary duty to act only in the best interests of the members of the NPF, yet he was also a member of the State committee responsible for keeping up the supply of necessary funds so the State would not be in breach of its project agreement with Curtain Bros.

The failure of these public service representative trustees to declare their conflict of interest and refrain from voting on the Freeway loan resolutions at NPF board meetings was also a breach of fiduciary duty.

Thirdly, management on some occasions failed to consult the board and acted without board authority. This included Mr Wright’s unauthorised activities in August 1997 to redeem deposits and alter security arrangements. Mr Wright also acted improperly by applying incorrect accounting principles to book K18.5 profit in 1997 on the BoH transaction, which resulted in an incorrect bonus being paid to senior management.

Finally, Minister Haiveta who failed on several occasions to seek advice of the DoF before granting approvals under Section 61 of the PF(M) Act, was possibly guilty of improper conduct under the Leadership Code.

Executive Summary Schedule 7c

NCD Water and Sewerage Ltd/Eda Ranu Loan Funding

Forward

This is a summary of the commission’s report Schedule 7C which deals with NPF’s loans to the National Capital District Water & Sewerage Ltd (NCD W&S). Unless otherwise stated, paragraph numbers referred to in this summary are references to paragraphs in Schedule 7C.

Background

Following a Cabinet submission from the then Minister for Finance Chris Haiveta, the NCD W&S Ltd was set up under NEC decision No. 85/96 of May 31, 1996. Its purpose was to take over responsibilities for water supply and sewerage from the National Capital District Commission (NCDC). The trading name of this new organisation is Eda Ranu.

The same NEC decision also directed the Department of Finance (DoF) to review various options for the funding of this newly created entity.

Department Of Finance Submission

The Department of Finance policy submission to the Minister in support of the Minister’s Cabinet paper details the background to the loan as follows:

  • ON September 3, 1996 (SIC) (NPF Board approved K5 million loan to Eda Ranu on August 27, 1996, at meeting No.102) the board and management of NPF agreed to provide a commercial loan of K5 million to NCD Water and Sewerage Pty Ltd under the same terms and condition as the Poreporena Freeway loans.
  • It was advised that the option to convert the loan to equity could be considered at a later date but at that stage the NPF board had no interest in being part owner of the water supply company;
  • IT was said that the terms and conditions were “quite favourable” to Eda Ranu and the State.

The wording of this policy submission brought out clearly the latent conflict of interest facing the DoF and the Minister, as DoF and the Minister also had a duty to take into consideration the interest of NPF. In this case, they did not do that sufficiently.

NPF’s Decision To Lend Funds To NCD Water & Sewerage Ltd

NPF board approved a K5 million loan to Eda Ranu in their meeting held on August 27, 1996. The terms of this loan were similar to the loan NPF had given to the Poreporena Freeway project.

NPF’s Funding Of The K5 Million Loan

NPF’s original intention was to fund this loan through its current loan facility with the ANZ bank.

However, NPF eventually sourced funds to meet this loan commitment of K5 million through its BSP loan facility of K30 million. The K30 million facility is dealt with in Schedule 2C “Borrowings”.

NPF Seeks Legal Advice About Reliance On State Guarantee

The State guarantee for the K5 million loan to Eda Ranu was dated October 31, 1996. NPF sought legal advice from Gadens Lawyers about its reliance solely on the State guarantee, given the State’s current cash restrictions in meeting its ordinary budgetary expenses. The legal advice they received stated that it was dangerous for NPF to rely solely on the State guarantee and NPF was advised to ask Eda Ranu to grant a fixed and floating charge over the borrower’s assets in addition to the State guarantee. Establishment Of A Debt Sinking Fund

In order to address NPF’s concern about the Government guarantee, Eda Ranu was to establish a debt sinking fund by way of a trust account with a commercial bank. NPF was advised of this move in a letter dated October 11, 1996, from Salamo Elema of the DoF. This same letter also advised that the first drawdown was required by November 4 to enable Eda Ranu to meet is payroll commitments.

Findings

(a) The pace at which the preconditions to the initial drawdown were being addressed shows clearly the apparent failure by the Department of Finance to critically analyse this loan funding, due to it’s attitude of serving the State’s interest first, even though they have a responsibility to protect the interest of NPF as well;

(b) The execution of the loan agreement was done without the inclusion by NPF lawyers of provisions for the establishment of a trust account and the Finance Minister’s approval for Eda Ranu to borrow from NPF as a precondition;

(c) The execution of the loan agreement was also done contrary to the PF(M) Act, which covered the NCD Water and Sewerage Pty Ltd and therefore required the prior approval of the Minister for Finance for Eda Ranu to borrow the funds.

Concerns Raised About Proposed Trust Account

Following conversations between NPF and Gadens Lawyers, NPF instructed Gadens on November 8, 1996, to write to Eda Ranu and DoF about its concerns regarding the trust account. Stephen Lewin of Gadens wrote to Young and Williams pointing out NPF’s concerns regarding the Trust Instrument on November 8, 1996.

These concerns include:

(a) Part Ill of the Public Finances (Management) Act 1995 (PF(M) Act) is not intended to be used for trust accounts of the type proposed;

(b) Notice by Minister for Finance arguably purports to amend and/or does not comply with the provisions of Part Ill of the PF(M) Act;

(c) Incorrect reference to section 10 (should be section 15);

(d) Poorly drafted notice;

(e) As lawyers for NPF, Gadens Ridgeway have not sighted any executed documents;

(f) Amend the Governor-General’s approval to specifically refer to section 37 of the PF(M) Act; and

(g) Declaration by existing shareholders of NCD W&S Pty Ltd that they hold shares in trust for the Independent State of Papua New Guinea.

Eda Ranu and DoF addressed the above concerns in a letter to NPF dated November 8, 1996. In this letter, Eda Ranu gave an undertaking that:

“1. IF the trust account established pursuant to a deed of trust executed by the Minister for Finance is declared invalid for any reason or the operation of it causes any difficulties, it will execute a new trust instrument with you in relation to the account upon request;

2. THAT it will use its best endeavours to obtain an amended executed approval from the Governor- General within 30 days after drawdown whereby the GG will approve the purpose of the loan pursuant to section 37 of the Public Finances (Management) Act, the loan being clearly stated to be made to NCD W&S Pty Limited.

3. THAT it will obtain a declaration by the existing shareholders of the company that they hold the shares in NCD W&S Pty Limited in trust for the Independent State of Papua New Guinea and will forward executed copies of those declarations of trust to your lawyers and that it will within 30 days satisfy you that 100 per cent of the issued share capital in the company is held legally and beneficially by the Independent State of Papua New Guinea or officers of the State on behalf of the State”. (Exhibit E74)

Lack Of Due Diligence

Right up until the day before the K3 million was advanced by NPF, there were still serious concerns about the legal validity of NPF lending money to NCD W&S Pty Ltd as a means of avoiding restrictions on direct state borrowing from NPF. Right up until the last day, NPF did not have details of the shareholders in the borrower company and whether they were acting as trustees for the Sate pursuant to valid declarations of Trust.

NPF, however, released K3 million of the K5 million to Eda Ranu without confirming who Eda Ranu shareholders were.

Findings

At paragraph 12.1, the commission has found that:

(a) NPF lent money to Eda Ranu without the benefit of knowing who the directors and/or shareholders of the company were and before legal due diligence had been completed; and

(b) The speed at which this loan was being arranged, under pressure from DoF and Eda Ranu, resulted in NPF entering into commitments prior to completion of basic aspects of due diligence and despite expressed concerns about the legality of the arrangements and the effect of hastily prepared trust arrangements designed to avoid doubts about the State’s power to borrow without an Act of Parliament. Drawdowns

The drawing notice from Eda Ranu to NPF predated the loan agreement and guarantee. It was dated October 22, 1996.

In an attempt to correct the drawing notice, Kenneth Frank wrote to Salamo Elema on December 4, 1996, enclosing a substitute drawing notice signed by Eda Ranu dated November 18, 996 (sic) for Mr Elema’s signature.

This action by Mr Frank was improper and risky as it may have legal implications in the sense that Eda Ranu could choose not to pay the interest and principal because the drawing notice predates the loan agreement.

In a letter dated November 8, 1996 to Chris McKeown of BSP, Mr Wright of NPF requested a draw down of K3 million. BSP released K3 million the same day to Eda Ranu.

The second K2 million was presented to Eda Ranu on November 20, 1996. This was sourced from a maturing IBD although Mr Wright made out that it was sourced from the BSP K30 million facility.

Findings

At paragraph 14.1, the commission has found that:

(a) The drawing notice predated the loan agreement and guarantee. While this matter was corrected by Mr Frank in his letter to Mr Elema on December 4, 1996, such action was not proper and it may have legal repercussions in the sense that Eda Ranu could choose not to pay the interest and principal because the initial drawing notice predated the loan agreement.

TO BE CONTINUED

* PART 71 is missing and has not been published in this series

National Provident Fund Final Report [Part 70]

November 11, 2015 Leave a comment

Below is the seventieth 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 70th 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.

SCHEDULE 7B  Poreporena Freeway Loan 

Introduction 

After a troubled history leading to a Supreme Court order against the Independent State of Papua New Guinea (the State), a contract was executed between the State and Curtain Bros (QLD) Pty Ltd (Curtain Bros) to construct the Burns Peak and Waigani Drive project on March 3, 1995.

The contract was made conditional upon funding. It was originally intended that the State would borrow money offshore to fund the project but the Government was advised that this would contravene World Bank guidelines.

On July 13, 1995, the contract was declared unconditional and the Government proposed to contribute equity of K12.7 million with the balance of K48 million to come from commercial loan funding from PNG banks and superannuation funds.

When Curtain Bros refused to receive the loans directly, a special entity, Curtain Burns Peak Pty Ltd (Curtain Burns Peak) (jointly owned by the State and Curtain Bros.) was incorporated to receive the borrowed funds.

Having trouble raising the money from the commercial banks, the State turned to the PNG superannuation funds. On legal advice, the other funds refused to participate and it was left for NPF to become, in effect, the lender of last resort.

In all, NPF provided loans totalling K62 million to Curtain Burns Peak. This loan funding is referred to here as the Poreporena Freeway loan.

Loans

The loans were as follows:

npf 70

K9 Million Loan — September 7, 1998: 

This loan was made using contributor’s funds and was made directly to the State.

The details and conditions of the K9 million loan appear to have been worked out and agreed to in discussions between Mr Kaul and the First Assistant Secretary (FAS) of the Commercial Investment Division (CID) of the Department of Finance (DoF) Vele Iamo.

Mr Iamo was also a Public Service representative trustee on the NPF board.

The NPF board approved the loan on June 29, 1995 and Mr Iamo briefed the Secretary for Finance Gerea Aopi and the Minister for Finance on July 18, 1995, recommending approval and saying that the DoF had been fully involved in the decision-making process.

The brief was forwarded to Minister Haiveta on July 17, 1995, and he approved the K9 million loan that same day on the recommended terms. He also gave approval for NPF to provide “additional funding of K10 million in 1996 and or 1997 under the same terms and conditions as above”.

Conflict of interest 

Mr Aopi and Mr Iamo were Secretary for Finance and FAS (CID) of the DoF respectively, with the responsibility of protecting the State’s financial interests. They were also chairman and trustee, respectively, of the NPF Board of Trustees, with strict fiduciary duties to look after the interests of members of the fund.

Their conflict of interest was, therefore, acute.

K10 Million Loan — June 27, 1996: 

Approval for the additional K10 million had not been resolved by the NPF board or requested from the Minister. Mr Haiveta’s premature approval was, therefore, irregular. It perhaps indicates his keenness to secure the funds that the Government required to fulfil its contractual obligation to Curtain Bros.

The additional K10 million loan was required by the State because the Public Officers Superannuation Fund (POSF) and Motor Vehicles Insurance Trust (MVIT) had withdrawn from their intention to make loans.

The proposal was subsequently approved by the NPF trustees, initially by circular resolution and later ratified at a board meeting on August 29, 1995.

Failure to disclose conflict of interest and to abstain from voting 

At that meeting, three employee representative trustees voted against the proposal. Chairman Aopi and Trustee Iamo voted in favour, despite their undisclosed conflict of interest, mentioned above.

Had they refrained from participating in the vote, the motion to advance the K10 million would not have been approved.

Findings 

At paragraph 4.10 of the report, the commission has found:

a) NPF’s investment appraisal and decision-making process, concerning this loan, was inadequate;

(b) To be able to make a prudential assessment of the investment, this matter warranted a full board discussion and a formal documentation of that appraisal. The decision to advance such large sums of money to the State should have been based on a critical appraisal of risk and return.

The clear existence of conflicts of interest with regard to the State representative trustees, should have led the board to seek independent advice as to the merits and appropriateness of this investment.

Judging by what was recorded in the minutes (Exhibit G3 and G10 and the board papers (Exhibit P2)), NPF did not carry out any critical appraisal on this investment proposal and its management did not obtain or offer the trustees any independent advice;

(c) The trustees and management failed respectively in their fiduciary and common law duties by using a circular resolution to approve a transaction that involved substantial amounts of members’ funds;

(d) The commission notes that Trustees Gerea Aopi (who was the chairman of the NPF board at that time) and Vele Iamo were, at that time, Secretary and FAS CID, respectively, of the DoF.

Minutes of the National Executive Council (NEC) meetings found in the DoF files (commission documents 5A), record that the DoF was charged with the responsibility of procuring funds for the Poreporena Freeway project. Both Mr Aopi and Mr Iamo were also members of the Poreporena Freeway Project Management Group, which was responsible for providing advice to and liaison with the NEC in respect of this project.

Mr Aopi and Mr Iamo were clearly in a position of conflict of interest and therefore should have withdrawn from participating at the NPF board meeting when the board considered the Freeway project funding request.

Mr Aopi and Mr Iamo did not declare their obvious conflict of interest position to the NPF board nor did the board consider the implication of this conflict. The NPF Board of Trustees failed in their fiduciary duty in this respect;

(e) The NPF management (particularly Mr Kaul, Mr Wright and Mr Leahy) failed to properly brief the board on this issue;

(f) NPF’s use of borrowed funds to on-lend in this way was not sanctioned by the NPF Act or any other law. It was, therefore, illegal as well as being thoroughly inappropriate for a provident fund;

(g) In light of this clear conflict of interest within the DoF, an independent review of the NPF loan proposal was required. DoF did not attempt to isolate its review process through the use of “Chinese Walls” or similar methods to ensure that an independent review of the investment, from NPF’s perspective, rather than from the State’s perspective was achieved. This shortcoming, in a structural sense, persists; and

(h) Trustees Paska, Gwaibo and Leonard voted against making the additional K10 million loan. Had Mr Aopi and Mr Iamo refrained from voting because of their conflict of interest, the motion to approve the additional K10 million loan would, on the numbers, not have been passed;

(i) The loans provided by NPF were long-term loans and long-term loans are approved investments, under NPF’s investment guidelines.

The approval given for the K10 million loan had the State as the borrower.

Borrower becomes Curtains Burns Peak 

The new arrangement, to lend through Curtain Burns Peak as intermediary, was put to the NPF board on April 26, 1996. No independent or expert advice was given or sought about the effect on NPF’s security of this “off balance sheet” transaction. The Minister approved this new arrangement on the same day.

Management allows early drawdown

The NPF board approval was that the K10 million could be drawn down in two tranches of K5 million each in 1996 and 1997. The K10 million loan was signed on June 27, 1996. Management allowed both tranches to be drawn down in 1996. This was because the State had applied pressure on NPF to advance the second drawdown date because POSF and the Defence Force Retirement Benefits Fund (DFRBF) had sought legal advice about the validity of the changed arrangements and would not commit their funds to the Poreporena freeway funding. This left a shortfall, which NPF was asked to fill.

The source of funds for this on-lending was NPF’s loan facility with the Australia & New Zealand Banking Group (PNG) Limited (“ANZ Bank”).

Findings

At paragraph 6.4, the commission has found:

(a) Management was in breach of its common law duty to the board in not obtaining independent expert advice regarding the State’s revised “off balance sheet” loan arrangements, using Curtain Burns Peak as an intermediary to receive the funds;

(b) THE trustees were in breach of their fiduciary duties to the members of the fund by failing to insist on obtaining independent expert advice about the loan agreement as well as an assessment of NPF’s security for the loan;

(c) NPF management acted beyond their authority by allowing Curtain Burns Peak to drawdown the entire K10 million loan in 1996, contrary to the loan agreement. This was a failure by Mr Kaul of his fiduciary duty as a trustee. He and Mr Wright also failed their common law duties to the NPF board;

(d) THE trustees failed in their fiduciary duty to the members by not noticing and questioning this obvious departure from the terms of the loan agreement;

(e) Minister Haiveta’s approval of the loan agreement between NPF and Curtain Burns Peak, without seeking advice from DoF, was a failure of his duty as a Minister.

In view of the conflict of interest situation that he and senior officers of the DoF were in, it was impossible for them to properly advise and consider the best interest of both the State and NPF. In these circumstances, the Minister should have sought independent advice from outside the DoF. His apparent failure to seek and take any advice at all was improper conduct; and

(f) NPF’s use of borrowed funds to on-lend in this way, was not sanctioned by the NPF Act or any other law. It was, therefore, illegal, as well as being thoroughly inappropriate, for a provident fund.

K15 Million Loan — November 14, 1996 

Management fails to disclose constitutional problems to NPF board 

During August and September 1996, Mr Wright was negotiating a drawdown on the ANZ loan facility to enable NPF to on-lend a further K15 million for the project. Bank approval was given in principle, subject to the ANZ obtaining legal advice that a charge over the inscribed stock would be effective.

The Government’s need to obtain the further K15 million from NPF at this stage was because POSF and DFRBF were holding back from their lending commitment while seeking legal advice, from Blake Dawson Waldron, as to the constitutionality of the new “off balance sheet” loan to Curtain Burns Peak and of the State’s proposed guarantee.

Even though Mr Wright and the NPF management were on notice that this legal question had been raised, they proceeded to recommend the K15 million loan to the NPF board, without advising the trustees that such a loan could be illegal and unenforceable.

Failure to obtain independent expert advice

Once again, the NPF board approved this proposal without any formal expert briefing from management and without any independent expert advice. On September 26, 1996, Minister Haiveta gave his approval.

Despite the clear conflict of interest affecting the DoF senior advisers and the Minister, no attempt was made to ensure that expert independent advice was made available to NPF.

Before the K15 million loan agreement was signed by NPF, POSF and DFRBF received their legal opinion from Blake Dawson Waldron dated October 10, 1996. The opinion stated that the proposed method of funding, by Curtain Burns Peak borrowing from PNG institutions and the State issuing a guarantee, violated Section 209(1) of the Constitution as it would constitute a loan raised by the State, without the authority of an Act of Parliament. Only at this late stage did NPF management see fit to obtain its own legal opinion. That opinion, provided by John Batch SC, was contrary to that of Blake Dawson Waldron.

Opposing legal opinion 

Mr Batch felt that the arrangement did not contravene Section 209 (1), though he conceded that if there was a contravention, the loan may not be recoverable against Curtain Burns Peak and that NPF would not be able to enforce the State guarantee in the Courts. Mr Batch’s opinion was dated November 7, 1996 and the K15 million loan agreement between NPF and Curtain Burns Peak was signed on November 14, 1996.

The K15 million loan agreement was executed on November 14, 1996, between Curtain Burns Peak and NPF. Again, it was fully drawn down ahead of the agreed dates. The management and facility fees totalling K85,000, were paid to NPF.

Findings 

At paragraph 6.8, the commission has found:

The Board of Trustees did not critically appraise the provision of further loans to the State and thereby failed in their fiduciary duties, in that:

(a) No consideration was given to the impact this further loan would make on NPF’s investment portfolio balance;

(b) The impact on NPF’s debt management and cash flow planning was not considered and documented;

(c) No assessment was made of the ability of the Government and Curtain Burn Peak to fulfil their obligations;

(d) No assessment was made of how the World Bank would view the State’s use of NPF funding for the State’s infrastructure projects, as political influence had clearly been brought to bear;

(e) NO consideration was given to the risks and returns or to other possible investment opportunities;

(f) There was a mismatch in the arrangements because the borrowed funds advanced to the State to finance the project, were repayable by NPF to ANZ “on demand”, whereas NPF’s loan to the State was not repayable for 10 years;

 (g) THE trustees did not seek independent investment advice concerning this additional loan, nor was a critical investment appraisal of the additional loan to the State made;

(h) THERE was no documented input from NPF’s investment division.

Of the K48 million which the State had expected to raise in order to fund the original Freeway contract between 1995 and 1997, NPF provided K42 million. This was K23 million more than had been planned in 1995.

Second K15 Million Loan — March 13, 1997 

Board and Minister approve further loan without any expert advice

As a result of the Blake Dawson Waldron advice, POSF and DFRBF resolved not to participate in the Poreporena Freeway loan and pressure was put on NPF to make good the funding shortfall.

NPF management eagerly accepted this challenge. Chairman Copland sought the board’s view at the 104th Board meeting, on December 9, 1996, about advancing another K15 million for the Freeway project. On the strength of a mere verbal proposal, without any attempt at appraising the investment, the board gave its immediate approval.

Minister Haiveta approved the proposal on January 28, 1997, without seeking advice from DoF.

THE NEXT EXTRACT, No.71 IS MISSING. WE WILL CONTINUE WITH PART 72 TOMORROW

National Provident Fund Final Report [Part 45]

October 7, 2015 1 comment

Below is the forty-fifth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

NPF Final Report

This is the 45th 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 

Additional sales August-December 1997 

Between August and December 1997, NPF management sold additional Orogen shares as follows:

a

The board was not explicitly informed of any of these transactions, though reference to them was made in the equity investment schedules.

Findings 

(a) The additional sales of Orogen shares, between August and December 1997, were made without board approval; and
(b) There was a breach of Section 61 of the PF(M) Act in respect of the shares sold on September 26 and 30, 1997.

Investment In Orogen – 1998 

During the economic downturn of 1998, NPF management acquired a further 425,000 Orogen shares for $A1,011,935, without NPF board approval:-

b

Sources: NPF accounting records/ Wilson HTM statements/Merrill Lynch Statement (Exhibits OR11 to OR13)

It seems that despite the general economic downturn and the falling value of Orogen shares neither the NPF management or the board reviewed this investment.

Findings

(a) The Board of Trustees did not adequately consider the implications of Orogen’s falling share price, in terms of NPF’s investment portfolio;
(b) It failed to address the following:

  • The impact of this investment on NPF’s strategy i.e., whether the fund should hold the investment long- term, consider reducing its exposure or sell its holding;
  • The impact on NPF’s ability to comply with the ANZ Bank loan covenants as the Orogen share scrip was held as security for NPF’s foreign currency loan with ANZ Bank;
  • The NPF board members should have, but did not, seek independent investment advice regarding this investment, especially towards the end of 1998, when the share price fell and huge unrealised losses were incurred;
  • NPF’s investment division headed by Mr Wright gave limited advice to the board;
  • Transactions undertaken by the management were made without the approval of the board, and the board was not explicitly notified, in this regard; and
  • These failings of the NPF Board of Trustees and management, constituted a breach of their duties as Trustees and officers of NPF.

Investment In Orogen 1999 

On February/March 1999, Pricewaterhouse Coopers (PwC) advised NPF on how to cope with its desperate financial situation. Following this advice, by circular resolutions, NPF resolved to sell off most of its equity portfolio including 50 per cent of the investment in Orogen.

In summary, the Orogen sales were as follows:-

c

Sources: NPF accounting records / Wilson HTM statements (Exhibits OR11 to OR13)

Wilson HTM was appointed as sole agent for the sell-down, without NPF board approval.

Dividends

Orogen consistently paid dividends to NPF totalling K2,506,627 between 1996 and 1999. The annual dividends were as follows:

d

Conclusion

The study of the investments showed that it was reasonably profitable because it was a passive investment in a large, professionally-run company which had spread its risks by

investing in a wide range of PNG resource companies, many of which had well established, commercially-producing resources and / or excellent prospects. NPF had no say in the management of Orogen, except to vote as a small investor.

Examination of the performance of NPF management and trustees in the initial acquisition, subsequent purchases and eventual sell-down shows: breaches of fiduciary duty; failure of management to give the board proper advice and to keep it fully informed; and failure of the trustees to seek advice and to exercise their authority in the interests of the members of the fund.

Executive Summary Schedule 4J BSP Investment 

Introduction 

This was a passive, risk averse investment in a consistently profitable bank. NPF never held more than 10.48 per cent of the company and it has been a safe and profitable investment for NPF.

The initial investment was made well before January 1990 and in January 1995, NPF held 812,500 shares.

During the period under review, NPF purchased 504,078 convertible notes, which were later converted to shares. At the end of the period under review, NPF held approximately K7.2 million BSP shares, making an unrealised profit during the period of K4.8 million. In addition, the regular annual dividends during the period under review, totalled K2.36 million and directors fees amounting to K500 per sitting were paid, or are payable to NPF (See paragraph 9.1 of the Report).

The investment was marred by management’s failure to keep the NPF board fully informed of its activities, some of which were beyond management’s delegated authority and by the board’s failure to maintain control over management.

Management failed to provide expert advice to the board and the board failed to seek it. These matters are reported on in detail in the text of Schedule 4J and in the Schedule of findings at paragraph 12.

Despite its safe profitability, there were two attempts to sell-off this investment. The first was a proposed sale to the Defence Force Retirement Benefit Fund (DFRBF) by Mr Wright in December 1997.

This occurred in a fit of pique after he felt he had suffered personal affront when BSP refused to invest in the NPF Tower. This attempted sale came to nought when the DFRBF discontinued the purchase.

The second attempted sale occurred in March/ April 1999, when there were negotiations to sell NPF’s BSP shares to Finance Pacific, parcelled together with the sale of Government Roadstock. This sale did not proceed as described below.

NPF appointed directors to the BSP board and their fees were paid to NPF.

NPF still holds its BSP investment, which continues to be profitable in terms of dividends and unrealised gains.

Investments In 1995 

In 1995, BSP increased its capital base by issuing convertible notes. NPF purchased 504,078 notes in two parcels for a cost of K504,078. The management papers prepared for the NPF board gave a reasonable brief to the trustees, except that for several months, Mr Kaul was referring to the convertible notes as “shares”.

In December 1995, a further 96,598 notes were purchased for K96,598 without obtaining the requisite board approval beforehand. No expert advice was provided on the 1995 investment.

Findings 

(a) Mr Kaul and Mr Wright exceeded their delegated powers by purchasing 96,598 BSP convertible notes on December 18, 1995;
(b) The trustees failed in their fiduciary duty to the members by not reprimanding Mr Kaul and Mr Wright for the purchase of 96,598 convertibles notes without the board’s approval;
(c) Mr Kaul’s frequent reference to convertible notes as “shares” in management briefs, was confusing and misleading;
(d) NPF management (Mr Kaul and Mr Wright) failed in their duties to provide timely and accurate information to the board about the fund’s investment in convertible notes;
(e) Mr Kaul failed in his fiduciary duty when he did not inform the trustees of Mr Haiveta’s instructions to POSFB, MVIT and NPF not to withdraw their deposits from BSP as the bank’s liquidity problems were so acute;
(f) The NPF management and the trustees failed in their fiduciary duties to the members due to the fact that the initial and subsequent purchases of convertible notes were made without specific professional and independent advice;
(g) Minister Haiveta’s direction of January 18, 1995, for NPF not to withdraw deposits from BSP was an improper interference with NPF’s statutory authority. It demonstrates the conflict of interest inherent in having Ministerial responsibility for the State’s financial affairs, the banking system and NPF. The Minister’s responsibility for State affairs is in potential conflict with his responsibility for NPF and its members.

Investments In 1996 

The NPF board, by circular resolution, approved the purchase of an additional 300,000 shares from the Defence Force Savings and Loan Society for K480,000.

There was no valid reason why this occurred by way of circular resolution.

In a paper seeking ratification of the resolution by the board, Mr Kaul misrepresented the number of notes already held by the NPF. He gave the figure as 230,921 instead of 504,078. No independent expert advice was obtained in this regard.

Findings 

(a) The purchase of 300,000 additional shares, together with 504,078 convertible notes, took NPF’s total holding in BSP to 13.25 per cent. It was imprudent not to have obtained independent investment advice and not to have performed a critical investment analysis. Accordingly, this represents a failure on NPF management and board in their fiduciary duty to the members;
(b) The trustees failed in their fiduciary duty where they did not ratify the circular resolution approving the purchase of 300,000 shares at the next scheduled board meeting;
(c) The NPF management and board failed in their fiduciary duties to the members because a professional independent valuation of the share purchases was not performed to ascertain whether the purchase price was fair. This was imprudent; and
(d) Mr Kaul’s report, included in the board paper for the June 28, 1996, meeting, stated that NPF owned 230,921 convertible notes. This was inaccurate and misleading, as NPF owned 504,078 convertible notes as at December 31, 1995.

During 1996, management failed to report the purchase of K96,598 worth of convertible notes and the board failed to inquire about this purchase. In August, however, the board did direct management to report on BSP’s prospects.

This is one of the rare instances during the period under review where the NPF board made a firm corrective resolution directing management to perform its proper role.

Findings

(a) Management failed to notify the board of the purchase of K96,598 worth of convertible notes in December 1995 and the trustees failed to inquire into this purchase throughout 1996;
(b) Trustees showed strength and initiative in requiring a management paper on BSP in August 1996.

Investments In 1997

NPF did not buy or sell BSP shares or notes during 1997. It monitored this investment by way of Mr Kaul’s attendance at BSP Board of Directors meetings, rather than by way of reports at NPF board meetings.

There was concern that BSP’s capital base was insufficient to enable it to grant the large loans required by NPF. BPNG failed to approve a BSP loan of K30 million to NPF for this reason.

Revaluation of BSP share value

In October 1997, Mr Wright revalued NPF’s BSP shareholding, raising the value to K3 per share. This gave an unrealised gain of K2,565,650 to NPF. He did not obtain any expert advice on the revaluation.

Proposal by Mr Wright to sell NPF’s BSP investment 

In December 1997, Mr Wright recommended the sale of NPF’s BSP holdings to the DFRBF. His paper to the NPF board clearly shows that a large part of his motivation for recommending this sale was that the BSP management had decided not to participate in the construction of the NPF Tower, which had been discussed.

Mr Wright’s emotional state and sense of betrayal is disclosed by the language he used, including the following:

“Given the above, I almost find it a personal affront that the BSP board have not given support to the Tower when the NPF board has never failed them.”

In order to state a case that BSP owed it to NPF to support the Tower project, Mr Wright disclosed that NPF had previously placed 70 per cent of its IBD’s with BSP, a “small bank” and that NPF had borrowed from BSP at a higher rate than could have been obtained at a larger bank.

However, if these claims are true, they indicate that NPF management made inappropriate investment decisions, which were against the best interests of NPF’s members.

Despite the fact that Mr Wright’s personal, emotional bias was clearly displayed, the NPF board resolved to approve his recommendation to sell-off its very satisfactory BSP investments, as recorded in the minutes of the NPF board meeting of December 11, 1997:

Bank South Pacific Limited (BSP) 

The deputy managing director tabled an offer from Kina Securities Limited to pay K3.75 for NPF’s share holding in Bank South Pacific on behalf of the Defence Force Retirement Benefit Fund. The offer was made subject to final approval from the Defence Force Retirement Benefit Fund board.

It was noted that in relation to NPF’s dealings with BSP over the past several months:

(i) BSP refused to take an equity position in the NPF Tower; and

(ii) BSP refused to take up floor space in the NPF Tower; and

(iii) There was much reliance on the expertise of Noel Smith, the current managing director of the bank who obtained his support from the National Bank of Australia.

(iv) The bank’s low capital base prohibited it from lending to major clients so it could never be in the big league.

In view of these matters it was resolved to approve the share sale to Kina Securities Limited”. (Exhibits B79-B81)

TO BE CONTINUED

National Provident Fund Final Report [Part 43]

October 5, 2015 1 comment

Below we continue the re-publication 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.

The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.

The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime! 

NPF Final Report

This is the 43rd 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 4F Continued 

Table of Niugini Mining share purchases in 1996 

npf 43 a

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

The purchases in January to February were authorised by the board by circular resolutions. No advice was given to the trustees other than that Mr Wright believed it was a good idea and that some Oil Search shares should be sold to finance Niugini Mining purchases as the latter had more significant upside than Oil Search.

The board endeavoured to inject some control over the widespread use of circular resolutions by resolving on February 23, 1996:

“. . . that management seek formal approval from the board for all circular resolutions obtained in between board meetings by tabling those resolutions at the first board meeting after the resolution has been taken.” (Exhibit NM58)

Findings

(a) THE NPF management, (particularly Mr Kaul and Mr Wright) did not present to the board any independent advice in respect of the investment in Niugini Mining;
(b) MR Kaul and Mr Wright failed to properly discharge their duties by not making timely disclosure to the Board of Trustees of the unauthorised purchases;
(c) THE NPF management failed to properly discharge their duties by purchasing shares without the board’s approval
(d) THE Board of Trustees failed to reprimand or question management over the unauthorised share transactions; and
(e) NPF management acted in excess of their delegated authority by purchasing shares without express board approval.

Sale Of Shares In 1996

In 1996, NPF also sold shares as per the following table. This was authorised by management without board approval.

Table of Niugini Mining share sales – 1996 

npf 43 b

Source: NPF accounting records/Wilson HTM records (CD 748), Exhibits NM2-NM4.

Findings

(a) MANAGEMENT sold 370,000 shares in 1996 for $A1,292,974 without prior board discussion or approval and the sale was not subsequently ratified by a formal board resolution. No loss was incurred by NPF;
(b) SPECIFIC Ministerial approval was not required as the sales were within the general K1 million approval previously granted by Minister Haiveta;
(c) ROBERT Kaul and Noel Wright jointly bear responsibility for these unauthorised sales. It was a breach of Mr Kaul’s fiduciary duty to the contributors and a breach of Mr Wright’s duty to NPF. No loss to NPF has been established.

Sale Of Shares – 1997 

In January and February 1997, NPF management arranged the sale of 1,300,000 for $A4,090,158 without the approval of the NPF board. In doing this, Mr Wright was in breach of his duty to the NPF board and Mr Kaul who, as managing director, was also a trustee, was in breach of his fiduciary duty to the members.

Management never disclosed these sales to the trustees explicitly but they were shown in the schedule of investments placed before the board in May, 1997. This did not provoke discussion at the May board meeting and the trustees once again failed to reprimand management for exceeding their authority.

Findings 

(a) NPF management sold 1,300,000 shares in 1997 for $A4,090,158.00 (K4,377,541) without prior board discussion or approval and the sales were not subsequently ratified by the board;
(b) THE sale on February 21, 1997, of $A2,013,954 (K2,169,040) was more than K1 million and therefore required ministerial approval. As ministerial approval was not obtained there was a breach of Section 61 of the PF(M) Act;
(c) MR Kaul and Mr Wright were responsible and Mr Kaul breached his fiduciary duty to the contributors and Mr Wright breached his duty to NPF. No loss to the NPF has been established.

Sale Of Shares – 1998

Once again, management purchased 32,300 shares on January 12, 1998, and sold them again on January 29, 1998, through Wilson HTM without the knowledge or authority of the board. A profit of $A13,890 was made. It was yet another breach of duty by Mr Wright and possibly Mr Kaul, which may have had connections with Mr Wright’s trading in Lihir options.

Conclusion 

This risky, unwise investment returned a small profit and was sold off voluntarily, not part of the 1999 forced sale. Both management and the trustees displayed the same failure to perform their common law and fiduciary duties as demonstrated throughout the period under review.

Executive Summary Schedule 4G 

Introduction

Oil Search Ltd (OSL) was PNG’s largest oil and gas explorer and producer in December 1995 and the fourth largest oil and gas exploration company registered on the Australian Stock Exchange (ASX).

NPF had bought 4,954,000 shares in OSL in 1994 and was still holding them at the beginning of the period under review. During 1996 NPF sold off all its OSL shares for a realised profit of $A3,571,011.

In 1998 NPF acquired 222,000 shares and disposed of them in January 1999 for a loss. See table 6.

npf 43 d

Source: NPF accounting records / Wilson HTM records (Commission Documents 748, 525) Exhibits OS4 and OS5.

The total realised profit on OSL at December 31, 1999, was $A3,034,637.

The stated reason put forward by Mr Wright for selling off OSL shares in 1996 was because he thought the share price would decline and he recommended that the proceeds of the sale should be used to purchase shares in Niugini Mining Ltd (NML) which he said had more “upside” than OSL.

In fact, the price of OSL rose significantly after NPF sold out and the price of NML fell significantly after NPF bought in.

Oil Search Share Price 

npf 43 e

Source: ASX (Commission Document 752)

Sale Of OSL In 1996 

During the time NPF held the OSL shares, they showed an unrealised gain of $A2,724,700 at December 31, 1995. Management never reported to the board on, or analysed, the investment.

Attractiveness Of NML – The Lihir Factor 

Mr Wright and Mr Kaul, with the enthusiastic support of Mr Copland and Minister Haiveta, felt NML was selling at a “one off” low price and acquiring NML shares would give NPF an interest in Lihir Gold, as NML held 17.15 per cent of Lihir. A management paper, signed by Mr Wright and Mr Kaul, was circulated to NPF trustees on January 11, 1996, advocating the disposal of 954,000 OSL shares, in three tranches, at $A1.20 and acquiring 420,000 NML shares at $A2.70.

The NPF board approved this proposal by way of circular resolution, despite receiving no investment advice or report.

NPF sold its OSL shares on January 11 and 12, at $A1.20 and $A1.23 respectively, after which the price rose (paragraph 4.3)

Further Sales

At the 99th NPF board meeting on February 23, 1996, Mr Kaul sought approval to sell a further two million OSL shares. The board resolved to approve the sale. Mr Wright and Mr Kaul did not advise the board they had already sold 1,000,000 OSL shares, without the board’s knowledge or approval. Another 100,000 shares were sold (on their prior direction) on the day of the meeting. This was a breach of duty by Mr Kaul and Mr Wright and amounted to improper conduct.

Management then proceeded to sell off the remaining two million OSL shares without further reference to the board. When the board was informed of this at the June 1996 meeting, there was no criticism of management for these further breaches of duty.

The sale of NPF’s OSL shares in 1996 was as follows:

npf 43 c

Source : NP accounting records/ Wilson HTM records (Commission Documents 748, 525), tendered document OS4 and OS5.

Findings 

The sales of 1,100,000 shares, prior to the February 23, 1996, NPF Board resolution, were made without the Board of Trustees’ approval.

Lack of Ministerial Approval

Although the Minister had purported to grant a standing approval in January 1996, for NPF to acquire and dispose of shares in batches up to a limit of K1 million without needing to apply to him, that approval was invalid as it had been signed and gazetted using the wrong sections of the PF(M) Act.

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 38]

September 28, 2015 1 comment

Below we continue the re-publication 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.

The Inquiry findings provide an unprecedented insight into the methods that are still being used today by the mobocracy that is routinely plundering our government finances. The inquiry uncovered for the first time how the Waigani mafia organise complex frauds using mate-networks, shelf companies, proxy shareholders, and a willing fraternity of lawyers, accountants, bankers and other expert professionals.

The Commission findings also reveal the one grand truth at the centre of all the corruption in Papua New Guinea: it is pure theft, no different from an ordinary bank robbery. However, if you steal the money by setting up, for instance, a bogus land transaction, the crude nature of the criminal enterprise is disguised to all but forensic experts, making it seem the perfect crime! 

NPF Final Report

This is the 38th 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 

Findings 

(a) Mr Wright, probably with Mr Kaul’s approval, purchased three parcels of shares totalling $A1,323,397 prior to receiving Ministerial approval in breach of S.61 of the PF(M) Act. The frequency with which these unauthorised investments occurred is a disgrace and amounts to improper conduct by both men;
(b) Mr Kaul’s letter dated April 9, 1996, misrepresented and overstated the extent of the board resolution of April 10, 1996. Whether this was deliberate or merely negligent, it was a failure of his fiduciary duty to the members;
(c) The DoF failed in its duty to provide the Minister with an expert independent and critical appraisal of the proposed investment and failed to pick up Mr Kaul’s misrepresentation in his letter dated April 9, 1996;
(d) Minister Haiveta approved the proposed investment in STC prematurely and without receiving any critical analysis of the proposal. This amounted to improper conduct by the Minister;
(e) Minister Haiveta’s approval dated April 15, 1996, was “open-ended”, releasing NPF from proper Ministerial constraints required by the PF(M) Act. This was an improper exercise of the discretionary power given to him by the PF(M) Act;
(f) The NPF’s resolution of April 26, 1996, which ratified the circular resolution of April 10, 1996, also gave management open-ended power to “continue buying CXL shares . . .” without setting an upper limit. This was an improper delegation of its power to management and constituted a breach of the trustee’s fiduciary duty to the members to exercise proper control over management’s expenditure of funds. All trustees concerned may be personally liable for any losses incurred by this breach of duty. It is unlikely that they could claim a defence of “acting in good faith”; and
(g) Minister Haiveta’s approval on April 15, 1996, for NPF to acquire up to K1 million worth of shares at any one time was invalid as it was made under the wrong section of the PF(M) Act.

Minister’s standing approval of transactions up to K1 million 

As a sign of his approval of NPF’s new aggressive investment strategies under Mr Copland’s chairmanship, Minister Haiveta purported to give his standing approval for NPF to invest up to K1 million in equity stocks traded on authorised stock exchanges overseas (As his declaration was made under the wrong section of the PF(M) Act, it was invalid until it was corrected in June 1995). Mr Haiveta also approved an increase of Mr Copland’s remuneration to K20,000 per annum in addition to his trustees’ entitlements.

There was no power for Mr Haiveta to do this.

Purchase Of POSF And DFRBF Holdings In STC And CXL Ministerial approval

NPF quickly proceeded to implement its take over strategy by acquiring the significant STC and CXL holdings of POSF and DFRBF. This rushed transaction was arranged at the meeting at the Gateway Hotel between Mr Copland, Mr Kaul and Mr Haiveta in April 1996 at which Minister Haiveta verbally approved the transaction which would involve NPF spending almost K40 million of borrowed funds.

The agreed price for the shares was above market price:

table 1

NPF Board approval

No management paper was prepared for the NPF board, which approved the K40 million investment in less than 30 minutes. Minister Haiveta then granted written approval for the purchase of 4,941,247 STC shares at K3.50 (K17.3 million) and 5,207,700 CXL shares (K22.4 million) totalling K39.7 million. The immediate and enthusiastic approval by the NPF board and Minister Haiveta reflected the nationalistic, aggressive stance then driving NPF’s investment policy.

Minister Haiveta’s improper conduct

As well as approving that NPF acquire the CXL and STC shares, Minister Haiveta also approved in writing the sale of these shares by POSF and DFRBF. He received no formal, written request for those approvals nor did he or any of the institutions involved seek independent investment advice. This was improper conduct by Minister Haiveta who had been a strong supporter of the take over strategy since the Gateway Hotel meeting in early April.

Had objective expert advice been considered, it would have been apparent that STC’s huge and powerful owner John Swire and Sons (PNG) Ltd (Swires), would not allow such a raw takeover strategy to succeed without a fight.

In his “self-congratulatory” letter to Prime Minister Sir Julius Chan on June 4, 1996, Mr Haiveta claimed to be an initiator of the strategy stating:

“I write to keep you abreast of the recent purchase of Steamships and Collins & Leahy shares by the National Provident Fund Board of Trustees.

“I have attached a longer brief by way of background for your information.

“In April, I decided to authorise NPF to acquire a reasonable interest in Steamships and Collins & Leahy, the two largest trading houses in PNG.

“This decision was based on the following considerations: (a) It was always my intention to move private sector investments to NPF to ensure increasing involvement by the fund in private sector activities by being a proactive investor; (b) To give ownership participation by the 4000 employees of the two companies who were members of the fund, who will indirectly be given investment returns through NPF’s interest distribution; and (c) To increase national shareholding and limit outflow of dividends paid to foreign shareholders; or maintaining large portions of dividend onshore, through dividend flows to NPF.

“When reviewing the STC and CXL accounts, NPF advised me that both shares were probably trading under Net tangible asset backing (NTA) and that any buy would be an exceptionally good buy.

“The fund’s analytics and research showed that both STC and CXL were trading on Australian Stock Exchange (ASX) at a significant discount to their Net Tangible Asset backing (NTA). This represented exceptional buying as valuing shares at NTA is the most conservative valuation methodology, and the fund have acquired their current holdings in both STC and CXL at an average below NTA.

“I am now informed that NPF’s average entry price to STC was K3.40 per share compared to an NTA of K3.44 per share, and its average entry price to CXL was K4.02 per share compared to a NTA of K4.14 per share.

“By reviewing prior year profitability of STC and CXL the fund can expect a return on investment at 16 per cent and dividend flows of over 5 per cent. This an attractive long term return for the fund’s membership.

“Honourable Prime Minister, the National Provident Fund currently holds 37.5 per cent of CXL and 19.3 per cent of STC providing the fund and its 150,000 strong membership a strategic holding in the two largest and most successful trading houses in PNG. It should be noted that almost 4000 of NPF’s contributing members are employed by STC and the joint venture companies.

“In addition, it is generally believed by NPF’s board and management that there is much upside in the STC and CXL investment with the potential for the fund to actively participate in the ongoing growth of STC and CXL investment with the potential for the fund to actively participate in the ongoing growth of both companies.

“It is also believed that both companies are under valued, in fact, a research paper put out by stockbroker D&D Tolhurst Ltd suggests that the realistic NTA of STC maybe as high as 2-3 times of the quoted market price per the ASX and at least twice the actual price paid by the Fund.” (Exhibit S38)

Unfortunately, NPF management and Mr Haiveta failed to take into account the costs and risks of borrowing in order to finance this investment, which undermined the positive aspects of the scheme.

Together with Mr Copland, Minister Haiveta was a prime mover in NPF’s bid to acquire a controlling interest in STC and CXL. At this stage, he had approved an investment of up to 37.5 per cent of CXL and 23 per cent of STC and must bear much of the responsibility for the losses, which subsequently occurred.

Borrowing 

To finance these investments, NPF drew down K35.8 million from its ANZ facility on June 8, 1996.

The shares were immediately pledged to ANZ Nominees as security for the loan. The share sale agreement between NPF, POSF and DFRBF was dated June 17, 1996. It provided for NPF to purchase at above current market price. Contrary to the working of the agreement, Mr Kaul gratuitously and without any NPF board approval, guaranteed POSF and DFRBF that accrued dividends payable in December 1996, on the shares, would be received by the vendors.

Mr Kaul is probably personally liable for NPF’s loss caused by this breach of his fiduciary duty to the NPF members.

Board representation – NPF bid for greater influence fails 

Having acquired a significant ownership, NPF sought to nominate three persons for appointment to the CXL board. After strong discussions, NPF gained one seat on the CXL board (Mr Kaul) and one on the STC Board (Mr Copland). The takeover strategy was not going too well.

Findings 

(a) Mr Wright and Mr Kaul failed to seek independent expert advice on the strategy to invest heavily in and attempt to gain control of CXL and STC. Nor did they provide such advice to the NPF board. This was a breach of duty and fiduciary duty respectively;
(b) The NPF Board of Trustees failed to direct management to provide it with independent expert or any sufficient advice before resolving to purchase CXL shares with K22.4 million STC shares and worth K17.3 million from POSF and DFRBF. This was a breach of their fiduciary duty to the members of the NPF for which they will be personally liable if the members can establish that they thereby suffered loss. It is unlikely that a defence of “acting in good faith” would be successful. Mr Copland, as an instigator and active proponent of this investment strategy, would have particularly clear liability;
(c) The NPF management and Board of Trustees failed to brief Minister Haiveta with formal written expert advice on the investments;
(d) Minister Haiveta, an ardent supporter of the strategy, failed to obtain expert independent advice from DoF or other expert sources before approving this very significant investment by NPF in CXL and STC as part of a strategy to gain control of these companies. He approved the strategy without due consideration and this amounted to improper conduct by Mr Haiveta;
(e) Minister Haiveta approved DFRBF and POSF selling their CXL and STC share holdings without sighting board resolutions from POSF and DFRBF (as no such resolutions occurred). This was improper conduct by the Minister;
(f) NPF drew down K35.8 million from their ANZ Bank loan facility to help finance the purchase of shares in CXL and STC, pledging the shares to ANZ Bank as security. This seriously depleted any benefits that NPF may have been able to gain from these investments;
(g) Mr Kaul gave unauthorised undertakings to POSF and DFRBF, allowing them to retain the benefits of dividends to be received at December 31, 1996, after the sale of CXL and STC shares to NPF. Mr Kaul should be personally liable to NPF for loss suffered by his negligent handling of this matter, which amounted to a breach of his fiduciary duty as an NPF trustee. His unauthorised undertaking was contrary to the clear terms of the contract and he would have great difficulty establishing a defence of “acting in good faith”.

During the remainder of 1996, NPF management purchased 102,090 shares in STC for $A348,477. Some purchases were within Mr Wright’s delegated limit but for others, he failed to obtain required board and Ministerial approval as shown in the following table. See table below.

These purchases in STC and CXL were not discussed with the board nor were they disclosed, except in the schedule of investments included in the board papers.

Wrong accounting treatment

In the 1996 annual financial report, NPF adopted International Accounting Standard 28 (IAS28) which is normally used to account for investment in associates. The proper standard should have been IAS26. Using IAS28 significantly enhanced the value of STC and CXL shares in 1996, as shown below:

table 2

Findings

(a) Between June 1 and December 17, 1996, Mr Wright purchased small parcels of shares in STC, sometimes beyond his delegated authority. Five of the purchases were made without NPF board approval (see Table No. 4, paragraph 4.7.1).

table 3

table 4

There was no explicit notification to the NPF board. This was a failure by Mr Wright of his duties to the NPF board;
(b) NPF did not follow International Accounting Standard No. 26 (IAS 26) in reporting on its investments in STC and CXL where investments are marked to market. Prima facie, NPF’s valuations method employed was not a “market” valuation and therefore was contrary to accepted practice and enabled NPF to record higher profits in 1996 than warranted (and lower than warranted profits in 1997 — see paragraph 4.8.1). The financial statements in each of 1996 and 1997 did not explain the sensitivity of the financial results reported and the valuation method employed in relation to these investments.

TO BE CONTINUED

National Provident Fund Final Report [Part 37]

September 25, 2015 1 comment

Below is the thirty-seventh 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 37th 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 4C Continued 

Unauthorised On Market Purchases of Cue Shares, December 30-31, 1997 

At this stage, there were virtually no buyers for Cue shares, however, this did not deter NPF management from buying two parcels of one million and 920,000 shares each totalling $A132,700 and $A139,389 respectively on December 30 and 31.

The value of Cue shares rose immediately to 14.37 cents on December 31, 1997, which significantly increased NPF’s recorded end of year profits and therefore increased the end of year bonus paid under the senior management bonus scheme.

These unauthorised purchases were breaches of duty by Mr Wright and Mr Kaul, which should expose them to personal liability for the loss incurred by NPF.

1998 Mr Jacobs of Cue is terminated and NPF management makes further unauthorised investments 

At the February 1998 NPF board meeting, the trustees were advised that Mr Jacobs of Cue was forced to resign his position and that Cue would change its focus away from Indonesia back to PNG. They were not told however, that management had purchased 1.97 million Cue shares costing K313,052, since the last meeting.

NPF’s last purchase of Cue shares occurred in June 1998, when Mr Wright authorised the purchase of 2,976,455 shares for $A301,384, again without NPF board knowledge or authority.

These purchases were not disclosed to the trustees at the July board meeting nor was the fact that NPF’s unrealised loss on Cue investments then totalled K2,578,000.

This information was hidden away in the investment schedule tabled at the meeting, which was not discussed.

Saga issues Writ against Cue

Saga then issued a writ against Cue, claiming 3US2.16 million and simultaneously Cue’s share price began nose-diving, down to 7 cents in June and 4.4 cents in August.

In September, the board finally looked at the conflict of interest of former trustee and NPF chairman David Copland, who was still a member of the Cue board and considered by Cue to be an independent director. It had taken more than a year for the NPF board to confront this situation since Minister Haiveta had raised it in July 1997.

Findings 

(a) Mr Wright continued to make unauthorised purchases of Cue shares and failed to specifically notify the board. He was in breach of duty by so doing and is likely to be personally liable to NPF for losses incurred by the breaches of duty;
(b) Mr Fabila and NPF management failed to address the mounting unrealised losses due to the falling price of Cue shares or to propose a recovery strategy. They also failed to advise the board in relation to this issue. This was a breach of duty exposing them to personal liability for the losses incurred;
(c) The continued failure of the NPF Board of Trustees to heed Minister Haiveta’s directions of June 19, 1997 is a breach of their fiduciary duty as trustees;
(d) The board of trustees did not adequately consider the implications of the falling Cue share price in terms of NPF’s investment portfolio and the board sought no independent investment advice concerning that investment. This was a breach of their fiduciary duty to members of the fund; and
(e) All trustees in office at the time are exposed to personal liability for losses incurred by contributors of the fund consequent upon their breach of duty.

NPF’s Selldown Of Cue Shares — 1999 Appointment of PriceWaterhouse Coopers

After PriceWaterhouse Coopers (PwC) were engaged in February 1999 to review NPF’s investment portfolio, the total inappropriateness of the Cue investment and many of NPF’s other investments, was reported to the NPF board and PwC recommended that NPF sell off 100 per cent of the Cue shares as well as most of its other equity investments, in order to reduce its debt.

This sell-down strategy was approved by circular resolution on March 25, 1999.

The problem was to find a way to sell off its Cue shares without realising a massive loss on the investment.

NPF allies itself with Mr Jacobs in selldown of Cue shares 

After very involved negotiations, NPF allied itself with Frank Jacobs, the former Cue managing director who was then representing Anzoil, a junior oil and gas company which wanted to buy into Cue, replace its board of directors, settle the Saga litigation and, hopefully, to cause the share price to rise from its current 4 cents to more like 8 cents per share.

Mr Jacobs and Mr Fabila discussed various strategies that caused much friction between the Cue board and Mr Fabila (see details in paragraph 19 and 20 of the Cue Report).

Mr Maladina fails to disclose a buy offer from CIBC 

During the negotiations, Mr Maladina, NPF’s new chairman, who had been appointed on Prime Minister Skate’s direction, attended a Cue board meeting in Melbourne.

He received an offer for NPF’s Cue shares from CIBC that was more favourable than the deal being finalised between Anzoil and NPF. Mr Maladina withheld the fact of this offer from NPF, and, with Mr Jacobs completing the arrangements of the sale, NPF sold its Cue shares to Palmcove Asset Pty Ltd. The final parcel of Cue shares was sold at 8.1 cents per share.

When Mr Maladina’s failure to disclose the higher CIBC offer became known, it led to a vote of no- confidence in him as chairman followed by his termination as a trustee of the NPF.

Failure to obtain expert advice in selldown 

Once again, NPF management had failed to obtain expert advice on the various offers to buy its Cue shares.

Findings 

“We find that Mr Maladina failed to advise NPF management and NPF Board of Trustees of the existence of an offer from CIBC made to him while he was attending a Cue board meeting in Melbourne on August 11, 1999. This was a failure to diligently discharge his fiduciary duties. Mr Maladina may be personally liable to the contributors for losses suffered because of his breach of duty. It is unlikely that Mr Maladina could successfully claim he was acting in “good faith”.

Concluding Comments 

The full details of the sorry story of the sell-down of NPF’s Cue shares is set out in paragraphs 19 – 21 of the Cue Report.

NPF suffered a net realised loss of $A7.4 million as a result of its investment in Cue. All trustees in office during the period of this investment seriously failed their fiduciary duty to the members of the fund by failing to seek investment advice, by failing to control and reprimand management for repeated and blatant excesses of authority and by ignoring the conditions imposed by Minister Haiveta in July 1997, which was effectively a direction to return to the investment guidelines.

Mr Copland, Mr Kaul and Mr Wright bear the heaviest responsibility for the losses that NPF incurred. During the period they were making investment decisions and guiding the NPF board to make repeated purchases of Cue shares, they also held undisclosed interests in Cue and stood to gain personally from the investments being pursued by NPF at their instigation.

It is unlikely they or the other trustees could successfully claim that they “acted in good faith” and they would probably be found personally liable for losses incurred by NPF for their failure of fiduciary duty.

Executive Summary Schedule 4D Continued Introduction

Steamships Trading Company Limited (STC) and Collins and Leahy Holdings Limited (CXL) are two of the largest diversified trading companies in Papua New Guinea with interests in retailing, hotels, manufacturing, transport and construction.

The decision to invest heavily in these two companies was largely motivated by NPF chairman David Copland, the former managing director of STC who persuaded Minister for Finance Chris Haiveta, at a meeting at the Gateway Hotel in April 1996 to support a strategy whereby NPF would acquire the shares in STC and CXL held by the Public Officers Superannuation Fund (POSF) and the Defence Force Retirement Benefit Fund (DFRBF) and then proceed to gradually acquire a controlling interest in the companies.

Once in control, the strategy was to merge and manage the two companies. Mr Copland gained the strong support of Minister Haiveta and NPF managing director Robert Kaul.

Implementation of the strategy was put under the direction of deputy managing director and investment manager Mr Wright. The shares in STC and CXL held by the POSF and the DFRBF were acquired and NPF proceeded to acquire further shares on market eventually acquiring a 23 per cent interest in STC and a 37.5 per cent interest in CXL by mid 1996.

NPF financed these share acquisitions with funds borrowed at variable interest rates from the ANZ Bank and as interest rates rose steeply after 1997, NPF began experiencing difficulties servicing the debt. STC continued to return a modest dividend but CXL began to record substantial losses in 1998.

Meanwhile, NPF’s ambition to acquire a controlling interest in STC and CXL was frustrated by STC’s owners, the large and powerful Swires Group.

When NPF’s finances reached crisis point in 1999, it was obliged to try and sell off equities, including its holdings in STC and CXL, and this proved very difficult because there was a very small market for the shares and it was dominated by the Swires Group. In the process, NPF lost heavily on the investment.

On-Market Investment 1996 Approvals for investment in STC 

Mr Wright recommended that the board approve the purchase of up to one million STC shares at up to $A3 per share in 100,000 lots “so as not to spook the price upwards”.

The board resolution, however, was far more modest, resolving on March 27, 1996, to purchase up to K1 million “worth of shares” in STC at a price between $A2.85 and $A3 in 100,000 share lots.

Mr Kaul nevertheless sought and obtained Minister Haiveta’s approval to purchase one million STC shares at levels of $A2.85 to $A3 million, failing to mention the 100,000 share lot limit.

In granting this approval, Minister Haiveta failed to seek the advice of the Department of Finance and Treasury (DoF).

The subsequent purchase of STC shares by management far exceeded the K1 million worth approved by the NPF board and the price was above the $A3 approved limit.

Initial investment in STC – 1996 

Between March 22 and May 24, 1996, NPF purchased 1,054,486 shares in STC at a cost of $A3,153,350 as follows: See table 1.

npf 37 table 1

There were gross defects in management’s performance in obtaining NPF and Ministerial approval. The board approved by invalid, unratified circular resolution up to K1 million worth of shares in 100,000 lots at $A2.85-$A3. Mr Kaul recommended to Minister Haiveta approval to purchase one million shares at $A2.85-$A3.

Mr Kaul did not mention to the Minister that the NPF board had approved acquisitions in lots not exceeding 100,000 per transaction.

Findings 

(a) Mr Kaul’s request for Ministerial approval to buy STC shares dated March 27, 1996, seriously misrepresented the board resolution of March 25, 1996 which resulted in the Minister approving a greater volume of purchases, at a higher price, than had been resolved by the board. This was a breach of Mr Kaul’s duty to the board. It was also a breach of his fiduciary duty (as a trustee) to the members of the NPF;
(b) Minister Haiveta’s failure to seek advice on the recommendation amounted to improper conduct;
(c) When Mr Wright and Mr Kaul directed Wilson HTM to purchase more than 100,000 shares on April 11, 1996 and in excess of $A3 per share on April 11, April 22 and May 24, 1996 totalling more than $A1 million worth of shares they exceeded the authority given by the board. This amounts to a breach of duty and of fiduciary duty respectively;
(d) To the extent that the purchases exceeded the price approved by the Minister, it was a breach of the PF(M) Act;
(e) The circular resolutions which were not subsequently ratified at the next formal board meeting were invalid; andfile://localhost/Users/timothyking/Desktop/npf%2037%20table%202.jpg
(f) BPNG foreign exchange approval was not obtained for all share acquisitions. Minister Haiveta’s evidence that he failed to seek DoF advice because he assumed Mr Kaul would have previously done so is unacceptable.

Initial investments in CXL — 1996 

Between April 9, 1996 and May 30, 1996, NPF purchased the following shares in CXL: See table 2 below.

npf 37 table 2

Once again, there were gross defects in the way management obtained NPF and Ministerial approval for these initial purchases in CXL.

The board approved, by way of circular resolution the purchase of up to K1 million “worth of CXL shares” at $A2.20- $A2.50 per share.

Mr Kaul sought approval from Minister Haiveta (before the NPF board resolution) to purchase one million CXL shares $A2.20-$A2.50 per share.

The DoF recommendation to the Minister did not provide any critical analysis and failed to pick up the discrepancy between the board resolution and the recommendation.

Minister Haiveta then granted approval on April 15, 1996 without imposing any limit on the number of shares or the total cost.

At the time of his approval, the NPF board’s circular resolution was invalid, as it had not been ratified.

When ratification finally occurred on 26, April, the resolutions gave management a dangerously open- ended discretion “to continue purchasing CXL shares given the currently low trading price of the stock . . . ”.

TO BE CONTINUED

National Provident Fund Final Report [Part 36]

September 24, 2015 1 comment

Below is the thirty-sixth 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 36th 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 4C Continued

(c) David Copland was in an undisclosed conflict of interest situation in that Cue offered him a directorship on their board if NPF agreed to take up the Cue shares and convertible notes on offer and to underwrite Cue’s share issue. At the same time, Mr Copland was actively advocating that NPF should take up the offer;
(d) Mr Cleary of Wilson HTM was an active proponent of NPF and POSFB supporting Cue’s MIMPEX bid, by underwriting and participating in the share issue. He attended meetings with Mr Kaul, the managing director of POSF and the chairman of both funds, advocating this course of action, which would be very beneficial for Wilson HTM who was acting on behalf of Cue with regard to the share issue and the underwriting;
(e) Minister Haiveta became actively involved in securing capital from POSFB for Cue’s proposed share issue;
(f) The active participation and advocacy by Mr Cleary of Wilson HTM, Mr Jacobs of Cue; Minister Haiveta and Mr Copland, helped create a feeling of nationalistic pride compelling national participation in a fledgling PNG resource project. This close involvement of outsiders, motivated by a mixture of nationalism, politics, profit and pride influenced Mr Kaul to deviate from his true focus, which should have been exclusively on the best interests of fund members;
(g) The NPF board abrogated its responsibility by:
(i) failing to reprimand management for unauthorised share purchases;
(ii) granting management unfettered powers on August 27, 1996; and
(h) Mr Kaul gave false information to Cue about NPF’s board resolution.

Offer by Chinese National Petroleum Corp (CNPC)

In October 1996, NPF was offered the chance to escape from its loss-doomed investment in Cue when CNPC contacted Mr Kaul with an offer to buy NPF’s Cue shares. Mr Kaul turned to Mr Jacobs of Cue for advice.

Mr Jacobs urged Mr Kaul to ask for an impossibly high price. The NPF board really abdicated their responsibility by authorising Mr Kaul to sell “if an acceptable offer was received otherwise an aggressive stance would be maintained to grow the company”.

However, the board gave no guidance about what it considered would be an acceptable offer. With the market price of Cue at 7.4 cents, Mr Kaul “killed the deal” by making a “not negotiable” offer to sell NPF’s Cue shares to CNPC for 20 cents a share.

The trustees and Mr Kaul are again accountable to NPF members for this failure of fiduciary duty to give expert, objective consideration to the best interests of the members.

This offer deserved serious consideration solely from the viewpoint of NPF members and it was improper for Mr Kaul to seek and follow the advice of Mr Jacobs, as Mr Kaul’s duty, in this matter, was not to the Cue board, of which he was a director, but to NPF (See paragraph 9 of the Cue Report).

In November 1996, Cue carried out an exhaustive in-depth self-appraisal, which was fully aired at a board meeting that Mr Kaul attended. It brought to the surface serious problems about Cue’s corporate strategy and management ability. At the NPF December meeting, Mr Kaul failed to brief the NPF board on these matters and the board resolved to increase its Cue share holding by 3 per cent every six months.

In January, Mr Copland was appointed to the Cue board. The other NPF trustees assumed he held this position as NPF’s second representative director, which NPF had long requested.

Unknown to them, however, Mr Copland accepted the appointment as an independent director not as NPF’s representative. This put him in a conflict of interest situation. By failing to disclose this fact, while continuing to attend and vote on issue regarding the Cue investment, was a breach of his fiduciary duty as well as being improper conduct. Mr Copland should be referred to the Ombudsman Commission for consideration as to whether or not he has committed an offence under the Leadership Code (see paragraph 11).

NPF Supports Cue’s Indonesian Venture with PT Wirabuana Prajamija

In January 1997, Mr Kaul, as a Cue director, voted to approve Cue issuing 40 million additional shares at 20 cents per share to fund an Indonesian venture with PT Wirabuana Prajamija.

It was clear at the time that this Indonesian folly that Cue embarked upon, was going to overstrain its financial resources and therefore endanger NPF’s investment in Cue, but Mr Kaul neither advised nor consulted NPF (as NPF’s representative director on the Cue board) before supporting the move.

He obtained NPF approval by way of an urgent circular resolution to sub-underwrite 20 per cent of this placement costing $A1.6 million. NPF would receive a sub-underwriting fee of $A80,000.

Findings

(a) NPF management were in breach of their duty to the board by not obtaining any expert analysis of this proposed investment and by providing only a false one-sided view of the benefits to Cue and to NPF. They did not provide any advice about the risks of the proposed investment or about the fact that it did not comply with NPF’s investment guidelines;
(b) The trustees who voted in favour of the investment, without seeking further advice, failed their fiduciary duty to NPF’s members. Minister Haiveta foolishly and improperly approved this investment, without seeking DoF advice and Mr Kaul and the NPF management then breached Section 61(2) of the PF(M) Act by committing NPF to the sub-underwriting agreement before receiving Ministerial approval.

NPF Supports Cue’s Attempt To Purchase Saga Petroleum ASA Assets (SAGA)

Between March and April, Cue considered an attempt to raise funds in order to purchase Saga’s Indonesian assets for $US15 million plus $US15 million.

By April, Cue had decided to make a cash offer of $US25 million. Both Mr Kaul and Mr Copland were actively involved in Cue’s deliberations on issuing a share placement to fund the proposed offer for Saga’s assets.

In April, Mr Wright signed a letter on behalf of Mr Kaul from NPF to Saga, which had been drafted by Mr Jacobs of Cue. The letter assured Saga that Cue had NPF’s support, although at this stage the NPF board had not been consulted.

In May 1997, without the benefit of any briefing or background paper from its Investment Division, the NPF board resolved to sub-underwrite $A10 million of Cue’s $A21 million float.

Findings

(a) Mr Kaul and Mr Wright failed in their duty to provide full information and expert advice to the NPF board on the sub-underwriting proposal;
(b) Mr Copland did not declare his “conflict” which was apparent because he was supposedly appointed an independent director of Cue and had already been granted 200,000 options in the ordinary shares of Cue;
(c) The NPF trustees did not consider the underlying risks of what Cue was proposing;
(d) The NPF trustees did not consider the implications for NPF’s investment portfolio, particularly the increase in NPF’s already over-exposed PNG resource stocks;
(e) Mr Kaul did not inform the NPF board that he had voted in favour of a Cue shareholder resolution to issue new shares for the proposed acquisition of Saga’s Indonesian assets; and
(f) Clearly, this further investment in Cue was a speculative investment and this issue should have been considered.

In further support of Cue, Mr Kaul wrote to Saga on May 9, falsely stating that NPF’s shares in Cue were unencumbered when in fact they had been bought with money borrowed from ANZ and were held by ANZ Nominees as security.

The Saga Sale and Purchase Agreement (SPA) was announced on the May 12, 1997. It was also announced that ANZ Securities would underwrite a Cue share placement to raise between $A21-25 million to finance the $US27 million cost of the SPA. NPF subscribed for $A5 million worth of shares and sub-underwrote an allocation of a further $A7 million.

Mr Copland and Mr Kaul, both members of the Cue board, personally sub-underwrote $A100,000 each without disclosing this to the NPF board. They were both therefore in an undisclosed conflict of interest situation, considering their positions with NPF.

Mr Haiveta Imposes Conditions On His Approval

When NPF applied for Ministerial approval for this investment, Salamo Elema, First Assistant Secretary for the Commercial Investment Division, recommended that it be rejected, stating that NPF already owned 20 per cent of Cue and had two directors on the board. He felt that exposure of a further $A10 million by participating in the proposed investment, would be completely contrary to the Investment Guidelines.

However, there was also a second, simpler DoF brief prepared, which recommended that the investment be approved. It seems the Minister acted on the latter brief as he granted approval on June 4, 1997. Then on June 19, the Minister applied conditions to that approval, in terms which reflected the wording of Mr Elema’s brief saying:-

“My approval is subject to the following conditions:
* Minimum value of acquisition of additional shares in Cue by NPF not to exceed K5 million in accordance with Section 61 of the PFM act;
* Reduction in NPF’s holding in Cue to 10 per cent as soon as practicable; and
* Reduction within three months (i.e. by August 31) of NPF’s equity portfolio to 60 per cent of its total investments.

In regards to these conditions, please point out to the board my concerns as follows:
* That NPF is over exposed to equities in mining and petroleum companies and under exposed to national enterprises in the commercial and industrial sectors;
* That NPF extra investment in Cue is ultimately only helping a foreign company to develop its non-PNG interests; and
* That there appears to be a conflict of interest between the chairman of NPF’s role as protector of national interest in the prudent management of the investments of NPF, and his role as holder of 200,000 options in Cue.

I wish to convey these concerns to your board for appropriate action”. (Exhibits CU648-CU649)

NPF Board Ignores The Ministers Conditions

Mr Haiveta’s letter, which imposed long overdue constraints upon NPF, was tabled at the 107th NPF board meeting on July 4, 1997, just after the national elections that led to the formation of the Skate government.

The board resolved to “wait for the formation of the new government” and then proceeded to disregard Minister Haiveta’s instruction.

All trustees who voted in favour of the investment and all subsequent trustees who had knowledge of Mr Haiveta’s instructions but continued not to apply them, were in breach of their fiduciary duty of care to the members and guilty of improper conduct.

Mr Haiveta gave evidence that he lost the Finance portfolio when the new government was formed and was therefore unable to follow this matter up.

Findings

(a) Mr Kaul misrepresented to Saga that NPF’s shares in Cue were unencumbered whereas they were held in the name of ANZ Nominees as security for a loan;
(b) Mr Copland’s personal $A100,000 participation in the sub-underwriting of the Cue share issue, accentuated his undisclosed conflict of interest as trustee and chairman of the NPF board;
(c) Mr Kaul also participated personally in sub-underwriting the Cue share issue thus accentuating an undisclosed conflict with his position as managing director of NPF;
(d) The Minister for Finance approved NPF’s request to sub-underwrite $A3 million of Cue’s share issue, despite contrary expert advice from the DoF;
(e) The Minister’s concerns regarding breaches of investment guidelines were in fact ignored and his concerns about Mr Copland’s conflict of interest were not acted upon until September 1998.

During this period, Mr Copland continued to participate in the “decision-making” process, despite his conflict of interest and NPF incurred substantial losses by investing further in Cue. This was a breach of fiduciary duties by the trustees who were then on the board and by subsequent trustees who became aware of the situation.

It was also a breach of the duty to NPF by the officers who failed to initiate appropriate action to rectify the situation.

Management Makes Further Investments Without Board Approval

Despite the $A25 million placement, Cue was required to raise additional funds to complete the Saga assets purchase and to raise working capital and costs on its Indonesian venture. NPF management advised the NPF board in August of Cue’s intended $A12 million share placement and the matter was discussed. Mr Haiveta’s conditions, however, were not discussed.

On September 10, 1997, Mr Kaul agreed, without board approval, that NPF would sub-underwrite $A400,000 of the placement and then after discussing the matter with Mr Copland, Mr Kaul agreed that NPF would accept a $A1 million shortfall, for a fee, subject to board approval.

NPF was allocated 4,880,000 shares at 25 cents totalling $A1,220,000.

This purchase was made at a premium to market price and was also made without NPF board approval (paragraph 13.15).

Cue Terminates The Saga Agreement

In October 1997, Cue was facing serious financial difficulties because of the Saga commitment and problems with its PT Wirabuana Prajamija joint venture as well as the general Asian Financial crisis.

It endeavoured, unsuccessfully, to reduce its Saga commitments and finally in February 1998, Cue terminated the Saga SPA.

This led to Saga instigating court action against Cue, claiming massive damages, which in turn contributed to the Cue share price falling until it reached 13.27 cents on December 20, 1997.

TO BE CONTINUED