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National Provident Fund Final Report [Part 76]

November 18, 2015 Leave a comment

Below is the seventy-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 76th 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 8 Continued

This was primarily a failure of duty by Mr. Wright and his successors regarding this duty, Mr Mekere, Mr Mitchell and Mr Gire. It was also a failure of fiduciary duty by the trustees who allowed this situation to continue for some 14 months.

Failure To Properly Implement The Deed Of Acknowledgement Of Debt

After the deed was signed on October 29, 1998, NPF failed to:

  • adjust prior billings to reflect the terms of the deed;
  • request the 1997 interest or obtain acknowledgement of its capitalisation;
  • BASE subsequent calculations on the higher principal sum and an interest rate of 14.67 per cent or 15.67per cent as appropriate; and
  • exercise its rights under the deed resulting from the State’s default in payment of interest. Auditor-General’s Intervention

The Auditor-General notified NPF of the understated interest in September 1999 and Mr Mitchell subsequently advised DoF that the cumulative underpayment for the period to December 31, 1999 was K4,000,510.91. This related only to the interest differential between 12.67 per cent and 14.67 per cent.

The commission finds that this figure must be increased to take account of:

(a) The applicable interest rate under the deed should often have been 15.67 per cent — with a discount rate of 14.67 per cent.
(b) The use of the incorrect principal sum in the calculations; and
(c) Penalties for late payment of interest.

The commission has given careful and detailed consideration to the underpayment of interest as set out in paragraph 8 of the report. It finds that the underpayment of interest (not including penalty interest) amounts to K4,288,674.

Findings

(a) The NPF management particularly Mr Wright, Mr Mekere, Mr Mitchell and Mr Gire failed in their duties when:

  • they failed to apply the correct interest rate and principal amount resulting in the interest being under- billed;
  • when DoF defaulted on numerous instances, NPF management failed to exercise its rights granted by the deed; and
  • their administration of the deed was careless resulting in loss of income to NPF;

(b) The trustees failed in their fiduciary duties to the members where:

  • they have failed to apply the correct interest rate and principal amounts, resulting in the interest amount being under-billed;
  • when DoF defaulted on numerous instances, NPF failed to exercise its rights granted by the deed; and
  • they failed to detect and correct management’s mishandling of this matter. Concluding Comments

The transfer of members and members’ entitlements from POSF to NPF consequent upon corporatisation of NAC and PTC was badly mishandled by NPF and also by the State and POSF. The transfer was characterised by a failure to anticipate and provide for the problems which would be encountered, with the result that basic policy decisions and administrative arrangements were not in place before the date of corporatisation and the implementation of the transfer of membership from POSF to NPF on 1st January 1997.

This unnecessarily caused great and understandable concern among the transferring members and led their unions to adopt a hardline and unreasonable stance. Faced with strong inappropriate demands for the payout of employee contributions to members who transferred to Air Niugini, NPF decided to honour an extra legal agreement between employees and Air Niugini management, despite the fact that it was in breach of the NPF Act.

Subsequently, when faced with strike action by communication workers unions for payout of the State’s contributions, NPF again capitulated. This was illegal and unfair to other NPF members as it allowed this group of transferred members to avoid the effects of the eventual write down of NPF member’s entitlements. It is clear that NPF’s decision to make the extra legal payment of the State share to former PTC employees was influenced by political pressure to settle the strike action.

Faced with the failure by POSF and the Sate to resolve the problems caused by the State’s longstanding failure to pay POSF the State’s contribution to the fund, NPF initiated a loan to the State to fund the transfer without seeking investment advice or performing due diligence on the State’s ability to meet its commitments. This was of great concern because NPF was already massively exposed to the State through the freeway loans.

Having entered into the loan to finance the transfer of the State’s contribution, NPF management and trustees demonstrated negligence and ineptitude in administering the loan. They under-charged the interest rate and applied it to an understated principal sum, resulting in a loss of more than K4 million to NPF members. This was gross mismanagement of the trust fund and a serious breach of fiduciary duties.

SCHEDULE 9 – Tender Procedures and Nepotism

INTRODUCTION

Terms of Reference and Finance Inspectors Report

The commission’s term of reference Number 1(0) requires the commission to investigate and report on:

“The failure to comply with prescribed tendering processes, and whether such failure benefited any person and if so who, and the role of any trustee or manager of the funds or of any other person or entity”.

The finance inspectors provided an excellent report on these topics, on December 15, 1999, exposing irregularities in the National Provident Fund’s (NPF) financial management.

This was one of the big issues, which led to the setting up of this commission of inquiry. The finance inspectors drew attention to the deficiencies in the procedures used by NPF in the procurement of goods and services and the disposal of assets.

Commission’s inquiries

The commission chose not to make a full and detailed investigation into every possible irregularity, as the task would be massively beyond this commission’s resources. Instead the commission examined the following topics in detail for the whole period under review, January 1995 to December 1999:

(a) Procurement and disposal of motor vehicles;
(b) Procurement of property management;
(c) Procurement of legal services;
(d) Procurement of security services;
(e) Procurement of accounting services;
(f) Procurement of computer and computer services;
(g) Procurement of other professional services; and
(h) Procurement of stationery and office supplies.

The results of the commission’s own investigation into these matters are presented in the main report (Schedule 9). That report shows a worrying lack of formal tendering procedures and many serious financial irregularities. The corrupt practices of NPF staff and instances of nepotism are also noted in the main report.

The law applicable to tender procedures

The commission has found, in paragraph 3, that Section 59 of the Public Finances Management Act (PF(M) Act) does not apply to the NPF but that the NPF must nevertheless follow financial instructions issued from time to time. In addition, all NPF trustees were under a fiduciary duty to ensure proper management of the fund’s assets and this would include the need to follow suitable tender procedures for the acquisition and disposal of assets, goods and services.

On the evidence, it is clear that management (wrongly) assumed that NPF was bound by Section 59 of the PF(M) Act and that, in 1989, a Supply and Tenders Committee had been established.

Mr Wright, Mr Leahy and Mr Tarutia were members of the committee, which ceased to operate before January 1995 (the commencing date set by the Commission’s terms of reference).

In March 1989, a NPF board resolution established a Supply and Tenders Committee and procedures and financial delegations for tenders. Although this resolution remains in force, it fell into disuse before January 1, 1995.

The commission has found that there were no clear procedures being followed between January 1995 to December 1999 and that this was a failure of duty of both management and the trustees.

We will now report upon each of the selected topics in turn.

Procurement And Disposal Of Motor Vehicles

Policy on use of motor vehicle

The procedure for acquiring and disposing of motor vehicles followed no clear policy. There was a formal policy adopted on October 27, 1994 regarding the use of motor vehicles which allowed vehicles supplied as part of an officer’s contract entitlement (“employment contract vehicles”) to be used on a 24-hour basis by the managers to whom they were allocated and to be replaced every four years. All other vehicles were to be used for official duty only and to be replaced every four years or “on reaching 150,000 kilometres whichever is the earlier”.

The policy did not deal with acquisition and disposal procedures.

The commission found that the standard of NPF’s documentation, regarding acquisition and disposal of motor vehicles, was extremely poor.

1995

A study of the Fixed Assets Schedule provides evidence of what vehicles were held at the beginning of 1995, how many of those were still held at the end of 1995 (or had been disposed of during the year) and how many new vehicles were acquired and became part of the NPF fleet during 1995. That evidence discloses that:

(a) NPF owned the following vehicles throughout the whole of 1995:

76 b

(b) NPF also owned the following other vehicles in 1995, but disposed of them during the year:

76 c

(c) NPF also purchased the following vehicles in 1995, which showed up on the capital asset schedule as at December 1995:

76 d

In addition to the outline of evidence provided by the Fixed Assets Schedule, the commission sought other evidence located in NPF’s poor record system in order to flesh out the outline.

The Fixed Assets Schedule indicates that during 1995 NPF disposed of four Suzuki Vitara’s used by divisional offices and a Nissan Pathfinder used by the managing director. Three of these were traded in — three Mitsubishi L200 4×4 single cabin utilities.

It seems that competitive quotes were obtained from Boroko Motors, Toba Motors, PNG Motors and Ela Motors. The Toba Motors quote was accepted. Toba is a subsidiary of STC and Mr Copland, who was managing director of STC at the time, declared his interest

Toba’s quote for supplying the three L200’s was K74,514 less K19,000 on the three traded Suzuki’s. The fixed asset schedule shows that NPF allowed K83,314 (K20,000 higher).

Although the Mt Hagen Suzuki was dropped off the fixed asset schedule by December 1995, it was not actually disposed of in that year. It seems that it was involved in a fatal accident and sold by internal tender among Mt Hagen NPF staff in 1996, though it was not carried forward onto the fixed asset schedule for that year.

Some documentary detective work shows that the managing director’s Nissan Pathfinder was stolen during 1995 and K29,500 was put towards the purchase price of K41,499 on a Mitsubishi Verada from Toba Motors.

No competitive quotes were obtained for similar vehicles from other firms this time and Mr Copland did not record his conflict of interest nor is he recorded as abstaining from discussions.

Findings

(a) NPF’s records on procurement and disposal of motor vehicles were fragmented and inadequate and it is necessary to use inference and deduction in order to make findings;

(b) Three area office Suzuki Vitara’s were traded in on the purchase of three Mitsubishi L200 4X2 single cabin utilities.

  • Competitive quotes were obtained;
  • Mr Copland declared his interest and abstained from discussions; and
  • THE fixed asset schedule records the purchase price paid as K20,000 higher than the quote. This could not be followed up, as NPF could not produce the vouchers;

(c) A fourth Suzuki Vitara was damaged at Mt. Hagen. It dropped off the Fixed Asset Schedule as at December 1995, but was not carried forward onto the 1996 Assets Schedule, though it was still owned by NPF (It was sold during 1996 by internal staff tender). This procedure was improper and amounted to nepotism;

(d) The Nissan Pathfinder allocated to the managing director was stolen and replaced by a Mitsubishi Verada from Toba Motors;

  • No competitive quotes were obtained; and
  • Mr Copland did not declare his interest or abstain from discussions;

This was improper procedure and nepotistic. Mr Copland’s conduct was improper.

1996

Again, based on the evidence of the Fixed Asset Schedule:

(a) NPF owned the following vehicles throughout the whole of 1996: (See Table 1 below)

76 e

(b) NPF also owned the following (Head Office) vehicles in 1996, but disposed of them during the year:

(c) NPF also purchased the following (Head Office) Vehicles in 1996, which were recorded on the Fixed Asset Schedule at the end of 1996: (See Table 2 below)

76 f

Changes in motor vehicle policy

The board amended the Motor Vehicle Policy regarding the change over of vehicles during their 101st board meeting on June 28, 1996, and resolved to reduce the mileage limit for change over of vehicle from 80,000km to 50,000km.

The reason given to justify this change in policy was the current condition of roads.

The resolution was based on a false premise, as the previous mileage limit was 150,000km, not 80,000km. The resolution also removed the four-year rule, leaving the 50,000km mileage limit as the only criteria for replacement.

The Fixed Asset Schedule for 1996 records that NPF disposed of two Suzuki Vitara, a Mazda 626 and a Mazda Bus and purchased two Mitsubishi Double cabs, a Mitsubishi bus and 4 Mitsubishi Lancers, all from Toba Motors.

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 50]

October 14, 2015 1 comment

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

NPF Final Report

This is the 50th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4N Continued 

Preparation Of ACOM contract Involves Protracted Negotiations 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

External funding: Bank Loan 

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

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

Bridging Finance From NPF 

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

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

Request To PNGBC 

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

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

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

Suspicions About Mr Mekere’s Motives In Supporting Odata

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

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

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

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

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

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

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

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

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

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

Continuing Negotiations For BSP Loan Facility Without NPF Board Authority 

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

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

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

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

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

ACOM Binds Itself In A Management Contract With Odata 

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

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

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

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

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

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

BSP Loan Facility Negotiations Discontinued 

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

NPF Withdraws Construction And Odata Sues ACOM 

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

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

Findings In Accordance With Terms Of Reference 

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

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

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

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

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

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

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

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

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

The other officers involved were Mr Wright and Mr Mekere.

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

Executive Summary Schedule 4O Plantations and Agriculture Investments 

Introduction 

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

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

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

TO BE CONTINUED

National Provident Fund Final Report [Part 49]

October 13, 2015 1 comment

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

NPF Final Report

This is the 49th 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 4L Continued 

The Crocodile board allowed Mr Jewiss to hire staff and enter into construction and other contracts without being presented with a satisfactory business plan, detailed costing, management structure or an agreed source of funding.

Even worse, Crocodile had not secured the required registration, which would have enabled it to open a bank account and carry on business in Indonesia; nor had it obtained secure title to the land on which the hotel would be constructed.

Mr Jewiss and his key expatriate staff had not acquired the appropriate visas to permit them to work in Indonesia.

This failure required them to fly out of Indonesia and return every 60 days at great cost. As Crocodile had not obtained its PMA status, Mr Jewiss, assisted by Mr Wright, used a number of methods to transfer funds to Indonesia including:

  1. Carrying foreign currency travellers cheques to Indonesia (Exhibit CC354, CC358 Transcript p. 6155);
  2. Personal credit cards and bank accounts (Exhibit CC307, CC309, CC310 Transcript pp. 6270);
  3. Mr Goodfellow’s bank account (Exhibit CC367, CC338, CC345, CC 360-362, CC367 – Transcript p. 6150);
  4. DGJ trust account (Exhibit CC270-278, Transcript pp. 6145-6147);
  5. NPF’s Wilson HTM trading account (Exhibit CC322); and
  6. PT Cipta Boga Baya (Exhibit CC383A) Crocodile entered an agreement to use this company’s bank account and work under its (legal) umbrella.

These devices were not legal, secure or transparent. The use of NPF’s offshore account with Wilson HTM as a vehicle to send funds to Indonesia was particularly contentious. Approximately $US600,000 was sent this way in breach of PNG foreign currency regulations and without the knowledge of the NPF board.

The Crocodile board made several attempts to impose cost controls on Mr Jewiss and to persuade him to provide proper financial reporting. These attempts failed.

With Mr Copland as chairman of the Crocodile board and with trustees Tau Nana and Henry Leonard and Mr Wright and Mr Kaul as directors, there should have been ample feed-back to the NPF board regarding the Maluk Bay affairs but this was not the case.

The willingness of NPF trustees to support Mr Jewiss’s wild and ill thought out proposals without insisting upon a professional feasibility study, was a failure of the trustees’ fiduciary duty to the NPF members.

Concluding Comments On Crocodile

During the period under review, from January 1997 to December 1999, NPF expended approximately K7.4 million by way of loan and equity investments in support of Crocodile for no return.

The commission has not pursued this matter after December 1999 but has been informed by the current NPF management that Crocodile has redirected its business operations to PNG, that management is vastly improved and that proper cost controls and reporting procedures are in place.

The commission has been told that there are signs of profitability and that once this trend is firmly established the intention is to sell off Crocodile.

Executive Summary Schedule 4M Amalpak Limited

Forward

This is a summary of the report on Amalpak Limited (Schedule 4M) which is set out in Schedule 4M of the commissions report. Unless stated otherwise, paragraph numbers referred to in this report are references to paragraphs in Schedule 4M.

Original Investment in Amalpak Ltd

NPF’s first invested in Amalpak Ltd, then named Amalgamated Packaging Pty Ltd, by purchasing 30 per cent of its shares in August 1990, for a price of K2,268,000.

The purchase agreement contained a performance warranty, which was not honoured by the company.

The shortfall was quantified at K1.033 million which was repaid to NPF meaning NPF’s net purchase price was K1.235 million.

Other Shareholders 

The other shareholders were the Investment Corporation of PNG (30 per cent) and VisyBoard, the active foreign manager (60 per cent).

In October 1997, the company’s name was changed to Amalpak Limited (Amalpak).

Despite problems caused mainly by significant devaluation of the kina, which affected the cost of its raw materials, and other economic circumstances, the company remained moderately profitable for NPF, paying a total of K4000 per annum as directors’ fees for NPF’s two directors and reasonable dividends throughout the period under review.

Amalpak’s managing director reported monthly and it held directors meetings four times a year. Although NPF had two directors on the board, NPF management’s reports to NPF were limited to summaries of Amalpak management reports and the Amalpak, annual report. No discussions by NPF trustees were recorded in board minutes.

Value Of NPF’s Equity 

NPF’s equity in Amalpak was valued as follows:

npf 49 b

Findings 

NPF’s investment in Amalpak is an illustration of a prudent passive investment in a sound well-managed commercial enterprise. The company has regularly reported and regularly paid high dividends with no problems. Although overall profits were reduced owing to the devaluation of the kina, it has remained a moderately profitable company paying an average return of 16 per cent on the total cost of investment.

During the five-year period under review by the commission, the returns on NPF’s investment were:

npf 49 c

The history of this investment is in pleasing contrast to NPF’s loss making investments in high risk PNG resource stock and the other investments in which NPF aggressively sought to pursue a much more active role. No borrowed funds were used in the Amalpak investment.

In view of the uncontroversial nature of this investment from quarter to quarter, the quality of NPF management’s reporting to the NPF board was adequate, though it merely summarised the regular reports coming from Amalpak itself. In latter times the timeliness of NPF management’s reporting became a little bit confused.

Executive Summary Schedule 4N 

Investment in Ambusa Copra Oil Mill Ltd – Proposal On Behalf Of Ambusa Pty Ltd For NPF To Fund Ambusa Copra Oil Mill 

During the second half of 1996, Jai Ryan and Stanis Valu who were connected with Ulamona Sawmill in West New Britain Province, approached Mr Wright with a business proposal to establish a copra oil mill at Ambusa, WNBP.

Mr Valu claimed to represent a landowner group, which had been incorporated as Ambusa Pty Ltd. They had already been introduced by Mr Ryan to Odata Ltd of Canada, to supply a Copra Oil Mill through contacts in India, to construct the mill and then to manage it and market the product.

The group had unsuccessfully sought funding elsewhere and wished to apply to NPF to join with it as a joint venture investment. They provided Mr Wright with a detailed proposal/business plan which had been drawn up with the help of Odata.

Mr Mekere Prepares Proposal Utilising Odata’s Business Plan Without Any Due Diligence 

Mr Wright asked his junior, Haro Mekere, to examine the proposal and to work with Mr Valu and Mr Ryan to develop it into a draft proposal in a format suitable to place before the NPF board.

Mr Mekere told the commission that he summarised the 40-page business plan into a few pages accepting the claims and assumptions at face value.

The only due diligence performed was to talk with unspecified officers in the Copra Marketing Board (CMB), the Bank of Papua New Guinea (BPNG) and the Bureau of Statistics. In essence, a new joint venture company would be incorporated consisting of NPF and Ambusa Pty Ltd who would each hold 50 per cent of the shares.

Ambusa Pty Ltd would contribute the former Ambusa Copra plantations, said to have been valued recently at K400,000, as its contribution to the joint venture. NPF would match this by contributing K400,000 which would be used for start up costs.

The new company, Ambusa Copra Oil Mill Ltd (ACOM) would enter a “turnkey contract” with Odata to build and manage the mill and to market the product. It would seek and obtain external funding for this purpose by way of bank loan.

NPF Board Accepts Proposal Involving Turnkey Contract Between Ambusa Copra Oil Mill Ltd And Odata 

With virtually no due diligence, this proposal was put to and accepted in principle by the NPF board at the 110th meeting on December 11, 1997.

Management’s failure to perform due diligence and to carry out a professional analysis of the business plan, meant that the trustees did not have an adequate basis upon which to make a decision as to whether or not to invest in the project.

This was a failure by Mr Wright and Mr Mekere to perform their duty to provide professional investment advice to the board.

The trustees’ acceptance of management’s recommendation without insisting upon expert independent advice was a failure of their fiduciary duty to the members of the Fund.

Defects In NPF’s Due Diligence 

In evidence, Mr Mekere stated:

(a) The idea for the ACOM originated with Stanis Valu, and Clebus Gavuli, local landowners and owners of Ulamona Sawmill Pty Ltd and Jay Ryan, the manager of Ulamona Sawmill. Mr Ryan secured the participation of Odata Ltd (Canada) as project manager and they developed a business proposal for the purpose of obtaining funding;

(b) After seeking funding from various sources, they approached Mr Wright of NPF who delegated to Mr Mekere the task of preparing the project in a form suitable as a proposal for the NPF board;

(c) Mr Mekere said that his due diligence consisted of having some discussions with Jay Ryan, Stanis Valu, Clebus Gavuli and officers of the CMB and the BPNG. Otherwise, he merely summarised the business proposal, which had been presented to him. He then gave the proposal, in the NPF board format, to Mr Wright who placed it before the board;

(d) Mr Mekere admitted the following defects in the due diligence process:

  • No independent evaluation of the business proposal was done;
  • No analysis was done of the (doubtful) assumption that it would have tax exemption for five years as it was a pioneer industry;
  • No consideration was given as to whether NPF had the power to grant bridging finance;
  • He was not aware of the existence of investment guidelines so gave them no consideration;
  • He did not follow up on perceived factual errors in the proposal;
  • He accepted the claim that it was a simple process but had never visited a copra mill;
  • He did not check on the bona fides or the experience of Odata;
  • He had no idea of the techniques used to load copra oil and did not inquire;
  • He did not check on availability of monthly shipments;
  • He did not consider bulk storage facilities to store oil between shipments;
  • He claimed he intended to do a more thorough evaluation after the board had approved the project – but did not do so;
  • He did not verify the (false) claim that licensing requirements had already been approved;
  • No verification was done of the claim that K550,000 had already been spent on feasibility studies and initial costs;
  • He did not complete any engineering evaluation of equipment proposed to be purchased;
  • No check was done on Odata’s marketing experience or on the buyer allegedly under contract to Odata; and
  • No verification was done of the (false) statement that the plantation to be contributed by Ambusa as its 50 per cent equity in the joint venture had really been valued at K400,000.

(e) The due diligence by Mr Wright and Mr Mekere was woefully deficient. Because of his immaturity, the cause of this in Mr Mekere’s case may be attributable to inexperience and naivety. The commission takes a harsher view of Mr Wright, who was a qualified accountant and who was in charge of supervising Mr Mekere. The commission finds that his failure to ensure that even basic and simple checks were made to verify the claims in Ambusa’s business proposal, should be attributed to reckless indifference about his duty to the NPF;

(f) Because of their breach of duty to the NPF board, Mr Wright and Mr Mekere may be personally liable for any loss incurred by NPF resulting from their failure to exercise reasonable care. It is unlikely that they could rely on a defence of “acting in good faith”, particularly not Mr Wright; and

(g) The trustees who attended the 110th NPF board meeting and who voted in favour of approving the project in principle, failed in their fiduciary duty to the members of the fund by not insisting that proper due diligence was carried out, including an independent professional evaluation of the proposal before approving it in principle.

After the NPF board approved the project in principle in December 1997, Mr Mekere conducted a site visit.

Having no expertise in the copra oil industry, he made a woefully inadequate assessment of the plantation.

NPF Board Resolves To Participate In ACOM

At the 111th NPF board meeting on February 20, 1998, the board resolved to invest in the project as recommended.

Mr Mekere then arranged for a shelf company to be purchased which was registered as “Ambusa Copra Oil Mill Ltd” with David Copland as chairman, Robert Kaul as director, Haro Mekere as executive director and two nominees from Ambusa.

Mr Mekere then became the main driving force pushing the project along.

TO BE CONTINUED

National Provident Fund Final Report [Part 32]

September 18, 2015 1 comment

Below is the thirty-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 32nd 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 4A Continued 

The sell-down resulted in a realised loss on the Vengold investment of $A37,772,991. The last months of NPF’s Vengold investment are described.

In July 1999, NPF sold off 629,400 shares at 8.2 cents Australian, pursuant to a board resolution. Acting investment manager (Haro Mekere) advised the board that at the current price of 9 cents per share, a 100 per cent sell-off by NPF would result in a realised loss of $A28 million.

In August 1999, Mr Mitchell and Mr Mekere asked Mr Telfer of Vengold to explain the dramatic fall in Vengold share prices.

They were given words of reassurance, and the NPF board consequently resolved “not to sell Vengold shares until developments in the market with regard to a proposed consolidation are known” (NPF management nevertheless continued to sell off 1.5 million Vengold shares in various parcels).

In September 1999, Vengold sold 95 million LGL shares for $A153 million in order to retire debt and, after this, NPF continued to sell-off the remainder of its Vengold shares, making a realised loss on Vengold of $A38,772,991 in the process. When the proceeds of the sale of NPF’s LGL shares is taken into account, the net realised loss on the Vengold and LGL investment, was $A29,559,580.

Findings 

(a) The NPF management and the board were disastrously slow to reassess and change NPF’s strategy regarding its Vengold investment. Despite advice to sell from Wilson HTM in February 1999 and from PwC in March 1999, the sell-down did not commence until June 1999. Therefore, the management and the trustees were in breach of their duties to the NPF contributors by delaying the sale;
(b) The July 1999 NPF board resolution to hold onto its Vengold shares on the strength of assurances by Mr Telfer, was a serious error of judgement;
(c) The sale of 1,536,000 shares by management (Rod Mitchell, Henry Fabila and Haro Mekere), in defiance of the board’s July resolution, was a breach of duty.
(d) Mr Maladina’s failure to attend Vengold meetings until December 1999, after his appointment in May 1999, was a breach of his fiduciary duty to the NPF contributors. It deprived NPF of vital information regarding Vengold’s plans and contributed to the loss suffered by NPF caused by holding onto this investment while the prices were failing.
In this matter, Mr Maladina would find it difficult to raise a defence of “acting in good faith” and he may be liable to NPF for losses incurred by his actions.

Vengold’s Change Of Strategy In December 1999 Benefits Mr Maladina 

Vengold’s dramatic conversion to an lnternet related company and how Mr Maladina profited from it, are described.

Mr Maladina learned of Vengold’s change of strategy at his telephone attendance at the Vengold Board meeting on December 8, but kept the knowledge to himself.

After the public announcement on December, 10, Vengold’s share price began to rise, which enabled NPF to obtain 27 cents a share on the sale of its last parcel of Vengold shares. Over the following months Vengold shares reached a peak of $C4.83 per share.

On September 27, 1999, Mr Maladina was allocated 150,000 options exercisable at 18 cents and a further 50,000 exercisable at 26 cents Canadian. He exercised these options on March 8, 2000, gaining a profit of approximately $C795,000 (K1.4 million).

Evidence shows that these funds were credited to Mr Maladina’s company Ferragamo Ltd on March 16, 2000, ($A852,183). Mr Maladina also received (and kept or himself) $C3000 in directors fees.

Findings

(a) Under the principles of trust, where Mr Maladina sat on the board of Vengold because of NPF’s investment in that company, NPF have the right to recover from him all the profits received in respect of:

  1. The profit $A852,1832.77 he obtained by exercising Vengold options; and
  2. Director’s fees of $C3000 (approximately K5000);

(b) Where NPF suffered a loss because Mr Maladina failed in his fiduciary duty to advise them of Vengold’s proposed change of corporate strategy, he may be personally liable for that loss;
(c) The commission also finds that Mr Maladina’s conduct is, prima facie, criminal in nature. Mr Maladina was grossly negligent in his role as a trustee and on the evidence available to this commission, it could not seriously be argued that Mr Maladina’s actions were in “good faith”. He is then, personally liable to the NPF for losses caused by his breach of trust;
(d) Mr Maladina should be referred to the Commissioner of Police to consider criminal prosecution and to the president of the PNG Law Society to consider whether his conduct has been unprofessional. NPF’s financial loss on its Vengold and LGL investments (not including interest on its ANZ loan from which the investment was funded), was as follows:

Concluding Comments

The Vengold investment was one of NPF’s greatest investment follies.

From the very beginning, Mr Wright and also Mr Copland were captivated by dreams of quick, easy profits to be made by capitalising on corporate takeover manoeuvre expected to be launched by Placer Dome, Rio Tinto and other corporate players interested in exploiting the reportedly fabulously rich Lihir Gold mine. For this dream, they were prepared to gamble, and lose more than $A38 million of NPF members funds.

The whole dream was funded by loan capital from ANZ. It was entered into without the benefit of wise conservative expert advice.

Many of the investment decisions were taken by management without NPF board approval and, in the case of options trading, despite the board’s direction not to do so.

As with other resource stock investments, NPF was faced with a dilemma when the economic conditions changed. As share prices plummeted, interest rates rose and the value of the kina fell, NPF was unable to honour its loan covenant with ANZ.

It had no option except to sell off the investments but, because of the prevailing low value of the shares, a massive sell off would realise a massive loss.

In the case of Vengold, the chance for NPF to offset some of that loss, by benefiting from Vengold’s re- birth as an Internet company was lost because Mr Maladina, as NPF’s representative on the Vengold board, kept the information to himself and used it for his own personal profit.

The profit he made, of about $A852,183 and directors fees of K5,000 is recoverable by the NPF.

Executive Summary Schedule 4B Highlands Gold Ltd/Highlands Pacific Ltd 

Introduction 

Initially, the NPF held a small passive investment in Highlands Gold Ltd (HGL). However, from October 1995, NPF began speculative buying in the hope of benefiting from an anticipated takeover bid by Placer Dome.

In the process, NPF participated in underwriting a share placement by HGL.

NPF led the opposition to Placer Dome’s bid and negotiated terms more favourable to NPF. Under a new structure, Placer Dome acquired all the shares in HGL for 75 cents a share. NPF and the other shareholders obtained shares in a new entity, Highlands Pacific Ltd (HPL).

NPF and the other shareholders obtained shares in a new entity, Highlands Pacific Ltd (HPL).

This company was formed to take the assets of HGL other then its Porgera interest and the receivables from Orogen (which remained with HGL and were thus acquired by Placer Dome).

NPF applied its takings from the HGL takeover and, borrowing additional funds, purchased shares in HPL to a value of $A50 million. It then made further on-market purchases and sub- underwrote a portion of a capital issue by HPL. Eventually, NPF acquired 73,852,175 HPL shares for a cost of more than $A69.5 million.

These corporate plays and investments were masterminded by NPF chairman David Copland, in conjunction with Noel Wright, the NPF finance and investment manager, with the support of managing director Robert Kaul and the enthusiastic support of Minister for Finance Chris Haiveta.

Many of the acquisitions were made either without the NPF board’s knowledge or prior to its approval. NPF did not obtain independent investment advice and did not perform due diligence.

The trustees failed to seek expert advice themselves or to direct due diligence. When they became aware of management’s unauthorised activities, the trustees failed to object or criticise or give directions about management’s future conduct. Mr Copland and Mr Aopi were appointed as directors of HPL and failed to disclose to NPF that they held personal interests in that company, which led to a conflict of interest. They also failed to disclose that they considered that they held their seats on the HPL board as independent directors, not as NPF representatives.

During the economic downturn, from 1997 onwards, when the HPL share prices were in continuous decline, the management and trustees failed to address the mounting unrealised losses which led to NPF eventually incurring losses of more than $A49.5 million on this investment at the sell-down which commenced in March 1999.

The report on HPL highlights improper conduct, failure of duty by management and failure of fiduciary duty by trustees.

It highlights procedural and structural deficiencies such as, Ministerial approval, required under the Public Finances (Management) Act (PF(M) Act), was not always obtained. Further, the Minister’s approval was sometimes given without seeking advice from the Department of Finance (DoF).

The investment in HPL was risky and speculative and the company was not expected to pay dividends in the short to medium term. It was wholly inappropriate for a provident fund to invest heavily in this type of investment.

In mid-October 1995, anticipating a take-over bid for HGL, Mr Copland and the NPF management decided that NPF should substantially increase its holding in HGL. Between October and November, NPF increased its small passive holding of 1.6 million shares by purchasing a further 3,070,000 shares for $A2,713,252 as shown in the following table:

npf 32

The purchase of the first two parcels was authorised by Mr Wright, probably at Mr Copland’s instigation, but entirely without the knowledge or consent of the NPF board.

When subsequently seeking NPF board approval to purchase a further 3.1 million shares in HGL, Mr Kaul made partial and inaccurate disclosure of the earlier purchase, thereby misleading the board. Before the board approved the further purchases, Mr Kaul had already sought and Minister Haiveta had already given Ministerial approval to purchase 3.1 million shares in HGL. Neither NPF nor Minister Haiveta sought or obtained DoF advice on the appropriateness of this purchase.

Findings 

(a) Mr Wright failed in his duty to the board by not providing unbiased investment advice critically examining the risks as well as the possible upside of investing in HGL in October 1995;
(b) Mr Kaul exceeded his authority by requesting Ministerial approval for the investment before the board had resolved to approve the investment;
(c) Minister Haiveta failed in his duty to supervise NPF investments by granting approval without seeking DoF or other expert advice;
(d) When seeking retrospective approval for unauthorised purchases, Mr Kaul misled the board by understating the number of shares purchased prior to board approval;
(e) Minister Haiveta failed in his supervisory duty by approving the acquisition of 3.1 million shares at 90-95 cents prior to the board approving a more narrowly worded resolution;
(f) The board of trustees failed in its fiduciary duty to members by not insisting that management carry out due diligence and provide independent advice on the HGL investment;
(g) Where officers and trustees failed in their duty and fiduciary duty respectively to ensure that independent expert advice was obtained before entering into this risky investment they are potentially personally liable for losses incurred by members of the fund consequent upon their failure of duty.
Whether or not they are personally liable to reimburse the fund for the loss will partly depend upon whether they can successfully raise the defence of “acting in good faith”.
It is particularly difficult for trustees, who have an onerous fiduciary duty, to succeed in this defence (See report on structure).

Investment In Highlands Gold Limited – 1996

In 1996, Mr Wright, fully supported by NPF chairman Mr Copland, led NPF on a strategy of acquiring HGL shares in anticipation of an asset sale by MIM Holdings.

In a paper headed “The potential NPF plays for 1996”, Mr Wright recommended that NPF buy a further 5-10 million HGL shares at 0.83 to 0.93 cents “. . . as a speculative play hoping Placer Dome PLC and MIM arrange their buy at AUD1.204”. Mr Wright added that this would be “a gutsy play”.

Mr Kaul’s management paper for the 98th NPF board meeting speculated that Placer Dome might buy out MIM’s stake in HGL.

Management did not provide and nor did the board seek, any independent expert advice regarding this proposal.

Relying on optimistic claims by Mr Wright and the fact that Mr Kaul and the very experienced chairman Mr Copland, were in favour, the board approved the purchase of a further 1 million shares at no more than 86 cents per share.

TO BE CONTINUED

National Provident Fund Final Report [Part 29]

September 14, 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 29th 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 3B continued

Findings

If not technically a direction, it was at the least a very strong request. Regarding Mr Lasaro however, it went further and amounted to impropriety. As Minister responsible for NPF, with responsibility for granting all-important approvals under the PF(M) Act, Mr Lasaro occupied a position of special influence over NPF.

When he followed up his initial request that NPF take up the advertising opportunity, by persistently urging the reluctant Mr Fabila to pay up in accordance with the terms of the contract (on one occasion humiliating Mr Fabila in front of Ms Bergin), the commission finds that it amounted to improper interference with the management of NPF.

Mr Lasaro should be referred to the Ombudsman Commission to consider whether there has been a breach of the Leadership Code.

(i) Mr Fabila’s ill-advised attempt to unilaterally impose a favourable discount in favour of NPF, contrary to the terms of the contract, exposed NPF to the possibility of an expensive lawsuit and cost NPF an additional K8577 in interest payments.

Universal News Inc.

Introduction of Universal News Inc.

The first record of NPF’s involvement with this organisation was through a faxed letter dated January 27, 1999 by Natalie Hughes and Alvaro Macarron. This letter thanked Mr Fabila for his warm reception and interesting interview and for his support and personal involvement in the project. Minister for Mining Masket langalio, also sent a letter introducing Universal News Inc. to Mr Fabila. This letter was not dated. However, a handwritten note on it is dated February 12, 1999. Clearly, Mr Fabila had interviewed Ms Hughes and Mr Macarron and then told Mr Leahy to take action.

Attempt by Mr Leahy to cancel the contract with Universal News Inc.

The day following the Universal News interview with Mr Fabila (January 27, 1999), Mr Leahy sent a fax to Universal News advising them that he had received instructions from the chairman of NPF to cancel the contract.

Invoice received

An invoice dated March 10, 1999, records that on March 10, 1999, a contract No.09810916 was entered into between Mr Fabila on behalf of NPF and Universal News Inc for junior advertising space at a cost of $US58,800. The commission has not found a copy of any such contract on NPF files.

Delay in payment to Universal News by NPF

Similar to the situation regarding the payments to World Report Limited, Mr Fabila delayed payment of the Universal News Inc. invoice. Tim Rooker, who described himself as the finance manager of Universal News, wrote a letter to NPF chairman Jimmy Maladina, on May 7, 1999 (copied to Mr Mekere) requesting full payment of the contracted amount of $US58,800. Mr Fabila endorsed the copy of Mr Rooker’s letter requesting Mr Mekere to pay half the contracted amount and the balance upon completion of the work. Mr Rooker wrote another letter to Mr Maladina (copied to Mr Mekere) requesting immediate payment of the contracted sum.

The first instalment of K79,263.28 was made on July 12, 1999. Mr Leahy approved this payment. This amount was above Mr Leahy’s delegated authority. The balance of K89,108.91 was paid on August 31, 1999. Again, Mr Leahy authorised this payment, which was above his delegated authority. The total cost to NPF was K168,372.19.

The unauthorised commitment by Mr Fabila of these expenses during this period of severe cash flow problems was improper and amounted to a serious breach of fiduciary duty. From observing Mr Fabila’s demeanour while giving evidence on several occasions and on the basis of the other oral and documentary evidence before it, the commission finds that Mr Fabila found it difficult to say no to requests and directions when he felt himself to be under pressure. In the case of these two contracts, Mr Fabila said “yes” in the face-to-face interview with the publishers’ representatives, entered into a binding contract and then regretted it when it was too late. His delaying tactics, then further aggravated the situation, causing further loss to NPF. Mr Fabila’s weakness led to him being in breach of his fiduciary duty to the members of the fund.

No Board of Trustees approval

The value of this contract was in excess of K100,000 and it therefore required Board of Trustees approval. No such approval was sought or obtained. The contract value was well above Mr Fabila’s delegated authority and he therefore did not have the legal power to sign the contract. The commission finds that both Mr Fabila and Mr Leahy may be personally liable to the fund for losses suffered by contributors for their respective actions in excess of lawful authority and that a defence of “acting in good faith” would be unlikely to succeed.

Involvement of Minister Lasaro

It seems that Minister Lasaro had some involvement in facilitating payments to Universal News Inc. as the letters demanding payment were copied to him. Mr Lasaro has denied in his sworn statement that he discussed the non-payment of the Universal News account with NPF, but he agrees that letters of demand for payment to NPF were copied to him.

Findings

Mr Fabila and Mr Leahy may be personally liable at this suit of the fund for loss suffered by the contributors of the Fund for their respective excess of lawful authority and that a defence of “acting in good faith” would be unlikely to succeed.

Findings

(a) Mr Fabila was in breach of his fiduciary duty to the members in signing the contract with Universal News Inc, especially as he suspected (with good reason) that it might be a scam;
(b) Mr Fabila failed in his fiduciary duty in not seeking NPF board approval for the contract with Universal News Inc, which was beyond his delegated financial authority;
(c) Mr Fabila may be personally liable for loss suffered by NPF as a result of his breach of duty. It is unlikely he could successfully claim to have “acted in good faith”;
(d) Mr Leahy acted in excess of his delegated financial authority in authorising the payment to Universal News lnc, as there was no board approval. This constituted a breach of his common law duty to the NPF board for which he may be personally liable.
(e) The commission is not satisfied that Mr Lasaro wrote letters of introduction for Universal Productions or that he acted improperly or inappropriately with regard to this matter.

Executive Summary Schedule 3C Entertainment and board expenses

Introduction

The Terms and Conditions and Remuneration of Trustees

Schedule 3C summarises the history of payments of fees and allowances to board members up to January 1995, and considers the validity of increases in accordance with the provision of Section 6(3) of the National Provident Fund Act (the Act). Section 6(3) provides that the only valid way to increase fees and allowances is by determination of the of the Prime Minister, which would then be brought into effect by way of publication in the National Gazette. There was a valid determination of NPF’s board fees and allowances made by Prime Minister Paias Wingti on December 31, 1990, which set fees and allowances as follows:

(a) Sitting Allowance – K45 per day
(b) Meal Allowance – K35 per day
(c) Stipend – K1000 per annum paid quarterly.

No Delegation Of Prime Ministerial Powers Under Section 6 Of The Act

Section 6(3) of the Act refers only to the responsibility of the Prime Minister. The commission was not able to find any delegation of the power by the Prime Minister under Section 6(3) of the Act.

Nevertheless, at the December 1993 board meeting, the board itself approved the following fees for employer and employee representatives who were appointed under Section 6(1) subsection (d) and (e) of the Act.

(a) Annual Stipend – K1200;
(b) Sitting Allowance – K70

The commission has not been able to locate any document or national gazette notification, amending the earlier determination by Prime Minister Wingti. The board had no power under the Act to set fees and allowances for its members.

NPF Board Seeks Massive Increases Of Board Fees And Allowances

In August 1995, the board resolved to increase board fees and allowances to:

(a) Board sitting fees – K250 per sitting; and
(b) Quarterly allowance – K2000.

Mr Kaul wrote to Prime Minister Sir Julius Chan giving an encapsulated history of the fund seeking to justify the increases sought. Chairman Mr Lalatute followed up Mr Kaul’s letter with a letter to Sir Julius on February 21, 1996, but Sir Julius did not respond.

In March 1996, Mr Kaul advised the board, in his managing director’s report, that Acting Prime Minister Haiveta had approved the increase.

Acting Prime Minister Haiveta Approves K20,000 Fee for Chairman Copland

Mr Haiveta, after considering Mr Kaul’s submission regarding the expertise of Mr Copland, approved Mr Copland’s remuneration as a trustee and chairman at K20,000 per annum, which was exclusive of board sitting allowances.

Setting of personalised remuneration for the chairman of the board is not provided for in the Act and it was therefore invalid.

Acting Prime Minister Haiveta Approves Increases In Board Fees And Allowances

On May 30, 1996, Mr Haiveta determined the following fees and allowances in the National Gazette for employee and employer representative trustees:

(a) Meal Allowances – K45;
(b) Sitting Allowance – K250 per sitting; and
(c) Stipend – K2000 per quarter

These increases were backdated to January 1, 1996. Mr Haiveta had the power as Acting Prime Minister to grant the increases to employer and employee representative trustees.

Findings
(a) It was not appropriate for the managing director to lobby the Acting Prime Minister to increase the board members’ fees and allowances;
(b) The determination by Acting Prime Minister Haiveta of board member’s fees and allowances, back dated to January 1, 1996, was valid;
(c) The determination by Acting Prime Minister Haiveta of a special allowance of K20,000 per annum for Mr Copland as chairman of NPF, was not provided for in the Act and was invalid. The commission sees this as an improper action by Mr Haiveta.

Acting Finance Minister’s Invalid Determination

On May 6, 1997, Mr Konga (when he was Acting Minister for Finance) approved the following variations under the Board Fees and Allowances Act:

(a) Stipend per year

(i) Chairman – K15,000;
(ii) Deputy Chairman – K12,000;
(iii) Other members – K10,000;

(b) Attendance fee per meeting

(i) Chairman – K400;
(ii) Deputy Chairman – K300;
(iii) Other members – K300.

As the Boards Fees and Allowances Act did not apply to the NPF, Mr Konga’s approval of the above fees and allowances was beyond his power and therefore invalid. The board, however, accepted this invalid determination and implemented it. Legal officer Mr Leahy failed in his duty to the board by not advising on this matter.

Findings
(a) Acting Minister Konga acted beyond his power by purporting to approve fees and allowances for the NPF Board of Trustees;
(b) The NPF board acted beyond its power by approving an additional K50 sitting allowance for trustees other than the chairman;
(c) Herman Leahy failed in his duties to the NPF board by not checking and giving advice on Minister Konga’s invalid determination.

Finance Inspectors’ Report

The finance inspectors report shows up many specific anomalies. The commission accepts and agrees with the findings in the finance inspectors report and has decided not to make further inquiries at this level of detail. These irregularities and over-payments to the trustees seem to include instances of improper conduct and breaches of fiduciary duty by trustees who knowingly accepted payments of fees and allowances in excess of their entitlement. The commission has not inquired into the details surrounding these comparatively minor breaches but has recommended that the matter be dealt with by way of an internal audit and recovery exercise.

Concluding Comments

It is of serious concern that the NPF management and board of trustees ignored the provisions of the Act, which empowered only the Prime Minister to vary trustees fees and allowances and simply approved their own increases. It is equally serious that those decisions were not criticised by the DoF or the Auditor-General at the time nor were they commented upon by Mr Leahy – the NPF’s senior legal counsel.

It is of similar concern that Minister Haiveta’s improper conduct in granting a special K20,000 allowance to Mr Copland was not similarly subject to criticism. NPF’s successive chairmen, managing directors and finance officers failed their duty to the members of the NPF by not ensuring proper financial controls were enforced to process claims and acquittals for trustee’s fees and allowances and board expenses as criticised in the finance inspectors report.

Findings
(a) Nakikus Konga acted beyond his power when he approved new allowances and board fees in his letter to Mr Kaul dated May 6, 1997. His approval was invalid in its application to the NPF;
(b) The NPF board acted beyond its power in approving an additional K50 sitting allowances for trustees based on Minister Konga’s approval;
(c) Legal secretary Mr Leahy failed in his duty to advise the board about the review of sitting allowances for trustees;
(d) The commission accepts and agrees with the finance inspectors’ findings;
(e) The finance inspectors report discloses clear evidence of improper conduct and irregularities in the administration of board fees and allowances.
The commission recommends that the NPF board commissions an internal audit to assess and recover amounts overpaid to trustees in board fees and allowances.

TO BE CONTINUED

National Provident Fund Final Report [Part 27]

September 10, 2015 1 comment

Below is the twenty-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 27th 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 2F continued 

Henry Fabila And Herman Leahy Oppose Noel Wright And David Copland Over Bonds

As NPF’s Financial Position Worsens ANZ Nominees agreed to hold the securities in a custodian capacity for a single client, which was significantly different from the security trustee, which had been recommended by Clifford Chance.

By April-May 1998, NPF’s financial situation was deteriorating rapidly and Mr Wright was staving off action by NPF’s bankers by promising the imminent signing of the bond agreement, which would provide immediate cash, which could be deposited with the banks to rectify breaches in the loan covenants. NPF and Warrington signed an agreement but as Warrington failed to affix its seal, the first payments were delayed.

In June 1998, ANZ Nominees became alarmed at Warrington’s notification that it was assigning the bond securities, which NPF had lodged with ANZ, to the RH Foundation of Anacirema. ANZ felt this would endanger NPF’s securities and it withdrew from further involvement.

Mr Leahy and Mr Fabila attempted to persuade the board to terminate the Warrington agreement but Mr Copland and Mr Wright successfully opposed this move. Mr Leahy made belated attempts to check out the financial bona fides of Warrington and wrote a strong memorandum recommending immediate termination of the agreement with Warrington.

Findings 

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

The commission finds that Mr Leahy’s assessment of NPF’s perilous predicament at this advanced stage of negotiations was well grounded.

NPF Board Approves Appointments of Wilson HTM As Security Trustee – Mr Wright Transfers Shares Without NPF Authority 

At this stage in 1998, Wilson HTM agreed to be the security trustee. Desperate to finalise the agreement, Mr Wright (and Haro Mekere) signed an assignment of share scrip from ANZ Nominees to Wilson HTM.

This was done without the approval of the NPF board. At the 113th NPF board meeting, despite open conflict between Mr Leahy and Mr Wright, the board approved the appointment of Wilson HTM as security trustee and resolved that the sale of the bond to Warrington should continue.

Findings 

(a) Mr Wright and Mr Mekere authorised transfers of shares from ANZ Nominees to Wilson HTM without NPF board authority. This was a breach of their common law duty to the NPF Board of Trustees.
(b) The decision by the board to continue with the bond purchase and sale agreement, in full knowledge of these circumstances, was reckless and a breach of the trustees’ fiduciary duty to the member’s of the fund.

Gadens Lawyers Advises That NPF Has No Power To Borrow – Mr Leahy and Mr Wright Negligently withholds the Advice 

PNGBC was requested to seek an alternative buyer in Australia. As part of normal due diligence, potential buyers sought assurance that the NPF had the power to borrow money and issue bonds. Geoffrey Applegate of Gadens Lawyers advised, correctly, that NPF had no power to borrow. Mr Wright was advised of this oral opinion, as was Mr Leahy, but they ignored the advice which would have virtually demolished NPF’s entire loan financed investment strategy.

Findings

(a) It is absolutely clear from the documentary evidence that Mr Wright was aware of Mr Applegate’s advice that NPF lacked power to borrow. PNGBC noted that Mr Wright had referred the issue for advice but the commission finds no direct evidence of this.
(b) In failing to seek independent legal advice and failing to notify the board on this issue, Mr Wright was guilty of gross dereliction of duty. NPF’s power to borrow not only was material to this failed attempt to issue a bond, but it struck at the very heart of many of NPF’s investments and of its whole investment strategy which by then was based on borrowed funds. If Mr Leahy and/or Mr Kaul had notice of Mr Applegate’s advice and just ignored it, they bear the same responsibility.
(c) As evidenced in transcript page 1688, Ms Israel ceased her employment with PNGBC towards the end of 1998, leaving the file with a Mr Hersey.

Mr Cop;and Persuades BPNG Governor to Require Mr Popoitai to Grant Further Extensions 

Meanwhile, Mr Popoitai made another attempt to stall the execution of the bond by refusing to extend foreign exchange approval beyond the July expiry date. On July 17, 1998, after intervention by the new Governor of the BPNG Mr Vulupindi, Mr Popoitai granted a series of further extensions until October 31, 1998. Mr Vulupindi’s intervention followed upon further pressure being exerted by Mr Copland.

Findings

Mr Fabila’s attempt to terminate the agreement was fully justified. Mr Copland’s successful interference illustrates his support for this risky venture and the strength of his influence over NPF management generally.

Desperate Mr Wright Makes False Statements And Acts Without Board Authority In Attempts To Save Bond Deal

Without seeking NPF board approval, Mr Wright purported to grant power of attorney to Allen Allen and Helmsly to appoint Commonwealth Custodian Services Ltd (CCSL) as security trustee. CCSL created a problem by seeking an assurance form NPF that all securities it would be holding would be unencumbered.

Such an assurance could not honestly be given because Mr Wright had been secretly pledging STC shares (which were intended as bond security) to ANZ Nominees to remedy breaches in NPF’s loan covenant to maintain a 150 per cent ratio between securities and borrowings. The assurances, which Mr Wright, nevertheless gave, was therefore untrue.

In September 1998, there was desperation in Mr Wright’s last efforts to finalise the agreement with Warrington. The hold up remained the appointment of a satisfactory security trustee. On September 1, 1998, without board authority to do so, Mr Wright transferred 6.4 million STC shares from Rubicon Nominees (a Wilson HTM company) to ANZ Nominees for transfer to CCSL. When this arrangement fell through there were last minute attempts to involve ANZ, Midland Bank and HKBA Nominees. Mr Wright repeatedly made false statements that the shares provided as security were unencumbered.

Findings 

(a) Mr Wright transferred 6.4 million STC shares on September 1 without the approval of either the NPF board or the Minister. This was a breach of his duty to the board as well as a breach of Section 61 of the PF(M) Act;
(b) Mr Wright misrepresented to HKBA (and probably also to Warrington) that shares in CXL, Orogen and STC were unencumbered;
(c) Again, Mr Wright failed to advise Mr Cooper, the NPF board or his own legal advisers that the STC shares were already transferred to ANZ nominees, as previously mentioned (Transcript p.1327).

Last Minute Proposal To Appoint Union Bank of California as Security Trustee But Brown Bai Leads NPF Board To Reject Bond Deal 

When all attempts to find a legitimate security trustee to hold unencumbered securities had failed, Jai
led, Jai Ryan proposed the unknown Union Bank of California (UBC) as security trustee. Documents were produced which Allens pointed out were dangerously flawed and would put NPF seriously at risk.

While Allens proceeded to deliver 30 crucial questions to Warrington on unanswered matters, Mr Wright was pressing to have the agreement executed before the expiry of the latest BPNG deadline of August 31, 1998. He failed to advise Mr Cooper, the NPF board or NPF’s lawyers that the STC shares nominated as securities had already been transferred to ANZ Nominees as security for NPF’s loan facilities.

The final showdown occurred at the 115th NPF board meeting on November 6, 1998, just as all arrangements were ready for an agreement to be signed in Australia. Under the firm chairmanship of Brown Bai, the board resolved to terminate the agreement with Warrington. This almost certainly saved NPF from a multi-million dollar disaster as the suspicions about Warrington’s bona fides were subsequently confirmed.

Financial Costs 

The financial cost to NPF of the attempt to issue the bond was K244,762 in addition to a vast amount of management time and energy.

Concluding Comments 

This attempted bond issue has been detailed at length. This is because, even though it finally came to nothing, it illustrates how the board chairman Mr Copland and Mr Wright, supported initially by former managing director Mr Kaul and corporate secretary Mr Leahy, took the NPF perilously close to a $A54 million commitment with Warrington to be serviced at 14.67 per cent interest over nine years. Neither Warrington nor Mr Cooper had an established reputation or reputable referee and were shrouded in suspicion (Exhibits AB634-635).

Mr Wright repeatedly exceeded his authority and kept the NPF board ignorant while he transferred and pledged NPF assets. He was also guilty of serious misrepresentation on several occasions. When Mr Leahy finally realised the dangers and turned against the project, Mr Wright and Mr Copland ignored his sound advice.

Similar advice and warnings from other experts in the DoF and BPNG and the NPF’s own consultants were also ignored by management and kept from the board. NPF management lacked expertise in these matters and dealt with investors, financiers and international bankers without adequate due diligence or references, putting NPF’s assets at risk.

Throughout this entire affair, the NPF Board of Trustees demonstrated an amazing lack of care and lack of inquiry, as they blindly and compliantly voted in favour of unsubstantiated motions and resolutions, taking NPF to the very edge of a financial precipice.

It is not even that there was a well-conceived plan for using the bond monies sought. Four possible projects were belatedly mentioned to justify the efforts, pledges and misrepresentations that were occurring and to complete the bond issue:

  • Government infrastructural programs;
  • Ramu Nickel project development;
  • construction of supermarkets for STC; and
  • other opportunities arising all the time (Exhibit AB129)

None of these projects were firm “in place” commitments and none were likely to bring in the income required to offset NPF’s interest commitment and make the bond issue profitable. In the later stages, there were plans to use the bond money to bail out NPF’s disastrous investment in Crocodile Catering and then merely to invest a substantial portion in ANZ deposits to secure NPF’s existing debts.

Information received from ICC – Commercial Crime Bureau (obtained by Benny Popoitai) indicated that the suspicions about Warrington and Mr Cooper were well founded.

Also, the so-called (and misspelt) “Banque de Fonds Prives E. Fiduciare de S.A.” in Antigua, which had acted as referee for Warrington, shared the same registered address as Warrington. It is not listed in the Bankers Almanac and is not an entity licensed and authorised by the Bank of England to conduct banking business or to even be a depository institution in the United Kingdom.

Allocation of responsibility

The commission has commented on the degree of responsibility of the main participants in this fiasco: Mr Wright, Mr Copland, Mr Leahy, Mr Kaul, Mr Iamo and all the trustees then in office must share the blame. The DoF also failed its duty by forwarding a bland, positive recommendation for Ministerial approval of the bond, despite excellent research by its technical officers who recommended strongly against recommending Ministerial approval. Similarly, the BPNG is criticised for giving and then extending foreign exchange approval for the issue of the bond despite the proper advice of its Foreign Exchange Controller and technical officers that issuing the bond would probably damage PNG and the NPF.

Executive Summary Schedule 3B 

Donations 

Introduction 

By the same process of reasoning and analysis, which led to the conclusion that NPF had no legal power to borrow funds, similarly, NPF had no power to make donations. There is no power under the NPF Act to give donations to charitable, sporting or religious organisations and to other individuals.

During Mr Kaul’s period as managing director of NPF, there was awareness that NPF had no specific power to make donations. This was Mr Kaul’s evidence, and it is supported by documentary evidence. However, during Mr Fabila’s period as managing director of NPF, there was a substantial increase in the use of members’ funds for donations.

Findings

NPF had no legal power to pledge or make donations.

Yearly record of donations – 1995 to 1999

The commission has examined the detailed income and expenditure statement as at December 31 of each year and the following is noted

1995 

NPF’s records examined by this commission showed that there were no donations made.

1996 

NPF’s records examined by this commission showed that NPF made no donation during this year. However, as is reported in Schedule 9 (Tenders, Procedures and Nepotism report), Minister Haiveta requested and NPF donated K1600 towards remuneration for sing-sing groups who performed during a scheduled NEC meeting at Vanimo.

Findings 

(a) Minister Haiveta’s request for K1600 to pay the sing-sing groups amounted to improper conduct and he should be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(b) Mr Kaul acted in excess of his authority in granting the request and in breach of his fiduciary duty to the members as he knew it was wrong. He would not be able to claim he was “acting in good faith” so he would be personally liable to repay this money. He should also be referred to the Ombudsman Commission for possible breach of the Leadership Code;
(c) The payment of K1600 was beyond the powers of NPF;
(d) If Mr Copland advised Mr Kaul to pay the donation towards sing-sing groups in Vanimo, his advice was improper and also a breach of his fiduciary duty for which he may be personally liable.

1997 

NPF’s records examined by this commission showed that there were no donations made during this year.

1998 

The income and expenditure statement under “general expenses”, shows that NPF gave a total of K104,182 in donations during 1998. The major portions of the total donation were made to the Bougainville Children’s Fund and the Aitape Tsunami Disaster Fund.

The vouchers extracted from this and other sources totalled K113,500 and there could possibly be others the commission did not locate (Exhibit B814).

1. June 23, 1998: Bougainville Children’s Fund – K1500;
2. July 13, 1998: Bougainville Children’s Fund – K5000;
3. July 23, 1998: Aitape Disaster Relief – K100,000;
4. August 19, 1998: PNG Sports Federation- K2000;
5. October 9, 1998: Bougainville Children’s Fund – K5000

These donations were made towards worthwhile causes. However, what this commission is concerned with is that no-one at NPF checked to make certain that NPF had the legal power to make donations out of members’ funds, as this money donated was in a direct sense coming out of member’s pockets.

Request by Dr Fabian Pok – Aitape Disaster Relief 

Dr Fabian Pok called a meeting at the Telikom Rumana office where he sought financial assistance from statutory bodies. Mr Fabila approved a donation of K100,000 after this meeting.

TO BE CONTINUED

National Provident Fund Final Report [Part 20]

September 1, 2015 1 comment

Below is the twentieth 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 20th 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 2c Continued 

Findings 

(a) Management, particularly Mr Kaul and Mr Wright, were in serious breach of their duty to the NPF board and NPF members by failing to disclose and seek board approval for the negotiations with BSP, the substitution of security arrangements and the acceptance of a K30 million loan facility;
(b) The NPF board minutes for 1997, up to the 109th board meeting on October 28, 1997, record:

(i) The brief mention of the Poreporena Freeway loan at the 105th meeting held on February 27, 1997 (Exhibit B1011)
(ii) The brief mention of the Poreporena Freeway, NCD Water and Sewerage and Eda Ranu loans – but not the source of funds for them – at the 106th meeting held on May 5, 1997;
(iii) a resolution to loan a further K1 million to NCD Water and Sewerage – but not the source of funds for it – at the 107th meeting held on July 4, 1997.
(iv) a brief mention that BPNG approval for BSP to loan K30 million to NPF had not been obtained by the time of the 108th meeting held on August 22, 1999 (Exhibit B1036) and at the same meeting, the Eda Ranu loan was mentioned but not the source of funds.

There is, otherwise, not a single mention in the board minutes of all the events earlier catalogued in this report.
There were no board approvals sought or given for the drawdowns on the BSP facility, the altered security arrangements with BSP or acceptance of the new BSP facility arrangements contained in the facility letter of October 10, 1997;
(c) The drawdowns on the BSP facility, the altered security arrangements (which involved pledging NPF assets) and the entry into the new facility arrangements in October 1997, were all matters beyond any financial or other delegated authority of any member of the NPF management team and all required board approval.
The 109th NPF board meeting held on October 28, 1997, afforded a clear opportunity for management to brief the board and to obtain board ratification of what had been done and board approval of the BSP facility letter of October 10, 1997 but this was not done;
(d) Mr Kaul, as managing director, was clearly in breach of his duties in not curbing these management excesses and requiring that the requisite board approvals be obtained.
(e) Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board approvals; (f) Herman Leahy was remiss in his duties in:

(i) Signing the false board minutes of October 9, 1997. For this it is recommended that Mr Leahy be referred to the PNG Law Society to consider whether to impose disciplinary measures and
(ii) Not advising of the need to obtain board approvals.

(g) The NPF Board of Trustees were in breach of their fiduciary duty in not questioning NPF management about where the money for substantial investments was coming from, what the borrowed funds were being expended on and what security NPF was giving BSP for this substantial facility.
(h) The DoF (Mete Kahona, in particular) had a serious conflict of interest as it represented the State’s interest in urgently securing funding for the freeway as well as having the function of making recommendations regarding NPF’s requests for approval. It failed to address the danger of NPF borrowing at a variable (ILR) interest rate and then on-lending to Curtain Burns Peak at a fixed rate.

Drawdown paid through NPF’s PNGBC account: BSP co-operates with NPF management regarding unauthorised transactions 

BSP paid the K3 million balance of the K8 million loan approved by the Minister to NPF’s Papua New Guinea Banking Corporation account before it was on-loaned to Curtain Burns Peak on November 20, 1997.

Payment through another account, in this way, has made it difficult to trace the source of the freeway project loan funding.

In January 1998, NPF’s drawdown balance was K20,092 and the accrued interest totalled K19,926.

In February 1998, Mr Kaul agreed with BSP about rearranging NPF securities and also drew down K1.8 million for payments on the NPF Tower. The board was not informed of these transactions.

At the same time Mr Kaul asked BSP to act as security custodian for NPF’s proposed $A54 million bond issue while Mr Wright sought the release of Orogen shares to bolster NPF’s security requirements elsewhere.

These moves were necessary as NPF’s finances were being seriously affected by the fall in the value of its shares and the rise in interest rates.

Again, management kept the NPF board in the dark in relation to these activities.

BSP TIGHTENS ITS CREDIT ARRANGEMENTS, 1998 

In March 1998, BSP did release seven million Orogen shares but ensured it maintained a 4.5 per cent differential between the rate it paid on borrowed funds and the rate it charged.

In order to protect its own profitability, BSP notified NPF that it was tightening its credit arrangements with NPF. BSP also refused to accept the assignment by NPF of IBD’s held at other banks as security and effectively began putting pressure on NPF to find more acceptable security or begin retiring its debt to BSP .

In April 1998, BSP did release K1 million in term deposits to NPF but retained its 4.5 per cent differential and kept the NPF within its K22 million limit. It was keeping a vigilant eye on NPF.

NPF was obliged to accept commercial terms or apply maturing IBD’s to retire the BSP debt. Mr Wright agreed to retire the debt.

In June 1998, BSP conferred with ANZ about NPF’s credit rating and both banks agreed to tighten up their credit arrangements with NPF.

In July, Mr Wright was obliged to apply maturing IBD’s with PNGBC and the Bank of Hawaii (BoH) to retire the BSP debt.

GOVERNMENT PRESSURES NPF TO DRAWDOWN AND ON-LEND TO BUY TREASURY BILLS 

In December 1998, the Government put pressure on the financially ailing and debt-burdened NPF to seek a further K15 million drawdown on its BSP facility in order to purchase Treasury Bills to assist the Government cope with an urgent cash flow crisis.

NPF complied and BSP agreed to the drawdown on the condition that it took a lien over the Treasury Bills.

DoF and Minister’s conflict of interest 

In applying this pressure and then recommending Ministerial approval for the drawdown, the DoF was acting contrary to NPF’s interest and its senior officers were in an impossible conflict of interest situation, as was the Minister for Finance when he gave that approval.

Findings

In relation to all these negotiations and transactions entered into by NPF management, the commission has found at paragraph 4.3.13 that:

(a) Yet again, the NPF board minutes for 1998 do not record any information being given or noted by the board in relation to transactions concerning this BSP facility. No board approvals were sought or given in relation to any drawdown of funds on this facility; the request to fund a payment to Kumagai Gumi for the NPF Tower construction; the release of Orogen shares from BSP to be used as security for another loan; the numerous alterations in the security offered to and held by BSP; the realisation of NPF’s IBD assets to retire debt; the purchase of K15 million in Treasury Bills; the drawdown on the BSP facility to finance that purchase or the pledging of the Treasury Bills as security to BSP;
(b) Yet again the transactions listed in (a) above were beyond any financial or other delegated authority of the NPF management team and all transactions required board approval;
(c) Yet again, both Mr Kaul and Henry Fabila, as successive managing directors of NPF, were each clearly remiss in their duties in not curbing these excesses and requiring that the requisite board approvals be obtained and that for transactions over K500,000, the requisite Ministerial approval be obtained;
(d) Again, Mr Wright was clearly in breach of his duties in exceeding his delegated authority and not obtaining the requisite board and Ministerial approvals and in pledging NPF assets without those approvals;
(e) The NPF Board of Trustees also failed their fiduciary duty by not questioning management’s conduct and not making inquiries about the source of the funds for NPF’s investments and the expenditure or application of the funds, which they clearly knew NPF was borrowing;
(f) In relation to the drawdowns for the freeway loans and the drawdown for the K15 million to buy Treasury Bills, each of the Minister for Finance and the DoF officers (and in particular Mete Kahona) were placed in an impossible position as the interests of the State, which they were obliged to advance, were in conflict with the interests of NPF, which they were obliged to protect (when advising the Minister whether to grant approval under section 61(2) of the PF(M) Act).

RETIREMENT OF BSP DEBT – 1999 

By February 1999, NPF had consulted and been advised by PwC about the massive 1998 losses and the urgent need to reduce assets and retire debt. The maturing K15 million Treasury Bills were accordingly used to retire debt in February 1999.

This was done without board or Minister’s approval or knowledge.

Finally, K8 million of maturing IBD’s were used in April to fully pay off the BSP loan, despite a last minute attempt by the NPF board to “hawk” it around to find an investment at a higher interest rate.

During 1999, although management put more effort into working under the controlling authority of the NPF board, the commission has found at paragraph 4.4.9, that there were shortfalls.

Findings 

(a) Mr Fabila exceeded his delegated authority in applying the K15 million in Treasury Bills to retire debt without board or Ministerial approval and failed to inform the board of his action;
(b) Haro Mekere, inadvertently, provided false information to the board meeting of April 30, 1999 as to the purpose of the BSP loan facility and did not explicitly advise the board whether NPF was free to deal with the maturing K8 million IBD.
He did, however, get the board, rather than management, to make a decision as to what to do with that IBD;
(c) Someone in NPF management exceeded his delegated authority in paying off the approximate K8 million balance of the BSP facility in April/May 1999, without specific board or Ministerial approval and failed to inform the board of his actions. That “someone” is not identified on the evidence before the commission;
(d) Rod Mitchell inadvertently provided false information to the board meeting of May 21, 1999, as to the existence of and need to address the BSP facility when that facility had, unknown to Mr Mitchell, in fact been paid out in full, prior to that date.

CONCLUDING COMMENTS 

The commission’s investigations into NPF’s BSP loan arrangements have revealed that management operated almost totally outside of the control of the NPF board.

For the most part the board was not informed or consulted.

Management sometimes entered into loan agreements entirely without the board’s knowledge and drew down funds without board authority, frequently paying the funds into accounts at other banks rather than spending them directly on BSP approved purposes.

On at least one occasion, when evidence of (a non-existent) board approval was required by BSP, Mr Leahy simply presented a falsified approval resolution.

When NPF management sought approvals for the K30 million BSP facility, BSP, BPNG and the Minister approved the facility be used to fund local “Government” projects – i.e.: Freeway, NCD Water and Sewerage and Eda Ranu. Mr Wright, however, also had an additional purpose to use the facility to fund the purchase of Orogen shares and he disclosed this only to the NPF board. When the Ministerial and BSP approvals did not include this purpose, Mr Wright simply paid the drawdown into another bank account and then used it to buy Orogen shares, despite the lack of Ministerial and BSP approval.

The NPF board was kept in the dark about the fact that various “investments” were financed out of the BSP facility and the purposes for which drawdowns on the BSP facility were applied. Each decision involving over K100,000, required board approval and each decision over K500,000 required Ministerial approval, as there was no delegation of powers.

Mr Wright seems to have thought he had the power to do what he liked and no one in NPF curbed him.

The only partially effective curb was BSP’s insistence on Ministerial approvals to cover the stated purpose of each drawdown.

Many drawdowns were not directed to their approved purpose but were paid to NPF’s ANZ or PNGBC accounts where they were mixed with other funds. This confused the position as it is hard to say what the actual source of funds for a given investment was. This is important in relation to the source of funds for the freeway loans and probably “masked” the payment of K9.6 million for Orogen shares.

Neither the NPF board nor the Minister were adequately briefed as to the risk of borrowing funds at a variable interest rate (ILR) and on-lending at a fixed interest rate. The concessional interest rate on the freeway and NDCW&S loans was 11 per cent after tax (14.67 per cent gross).

The on-loans were profitable only when the ILR was below 11 per cent, when NPF was paying tax or 14.67 per cent when not paying tax. From October 1996, the ILR remained below 14.5 per cent only until April 1998.

Thereafter, it ranged from 17.5 per cent to a high of 23 per cent then back to 19.75 per cent when the loan was repaid in May 1999.

After 1998, NPF was clearly making a loss on the money on-lent for the Poreporena Freeway project.

Not only did management act beyond the control of the board regarding entering loan agreements and making drawdowns, it was equally beyond control in the way it pledged assets for security and redeemed and substituted securities with no reference to the NPF board whatsoever.

Throughout the period of the BSP loan facilities, from January 1996 until early 1999, there is no evidence that the Board of Trustees ever questioned management about what was occurring. All trustees appointed at the time were therefore in breach of their fiduciary duty to the members of the fund.

TO BE CONTINUED

National Provident Fund Final Report [Part 12]

August 20, 2015 1 comment

Below is the twelfth 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.

NPF Final Report

This is the twelfth 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 [2002] by Prime Minister Sir Michael Somare.

Continued from yesterday

Background to April 1999 restructure

Throughout the period under review, NPF suffered from its failure to recruit well-qualified experienced officers for senior management positions.

This may explain why it sought to be liberated from the confines of the SCMC Act (paragraph 7.3) and why it ceased applying for SCMC to approve the higher salaries it was offering to attract suitable applicants.

In paragraph 7 – Background to April 1999 Restructure – the Commission reports how despite the illegally high remuneration offered, NPF still failed to attract well quality officers. During the period 1996 – early 1999, NPF promoted existing inexperienced and unskilled staff to the manager positions at high rates of remuneration (paragraph 7.2). Their poor performance is reported at paragraph 10.5 especially at 10.5.3 and following.

During this period, the plot to remove Mr Kaul and appoint Mr Fabila as managing director succeeded in May 1998.

Mr Leahy’s new contract was presented to and approved by the NPF Board on 6th November 1998. DoF had advised that Mr Leahy’s total remuneration of K121,700 was excessive. This advice was not passed on to the NPF Board by its Chairman (DoF Secretary Bai) and the contract was approved. SCMC approval was not sought.

Findings

(a) The DoF provided wrong advice to the DoF Secretary on the provisions of the NPF Act, which governed Mr Leahy’s salary.
(b) Mr Bai, as Secretary of the DoF, provided this incorrect advice to the Minister.
(c) Mr Bai, as chairman of the NPF Board failed his fiduciary duty to advise the Board that Mr Leahy’s proposed salary package was excessive (especially as he had already given such advice to the Minister).
(d) Mr Leahy, as Senior Legal Counsel, failed his duty to the NPF Board by not pointing out the correct procedures for determining his salary under the NPF Act.
(e) Mr Leahy’s contract exceeded K500,000 and thus required, but did not receive, prior Ministerial approval.
(f) Messrs Leahy and Fabila’s action in preparing and signing their own contract of employment in September 1998 was done without the authority of the NPF Board.
(g) The NPF Board was remiss in their duties by not giving full consideration to and questioning Messrs Leahy and Fabila about their employment contacts and in not taking the necessary action to correct anomalies.

Resignation of Mr Wright

Mr Wright resigned (under pressure) in January 1999 and the full extent of NPF’s losses began to become apparent. Mr Wright’s termination payments were irregular especially if it is true that he resigned voluntarily.

Findings

(a) Minister Lasaro acted beyond power in his instruction to Mr. Fabila to terminate Mr. Wright’s contract. This was a function of the NPF Board not of the Minister. Mr. Fabila also had no power to carry out this function.
(b) Mr. Fabila was in breach of his fiduciary duty to the members of the Fund and his duty to the Board in failing to inform the Board of his so called concerns about Mr. Wright and in manoeuvring to obtain Mr. Wright’s resignation, in secret consultations with Minister Lasaro.
(c) Mr. Fabila acted illegally where he authorised extra termination pay for Mr. Wright without the authority of the NPF Board. Mr. Fabila may be personally liable to reimburse NPF for the extent of the overpayments.
(d) It is very clear that political direction and interference with the administration of NPF was occurring with the willing cooperation of Mr. Fabila.

PwC was engaged and reported on severe deficiencies in NPF’s management performance.

Other managers

The remuneration history of Ms Andoiye (paragraph 7.8), Mr Tarutia (paragraph 7.9), Messrs Frank and Aiwa, Ms Dopeke (paragraph 7.11) and Mr Mekere (paragraph 7.1) are reported upon.

Findings

(a) The payment of DMA to Mr Tarutia, though approved by SCMC, was not formally approved by the NPF Board as required under the Act.
(b) After commencing as an Assistant Financial Controller in June 1994, Ms Dopeke was rapidly elevated to the position of Chief Accountant for want of any better candidate. It is clear that despite her higher status and salary, she did not have the experience or skills and was not competent for that job.

Despite increases in responsibilities and remuneration, NPF managers continued to perform badly and were criticised by Mr Fabila (paragraph 7.14.1).

Political involvement of Prime Minster Skate

There are two recorded incidents of interference by Prime Minister Skate. In October 1997, he applied a ban on overseas travel by statutory authorities to NPF. This was inappropriate as NPF had overseas investments, which required NPF representatives to attend at Board meetings and there was also Crocodile Catering in Indonesia.

Minister Lasaro reinforced the ban, which continued into 1999.

In March 1999, Prime Minister Skate directed NPF to review all its investments and report to the NEC. Meanwhile he forbade NPF from making any new investments (paragraph 7.16). Whereas Mr Skate was well and truly justified in feeling concern his direction as Prime Minister was improper. There were provisions under the PF(M) Act for the Secretary DoF and the Minister for Finance to seek such reports (the Prime Minister’s direction was followed up by letters from Secretary of the DoF and Minister directing compliance).

Pricewaterhouse Coopers Report

Mr Fabila had engaged PwC to report on NPF’s investments and financial situation. PwC commented upon very serious deficiencies in NPF’s accounting procedures, reporting and management of its investments functions and the high interest rates on its debts.

PwC was particularly critical of NPF’s accounts section and recommended redefining the role of the Finance Investment Manager and correcting the deficiencies in the accounts function. The situation described by PwC at paragraph 8.2 was extremely serious.

The Hay Group

Mr Fabila also engaged the Hay Management Group to analyse NPF’s management structure and propose a total restructure.

Findings

On the evidence of the PwC report, in early 1999 the Accounts section at NPF was so weak that it endangered the capacity of the NPF Board to carry out its function to safeguard the funds of the members.

April 1999 Restructure

With the report of Hay Group in hand, the NPF Board approved the restructure but limited it to the six senior management positions, not the total restructure which had been commissioned and recommended.

Mr Rod Mitchell

Mr Mitchell was engaged as Investment Manager under a consultancy agreement with a remuneration package of K200,000 (paragraph 8.3.2) plus extras.

Despite ongoing criticisms of and disciplinary action against the existing managers they were all retained as managers of the various divisions on the increased remuneration packages recommended by Hay Group.

Mr Leahy did not advise the Board about the underlying concerns about the managers’ efficiency.

Findings

(a) NPF management (Messrs Fabila and Leahy) deliberately failed to fully advise the Board about the incompetence of senior management staff.
(b) Mr Leahy’s deliberate lie to the NPF Board about Ms Andoiye’s departure was improper conduct.
(c) During this period, senior management placed proposals for substantial increases for management before the Board for approval.

Revitalisation of management under Mr Mitchell

By September 1999, under the influence of Mr Mitchell’s leadership and energy managerial weaknesses were being addressed effectively, but the restructure was not in place.

8th October special meeting – complaints and allegations

At the October meeting, the complaints about Messrs Maladina and Leahy regarding the Waigani Land deal and related matters finally erupted. This led rapidly to Mr Leahy’s suspension and then dismissal on 30th November 1999 and to the collapse of Mr Maladina’s chairmanship in early 2000. It led also to the establishment of the Finance Inspectors investigation and, eventually, to the establishment of this Commission of Inquiry.

The matter of Mr Leahy’s termination benefits is dealt with at paragraph 8.3.13.2. Although a huge sum was being calculated he received a gross payment of K49,807.58.

SCMC approval of senior office increases

After the Hay Group recommendations for senor officer upgrades were approved by the Board, NPF, at last, returned to the SCMC for approval. With minor variations, the increases were approved in January 1999.

Senior staff grades and SCMC approvals

The senior staff were job-graded by Hay group as follows:-

The contracts were drawn up by Carter Newell and the following package was given to each of Mr Tarutia, Ms Andoiye, Ms Dopeke, Ms Marjen and Mr Mekere.

The Carter Newell package gave remuneration at the top of the grade 13 range. Messrs Tarutia and Mekere had in fact been approved at grade 11 level, so they were overpaid. Those listed as grade 11 and 12 received the appropriate remuneration for those grades).

Mr Mitchell’s package

Carter Newell prepared an appropriate employment contract for Mr Mitchell. This was disregarded and he signed instead a consultancy agreement prepared by Mr Leahy.

Mr Mitchell received a gross remuneration package of AUD175,000 per annum with 5 weeks recreation leave per year and 10 days special leave.

The contract was not submitted for SCMC approval despite a demand by SCMC. It did receive NPF Board and Minister’s approval however.

Findings

(a) The remuneration package for Messrs Tarutia and Mekere were approved by the NPF Board and the SCMC but they were being paid at Grade 13 instead of the approved Grade 11 rate.
(b) Mr Mitchell was being paid since April 1999 according to a sham consultancy agreement which had been approved by the NPF Board and the Minister for Finance (pursuant to the PF(M) Act). It was not, however, approved by the SCMC and was therefore void.
(c) The other restructured senior officer contracts were in order.

OFFICERS ENTITLEMENTS AND ALLOWANCES

The Commission has not carried out its own inquiries into these matters but has studied the excellent report of the Finance Inspectors investigations. The Inspectors selected and investigated a sample of payments and allowances to individual officers as specified in paragraph 8.6 of Schedule 1.

The Commission accepts the Inspector’s findings. It is clear that there have been major abuses, which had led to an alarming increases in expenses paid as can be seen from the following table:-

Findings

(a) There were major abuses and over-payments of expenses and allowances to Trustees and senior officers in the period under review.
(b) The Commission recommends that a full audit and recovery action be carried out.

EMPLOYEES

The fairly generous remunerations for employees is reported at paragraph 9. Some attempts to set up a bonus scheme for this level of employee were rejected by the NPF Board, which did however approve a modest scheme of staff performance benefits to be administered by the managing director.

Home Ownership Scheme

The major additional benefit available to all staff, including the category of “employees” was the Home Ownership Scheme, which had been adopted in October 1993 and continued in the 5 year period under review. The rules for participating are set out at paragraph 9.2.2.

Basically a participant received an advance equal to one years gross salary for down payment on a property. The amount is progressively forgiven at the rate of 20 per cent per year. If the employee remains with NPF for 5 years no repayment will be required.

This scheme should have been, but was not, referred to SCMC for approval.

Findings

During the period under review, NPF consistently failed to refer increases in NPF staff remuneration and benefits (such as the Home Ownership Scheme) to the SCMC for approval. This appears to have been deliberate defiance of the SCMC Act by senior management and the NPF Board.

Salary increases

There were several “real” wage increases in the period in addition to CPI adjustments.

At the 109th NPF Board meeting on 5th May 1997 it was resolved to adopt the following policy in relation to staff salary increases:-

During the period under review, NPF consistently failed to refer increases in NPF staff remuneration and benefits (such as the Home Ownership Scheme) to the SCMC for approval. This appears to have been deliberate defiance of the SCMC Act by senior management and the NPF Board.

Throughout 1997, despite severe falls in profits, the NPF still increased benefits to staff based on performance.

When the PEA won an across-the-Board increase of 5% the NPF ruled that this could be paid to PEA members but that they must opt whether to accept that increase or remain with the NPF performance based scheme. They could not benefit from both.

Budgetary restraint

At the end of the period under review, at the Special Board meeting on 8th November 1999, Mr. Mitchell indicated that the budget for 2000 would involve restricting the size of the productivity review to 5% and that local leave fares would be reviewed. Nevertheless, there was still a relaxed attitude to spending members funds as entertainment expenses would still be K5,000 for the managing director, K2,000 each for the corporate secretary and general manager and that K1,600 would be budgeted for the staff Christmas party which included a K100 voucher for each employee at Stop and Shop.

Finding

(a) The repeated failures to obtain SCMC approvals to improvements in employees’ remunerations reflected a cavalier approach to employment laws by NPF Board and management.
(b) The attempt to implement the coherent total staff restructure recommended by Hay Group was restricted to 6 senior positions.
(c) The total remuneration of NPF employees, including performance based percentage increases and access to the NPF home ownership scheme, compared favourably with the remuneration of similar employees in private enterprise and the public service.

continued tomorrow

National Provident Fund Final Report [Part 4]

August 10, 2015 Leave a comment

This week 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.

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!

This is the fourth 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.

These two investments demonstrated all the flaws detailed above. However, as the investments were less massive, the losses as at December 31, 1999, were smaller:

  • in Macmin NPF invested $A4,370,349 and made a realised and unrealised loss of $A3,469,977
  • In Cue, NPF invested $A11.7 million and made a net realised loss of $A7.4 million (Executive Summary 4C, paragraph 2.5). 

PROFITABLE PASSIVE EQUITY INVESTMENTS

In contrast to the above loss-making, high-risk, aggressively active equity investments in companies listed on registered stock exchanges, NPF also held passive investments in large income earning companies, which were reasonably profitable. They would have been appropriate investments for a superannuation fund if they had formed part of a balanced portfolio.

These included Oil Search Limited (OSL), Schedule 4G, Niugini Mining Limited (NML) Schedule 4F and Orogen Minerals Limited (Orogen) Schedule 4H.

NPF sold off its OSL shares at a modest profit to finance the purchase of shares in NML, which were in turn sold off at a modest profit so that NPF could invest more aggressively in LGL and Vengold. NPF’s K29.5 million investment in Orogen resulted in a realised capital gain of K9.9 million when it was sold off between April and June 1999. Dividends of K2.5 million were also received.

INVESTMENT IN UNLISTED ENTITIES

During the period under review, NPF also invested in some unlisted entities. Some of these were passive investments in well run companies such as the Bank South Pacific (Schedule 4J), Westpac bank PNG Ltd, SP Holdings and Toyota Tsusho PNG (Schedule 4K) and Amalgamated Packaging / Amalpak (Schedule 4M).

These were all safe, profitable and appropriate investments for a superannuation fund.

There were also investments in four plantation companies described in Schedule 4O. These had been acquired well before 1995 and for reasons beyond NPF’s control, were now non-productive loss-making investments. NPF disposed of them in the best way possible in the circumstances.

There were also two foolish investments undertaken and mishandled during the period under review. The first was Crocodile Catering PNG Pty Ltd (Crocodile), which is the subject of separate findings pursuant to Terms of Reference 1(l) and 1(m). The second was Ambusa Copra Oil Mill Ltd – see paragraph 3.5.4 at page 11 above and Schedule 4L and its Executive Summary.

Ambusa was an investment where, prompted by newly appointed investment advisor Haro Mekere and without due diligence NPF entered a joint venture with Ambusa Pty Ltd to operate a Copra Oil Mill to be constructed by a Canadian Company Odata Pty Ltd. NPF lost K1.1 million which had largely been transferred to the project in an unplanned way. Despite NPF’s financial crises in 1999, it guaranteed a K3,150,000 loan from BSP — Executive Summary 4L, paragraph 13. Mr Mekere’s motive for supporting this inappropriate investment with such fervour may have been influenced by the fact that his wife had been appointed to the Board of Odata (PNG) Ltd, and this fact had not been disclosed (Executive Summary 4L, paragraph 12).

REPORT ON THE COMMISSION’S  SPECIFIC TERMS OF REFERENCE

Term of Reference 1

“Whether in connection with the management of the fund, there has been any illegal or improper conduct by any person, business, company, legal entity or agency between 1995 and 1999”

The commission has interpreted “illegal conduct” to mean conduct which is prescribed or forbidden according to a law in force in PNG, which includes the NPF Act, the PF(M) Act, the Criminal Code, the Organic Law on the Duties and Responsibilities of Leadership (the Leadership Code) and the Trustee Act and the Common Law as adopted at independence.

“Improper conduct” includes any conduct forbidden by law (criminal conduct) but also conduct, which is a breach of a person’s fiduciary or common law duty or a leader’s failure to conduct himself in accordance with the requirements of the Organic Law on the Duties and Responsibilities of Leadership. Thus, a Trustees breach of fiduciary duty (as governed by the Common Law or the Trustee Act) may also amount to improper conduct.

When therefore the NPF board borrowed money from a bank the commission has found that was ultra vires the NPF Act. That is an example of illegal conduct by an entity, the NPF. The trustees who resolved to approve the borrowing and pledge NPF’s assets, without seeking expert advice on, or even thinking about, NPF’s power to borrow are in breach of their fiduciary duty to members of the fund. Repeated, reckless breaches of fiduciary duty is considered as improper conduct to be referred to the Ombudsman Commission as a breach of the Leadership Code. In the commission’s view, the banks which repeatedly lent money to the NPF to enable it to fund its share acquisitions, without obtaining competent legal advice about whether NPF had the power to borrow, and knowing that NPF was a superannuation fund, are guilty of improper conduct and may in fact have civil liability to NPF members for losses the members have suffered from the bank’s negligent failure to carry out due diligence in this respect.

Other examples of illegal or improper conduct include the criminal offences described in Schedules 5 and 6; making false claims and misrepresentations to the NPF board or the Minister; falsifying minutes of proceedings; creating false invoices; the appointment by Mr [Jimmy] Maladina of Mr Petroulas and Mr Barredo to Crocodile (Schedule 4L, paragraph 11.1.8) and transferring funds illegally through the Wilson HTM account.

At the end of each schedule, the commission provides a final paragraph headed “Findings in Context of the Terms of Reference”. This paragraph has a separate sub-paragraph for each term of reference, which groups together all findings in the body of the report regarding the relevant term of reference. Sub-paragraph 1 deals with illegal and improper conduct and major instances of such conduct are referred to.

Sub paragraph 2 deals with breaches of fiduciary duty and there is some overlap between sub paragraphs 1 and 2. Instances when the commission has recommenced referral to another authority are listed in the subparagraph dealing with Term of Reference 3. Instances of personal liability for loss are listed under Term of Reference 4 and so on.

The Terms of Reference then list specific conduct, activities or situations where such illegal or improper conduct may have occurred and into which the commission is directed to inquire, such as (a) the failure of the trustees and management to carry out the expected fiduciary duties of trustees and management under the NPF Act. These are listed as 1(a) to 1(o). Specific findings on these matters are also listed in “Findings in Context of the Terms of Reference” paragraph at the rear of each schedule. Terms of Reference 2, 3, 4, 5 and 6 are reported upon in the same way in the schedules.

Term of Reference 1(a)

“The failure to carry out the expected fiduciary duties of trustees and management under the National Provident Fund Act”.

A fiduciary duty is a duty owed by a trustee to the beneficiary of a trust. In this context, the trustees of the NPF Board of Trustees owed a fiduciary duty to the members of the fund. At law, it is a very onerous duty governed by the Trustees Act and the Common Law. The officers of the NPF are not trustees (except the managing director who is a trustee by virtue of being a member of the board). Officers owed a Common Law duty to the NPF board by virtue of their contract of employment.

Each schedule is liberally sprinkled with findings on breaches of fiduciary duties to members of the fund by trustees and of common law breaches of duty to the NPF board by officers of the NPF (often referred to generically as “management”).

When the breach is specific to an individual trustee or officer the person is usually named. It would not be meaningful to name each specific breach here in the main report, outside the context in which the breach occurred, so this section deals with such breaches in general and the general consequences of the breaches as a whole. Each individual breach of duty is, however, dealt with in its context in the schedules to this report by way of findings paragraph by paragraph. In the paragraph “Findings in Context of the Terms of Reference”, at the end of each topic schedule, these breaches of duty pursuant to Term of Reference 1(a) are listed with reference to the relevant paragraph where the breach is described and the finding is made.

Frequently, breaches by “management” or individual officers are described first – such as acting in excess of delegated authority (such as unauthorised transactions; failing to obtain required ministerial approval; failing to keep the NPF board informed, failing to perform due diligence; failing to obtain expert advice . . . etc).

These findings will often be followed by related findings against the trustees for the same failures or for failing to reprimand and control management, failing to insist that management obtain independent expert advice . . . etc.

Some findings are made against individual trustees for their personal conduct while other findings are made against all trustees in office at a particular time or all trustees who supported a particular resolution.

For some matters, the failure by the trustees to address an issue over a long period – for instance the trustees’ continuing failure to address management repeatedly acting in excess of its authority – is found by the commission to amount to improper conduct by the trustees. When management’s serious breaches of duty have been repeatedly brought to the trustees’ attention and they have repeatedly not addressed the matter, the commission has found that it is not only improper conduct but it should be referred to the Ombudsman as a breach of the Leadership Code (to which all NPF trustees were subject (For example see Schedule 4B, paragraphs 5.12(e); 5.14.2(e); 6.3 & 6.7(b); Schedule 1 paragraph 14.4.4.5) – where the trustees deliberately chose to acquire shares outside the investment guidelines it was not only a breach of fiduciary duty to the members but was illegal and improper conduct amounting to a breach of the Leadership Code for which the commission recommended that they be referred to the Ombudsman Commission). In these instances, the conduct is listed as a breach of fiduciary duty and also under the subparagraph dealing with Term of Reference 3 – referral to other authority (Schedule 1 paragraph 14.4.4.2).

Similarly, the trustees’ longstanding failure to notice and rectify management’s failure to follow appropriate tender procedures has been referred to the Ombudsman Commission as a possible breach of the Leadership Code (Schedule 9, paragraph 14).

Some terms of reference encompass conduct which is relevant to more than one term of reference, thus, the same action might be a breach of duty, a failure to disclose a conflict of interest and benefiting from the trust property. It could also be an offence or breach of statutory duty (Schedule 1, paragraph 14 provides a full report on breach of duty and leadership offences regarding repeated, blatant and deliberate breaches of investment guidelines).

Term of Reference 1(b)

“Breaches of the Act and National Provident Fund Rules relating to borrowings and placement of charges over members’ asset”

It is quite clear that the NPF had no power to borrow or pledge members’ assets, as these powers are not granted to it under the NPF Act or any other law. As NPF was created by statute it possesses only those powers expressly given to it. The legal opinion of Allen Arthur Robinson, with which the commission is in full agreement, is set out at Appendix 6 to Schedule 2E (The erroneous opinion of Herman Leahy, which concluded there was a power to borrow, is reported at Schedule 2E paragraphs 3.9 and 3.10(i)). Carter Newell’s inadequate and incorrect opinion is at Schedule 2E, paragraph 3.4.

There being no power to borrow or pledge assets, the following breaches of the NPF Act with regard to borrowing occurred:

  • Overdraft with the PNGBC which peaked at K6 million (Schedule 2A);
  • The ANZ loan facilities which peaked at $A20 million and K40 million fully drawn (Schedule 2E); and
  • The BSP loan facility of K30 million fully drawn (Schedule 2C).

As a condition to these loans, NPF was obliged to pledge its assets in the form of share scrip and to maintain an agreed security to loan ratio. As the value of the scrip fell over the years, more and more assets had to be pledged in order to maintain the security to loan ratio.

All these loans and pledges were in breach of the NPF Act and were therefore ultra vires.

The commission believes that the banks were in serious dereliction of their duty by not performing due diligence before entering into the loan agreements to assure themselves that NPF had the power to borrow, especially as the banks were well aware that NPF was a superannuation fund and that it was therefore inherently likely that it would not have power to borrow. The banks were also aware of the purposes for which NPF intended to draw upon the loan funds. The ANZ, for instance, was fully aware of NPF’s intention to use the borrowed funds to finance its massive investments in volatile, risky, non-income producing PNG resource stocks. When it finally obtained competent legal opinion from Allens that NPF lacked the power to borrow it kept that information from NPF and aggressively called in the debt, forcing NPF to sell off assets at a loss (Schedule 2E, paragraph 13).

NPF members suffered losses in excess of K100,000,000 as a result of those investments. In addition to the losses on the investments, NPF members suffered the loss of many millions of kina in interest and bank fees and charges. For instance, interest and bank fees on the ANZ loan facilities alone amounted to K14,102,276.09 (Schedule 2E, paragraph 12).

NPF members may have rights to recover some of these losses in a class action brought against the NPF board and against individual trustees who were in breach of their fiduciary duties to the members by entering into these loan agreements. The members may have similar rights against the banks concerned (These possibilities are discussed in Schedule 2E paragraph 17 and Executive Summary paragraph 13).

Term of Reference 1(c)

“Provision of false or misleading information provided by or to trustees and management, including over the financial state of the funds in relation to the provision of the year end performance bonuses”

Misleading silence

The investigations disclosed many instances when particular officers, or management generally, provided false or misleading information to the NPF board on a variety of topics. Equally importantly, perhaps, was management’s misleading silence with regard to things that should have been disclosed.

This includes silence about unauthorised overdrafts (Schedule 2A), drawdowns, (Schedule 2E, paragraph 13.3) acquisitions, (Executive Summary 4D, paragraph 4.1) agreements and commitments (Executive Summary 2E, paragraph 7.7.1).

False and misleading information generally

Specific instances of giving false and misleading information can be examined by consulting the “Findings in the context of the Terms of Reference” at the rear of each schedule under Term of Reference 1(c). Examples include:-

  • false information about obtaining SCMC approval (Schedule 1 paragraph 5.4.4.5);
  • Mr Leahy lied to the NPF board about Mrs Andoiye’s departure from NPF (Schedule 1 paragraph 20.1);
  • Concealing from the NPF board the existence of an unauthorised PNGBC overdraft by adopting misleading accounting procedures and netting the overdraft against credits in other accounts (Schedule 2A paragraph 4.3);
  • Mr Wright falsely told both the BSP and the Minister that the proceeds of a K30 million drawdown were to be used for local infrastructure projects. He did not disclose the intention to use the loan money to purchase Orogen shares (Schedule 2C paragraphs 4.1.4 and 4.1.5(c));
  • Mr [Robert] Kaul falsely advised the NPF board that the board had previously approved a K30 million ANZ facility whereas the approval had really been for K20 million (Schedule 2E paragraphs 5.23 & 5.24);
  • Misleading information given by Mr Wright to the NPF board about the profits to be expected from issuing the Australian dollar bond (Schedule 2F paragraphs 5.1; 7; 7.1 & 7.2);
  • False information given by Mr Wright to the BPNG about by NPF board’s approved use for the Australian dollar bond money (Schedule 2F paragraphs 11.10; 11.12(b) and (c)); Management provided overly optimistic briefings on Vengold without referring to the risks involved (Schedule 4A paragraph 10.4);
  • Mr Kaul misled the NPF board and the Minister about the date he signed the HPL sub-underwriting agreement (Schedule 4B paragraphs 5.3 and 5.4(b));
  • Mr Kaul gave false information to the NPF board understating the number of unauthorised HPL shares that had been acquired (Schedule 4B paragraphs 4.2 and 4.3(d));
  • Mr Leahy falsely advised the newly appointed NPF board members that the proposal to purchase the Waigani Land had been raised at the previous board meeting but not resolved – whereas the proposal had been rejected (Schedule 5 paragraph 21.2.7);
  • Management provided false information to the NPF board about the purchase of a motor vehicle for the managing director (Schedule 9 paragraphs 4.4.3; 4.4.4(a) and 4.4.4(d));
  • Mr Leahy requested the board to approve the Tower management contract with PMFNRE without disclosing the contract had already been agreed by management (Schedule 9 paragraphs 5.8 and 5.10(i));

False information specifically about the financial state of the Fund and end of year performance bonuses

The two main examples of this type of false information were:-

  • Bank of Hawaii transaction.
    The accounts drawn up by Mr Wright for the 1997 year included the whole of the K18.5 million received from the Bank of Hawaii transaction as profit in 1997 instead of spreading it over the lifetime of the loan. This false reporting resulted in senior management receiving an undeserved end of year bonus based on a falsely reported profit (Schedule 1 Appendix 20 – paragraph 20.7.2.1 – end of year bonus);
  • K10 million “reserve” provision:
    Management set aside a K10 million reserve in 1996, contrary to International Accounting Standard AS26. This reserve was utilised in 1997 thereby showing a false profit with the result that an undeserved end of year bonus was paid to senior management (Schedule 1 Appendix 20 – paragraph 20.7.2.2);

Concealing relevant information on the state of the Fund

The commission’s inquiries have disclosed many instances when NPF management concealed relevant information on investments. This regularly occurred when management had made unauthorised acquisitions or sales of shares and then failed to specifically mention this at subsequent board meetings. For most meetings, however, management-briefing papers would be distributed in advance to trustees, which would usually include a schedule of investments.

This was a list of NPF’s investments so a really conscientious trustee who took the time, should have been able to work out recent transactions by comparing the amount in the schedule of investments with the previous schedule.

Evidence from the trustees indicates that few, if any, trustees checked out the investment schedules, so management succeeded in concealing information about these investments (Often, the schedules were several months out of date anyway).

Further concealment of relevant information consisted in the endemic failure by management to keep the Board of Trustees informed of the state of the various loan accounts with the NPF’s lender banks. This non-disclosure constituted a failure of management’s common law duty to make open disclosure to the board. The main offenders would be the managing director, who had ultimate responsibility for management’s performance and Noel Wright who was in charge of finance and investments.

Term of Reference 1(d) This Term of Reference was repealed.

Term of Reference 1(e) “The failure to adhere to prescribed Investment Guidelines”

After NPF adopted its new aggressive investment strategy in 1995 with firm guidance from Mr [David] Copland and his protégé Mr Wright, NPF departed further and further from the investment guidelines proclaimed by Sir Julius Chan in 1993. The story is told in Schedule 1, paragraphs 14.1 to 14.5.1 and Executive Summary 1, paragraphs 8 to 8.4.1. The departure from the guidelines was pointed out by Mr Kaul in 1996 but the trustees and management determined to proceed with the strategy of acquiring the high-risk PNG resource stock, using borrowed funds to do so (Schedule 1, paragraph 14.5.1(e)).

When the board became aware that NPF was seriously in breach of the guidelines, particularly in having its portfolio weighted heavily in favour of the high-risk equities, the Board of Trustees resolved to try and get the guidelines changed, but to continue with their foolhardy strategy in any event (Schedule 1, paragraph 14.5.1(e)).

The result was that the expenditure of NPF’s funds in this way was illegal and the trustees who permitted this to occur were all in breach of their fiduciary duty to the NPF members. Given their awareness of what they were doing and their conscious decision to continue, it is likely that the trustees would be personally liable for the huge losses suffered by the members from the trustees’ breach of fiduciary duty. It is very unlikely they could succeed in a defence of “acting in good faith”. (Executive Summary, paragraph 8.5 and Schedule 1, paragraphs 14.4.4.1 to 14.4.4.5).

It was NPF’s failure to adhere to the investment guidelines and its strategy of borrowing funds to finance these high-risk investments, which accounted for by far the greatest proportion of the K150 million losses suffered by NPF.

Term of Reference 1(f)

“The failure to adhere to prescribed foreign exchange regulations under the Central Banking Act, particularly with respect to the investment in Maluk Bay Resort in Indonesia”

The NPF management found it convenient at times to utilise unorthodox methods of making payments overseas.

The prime example of this was providing funds to support the activities of Crocodile in Indonesia, particularly the construction of the resort at Maluk Bay. Crocodile was not properly registered to carry on business in Indonesia and was therefore unable to operate an Indonesian bank account. Also, the NPF board had never considered a comprehensive strategy for funding Crocodile and that process was occurring on an ad hoc basis, often behind the back of the NPF and Crocodile boards.

Mr Wright utilised the fact that NPF’s sharebroker, Wilson HTM, held money in its accounts for NPF from proceeds of share sales and dividend payments. Rather than account for the money in PNG, as he should have, Mr Wright arranged for Wilson HTM to make payments from this account directly to Crocodile’s overseas contractors and creditors. Approximately $US891,773 was transferred in this way (Executive Summary 4L, paragraph 12, Schedule 4L, paragraphs 7.5.5, 7.5.6, 7.5.7 and 7.7.4).

NPF management also made payment of $A40,282 to Odata for construction of the Ambusa Copra Oil Mill through its account with Wilson HTM (Executive Summary 4N, paragraph 7, Schedule 4N, paragraphs 5.6 and 5.7).

Using the Wilson HTM account to make overseas payments in this way had two advantages for Mr Wright.

Firstly, it enabled him to avoid the time-consuming inconvenience of seeking approval from BPNG’s controller of Foreign Exchange (In the $A54 million bond affair, the Controller Mr Popoitai delayed granting foreign exchange approval because of his well-founded concerns about the proposed purchaser of the bond, Warrington International. Mr Copland brought pressure on the Governor of the BPNG to obtain foreign exchange approval (Schedule 2F, paragraphs 13.2, 13.3 and Executive Summary, paragraph 8).

Secondly, it enabled Mr Wright to make overseas payments “behind the back” of the NPF board more easily.

It is likely that NPF management made other overseas transactions through Wilson HTM in breach of foreign exchange regulations and this should be checked by the BPNG.

Continued tomorrow