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National Provident Fund Final Report [Part 35]

September 23, 2015 1 comment

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

NPF Final Report

This is the 35th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4B Continued 

When Mr Kaul was replaced as managing director by Mr Fabila, there was some initial inquiry into NPF’s investments and borrowings but then Mr Fabila found himself unable to exercise control over Mr Wright, who was so close to Mr Copland.

Mr Fabila lost his initiative until he was able to bring about the termination of Mr Copland and the resignation of Mr Wright.

By then, Mr Fabila was being manipulated by Mr Leahy and Mr Maladina regarding HPL and other investments. In the falling market, the management seemed paralysed until PwC was called in and the sell-off began.

The loss of approximately $A50 million from the HPL investment was the largest single loss NPF suffered from its investments.

It was compounded by the fact that the investment was largely financed from funds borrowed from ANZ, so interest payments and bank fees need to be included in assessing the total loss to NPF.

Looking back, it is tempting to speculate what might have happened had Mr Taureka’s sole dissenting voice had been heard at a properly constituted board meeting. In that forum, he may have pressed his view that the money from the HGL take-over should be invested in a safe income bearing investment rather than being invested, together with further borrowed funds, in the risky HPL venture.

Executive Summary Schedule 4C 

Introduction 

The National Provident Fund’s investment in Cue Energy Resources NL (Cue) was typical of its investment policy between 1995 and 1999.

In 1995, when NPF made initial investments in Cue totalling $A3 million, it did not carry out any proper due diligence and did not seek independent expert advice.

It ignored obvious risk factors, especially Cue’s weak financial position.

NPF management was negligent in failing to provide adequate briefings to the board. In general, the Department of Finance (DoF) failed to undertake an independent analysis of investment proposals submitted by NPF and the NPF board failed to make proper inquiries and failed to direct management to present proper briefs.

When the DoF did eventually recommend a halt to further investment in Cue, the advice was ignored.

On occasions, the Minister for Finance approved unwise NPF investments without seeking departmental or other expert independent advice.

As Cue’s financial position began to weaken, NPF provided further capital by underwriting Cue’s share placements and by standing guarantor for Cue with the Bank South Pacific Limited (BSP). NPF actually borrowed from the Australia & New Zealand Banking Group (PNG) Ltd (ANZ Bank) in order to on-loan to Cue. Time and again, NPF management acquired Cue shares, gave undertakings or pledged NPF assets for Cue’s benefit without the approval or authority of the NPF board.

Time and again, the NPF board failed to reprimand management when these unauthorised dealings belatedly came to the trustees’ attention.

Other irregularities included entering into substantial contractual commitments before (or entirely without) Ministerial approval.

These events occurred during the period that David Copland, NPF trustee and board chairman, unbeknownst to the board, considered himself to be an independent director of Cue (and therefore not appointed to represent NPF’s interest) and held substantial shares and options in Cue in his own name.

At the same time, Robert Kaul, NPF trustee and managing director, was also a Cue director holding Cue shares and options in his own name. Mr Wright also held Cue shares while he was deputy managing director of NPF.

Rather than cutting its losses early and selling off its non-performing and non-income producing investment in Cue, NPF management led the NPF board to support Cue in ventures in Indonesia and in attempting to buy the Indonesian assets of Saga Petroleum ASA (Saga).

By 1998, NPF had invested $A11,703,040 in Cue and had made unrealised losses as at October 31, 1998 of $A9.105 million (Exhibit CU776A). It held 20 per cent of Cue’s shares and its investment was so massive that it was impossible to sell off without drastically reducing Cue’s share value even further.

Facing extreme financial pressures from other sources as well, NPF was eventually forced to sell 100 per cent of its Cue shares as part of a general sell-down strategy to reduce its crippling debt burden. In all, NPF suffered a loss of $A7.4 million from its foolhardy investment in Cue.

Initial Investment 

The investment in Cue was clearly inappropriate in the first place. It was high risk, non-income producing and speculative in nature. Cue did not have sufficient cash resources to fund an exploration and appraisal program. Also, it did not have any exploration interests with commercially proven reserves.

Any expert due diligence would have disclosed this but none was performed (see details in paragraph 4.3 of the Cue Report).

Management’s failure to provide adequate investment advice to the board was a breach of duty and the trustees’ failure to seek such advice was a breach of their fiduciary duty to the members. The DoF advice to the Minister lacked any independent analysis; it merely uncritically summarised the submissions made by NPF’s management.

Without waiting for the Minister’s approval, NPF proceeded with the investment anyway, in breach of the Public Finances (Management) Act 1995 (PF(M) Act).

The commission’s detailed findings on the initial investment in Cue, are set out at paragraph 4.4 of the Cue Report as follows:-

Findings 

(a) According to the relevant board minutes and report, NPF management, (specifically Mr Kaul and Mr Wright) did not present the board with any independent advice or critical appraisal in respect of the investment in Cue;
(b) NPF breached Section 61 of the PF(M) Act by signing a sub-underwriting agreement for $A3 million without the prior approval of the Minister;
(c) Mr Kaul and Mr Wright failed to properly discharge their duties in that they failed to disclose to the board of trustees sufficient relevant information to enable the trustees to properly assess the investment;
(d) The trustees failed to critically assess the investment proposal that management put to them and sought no specific guidance in relation to this investment;
(e) Mr Kaul and the trustees failed to provide the Minister for Finance full and adequate information, which was necessary in order to properly assess the investment;
(f) The DoF failed to critically appraise NPF’s investment in Cue;
(g) Management (Mr Kaul and Mr Wright) failed their common law duty to the NPF board to provide expert investment advice;
(h) The trustees were in breach of their fiduciary duty to contributors of the fund by failing to ask for and obtain expert investment advice; and
(i) The Secretary for Finance and relevant senior officers failed in their duty to critically appraise the proposed investment in Cue and to give competent advice to the Minister.

As early as January 1996, Cue was already seeking working capital from NPF (and from other sources). As a member of the board of Cue, Mr Kaul was privy to the full details of Cue’s financial position but he did not fully convey this information to the NPF board. The fact that NPF owned a large parcel of Cue shares was used as the basis to justify NPF lending $A1 million to Cue to get it out of trouble. This was the next step in a cycle whereby NPF allowed itself to become increasingly ensnared in Cue, investing more and more in order to protect the unwise investments already made. Further falls in Cue share prices stimulated more purchases by NPF (paragraph 6).

NPF actually used its own high credit rating to borrow the funds from ANZ in order to on-lend $A1 million to Cue (see paragraph 6.1).

Mr Kaul and Mr Wright and all NPF trustees in office at the time, compounded their failure of duty to the NPF members, by advancing this loan (see the detailed findings in paragraph 6.1 of the Cue Report). As this injection of support for Cue was not sufficient to resolve its difficulties, Cue actively sought other sources of funds. It suffered many rejections until finally at the end of May 1996,

Mr Kaul committed NPF to support Cue’s application to the BSP for a loan of $A1 million, without any authorisation from the NPF board. Mr Kaul committed NPF to maintain a minimum of K32 million in cash deposits with BSP, as security to guarantee Cue’s $A1 million loan from BSP. The commission considers that Mr Kaul, who, as a member of Cue’s board of directors participated fully in Cue’s discussions, was losing sight of his primary and fiduciary duty as an NPF trustee to NPF members.

Findings 

(a) The Cue budget prepared (Exhibits CU70-CU71 and CU134-CU136) and provided to the Cue directors and Mr Kaul, showed a shortfall in the working and development capital on both a short and long-term basis;
(b) Mr Kaul failed his common law and fiduciary duty to adequately disclose Cue’s funding problems to the NPF Board of Trustees;
(c) Without the short-term loans of $A2 million from BSP and NPF, Cue would not have been able to meet its commitments. Mr Kaul never fully disclosed Cue’s inherently weak financial position to the NPF board. This was a material fact that should have been made known to the board when it was assessing any investment decision regarding Cue;
(d) Mr Kaul pledged NPF’s IBD assets of K32 million as security with BSP for Cue’s loan facility with BSP, without the express authority of the NPF board and without financial consideration for NPF. He may be personally liable for losses suffered by NPF resulting from this breach of his fiduciary duty, unless he can establish that he was “acting in good faith”;

Cue bids For MIMPEX’s PNG Assets 

Cue then sought a massive increase in the amount of funds to finance their bid to purchase MIMPEX assets in PNG. It attempted to raise $A43.2 million by issuing a mixture of ordinary shares and convertible notes using ANZ Corporate Services and Wilson HTM as underwriters.

Mr Kaul recommended to the NPF board that it should participate in the issue in order to maintain its current 15 per cent equity in Cue.

He did not advise the board that management had already increased NPF’s percentage of Cue shares to 19.78 per cent by a recent unauthorised purchase of two million more Cue shares. The NPF board then resolved to purchase 16.4 million shares at K6.4 million in order to maintain 15 per cent equity in Cue.

Mr Kaul then misled the Cue board when he referred to the two million share purchase as a strategy by NPF to maintain 17.58 per cent equity in Cue and by falsely claiming that the NPF board had resolved to seek a second seat on the Cue board, when no such resolution had been made.

Continuing with his duplicitous conduct, Mr Kaul concurred by tacit acquiescence at the Cue board when Mr Jacobs wrongly stated that “NPF had agreed to provide $A3 million equity and $A5 million in convertible notes”.

At the next NPF board meeting on August 27, 1996, the board, deceived by Mr Kaul’s duplicity, agreed to maintain NPF’s current 19.88 per cent equity by approving and ratifying management’s previous purchases “up to this current level of holding”.

Findings 

(a) The minutes do not indicate any concern raised by the trustees that between February 1996 and June 1996, NPF management had, without the approval of the board, purchased on market 3,156,500 shares at a total cost to the members of $A310,759;
(b) The resolution at the earlier meeting provided discretion to management to purchase “any number” of convertible notes, if no other investor took up an interest;
(c) No apparent consideration was given by management or the trustees about the increased investment in Cue with regard to:
* The risk of investing where it is clearly speculative;
* The risk of another large investment holding in stock because NPF already held a number of other PNG resource based stocks; and
* Complying with investment guidelines
(d) NPF’s commitment had changed from K6.4 million approved by the NPF board at the 101st Board meeting to more than K8.1 million (A$8 million);
(e) Mr Kaul made misrepresentations to the NPF board and to Cue;
(f) Management (Mr Kaul and Mr Wright) were in breach of their duty to the NPF board and Mr Kaul was also in breach of his fiduciary duties to contributors; and
(g) Mr Kaul’s false representations amounted to improper conduct.

Investment Of $A25 Million In Convertible Notes 

Failing in its endeavour to raise funds in Australia, Cue sought the support of NPF and POSFB to take up $A25 million of convertible notes with an option to purchase between $A2 million to $A8 million more shares. This was linked to a proposal to appoint Mr Copland as chairman of the Cue board (paragraph 8.7).

Mr Kaul and Mr Wright sought approval by way of circular resolution for NPF to take $A25 million of the convertible notes. The management paper merely plagiarised Cue’s own promotional material and made no attempt to analyse Cue’s very real financial and other difficulties.

The circular required the trustees to respond the next day. Without waiting for the expected favourable response, Mr Kaul sought the approval of Minister Haiveta under Section 61(2) of the PF(M) Act. The Minister gave his approval for this totally inappropriate resolution without seeking any advice from the DoF.

Findings 

(a) The convertible notes were unsecured, unrated and convertible to high-risk shares in Cue;
(b) Mr Kaul Mr and Wright provided misleading information to the NPF board in order to get a favourable resolution and were in breach of their duty to the board and of their fiduciary duty to the members. It was improper conduct and in Mr Kaul’s case, may amount to an offence under the Leadership Code. He should be referred to the Ombudsman Commission for them to investigate this aspect;
(c) The trustees failed their fiduciary duty to the members in approving this investment and in not seeking independent expert advice.
(d) Mr Haiveta’s conduct in granting approval without seeking DoF advice was improper conduct.

Mr Kaul Agrees To Sub-Underwrite The Cue Share Issue 

During the first week of September, Cue, Wilson HTM and ANZ Securities strove to get the underwriting agreement into place and to persuade MIMPEX that Cue was a serious and funded bidder for the assets. Mr Kaul sent a Cue-drafted letter of support for Cue to MIMPEX.

Then with breathtaking disregard for his lack of authority to do so, Mr Kaul sealed an irrevocable offer by NPF to sub-underwrite 17 million shares ($A2.04 million) and 23 million 5:1 convertible notes ($A23 million in the placement), without any consultation with or approval from the NPF board (paragraph 8.11).

When POSFB withdrew its participation, because its board had very properly declined approval, the chance to purchase MIMPEX assets began slipping away, as MIMPEX imposed a deadline on Cue to get its offer together.

Mr Kaul participated actively with Mr Cleary of Wilson HTM and Mr Jacobs of Cue, to bring pressure on Rupa Mulina, who was Secretary for Finance and chairman of both POSFB and DFRBF, to drum up PNG institutional support for Cue’s share placement, using somewhat dubious means to try and by-pass some of the reluctant POSFB directors.

Just when it looked as though the underwriting and sub-underwriting agreements were in place, which would have committed NPF to a huge financial risk, Wilson HTM withdrew and MIMPEX accepted another offer for the assets. NPF was thereby saved from a massive $A25.04 million exposure.

Although this particular misguided investment did not take place, because of outside circumstances, the attempt by Mr Kaul to get NPF involved (which was strongly supported by Mr Copland and Mr Wright), included incompetence, professional negligence, misrepresentation, role confusion and conflict of interest.

It saw Ben Semos of Wilson HTM, as broker for both NPF and Cue, ignoring Wilson HTM’s duty to know its client, NPF. Far from warning NPF of the inappropriateness of investing in the high risk Cue placement, Wilson HTM was actively struggling to hold the deal together, with NPF as a major player in an underwriting transaction, from which Wilson HTM would benefit financially as underwriter of the transaction.

The commission finds that Mr Kaul’s conduct was improper and so was Wilson HTM’s involvement and failure to warn NPF that the large investment in Cue was inappropriate for a superannuation fund. The trustees approval of the investment was a failure of their fiduciary duty to the members of the fund. The full details of this amazing attempt by NPF to risk the members’ funds to help Cue acquire MIMPEX assets, are set out in paragraphs 8 to 8.15 of the Cue Report.

Findings

(a) Mr Kaul made unapproved variations to the amount to be underwritten by NPF, in respect of Cue’s share issue;
(b) Mr Kaul was in a conflict of interest situation because he was an active fully participating director of Cue as well as being the managing director and a trustee of NPF.

TO BE CONTINUED

National Provident Fund Final Report [Part 34]

September 22, 2015 1 comment

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

NPF Final Report

This is the 34th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4B Continued 

In October 1997, Mr Wright wrote in his investment report: “The board needs to give some consideration to how much we want to spend to push the price up at the end of the year”.

The commission recommends that this matter be reported to the Australian Stock Exchange for consideration as possible illegal share ramping (paragraph 6.9).

During October 1997, NPF management again purchased shares for $A2,959,967 also without board authority:

npf 34 a

During this period, Mr Copland and Mr Kaul purchased HPL shares without disclosing this to the NPF board. As they continued to participate in NPF discussion and decision-making on the HPL investment, they were both in a conflict of interest situation and of improper conduct.

Findings

(a) Mr Copland failed to disclose to the NPF Board of Trustees, that he owned 273,000 shares and 125,000 options in HPL. This was improper conduct;
(b) The proposal by Mr Wright for the board to buy shares at year end 1997 and the subsequent purchases of seven parcels of shares in October totalling 3,718,361 shares for $A2,959,967, a strategy designed expressly to increase end of year profits, constituted improper conduct and may amount to illegal share ramping;
(c) When Mr Copland and Mr Kaul participated in the decision to “buy into” HPL shares for that purpose on the October 28, 1997, that decision would also increase the value of their shareholding in HPL. Their failure to disclose to the NPF board their own shareholdings and options in HPL and their participation in the vote, was improper and a breach of their fiduciary duty to members.

On December 11, 1997, the NPF almost formalised the incipient take-over of board functions by management when it resolved: “To approve management’s discretionary buying of shares in HPL between December 11, 1997 and December 31, 1997”. (Exhibit H60)

The resolution did not impose any limit as to quantity or price and really amounted to a licence to buy until the end of the year.

Management took full advantage of this virtually unfettered discretion, to buy up HPL shares by purchasing 4,330,635 HPL shares over 15 days to December 31, 1997, at a cost of $A3,540,036. By increasing NPF’s end of year profits in this way, management increased the size of the senior management onus under the staff bonus scheme.

Investment in HPL – 1998 

Between February and June 1998, NPF management continued to purchase HPL shares without board authority, long after the end of year licensed buying spree had ended.

By this stage, NPF held approximately 70 million HPL shares representing an investment of approximately $A60 million.

npf 34 b

The price had dropped from $A1 in June 1997 to 61 cents in June 1998, yet Mr Wright was still presenting a rosy future to the trustees. Because of the huge size of the HPL investment, the fall in share value represented an unrealised loss of over $A20 million on the HPL investment. This loss was compounded by the facts that the investment had been purchased largely with borrowed funds and that interest rates on the loan were steadily rising.

Both management and the trustees were seriously failing in their duty and fiduciary duties by not calling for any independent expert opinion on how to handle this situation.

Findings 

(a) Mr Wright continued to give one- sided overly optimistic reports to the NPF board about HPL’s immediate and mid-term prospects and failed to initiate a revaluation of the huge investment in light of falling share prices.
(b) Mr Wright and NPF management repeatedly acquired shares for NPF with no reference to or approval of the Board of Trustees. This constituted breaches of duty by management as well as a failure by the trustees to supervise and control management;
(c) NPF trustees failed in their fiduciary duty to contributors by not directing management to report on the changing values of NPF’s major investments or seeking independent advice; and
(d) Both Mr Wright and the then trustees may be personally liable for losses incurred by NPF because of these breaches of duty. It is unlikely that a defence of “acting in good faith” would succeed.

Appointment of Mr Fabila – May 5, 1998 

Mr Fabila replaced Mr Kaul as managing director on May 5, 1998. He obtained a report on NPF’s investment portfolio from Deutsche Securities, which pointed out the extreme bias towards PNG resource stock and PNG businesses. Mr Fabila chose to ignore this report and not disclose it to the NPF board.

This was a serious failure of Mr Fabila’s fiduciary duty to the members of the fund as it deprived the board of its last chance to minimise the losses, which were soon to become realised.

Termination of Appointment of Mr Copland and Mr Aopi 

On August 1, 1998, Mr Copland’s appointment as a trustee was terminated and shortly afterwards Mr Aopi resigned from the NPF board.

Both continued, however, as “independent” directors of HPL and a struggle to have them replaced by NPF representatives, ensued. Both had been receiving K50,000 per annum in directors fees which were payable to NPF if they represented NPF on the HPL board. Legal proceedings are occurring regarding this aspect.

In October 1998, Herman Leahy finally spoke out, critically examining the value of this loss-making, non-dividend producing investment to NPF.

Both Mr Copland and Mr Aopi had also been allocated options by HPL. The directors fees and options issued to them were as follows:

Directors Fees  Findings

With regard to the benefits received by Mr Copland and Mr Aopi, the commission has found at paragraph 7.9:

npf 34 c

The commission finds that the names of Mr Aopi and Mr Copland were submitted by NPF to HPL for appointment on the HPL board of directors. The understating between NPF and Mr Aopi and Mr Copland was that they would act as NPF’s representatives on the board. As such, they were obliged to pay any remuneration or benefits received to the account of NPF. Their failure to account to NPF for benefits received as directors of HPL, was illegal and improper.

Appointment Of Mr Fabila And Mr Maladina to HPL Board 

After Mr Maladina was appointed as chairman of the NPF board on January 27, 1999, he and Mr Fabila were appointed as NPF’s representative directors to the board of HPL in May 1999.

Wilson HTM Assessment Of NPF Portfolios

In February 1999, Ben Semos of Wilson HTM, at the request of Mr Fabila, reported on NPF’s portfolio. With regard to HPL, he noted:

Holding: 72,877,733
$A Average Net Entry Price: 0.9393
$A Current Price: 0.22 – 0.23 $A
Total cost: 69,402,748
$A Market Value: 16,033,101
$A Net Loss: 53,369,647

It showed an unrealised loss on HPL of $A53.3 million.

Mr Semos recommended against selling because of the size of the loss which would be realised and in the hope that Ramu and Frieda River would produce results, saying that they: “Present incredible long term upside and phenomenal benefits to PNG’s future growth.” (Exhibit 96)

He also said that a sell-off would provoke a corporate takeover, which “would not be in the interest of PNG”.

Findings

Wilson HTM and Mr Semos in particular, failed in its duty to “know its customer” and carry out a reasonable investigation upon which to base its recommendations regarding NPF’s massive investments in HPL. It should have advised that the investment strategy regarding HPL was completely inappropriate for NPF.

On the advice of PwC, NPF then sold off its entire holding of HPL shares. As at December 31, 1999, with the sell-down still proceeding, NPF had realised a loss of $A27,332,554 on sale and an as yet unrealised loss of $A1,8974,100 for a total loss of $A46,296,654 million on its HPL investment.

npf 34 d

Conclusions

The evidence shows that NPF’s nationalistic, so called “gutsy” play to lead the other PNG institutions to block Placer Dome’s take-over bid for HGL and turn it to the advantage of NPF and the other PNG institutions, was master minded and controlled by Mr Copland and Mr Wright, with the support of Mr Aopi and Mr Kaul and the enthusiastic support of Minister Haiveta.

The NPF trustees allowed NPF to be led into this huge, high-risk and speculative investment, without question or protest. With the exception of Mr Taureka, when provided with a circular resolution committing NPF to a $A50 million investment, they simply signed on without seeking expert advice, relying on their faith in Mr Copland and Mr Wright.

Thereafter, the trustees stood by silently while NPF management acquired more and more HPL share to peak at 72.9 million shares at a cost of $A69,402,748. These acquisitions were usually in parcels worth less than K1 million to avoid the need for Ministerial approval (and DoF scrutiny).

As these unauthorised acquisitions became known, the trustees, including the DoF representative public service trustees, failed to question or criticise management for acting in excess of their authority.

As the HPL share price continued to fall from $A1 to 30 cents a share and below, both management and trustees seemed paralysed, doing absolutely nothing to try and save the members of the fund from the financial catastrophe, which was clearly approaching.

During this period, NPF suffered from a lack of responsible leadership.

Until August 1998, its chairman was Mr Copland who masterminded and continued to support the investment until the termination of his appointment in August 1998.

He was followed by the well qualified and efficient Brown Bai whose honest attempts to restructure NPF’s investments stopped after a few months when he stood down at then Prime Minister Skate’s direction.

His successor Jimmy Maladina has been found by the commission to have been dishonest, fraudulent and not acting in the interests of the members of the fund.

When Mr Bai stood aside as chairman and acting on the direction of the Prime Minister nominated Mr Maladina as his successor, Mr Bai remained as a trustee. However, in dereliction of his fiduciary duty to the members, he simply absented himself from attending meetings while the fortunes of NPF plummeted.

The board’s other DoF trustee, Vele Iamo, also continued his long-standing practice of not usually attending NPF board meetings. This was a serious failure of Mr Iamo’s fiduciary duty to the members.

On the management side, for most of this period the manager was Mr Kaul who gave evidence that he was unable to control Mr Wright and had difficulty communicating with Mr Copland.

In full knowledge of what was happening with this and other investments, Mr Kaul went along with the initiatives of Mr Copland and Mr Wright. He was party to and supported Mr Wright’s repeated purchases of HPL shares without board approval.

This was a breach of fiduciary duty by Mr Kaul.

TO BE CONTINUED

National Provident Fund Final Report [Part 33]

September 21, 2015 Leave a 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 33rd extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4B Continued 

Management purchased the approved one million shares by March 2, 1996 but then proceeded, with no board approval, to purchase an extra 1.61 million shares as shown in the following table:

npf 33 a

*Exempt – Ministerial approval is required for investment purchases in excess of K1,000,000.

Findings

(a) Mr Wright and NPF management failed in their duty to provide expert objective advice to the board on the HGL share acquisitions;
(b) The board failed to direct management to perform due diligence on HGL investments and to provide satisfactory reports;
(c) Both the officers and the trustees are potentially personally liable for losses caused by these failures of duty, as found above; and
(d) Management acquired at least 1.6 million shares, through Wilson HTM, without authorisation from the board to do so.

In April 1996, Mr Kaul reported that NPF now held 7,805,000 HGL shares. By simple mathematics and/or by consulting the schedules of investment tabled with the board papers, the trustees should have detected the unauthorised transactions and brought management sharply into line. They failed to do so and this opportunity was allowed to pass.

Management, particularly Mr Kaul and Mr Wright, then grew bolder in their unauthorised activities. Trustees Tau Nana and Abel Koivi have explained in evidence that they did not check the investment schedules because they felt that it was quite clear that Mr Copland knew what was happening throughout and was in full approval (Transcript pp. 8659-8720).

Sub-Underwriting HGL Shares 

On the unsupported advice of management, the NPF board gave approval to a strategy for NPF to underwrite $A15 million of a HGL share placement. Wrongly taking this as board approval to implement the strategy, management entered into the sub-underwriting agreement.

There was a shortfall of $A6,084,650 which NPF was obliged to take up. Mr Kaul belatedly sought Ministerial approval after the event and made false representations to the Minister, and later to the board, to cover up the breach of the PF(M) Act.

Findings 

(a) NPF management (Mr Wright and Mr Kaul) entered into an agreement sub-underwriting HGL’s $A15 million share issue before seeking Ministerial approval, as directed by the board; and
(b) Mr Kaul deliberately misled the Minister (and later the board) in order to cover up the fact that the agreement was executed prior to obtaining Ministerial approval.

Management continued to act in excess of their authority throughout 1996. Mr Wright refused an offer by Placer Dome to buy out NPF’s HGL shares at 75 cents without referring the offer to the board.

In November and December, the following unauthorised purchases were made:

npf 33 b

Once again, there were no complaints from the trustees.

At the 104th NPF board meeting, chairman Copland informed the board that NPF now held 31.2 million HGL shares. He proceeded to outline NPF’s strategy regarding the current takeover bid.

Under his guidance, the board refused an offer by HGL to buy back its shares for 75 cents and resolved instead to continue purchasing HGL shares up to 75 to 76 cents, in order to keep the HGL share price above Placer’s offer of 75 cents. The board resolved to acquire up to 10 per cent of HGL’s issued capital for approximately K21 million. Armed with this resolution, NPF made the following HGL share purchases in December 1996:- See table on right:

Findings 

(a) The management, the board and the Minister failed to comply with their duty of due diligence before recommending and approving purchases totalling $A16,469,387 worth of HGL shares in early December 1996;
(b) Management exceeded its authority by purchasing 1.15 million shares, without board authority, costing $A879,681;
(c) The purchase of 21.6 million HGL shares in December 1996 was excessive. The trustees had been enticed into agreeing with management’s speculative investment “plays” which was inappropriate for a provident fund;
(d) Management failed in its duty to provide the board with independent investment advice on this strategy and may be personally liable for losses incurred unless they can successfully claim to have “acted in good faith”;
(e) The trustees failed in their fiduciary duty in not directing management to provide the board with independent expert advice and may be personally liable for loses incurred unless they can successfully claim to have “acted in good faith”;
(f) The decision to buy at 75-76 cents a share, may amount to illegal share ramping, which should be referred to ASIC for investigation; and
(g) The purchases were made without obtaining the requisite Ministerial approval.

Placer Dome Buy Out And The Establishment Of Highlands Pacific Limited 

On January 7, 1997, the restructuring was announced so that all HGL assets except the valuable interest in Porgera and Orogen receivables, were transferred to the new entity, HPL, and HGL received 564.5 million shares in HPL, with an equity raising of $A160 million at 30 cents.

NPF would receive $A27.6 million for its HGL shares and Mr Wright recommended NPF add an additional $A22.4 million to invest $A50 million in HPL. Mr Wright’s investment paper followed the HGL media release and gave the following reasons in support of the investment, without providing any professional investment analysis:

npf 33 c

  1. NPF realises $10 million profit on the deal upfront;
  2. PNG Institutions, NPF in particular will control Highlands Pacific Ltd and by default Ramu Nickel and Nena/ Frieda Copper;
  3. The deal shows the maturity of the PNG institutions and PNG capital markets;
  4. Provides members with long-term opportunities and maximises return to get in to these big projects at the ground level;
  5. Baring Brothers valuations of these assets indicate the shares should be worth 42 cents each and not 30 cents. The 30 cents issue price represents a 29 per cent discount to the Baring Brothers low valuation.” (Exhibit H29)

Without providing expert advice or any opportunity for discussion, Mr Wright sought immediate approval, by way of circular resolution on January 15, 1997, from the trustees.

All trustees, except Isikeli Taureka, gave their immediate approval without seeking further advice and without protesting at being given no opportunity to discuss this huge $A50 million investment at a properly constituted board meeting (Mr Taureka proposed that the money from the HGL takeover be invested in a sale interest bearing investment rather than being invested, together with further borrowed funds, in the risky HPL ventures).

This investment was made in such a rush that it was certified as a board resolution the next day, January 16, 1997, and given approval by Minister Haiveta on the same day.

Findings 

(a) Mr Noel Wright failed in his duty to provide expert objective advice to the board regarding investing the HGL share proceeds and extra funds totalling $A50 million, in HPL;
(b) Seeking approval for the huge investment in HPL, by way of circular resolution, was unnecessary and inappropriate and deprived the trustees of the opportunity to have face-to-face discussions regarding that important topic;
(c) The trustees, with the exception of trustee Isikeli Taureka, failed in their fiduciary duty to the members, by voting in favour of the resolution without insisting on due diligence and proper expert briefing from management. They face personal liability to reimburse the fund for any losses incurred from their failure of duty, unless they can successfully claim to have “acted in good faith”;
(d) Mr Frank erred by certifying the result of the circular resolution as a resolution of the NPF board, before the board convened face-to-face to ratify the resolution;
(e) Minister Haiveta failed in his duty pursuant to the PF(M) Act when considering NPF’s request for approval in that he failed to seek DoF or other expert advice on the HPL investment. This amounts to improper conduct by Mr Haiveta.

Mr Wright and Mr Frank exceeded their authority by unlawfully signing the formal reconstruction agreement on January 28, 1997, under the NPF seal.

In February 1997, NPF management acquired a further five million HGL shares for $A3,875,025 without board approval and without due diligence.

Mr Wright and Mr Kaul face personal liability for loss suffered by NPF members for this unauthorised purchase.

Highlands Pacific Limited

Mr Copland and Mr Aopi were appointed as NPF representative directors on the HPL board. In addition to the $A50 million shares acquired by NPF, NPF agreed to sub-underwrite $A50 million of the HPL share placement. NPF later agreed to scale back its entitlement.

Findings

At paragraph 6.5, the commission has found that:

(a) The failure of Mr Copland and Mr Aopi to disclose their conflict of interest as HPL directors to the NPF board was improper;
(b) Whichever officers signed the sub-underwriting agreement exceeded their financial delegation;
(c) The Minister was not formally informed of the details of the sub-underwriting and scaling back arrangements;
(d) NPF failed to seek BPNG approval for the full amount of the $A50 million share price. This failure was an offence under the Foreign Exchange regulations.

From June 12 to September 29, 1997, NPF management authorised the purchase of 1,712,333 million shares without board approval. They were purchased in parcels worth less than K1 million so Ministerial approval was not required. (This seems to have been a deliberate strategy to take advantage of Mr Haiveta’s standing approval for transacting up to K1 million to avoid the necessity of involving the Minister and possibly to avoid DoF scrutiny of the proposed transactions).

TO BE CONTINUED

National Provident Fund Final Report [Part 9]

August 17, 2015 1 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!

NPF Final Report

This is the ninth 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.

Continued from Friday

Three Employee Representative Trustees
Position: Trustee
Name: Henry Leonard
Period: May 18, 1995 to May 17, 1998 and January 1, 1999 to December 21, 1999

Irregularity
The only irregularity is that after his first term expired on May 17, 1998, a period of seven months was allowed to elapse before his reappointment. During that period, there were only two employee representative trustees.

Three Employer Representative Trustees
Position: Trustee
Name: Graham Hogg
Period: February 12, 1993 to February 11, 1996

Irregularity
No irregularities

Position: Trustee
Name: Isikeli Taureka
Period: February 12, 1993 to December 1997

Irregularity
Mr Taureka apparently resigned in about December 1997. It was not gazetted as required by the NPF Act. The vacancy was not filled for over 12 months.

Position: Trustee
Name: David Copland
Period: September 1, 1998

Irregularity
Mr Copland was allowed to continue as an employer representative trustee long after he ceased to be an employer – in contravention of the Act. The stated ground for termination was not a prescribed ground under the Act.

Position: Trustee
Name: Tau Nana
Period: February 8, 1996 to February 7, 1999 and April 20, 1999 to December 31, 1999

Irregularity
Once again, there was a gap between the end of Mr Nana’s first term and his reappointment. For a period Mr Nana was the only employer representative trustee. Mr Nana’s second appointment was invalid as there was no vacant employer trustee position available.

Position: Trustee
Name: Nathaniel Poiya
Period: January 19, 1999 to December 31, 1999

Irregularity
No irregularity

Position: Trustee
Name: Jimmy Maladina
Period: January 19, 1999 to December 31, 1999

Irregularity
This controversial appointment was opposed by the employers federation on the ground that his name had not been put forward by an organisation representing employers. Court action was settled on the basis that Mr Maladina would resign as trustee. He did not do so.

Position: Trustee
Name: Wayne Golding
Period: February 18, 1999 to March 13, 1999

Irregularity
Mr Golding was appointed by Minister Lasaro as an employer’s representative trustee. The appointment was invalid as there was no vacancy for an employer’s representative trustee and because his name had not been put forward by an organisation representing employers. When the employers federation threatened court action, his appointment was terminated.

Position: Managing Director
Name: Robert Kaul
Period: July 5, 1993 to May 5, 1998

Irregularity
His initial appointment was in accordance with the NPF Act but his conditions of employment were agreed by way of a personal contract of employment, with generous early termination clause. This was contrary to the provisions of Section 15 of the NPF Act, which required a Ministerial determination after prior consultation with the NPF board.

Revocation of his appointment by Minister Lasaro was improper and ineffective. It coincided with conflict between Mr Kaul and Mr Lasaro over claim for exemption by Masurina Group of Companies.

Position: Managing Director
Name: Henry Fabila
Period: ?

Irregularity
His initial appointment was invalid as Mr Kaul had not vacated the position. The signing of personal contract of employment was contrary to the NPF Act.

Findings regarding the  appointment of chairmen to the NPF Board

Appointment of Evoa Lalatute

Minister Haiveta’s precipitate conduct in purporting to appoint Mr Lalatute, as chairman of the NPF board was improper and ineffective. The proper way to make the appointment was for the Secretary of the DoF Rupa Mulina to nominate him as chairman and for the Minister to then approve the nomination. Mr Mulina’s attempt to regularise the appointment by way of a backdated nomination may be ineffective.

Findings

(a) Minister Haiveta had no legal power to appoint a chairman to the NPF board. His appointment of Mr Lalatute as chairman on December 13, 1995 was therefore illegal and improper.
(b) It is not appropriate for NPF management to be involved in giving advice to the Minister and DoF on the appointment of a trustee and to draft the required legal documents.
(c) The improper appointment resulted from Mr Haiveta’s enthusiasm for achieving results by exercising power and because DoF and Mr Mulina did not insist on asserting DoF’s primary role as Ministerial advisor and implementer of Minister’s decisions. There was nothing sinister in the replacement of Mr Mulina by Mr Lalatute, however.
(d) In an attempt to regularise Mr Lalatute’s appointment, Mr Mulina nominated Mr Lalatute to replace himself as chairman on January 19, 1996 pursuant to Section 6(1)(b) of the NPF Act. The instrument of nomination was however, backdated to December 1, 1996, in order to give the appearance that the initial appointment of Mr Lalatute had been done in accordance with the Act.

The validity of Mr Lalatute’s appointment is questionable.

Revocation of Mr Lalatute’s appointment as Chairman

The proper way to revoke this appointment was for Mr Lalatute to resign or else for the Secretary of the DoF Mr Mulina, to withdraw his nomination. Instead, Minister Haiveta purported to rescind the appointment and published a notice in the Gazette approving the revocation of Mr Lalatute’s appointment as chairman.

Mr Mulina did not withdraw Mr Lalatute’s nomination as chairman and there is no documentary evidence that Mr Lalatute ever resigned in writing given to the Minister, as required by the Act. No termination of Mr Lalatute’s appointment was ever gazetted. Nor is there evidence that Mr Lalatute’s appointment as a trustee was ever properly terminated.

The uncertainty about Mr Lalatute’s termination as a public service representative trustee and as chairman throws up doubts about the legality of the appointments of his successors as chairman and trustee.

Findings

(a) Mr Lalatute’s appointment as chairman of the NPF board on the nomination of the previous chairman Rupa Mulina was never properly revoked or otherwise terminated prior to the appointment of his replacement as chairman – David Copland.
(b) The appointment of Mr Copland as chairman of the NPF board was not valid as the position was not vacant.
(c) The appointment of Mr Lalatute as a trustee representing the public service was not validly terminated.
(d) The appointment of Gerea Aopi to replace Mr Lalatute as a public service representative trustee was not valid as there was no vacancy in that category of trustee position at that time.
(e) The managing director of NPF had no power to recommend trustees to the Minister and DoF to be appointed to the NPF board.
(f) DoF failed to assert itself as the prime authority to advise and support the Minister in these matters. This left a bureaucratic vacuum, which NPF management attempted to fill.
(g) In consequence there is serious doubt about the legality of Mr Lalatute’s vacating the office of chairman and consequently there is also doubt about the validity of Mr Copland’s appointment as chairman.

Role of Morea Vele

The new Secretary of the DoF assumed the role of chairman by revoking Mr Copland’s nomination but then failed to attend meetings.

Findings

(a) Mr Vele’s failure for a period of almost six months (February 15 to August 4, 1998) to attend to his duties as NPF chairman or, alternatively, to nominate a person to occupy the position of chairman at and between meetings was a breach of his fiduciary duty to the members of the fund.
(b) There is no evidence that Mr Vele was under any political or other external pressure to not perform his role as chairman.

David Copland – termination of appointment as a Trustee 

In the absence of Mr Vele from meetings, Mr Copland was repeatedly appointed acting chairman, even after he ceased to be an employer. When he was finally terminated as a trustee no valid ground was stated. The correct grounds for terminating Mr Copland should have been under Section 10(1)(h) of the Act (ceasing to be an employer).

Findings

(a) After Mr Copland ceased to be a representative employer in PNG he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act.
(b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds.

Brown Bai

After Mr Bai became Secretary of the DoF on September 1, 1998, he performed actively as chairman of the NPF board. He stood down reluctantly and nominated Jimmy Maladina as chairman under pressure from Minister Lasaro and Prime Minister Bill Skate, who exerted strong and improper pressure to have Mr Maladina appointed as a trustee and as chairman.

Findings

(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1)(e) of the NPF Act.
(b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator, Mr Maladina.
(c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion.
(d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper.
(e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board.
(f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Minister Lasaro and Prime Minister Skate.
(g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees.
(h) Mr Bai’s failure to attend meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund.
(i) Mr Maladina’s failure to formally resign his position of employer representative trustee, as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment, as there was no vacancy for him to fill.

Findings regarding appointments of Trustees to the NPF Board

Vele Iamo

Mr Iamo’s repeated absences from NPF board meetings deprived the board of the benefit of his expertise. Even though it was caused by pressure of other important work it was a breach of his fiduciary duty to the members of the fund. After absenting himself without permission of the chairman for more than three consecutive meetings, it was obligatory for the Minister to terminate Mr Vele’s appointment. This did not happen for several years.

The belated termination of Mr Iamo’s office of trustee was irregular.

Findings

(a) Mr Iamo failed in his fiduciary duty to NPF when he failed to regularly attend board meetings.
(b) Mr Frank and Mr Leahy failed in their fiduciary duties by not advising the board about the legal position concerning Mr Iamo’s continuous absences from board meetings.
(c) Minister Lasaro failed to make a clear-cut and publicly gazetted termination of Mr Iamo’s appointment, before advertising for applications to fill the non-existing vacancy in his position.
(d) Mr Iamo’s frequent absences from NPF board meetings were because of his extremely busy schedule as a senior officer of the DoF, which obliged him to attend a great many board and other meetings. Expecting senior officers to hold responsible positions on so many boards amounted to a structural weakness in the NPF Act.
(e) There were many instances where Mr Iamo’s role as a senior officer of DoF was in direct conflict with his role as a trustee of NPF, especially when he was promoting the Government’s interests while advising/requesting NPF to assist the State by, for instance, purchasing Government bonds or road stock.

Evoa Lalatute

There was confusion about Mr Lalatute’s position as a trustee after he ceased to be chairman because proper procedures were not followed.

Findings

As Mr Lalatute never resigned as a trustee and as his appointment was never formally terminated, it throws legal doubt about the subsequent appointment of Gerea Aopi as a public service representative trustee, as there was no vacancy in that category of trustee at the time of his purported appointment.
Gerea Aopi

Mr Aopi’s appointment as a public service trustee occurred before there was a vacancy, as Mr Lalatute was still a public service trustee. There were, therefore, too many public service trustees for over 21/2 years, from February 8, 1996 until August 28, 1998.

Findings

(a) The failure to follow the prescribed procedures in the NPF Act regarding appointment and termination of trustees continued to undermine the constitutional validity of the NPF Board of Trustees up until Mr Aopi’s resignation on August 28, 1998.
(b) Primary responsibility for this situation is the failure of DoF to accept responsibility for managing these changes to the NPF board and Mr Leahy’s failure to proactively provide timely and professional advice as legal counsel and corporate secretary.
(c) It seems there was more than the maximum allowed number of public service representative trustees for more than 21/2 years throwing doubt on the legality of the NPF board and all its decisions in that period.

Abel Koivi

Mr Koivi was appointed as a public service representative trustee because he held a position with Air Niugini when it was Government owned. The appointment was invalid because there was no vacancy for a public service representative trustee at that time.

When Air Niugini was privatised, Mr Koivi was no longer a public servant and therefore he was not qualified to hold this position.

Mr Leahy attempted to “qualify” him by arranging for his job with Air Niugini to be declared an office in the public service.

Findings

(a) Mr Koivi was initially appointed to the NPF board on April 1, 1996, when there was no vacancy for a public service representative trustee and without following prescribed procedures. His appointment was therefore invalid.
(b) This irregularity became known to Mr Leahy who on August 5, 1997, advised managing director Kaul of the fact and the legal consequences, but did not pursue the matter to rectification.
(c) When an attempt was made to regularise Mr Koivi’s appointment as a public service representative trustee he was no longer in the public service.
(d) Following Mr Leahy’s advice, NPF management sought to overcome this impediment by declaring the position to be a public service office by declaration under Section 3(5) of the Interpretation Act. This was done surreptitiously, without notifying DoF or the Minister about the reasons for this deft legal manoeuvre. It is not certain whether or not this finally regularised Mr Koivi’s appointment, two years and five months after it had been made.
(e) When it was decided to terminate Mr Koivi’s appointment, he was given no notice and it was done by Prime Minister and Acting Minister Skate, irregularly and not upon any grounds specified under Section 10 of the NPF Act, as required. The effectiveness of the formal termination of appointment is therefore in doubt.

Brown Bai

When appointed a trustee after he stood down as chairman, Mr Bai continuously failed to attend meetings. His appointment was not terminated as required by Section 10(1)(d) of the NPF Act.

Findings

(a) Because of slackness in the way appointments and terminations of office of trustees were handled, the NPF board of trustees was improperly constituted for almost two years and five months from early 1996 until August 28, 1998.
(b) This situation was known by Mr Vele, Mr Kaul, Mr Fabila and mr Leahy.
(c) It raises doubts about the legality of NPF board decisions and contracts during a period when there were very significant transactions involving many millions of kina.
(d) Mr Leahy failed in his duties by not taking immediate and appropriate action to ensure the board was properly constituted as far as public service trustees are concerned.
(e) The DoF failed in its duties by not ensuring that the matter of the constitution of the NPF board under Section 6(1)(c) of the NPF Act was properly managed.
(f) The commission recommends that the monitoring of the constitutional integrity of statutory corporations should be the responsibility of a single agency and that the statutory instruments should always be prepared in the office of the First Legislative Counsel.

Findings regarding the appointments of three employee representative Trustees

There were no substantial irregularities in the appointment and terminations of appointment of the employee representative trustees — Mr Paska, Mr Gwaibo and Mr Leonard. The only serious irregularity was that for substantial periods, there were only two employee representative trustees instead of the prescribed three.

Findings regarding the  appointments of three employer representative

Trustees Graham Hogg
There were no irregularities.

Isikeli Taureka

Mr Taureka resigned for personal reasons about December 1997. There is an air of uncertainty, as his resignation was not gazetted as required under Section 10(3) of the NPF Act. The vacancy caused by his departure was allowed to remain vacant for 12 months.

David Copland

After being illegally allowed to continue as an employer representative trustee, after ceasing to be an employer, Mr Copland’s appointment was terminated on a ground, which was not prescribed in Section 10 of the NPF Act.

Findings

(a) After Mr Copland ceased to be a representative employer in PNG, he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act.
(b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds.

Mr Copland’s vacancy was not filled immediately and for a period, Mr Nana was the only employer representative trustee on the board.

Tau Nana

There were no irregularities except the two-month delay in reappointing him. For a period, Mr Nana was the only employer representative trustee.

Jimmy Maladina

There was considerable controversy surrounding Mr Maladina’s appointment as employer representative trustee as for a long while no valid organisation representative of employers was willing to nominate him for consideration by the Minister. It involved much political pressure and contrived nominations.

In evidence before the commission, Mr Skate and Mr Lasaro each blamed the other for the appointment of Mr Maladina.

Findings

(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1) (e) of the NPF Act.
(b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator Mr Maladina.
(c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion.
(d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper.
(e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board.
(f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Mr Lasaro and Prime Minister Skate.
(g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees.
(h) Mr Bai’s failure to attend any meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund.
(i) Mr Maladina’s failure to formally resign his position of employer representative trustee as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill.

The employers federation strongly resisted the appointment of Mr Maladina as an employer representative trustee on the nomination of Waghi Mek Plantations, saying this was not an organisation of employers representing employers and a Writ was issued. It was settled on the basis that Mr Maladina would resign as an employer representative trustee, allowing for the appointment of Mr Jeffery in his place, with Mr Maladina to remain with NPF solely in his capacity as chairman. When Mr Maladina failed to carry out the formalities required in order to validly resign, it threw doubt on the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill.

Wayne Golding

Mr Golding’s appointment by Minister Lasaro was invalid from the start. He was not nominated by an organisation of employers representing employers, nor was there a position for him. Nevertheless, he assumed duties and voted at meetings before his appointment was terminated in the face of threatened court action by the employers federation.

Findings

(a) The appointment of Mr Golding as an employer’s representative trustee by Mr Skate as Acting Minister for Finance, without a nomination by an organisation of employers representing employers, was improper and invalid, being contrary to the requirements of Section 6 of the NPF Act.
(b) It was inappropriate that Mr Fabila and Mr Leahy were dealing directly with the Minister in organising the appointment of Mr Golding, by-passing the DoF.
(c) The DoF failed to assert itself by insisting on advising the Acting Minister on this appointment. This is understandable considering that Mr Skate had already indicated he would act despite DoF’s contrary advice.
(d) The procedures adopted by Mr Lasaro and Mr Fabila to terminate the (invalid) appointment of Mr Golding were not in accordance with the NPF Act and were very confusing.
(e) It seems that Mr Golding participated in NPF decision-making, despite his initial appointment being invalid and after steps had been taken to terminate the appointment.

No independent monitor of statutory compliance

Many of the irregularities which occurred regarding the appointment and termination of trustees arose from the fact that no agency of government assumed responsibility for ensuring that the NPF board was properly constituted at all times.

It was left to the NPF corporate secretary/legal counsel to monitor the completion of terms of appointment, to ensure nominations for appointment and reappointment occurred in compliance with the Act and to prepare instruments of appointment for signature by Prime Minster or Minister and to organise gazettal as appropriate. Similarly, it was left to Mr Leahy and NPF management to ensure that all categories of trustee position were filled, with the prescribed number of trustees of that category.

This system clearly broke down.

As neither DoF nor the First Legislative Counsel had clear responsibility in these matters, the gross constitutional defects which occurred in the composition of the NPF board throughout the period under review were not noted and corrected.

Findings

(a) The failure of DoF or any other government agency to advise the Minister and manage appointments and termination of trustees continued to undermine the constitutional validity of the NPF board when the resignation of Mr Maladina as an employers representative trustee did not proceed as agreed.
(b) The appointment of Mr Nana and Mr Jeffrey on June 3, 1999, resulted in there being four trustees in that category and consequently the board was invalidly constituted from June 3, 1999, until the end of the period under review on December 31, 1999.
(c) The fact that there was no validly appointed NPF board of trustees casts legal doubt upon the validity of the major board decisions made after June 3, 1999, which included the transfer of NPF assets. There is no validating clause in the NPF Act to protect decisions made by an unconstitutional board containing too many members in any one category of trustee (Section 11 only validates decisions of a board which has two few trustees in a particular category).
(d) The primary responsibility for ensuring that the trustees are validly appointed to the NPF board and that the composition of the board is in accordance with the requirements of the Act lies with the corporate secretary and principle legal officer Herman Leahy. Mr Leahy was in serious and repeated breach of that duty.
(e) The DoF did not accept responsibility to oversee and monitor the process of appointments to the board.
(f) Mr Lasaro and his advisors within the NPF, Mr Fabila and Mr Leahy as well as the DoF, which failed its responsibility to advise and manage this process, are all responsible for the serious legal confusion.
(g) The commission recommends that all instruments of appointment or termination of appointment should be prepared by the office of the First Legislative Counsel.

Appointment of  Managing Director

Legislation

Section 15 provides that the appointment of the managing director is by the Minister after prior consultation with the NPF board. Under Section 16, termination is by the board. Terms and conditions are as determined by the Minister after prior consultation with the NPF board.
Robert Kaul

Mr Kaul’s initial employment in 1993 was regular but his terms and conditions were agreed to by a contract of employment with NPF rather than by Ministerial determination as required by Section 15(2) of the NPF Act. This was repeated on his reappointment on July 4, 1996, with generous payout terms for early termination.

His early termination in 1998 was a result of improper political direction from Minister Lasaro and Prime Minister Skate, which resulted in a significant payout of his unexpired contract. Proper procedures were not followed. The termination was the result of a political scheme involving Mr Skate and Mr Lasaro, assisted by Mr Leahy, to appoint Henry Fabila to the office of managing director.

The irregular termination of Mr Kaul’s appointment was legally ineffective, which in turn invalidated Mr Fabila’s appointment, as the position of managing director had not yet become vacant.

Findings

(a) Gerea Aopi and the NPF management and board ignored the provisions of Section 15 of the NPF Act regarding appointments and the conditions of a managing director and inappropriately appointed Mr Kaul in 1993 pursuant to a personal contract of employment, containing generous payout provisions for early termination.
(b) After the formation of the “Skate” government in 1997, Prime Minister Skate and Minister Iairo Lasaro wished to replace Robert Kaul with Henry Fabila as managing director NPF.
(c) Prime Minister Skate had strong personal links with Mr Fabila and Minister Lasaro had strong personal reasons for replacing Mr Kaul, who was strongly resisting the Minister’s improper pressure to grant an exemption to the Masurina Group of Companies.
(d) Minister Lasaro gave an improper direction to the chairman of the NPF board/Secretary DoF Mr Vele to terminate the appointment of Mr Kaul without any prescribed grounds, which was beyond his power as this power lay with the board.
(e) Minister Lasaro’s direction to NPF to submit a list of names, including the name of Mr Fabila for his consideration, in circumstances where he had already made up his mind to appoint Mr Fabila and had issued a press release to that effect, did not constitute prior consultation with the NPF board as required by Section 15(1)(a) of the NPF Act.
(f) It was not possible to appoint Mr Fabila until Mr Kaul’s appointment had been terminated. This early termination required a payout to Mr Kaul of K141,983.51 for early termination according to his contract of employment.
(g) The DoF gave inadequate and incorrect advice to the Minister on the termination of Mr Kaul and appointment of Mr Fabila.
(h) Mr Leahy failed his duty as legal counsel and corporate secretary to advise the NPF board as to its rights and duties and that the Minister was exceeding his power in directing the termination of Mr Kaul’s appointment.
This was a serious breach of duty for which Mr Leahy, as a qualified and practising lawyer, was professionally liable. He may be personally liable for damages at the suit of the NPF board, including liability for loss suffered by NPF members caused by the excessive payout to Mr Kaul.
(i) The decision to terminate Mr Kaul and appoint Mr Fabila amounted to improper interference with the management of the NPF for which both Minister Lasaro and Prime Minister Skate were responsible.
(j) The commission recommends that the constituting authority refer William Skate and Iairo Lasaro to the Ombudsman Commission to investigate whether there have been breaches of the Leadership Code in relation to the termination of Mr Kaul’s appointment and the appointment of Mr Fabila as managing director of the NPF.
(k) The action of Acting Minister Sir Mekere Morauta in signing the instrument of appointment of Mr Fabila to the position of managing director of the NPF was not improper, as he acted in good faith, on the advice of the DoF, that the appointment was appropriate and in order.
(l) The statutory instrument of appointment of Mr Fabila was not prepared by the office of the First Legislative Counsel. It was probably prepared by Mr Leahy at the NPF. The instrument fails to recite the words of section 15(1)(a) “after prior consultation with the board” and there had been no such prior consultation — merely directions given by the Minister.
(m) The commission recommends that the office of First Legislative Counsel be given clear authority to prepare all instruments of revocation and appointment.
(n) Carter Newell were remiss in their professional duty for simply producing a contract for Mr Fabila’s terms and conditions, without proper research and without taking account of statutory provisions including Sections 16 and 17 of the Act, which set out grounds for termination.

continued tomorrow