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National Provident Fund Final Report [Part 81]

November 24, 2015 1 comment

Below is the eighty-first 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 81st extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 9 Continued

Mt Tapi Brothers

Mt Tapi Brothers Ltd (MTB) had associations with Mr Skate as it provided security services for the Prime Minister’s residence and family and for some of his Ministers. The telephone contact number MTB provided NPF was one of Mr Skate’s official numbers. Also at a later date, Mr Skate actively intervened on behalf of MTB (see below).

Mt Tapi Brothers Forceful Initial Approach

On February 23, 1999, MTB offered to provide security for all of NPF’s properties. In its initial letter it pointed out its close connections with the Prime Minister and enclosed a draft contract. Mr Fabila received the letter on February 24, 1999 and immediately granted a contract to MTB, in the full knowledge that NPF was contractually bound to Metro and Kress.

On February 26, Mr Fabila wrote to Kress and Metro arbitrarily terminating their contracts as from February 28, enclosing cheques for payments due to that date.

Mr Fabila also wrote to MTB granting a 12-month contract, with a three-month probationary period. He then wrote to Century 21, which was still managing NPF properties, directing them to terminate any current security contracts for the investment properties and to make way for the new security guards to commence work from 1st March 1999.

Metro accepted the termination of its head office contract without a fight.

Kress on the other hand demanded K199,844.80 for wrongful termination of its contract. Kress received K8283.60 from NPF for the Nine-Mile properties for January and February and K22,754.40 for its other contracted properties prior to its contract being terminated. Its claim for breach of contract was eventually settled out of court for K40,684.80 (being three months payment in lieu of notice plus costs).

MTB Contract

Mr Leahy prepared a contract on March 29, 1999 granting the security services for all NPF properties to MTB. The contract followed the draft presented by MTB with a few very minor amendments.

The first invoice for the period March 3, 1999 to April 7, 1999 was a phenomenally high K45,792, yet reports were being received that the service was very poor. When Mr Fabila complained about the exorbitant cost, the number of guards was cut from 52 down to 17. From March to August 1999 the complaints about the MTB security guards were pouring in.

NPF records show that the following payments were made to MTB in 1999: (See table)

npf 81 aIn October 1999, the NPF board resolved to terminate the services of MTB for the properties being sold off by NPF and the purchasers were advised that they could contact MTB if they wished to reemploy that firm. This resulted in MTB instituting court proceedings claiming K200,000 from NPF, which had been rejected by the NPF board.

On June 21, 2000, Shirley Marjen noted on an NPF file:

“File Note — Tapi Bros Security Service Bill Skate phone me at home on 20/06/00 at about 8.00pm asking me if I could assist with Mr Tapi Bros claim of about K200,000.00 I told Mr Skate that it would not be possible as NPF had objected to the claim and that Mr Tapi Bros can proceed to sue NPF if it wished to.

“I also told Mr Skate that if the matter went as far as the National Court, NPF would defend the matter vigorously.” (Exhibit N401)

In evidence to the commission on December 12, 2001 (Transcript pp. 9897-9902), Mr Skate admitted that the head of MTB Mr Okil, was employed on his Prime Ministerial staff and that MTB provided security services for himself and his family. He denied holding any interest in MTB or putting pressure on NPF to employ MTB. He said that if MTB played upon its close association with the Prime Minister, it was without his knowledge or authority.

Findings

(a) Both Mr Fabila and Mr Leahy failed in their duty to NPF in the way they handled the security services arrangements. As a result of these failures, NPF:

(i) suffered a K41,684.80 loss, paid to Kress Security, plus the related legal costs paid to Maladinas Lawyers;
(ii) may well be at risk of a similar claim or suit by Metro Security;
(iii) paid the very large security bill for the period March 3 to April 7, 1999 (K45,792) which, as later costs show, was for services vastly in excess of NPF’s reasonable security service needs; and
(iv) faces possible further risk in the pending litigation with MTB.

(b) Mr Fabila and Mr Leahy face personal liability to NPF in relation to their failures outlined above which led to NPF’s loss. They would have great difficulties pleading a defence of “acting in good faith”;

(c) Mr Fabila and Mr Leahy disregarded the proper tendering process when engaging MTB;

(d) The commission finds that nepotism and political interference were operating in the actions of Mr Fabila and Mr Leahy in their handling and engagement of security firm MTB; and

(e) The action by Prime Minister Skate in telephoning Mrs Marjen on behalf of MTB was improper conduct. The commission recommends that the constituting authority refer this matter to the Ombudsman Commission to investigate Mr Skate’s conduct and his possible links to MTB to consider possible breaches of the Leadership Code by Mr Skate.

As MTB’s legal proceedings in the National Court against the NPF are still pending, the commission refrains from further comment about the roles of the various persons involved.

The finance inspector’s report, which examined and detailed irregularities in the security contracts, is summarised in paragraph 7.8.1. The finance inspectors focused on the failure to call tenders; failure to verify invoiced charges; advance payments; overpayments; extra legal amendments and failure to obtain the authority of the NPF Board of Trustees. The schedules to the finance inspectors report contain details of persons who authorised all the payments referred to and detailed calculations of the overpayments made to Kress Securities of K7632 (Schedules 3.1 and 3.2) and overpayments to MTB of K16,896 (Schedule 3.5). No attempt has been made by NPF management or the board to recover these amounts.

The commission records its agreement with the finance inspectors findings on these matters.

120th NPF Board Meeting

At the NPF board meeting on September 29, 1999, Trustee Jeffery and Mr Mitchell asked detailed questions about the failure to tender security contracts; the termination of Kress and the appointment of MTB without competitive tenders. Mr Fabila’s answers were very unsatisfactory and it was resolved that:

“Resolution:
“It was resolved that all security contracts adhere to proper tender procedures. It was further resolved:
(i) THAT the vendor for each property sold be advised in writing after contracts of sale be exchanged and that security on the property then becomes the purchasers responsibility;
(ii) THAT MT Tapi Brother be advised that their services are no longer required for each property when sold, however, allowing for the appropriate time for vendors to engage new security services;
(iii) THAT NPF put out tenders for the Tower and remaining properties;
(iv) THAT at the end of the property rationalisation that MT Tapi Brothers be given three months notice of termination.” (Exhibits N423-4)

The now active NPF board held a special meeting on October 8, 1999 to consider a special report by Mr Jeffrey and Mr Mitchell. Mr Leahy was given time to answer searching questions. His reply, when it came, was evasive.

The changing of security arrangements in 1999 entailed breaches of contract and unnecessary cost to NPF. As corporate secretary, legal counsel and operations manager Mr Leahy had a duty to give proactive advice to Mr Fabila and the NPF board on these matters. He failed in that duty.

Findings

At paragraph 7.8.4, the commission has found:

(a) NPF paid Metro Security K6830.20, Kress Security K8283.60 and MTB K199,560 for security services in 1999, aggregating K214,673.80. In addition, the payment of damages and legal costs made to Kress Security of K41,684.80, increased this total to K256,358.60 (It is necessary to deal with a single total, as the payments to MTB have not been split, in the commission’s calculations, between head office and other properties);

(b) The actual security costs included in the 1999 Income and Expenditure Account are; K223,223 for “Rental Property Expenses” and K54,542 for “Head Office Expenses”, aggregating K277,765. The difference of more than K21,000 cannot be explained by adopting a cash against accruals basis of calculation and the commission is not able to explain a difference of this magnitude;

(c) The decision by Mr Fabila to terminate the less costly services of Metro and Kress and to appoint the more expensive MTB was made in two days, without competitive bidding or advice. It cost NPF dearly in terms of:

(i) A payout to Kress of K41,684.80 for breach of contract;
(ii) AN enormous initial bill of K45,792 from MTB for the first month for services, which were massively in excess of NPF’s actual needs;
(iii) THE legal risk to NPF of a like wrongful termination suit from the second terminated contract; and
(iv) litigation now pending before the National Court by MTB whose services, under a legally deficient contract, were also subsequently terminated.

(d) MR Leahy was remiss in his duty in not proactively advising Mr Fabila against the foolhardy course on which he was embarking; (e) The contract awarded, without contest, by Mr Fabila to MTB Ltd was politically influenced by the close association with that company of Mr Fabila’s political appointer, the former Prime Minister Hon. Bill Skate and constitutes an example of nepotism in the award of that contract.

Concluding comments

The commission concluded that:

“As with other topics in this report, it does seem that in 1994-5, both the NPF board and senior management appreciated the need to tender and obtain competitive bids for the provision of security services for the NPF Head Office and for the NPF properties rented to third parties.

Even then, when tenders were obtained and considered in March/ April 1995, there were competitive tenders for the rental properties only, but not for the head office. The board of trustees made the decision to contract in this instance.

Thereafter and until the end of 1999, all NPF security service contracts were let without tender and without any competitive bidding process and contrary to Government procedures for the procurement of services.

The board of trustees was only consulted once during this period — in October 1996 — over the change of security provider at NPF’s head office. On that occasion the board delegated the decision to management.

Otherwise, all other decisions about security services were made at management level.

The situation reached absurd proportions in February/March 1999 when Mr Fabila made a hasty decision to terminate the services of the two contracted security providers in favour of a single more expensive alternative — Mt Tapi Brothers Limited.

He did this without seeking advice or making inquiries and did so without referral to the NPF board”.

Procurement Of Accounting Services Background

In house accounting capabilities during the period under review were as follows.

Noel Wright, a qualified Chartered Accountant who was originally employed as compliance manager, later became finance and investment manager and deputy managing director. He resigned from NPF in January 1999. He was replaced by Rod Mitchell who is not a qualified accountant. This was the time when NPF struggled to come to “grips” with its financial crisis.

Salome Dopeke was the chief accountant — she was a graduate accountant but had not passed all her PNGIA examinations and as such was not a formally qualified accountant.

It is therefore important to note that the accounting capabilities of NPF were weak and lacked professional efficiency and effectiveness. There were other specialised accounting requirements, which were outsourced to local accounting firms in Port Moresby.

Fees Paid To Accountants — 1995

Other than the above fees and audit related fees there were no external accounting fees incurred in 1995 and it is inferred all other accounting needs were satisfactorily handled in-house.

NPF utilised the services of the accounting firm Ernst & Young as tax agent from 1995 to 1998. There is no evidence of favouritism or nepotism in the appointment and continued engagement of Ernst & Young.

npf 81 b

The audit of the financial statement of NPF is the responsibility of the Auditor-General’s office (AGO). In the case of NPF, the AGO subcontracted Deloitte Touche Tohmatsu to audit NPF’s accounts until the year ended December 31, 1997. There was scope for nepotism by NPF in this arrangement.

TO BE CONTINUED

National Provident Fund Final Report [Part 78]

November 19, 2015 1 comment

Below is the seventy-eighth* 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 78th* extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 9 Continued

Their failure to ensure this was a breach of their fiduciary duty to the members of the fund. The successive managing directors, as trustees and as managers, were in breach of the same duty in allowing such lax and inappropriate procedures to be followed.

Procurement And Disposal Of Property And Property Management Services Property disposal

Many of NPF’s “lesser” properties were sold during 1998 and 1999 as part of NPF’s asset disposal strategy.

The sales have been examined by the commission and found to be in order, with the one exception of Allotment 13 Section 73 Pipigari S Korobosea, which was sold to the Papua New Guinea Trade Union Congress (PNGTUC). The further investigation into this matter is dealt with at paragraph 3.6 below.

Property management services

Many irregularities have been discovered in management services contracts where proper tender procedures have not been followed and nepotism has clearly been occurring.

Long standing relationship with Century 21 Siule Real Estate (Century 21)

Since well prior to 1993, Century 21 was NPF’s sole agent, managing and marketing NPF’s various properties.

It is not known how this relationship developed, however, the commission is aware that Century 21 employed Noel Wright’s wife, Helen Copland.

In late 1997, as the NPF Tower neared completion, the question of marketing and managing it came up for consideration and this was clearly to be lucrative business for the chosen agent.

In August 1997, the exclusive marketing rights for the NPF Tower were granted to Century 21 as a matter of course, without following any form of competitive tender procedures. At the 114th NPF board meeting on September 1, 1998, Mr Fabila, supported by Mr Leahy, challenged that arrangement. Mr Wright’s failure to disclose his interest in Century 21, through the fact that his wife was employed there, formed part of the discussion.

In August/ September 1998, after obtaining legal opinion about the power to do so, Mr Fabila cancelled Century 21’s exclusive marketing rights over the Tower and called for competitive quotes from Graeme Dunnage and Associates, The Professionals, Port Moresby First National Real Estate (PMFNRE), L J Hooker and Century 21.

Mr Fabila also notified Century 21, in October 1998, of NPF’s intention to terminate Century 21’s contract for the exclusive management of all NPF’s properties and to call for tenders. This matter was not put before the NPF board and seems to have been an initiative of Mr Fabila and Mr Leahy.

Century 21 seems to have accepted the termination of its exclusive marketing and management contract, which took effect on 22nd December 1998 and then participated in the tendering process in January 1999 for a new contract.

The tenders

Advertisements, calling for tenders to manage all NPF’s properties as one contract, were published on January 15, 1999 with January 31, 1999 set as the closing date.

Tenders were called for the management of the following properties:

  • The four blocks of units at Allotment 7 section 142, Tokarara;
  • The NPF Head office Allotment 7 Section 58 Boroko;
  • One house at Allotment 18 Section 34 Lawes Rd;
  • One house at Allotment 26 Section 34 Ela Makana;
  • Eight units at Allotment 26 Section 34 Ela Makana;
  • Three units at Allotment 83 Section 51 Davetari Drive; and
  • The warehouse at Allotment 16 Section 62 Gordons.

Tenders were received from Gemini Holdings Ltd, Haka Holdings Ltd and Century 21 within time.

Possible collusion between Mr Leahy and PMFNRE

A proposal from PMFNRE was also considered although initially neither NPF nor PMFNRE was able to produce under summons a formal tender document from PMFNRE.

In April 2001, PMFNRE later produced some correspondence between Mr Leahy and Mr Sullivan of PMFNRE, which indicates that Mr Leahy was providing information to assist Mr Sullivan to prepare a tender in January 1999.

One of the documents he provided to Mr Sullivan was a list of NPF’s property portfolio, as follows:

78 a

The papers included a document purporting to be a tender which contained promotional material about PMFNRE and a one page sheet listing the quoted fees as “6 per cent of the total monies paid”.

It acknowledged that tenders for the Tower were not then being called for but expressed an interest in tendering for that contract when it came up. The PMFNRE unsigned and undated document entitled “Tender for NPF Property Management” cannot be seriously treated as a formal tender but it seems that it was accepted by NPF as such.

Mr Leahy intervenes in the tender process

After the tenders from Gemini, Haka and Century 21 were received and, possibly, the PMFNRE “tender” also, Mr Fabila left PNG for a short period. While he was away, and before any formal decision had been made to accept the best tender, Mr Leahy communicated with Haka, Gemini and PMFNRE. He advised Haka and Gemini that each had been accepted to manage a few of the properties for which they had tendered and asked them to again list the services they would supply and to, again, quote their fees.

As a result each restated the services and quoted substantially higher fees than previously (perhaps because the property portfolio to be managed was smaller). Haka complained bitterly at the limited portfolio it had been granted, and this was subsequently increased.

Mr Leahy grants management of the Tower to PMFNRE

On February 11, Mr Leahy also wrote to PMFNRE advising that it had been awarded:

  • Section 34: Allotment 26 Granville — 8 units;
  • Section 62: Allotment 16 Gordons — 1 x Archives shed; and
  • Section 5: Allotment 11 Granville — (The Tower)

The letter requested PMFNRE to provide a description of the scope of the service as well as a quotation of their fees.

Mr Leahy’s intervention in the competitive tender process changed it to that of non-competitive negotiated contracts with the three successful applicants.

Mr Fabila negotiates with the successful tenderers

On February 26, 1999, Mr Fabila formally notified Gemini of the list of properties it had been awarded at the higher fee, though he negotiated the fee down slightly. On the same date, Haka was similarly notified, but because of its complaints that the portfolio awarded by Mr Leahy on February 11 was too small, it was also awarded the management of the Ela Makana units (which were taken back from PMFNRE).

Also on the same day, Mr Fabila also confirmed the good news to PMFNRE that it had won the management contract for the NPF Tower, which had not even been on the list of properties for which tenders were called.

Finally, on February 26, 1999, Mr Fabila also notified Century 21 that its tender bid had been unsuccessful. Because of the way NPF handled this matter, the handover arrangements from Century 21 to the successful tenderers, were messy and unprofessional.

There is no evidence that the various tenders were ever comparatively analysed to choose the best tender.

On the face of the documents, it seems that Century 21’s tender was probably the best, considering its experience, prior successful service and fees quoted.

Findings

(a) The termination of Century 21’s exclusive property management agreement with NPF was a management decision Mr Fabila made without the authority of the NPF board;

(b) The exclusive property management contract for all NPF properties (other than the NPF Tower) was put out to tender. The lowest and best tender was that of Century 21;

(c) Mr Leahy acted improperly by contacting each of the three companies (Gemini, Haka and PMFNRE) while the tender procedure was in progress, asking them to specify a job profile and to quote a price to manage a portion of the properties originally put out to tender. This resulted in NPF paying a higher price than the tenders initially received;

(d) The Century 21 tender was rejected by management without proper analysis of the competing tenders;

(e) The appointment of Gemini, Haka and PMFNRE as management agents for NPF properties (shared between them) was not arranged under any proper or approved tenders procedures, but was the result of non-competitive contract negotiation;

(f) The awarding of property management contracts to Haka, Gemini and PMFNRE was a management decision made without board authority or approval; and

(g) Mr Fabila negotiated directly with each of the tenderers to agree upon a lower price than quoted.

Management agreement for the NPF Tower

The agreement was between PMFNRE as agent and the Tower Ltd as owner. The directors of the Tower Ltd, appointed by the NPF board on February 8, 1999, were Henry Fabila (chairman), Jimmy Maladina and and Herman Leahy (also secretary) although NPF was sole shareholder, its approval was not legally required for the terms of the management agreement, which was signed by Mr Leahy and Mr Fabila.

As these three persons were all involved in schemes to defraud the NPF at the time, it is not surprising that the terms of the management agreement were very generous to PMFNRE at the expense, of course, of the members of the fund. This generosity was built in by:

(a) Providing a 5 per cent commission, not only on rent paid, but also on rent plus the tenants outgoings paid;

(b) Providing for a minimum commission in the early days, when the occupancy rate would still be low, of K199,999.92 or 5 per cent of gross rentals, whichever was the greater; and

(c) The termination clause provided that PMFNRE would be entitled to its full commission for the whole of the three-year term unless the agent had breached a fundamental term of the agreement.

False report to the NPF Board

In his report to the NPF board at its meeting on April 20, 1999, Mr Leahy pointed out the important details of the contract as:

“(i) Three-year term; and;

(ii) Fee = 5 per cent of the gross monies collected from tenants; and

(iii) Subject to board approval”.

Mr Leahy failed to point out that:

(a) In the early years when the rental income would be low because the building would be only partly tenanted, the commission would be a guaranteed minimum of K199,999.92 per annum.

(b) In the event of wrongful termination, the agent would be entitled, not just to damages, but to the whole of the management fees for the rest of the term; and

(c) As the contract had already been executed on March 23, 1999, it was too late to make it subject to NPF board approval.

Sub paragraph (a) and (b) above amounted to a misrepresentation to the board. Sub paragraph (c) was simply false.

The commission views all these arrangements with suspicion because of its findings in relation to the NPF Tower fraud and the Waigani Land deal in which the same characters were involved in either the fraud itself or the subsequent laundering of the money — Mr Maladina, Mr Leahy, Mr Fabila, Mr Barker, Mr Sullivan and PMFNRE.

Findings

(a) The management contract between the Tower Pty Ltd and PMFNRE was negotiated directly by Mr Fabila, Mr Maladina and Mr Leahy as directors of the Tower Ltd and the management of PMFNRE;

(b) The awarding of contracts in this way justifies the commission’s suspicion of nepotism, because:

  • MR Maladina and Mr O’Neill have direct interests in PMFNRE and used PMFNRE as a vehicle to defraud the NPF regarding the NPF Tower and Waigani Land, NPF Tower Investigations and, Waigani Land);
  • THE property management contract between PMFNRE and the Tower Ltd (signed for the Tower Ltd by Mr Maladina and Mr Leahy), was excessively favourable to PMFNRE.
  • MR Leahy provided false information to the NPF board regarding the property management contract, which understated the benefits payable to PMFNRE under the contract.

Sale Of The Non-Core Properties Using Multiple Agents

In July 1999, NPF resolved to sell off all non-core properties and part of the NPF Tower. This was in accordance with the PwC report on NPF’s losses. It was decided to use multiple agents and the existing exclusive managing agents accepted this.

NPF Board Challenges Management Over Tender Procedures

In October 1999, the NPF board, led by trustee Jeffery and acting managing director Rod Mitchell, challenged Mr Maladina and Mr Leahy over a number of issues, including failure to follow tender procedures and nepotism. This led to the termination of Mr Maladina and Mr Leahy.

Findings

(a) The decision to enter into one-year and (for the Tower) three- year management contract for the properties in early 1999, when NPF was considering selling those properties was inappropriate and could have resulted in NPF facing a claim for damages in breach of contract.

(b) The questions posed by Mr Jeffery and Mr Mitchell regarding the failure to follow proper tender procedure when awarding property management contracts were valid questions which required answering.; and

(c) Mr Leahy’s responses to the questions were false and evasive.

Sale of NPF Property to PNGTUC

Expression Of interest by Mr Paska

NPF built a three-bedroom house on its land at Allotment 13 Section 73 Pipigari St, Boroko. As construction of the house was nearing completion in September 1995, it was recorded that trustee John Paska was interested in purchasing the property. Mr Paska was the general secretary of the PNGTUC and was one of three people appointed to the NPF board as a representative for employees on the NPF board.

Under the law of Trusts, it would be a serious breach of trust for a trustee to buy Trust property but this did not occur to anyone, not even the fund’s corporate secretary and legal counsel Herman Leahy, who should have advised Mr Paska and the NPF against this proposed purchase. In fact, Mr Leahy took very improper action to facilitate the sale to Mr Paska, as described below.

Mr Paska wrote to Mr Leahy in September 1995 expressing his interest to buy the property and advising that he had received legal advice that his conflict of interest would not be an impediment to the sale. His offer of K96,000 had been worked out in conjunction with Mr Leahy based on the cost of land and of constructing the house thereon. He wrote again in November saying he was prepared to pay the (higher) valuation placed on the property by the bank, which was financing him and would seek Ombudsman Commission approval.

TO BE CONTINUED

* PART 77 is missing and has not been published in this series

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 51]

October 15, 2015 1 comment

Below is the fifty-first 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 51st 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 4O Continued

NPF’s Investment In NGPHL/NGPL 

The two companies are essentially one enterprise. NGPHL was formed to purchase coconut plantations in the New Guinea Islands, some from the old Burns Philip Company and one plantation in the Central Province. The intention was for NGPHL to re-develop the old coconut plantations in the New Guinea Islands into cocoa plantations. A development plan was drawn up and costed by the proponents.

The Commonwealth Development Corporation (CDC) was interested in investing in the plantations in the New Guinea Islands but not the Robinson River Plantation in Central Province. In an attempt to accommodate this requirement, the company NGPL was formed and CDC then invested in 20 per cent of this company.

NGPHL and NGPL made submissions inviting the three major private superannuation funds, NPF, POSF, and DFRBF and the Investment Corporation of PNG (ICPNG) to invest in the two companies. In addition, there was a public issue of shares. The response to the share issue was poor. NPF invested in 250,000 shares in NGPHL and also took up 250,000 shares in NGPL.

With the initial capital in place, the project proceeded and went quite well in Bougainville with annual cocoa production reaching 13,000 tonnes per year. Outside of Bougainville, operations were not proceeding as well as expected. When the unrest situation in Bougainville reached crisis point in 1989, the companies became unviable and the creditors (Westpac Bank and CDC) took over.

Evidence suggests that even at this point, when the companies were unviable due to the crises in Bougainville, NPF bought all the NGPHL and NGPL shares, which were held by the other three institutions POSF, DFRBF and ICPNG. The commission has not been able to confirm the price NPF paid for the shares.

Investment In Walmetke Ltd

This company was formed to take over from the Agriculture Bank’s three plantations in the Baining area of the East New Britain Province. The three plantations are Stockholm, Kuriendahl and Manimbu. The company issued a formal prospectus and raised just under K2 million. Kina Securities handled the share issue. NPF subscribed to this share issue and bought 250,000 shares in Walmetke Ltd at the issue price of K1.

The Selldown Of NGPHL, NGPL And WALMETKE

In the period after 1995 covered by this commission’s terms of reference, NPF was seeking to extricate itself from its investments in the three companies. At the 99th board meeting on February 23, 1996, the NPF board resolved to sell its interest in these companies. Mr Kaul wrote to Mr Tony Gilbank on October 23, 1996, offering the shares on the three companies to Kina Gilbank, for one toea per share giving a total of K29,571.00. Kina Gilbanks accepted this offer.

At the 104th board meeting on December 9, 1996, the NPF board passed a resolution to have the loss from the sale of these shares written off in 1996 to claim the tax benefits and credit the payment received from the sale, if the payment was made in 1997, as profit for 1997.

Findings 

This resolution as to tax treatment was clearly wrong. The proper tax treatment is to include the loss in the year it occurred, which, in this case, was 1997. This matter is serious in the sense that Noel Wright, an accountant, was present at this meeting, yet the minutes do not record him advising against what the board approved.

This treatment would also impact on management bonuses by bringing an overstated loss to book in 1996 (where bonuses were at the upper threshold) and a false profit to book in 1997 (where bonuses were below that threshold).

Conclusions

The board of trustees, prior to the period covered by this commission of inquiry, inherited those investments and the associated problems, which rendered them essentially worthless. NPF invested more than K1 million in these three companies. It received no dividend, and then it sold all its shares for K31,237.67.

Findings 

In difficult financial circumstances, which were not of NPF’s making, the selldown was orderly and appropriate.

Investment In New Guinea Islands Produce Company (NGIP) 

Background 

NGIP was originally based in Rabaul and Kokopo in the East New Britain Province. After the 1994 volcano eruptions, its main base shifted from Rabaul to Kokopo. The company is an agriculture company involved in plantation management, cocoa buying and processing and commercial property development. It is also a 50 per cent shareholder in Papua New Guinea’s largest cocoa exporter, Agmark Pacific Ltd.

NPF invested 100,000 shares in NGIP in 1987, well before the period covered by this commission’s terms of reference.

Sell-down of shares in NGIP 

In August 1999, when NPF was urgently trying to solve its cash crisis, NPF management decided to sell all shares in NGIP.

Quite clearly, board approval was not requested for the sale of these 100,000 shares in NGIP. The sale of these shares was at a unit price of K3.03 per share.

Findings 

(a) NPF management and, in particular Rod Mitchell and Henry Fablia, acted in excess of their authority and their financial delegation in authorising and completing the sale of these shares without the NPF board’s prior approval;
(b) The board of trustees was also remiss in simply noting the sale as a fait accompli and not reprimanding management for acting without authority and selling assets without the requisite board approval; and
(c) A fair market value was obtained for the shares sold.

Conclusion On NGIP 

NPF purchased 100,000 shares at K3 per share in the capital of NGIP at a cost of K300,000 in 1987 and sold for a net K301,030.50 in 1999. NPF also receive dividends totalling K75,000 from this investment between 1996 and 1998.

Mr Bell, the current general manager of NGIP, has informed the commission that the current trading price for NGIP shares is K6. It is not appropriate to use hindsight to criticise NPF for the price at which it sold these shares in August 1999.

It is appropriate, however, to criticise management for not obtaining board approval for the sale.

Executive Summary Schedule 5 Waigani Land And Related Matters 

Introduction 

Sometime in late 1997, a plan was formulated to acquire the Waigani land cheaply and on favourable terms in order to entice the NPF and/or other PNG statutory bodies to use member’s (or public) funds to buy the land for an exorbitant price, with some of the proceeds being used for political purposes related to an anticipated vote of no confidence in the Skate government (paragraph 3).

Jimmy Maladina, a partner with the firm Carter Newell Lawyers, acquired Waim No. 92 Pty Ltd in February 1998 to be the corporate vehicle to acquire the lease over the Waigani land. The directors became Philip Eludeme (representing Mr Maladina) and Mr Maladina’s wife Janet Karl.

By August 1998, Prime Minister Skate decided to press for Mr Maladina to be appointed chairman of NPF and Mr Maladina then concealed his interest in Waim No. 92 by appointing an associate, Philip Mamando, to replace his wife as director. This was to conceal Mr Maladina’s conflict of interest in the event that NPF could be persuaded to acquire interests in the Waigani land (paragraph 3.6).

Findings

(a) Mr Maladina purchased Waim No. 92 Pty Ltd from Ram Business Consultants (Ram) as a shelf company. He exercised control through the appointment of his wife, Ms Karl, as a director;
(b) Mr Eludeme gave false evidence in order to hide Mr Maladina’s involvement with Waim No. 92 Pty Ltd; and
(c) The commission has referred Mr Eludeme to the Commissioner of Police to investigate whether he has committed the crime of perjury.

To ensure Waim No. 92 was allocated the lease of the Waigani land cheaply and on favourable conditions, Mr Maladina bribed the chairman of the Lands Board Ralph Guise and the Lands Minister Viviso Seravo.

Mr Maladina used Mr Eludeme as his agent in some of these activities (see paragraphs 4, 5 & 7). The records of the Land Board indicate it notified Waim No. 92 that it had been recommended as the successful applicant and on September 28, 1998, Waim No. 92 received notice that a corruptly reduced purchase price of K1,724,726.10 was payable before title would issue, with annual rent to be K17,000 (instead of the legally correct amounts of K2,866,000 and K143,000 respectively).

Further corrupt dealings occurred and a second substitute notice was signed in October but backdated to September 28, 1998, allowing payment by instalments of K50,000 every second month, with title to issue after the first instalment.

Findings 

(a) Mr Eludeme performed free professional work, valued at approximately K100,000, for Minister Viviso Seravo, before the Land Board sat on June 19, 1998;
(b) The Land Board advised Waim No. 92 on August 10, 1998, that it had recommended that the Minister should grant the lease over Waigani land;
(c) On September 28, 1998, Mr Eludeme was advised by notice that the purchase price of K1,719,600 was payable with annual rental of K17,000, both to be paid in full, before the title would be issued;
(d) A second notice was prepared afterwards and backdated to September 28, 1998. It showed the same purchase price but advised that the amount payable before title issued was K50,000 with the balance of the purchase price payable by instalments of K50,000 every second month; and
(e) There was no legal basis to vary the amounts below the tendered price nor to allow payment of the purchase price by instalment or to issue title before the payment of the full purchase price. Mr Maladina funded the sum of K50,000 on October 6, 1998 (he had already paid the original K500 application fee to the Lands Department) but trust statements were fabricated on Carter Newell file no 970625 (Phillip Eludeme – general matter, investment advice) to make it appear that the money came from Mr Eludeme’s funds (see paragraph 7.3).

It appears that a criminal offence under Section 122 of the Criminal Code Act – fabricating documents – has been committed and the commission has referred this file to the Commissioner for Police for investigation.

The corrupt activities in the Land Board and the Office of the Minister became clearer after Mr Guise gave evidence “in camera”.

Findings 

(a) Waim No. 92 Pty Ltd was at all relevant times beneficially owned by Mr Maladina and he paid all the necessary application fees, costs and the required K50,000 instalment on the purchase price to acquire the lease over the Waigani land;
(b) Mr Eludeme was, at all material times, acting as an agent and representative director/ secretary of Waim No. 92 on behalf of Mr Maladina;
(c) Mr Mamando acted as a director representing Mr Maladina;
(d) Waim No. 92’s application was lodged after the closing date of May 6, 1998, and, by law, should not have been considered;
(e) The decision to list Waim No. 92 as a late application was made on direct instructions from Minister for Lands, Viviso Seravo;
(f) Land Board chairman Ralph Guise, accepted direct instructions from Minister Seravo that the Land Board should consider that Waim No. 92’s application was sponsored by the NEC and should be supported. He ensured that it would be received and considered by the board as a late application. He then ensured that it was one of two alternative recommendations sent to the Minister for approval;
(g) Mr Guise participated in the activities to retrospectively vary the conditions of the Letter of Grant and signed a minute to the Minister which had been prepared in the Minister’s office. It falsely stated that the Land Board had recommended reduction in the purchase price and annual rental and that the purchase price be paid by instalments, with title to issue upon payment of the final instalment.
This enabled Minister Seravo to subsequently sign and backdate the document to June 1999. Mr Guise was present at a meeting when a fabricated substitute letter of grant was placed before Secretary Alaluku for signature and thereby added the support of his apparent authority to what was being done;
(h) Prior to the Land Board hearing, Mr Eludeme had approached Minister Seravo seeking favourable consideration for Waim No. 92’s application and, at Mr Seravo’s request, had performed, free of charge, accountancy services for Minister Seravo valued at K100,000 at the Minister’s request;
(i) At the Land Board hearing on June 19, 1998, chairman Guise and members Yanepa and Wak voted for Waim No. 92’s invalid application. The two official representatives voted for the preferable application by MDP Pty Ltd;
(j) There was no discussion at the meeting about reducing the purchase price or the annual rental or about allowing the title to issue after partial payment of the purchase price (contrary to the Statutory provisions);
(k) When Minister Seravo approved the non-legal application by Waim No. 92, he was influenced by bribes received and in anticipation of future bribes;
(l) After the grant of the lease to Waim No. 92 by Minister Seravo, the Minister was approached by Mr Maladina (and possibly by Mr Eludeme with Mr Maladina’s knowledge) who requested successive variations to the terms of the lease to lower the total purchase price, lower the annual rental and to provide a new term that title would issue after the first K50,000 instalment of the purchase price was paid. The balance to be paid at the rate of K50,000 every second month;
(m) Mr Seravo, Mr Guise and Mr Maladina conspired to illegally reduce the terms of the lease and to persuade Lands Secretary Alaluku, to sign a false lease offer letter, on October 2, 1998, which set out the illegally varied terms of the lease;
(n) After the Waigani land was eventually disposed of (by sale of shares in Waigani City Centre), Mr Maladina paid the sum of K49,598.49 to Mr Seravo after it was laundered through the accounts of Carter Newell Lawyers, in consideration of his assistance in the allocation of the lease to Waim No. 92, on favourable terms (paragraphs 32.8.6.3 & 32.8.6.13).

Once the lease was allocated for a reduced purchase price payable by instalments, Mr Maladina entered into a criminal conspiracy with Herman Leahy, the corporate secretary and legal counsel of NPF and valuers Iori Veraga and Mariano Lakae.

The agreement was for NPF to engage the valuers to value the Waigani land (and the NPF Tower) for an exorbitant fee. Mr Leahy acted from within NPF to ensure that Mr Fabila signed the contract on behalf of NPF. Mr Maladina, meanwhile, reached an agreement with the valuers for them to pay half their fees to him.

As a result of this scheme, valuation fees totalling K235,000 were paid to Mr Maladina/ Carter Newell of which K226,175.13 was received into the Carter Newell Trust account (Mr Maladina taking K8864.87 as “expenses”). The valuers put a grossly inflated value on the Waigani land of K14.7 million (Mr Veraga) and K17.6 million (Mr Lakae). They valued the NPF Tower at K87,854,500 (Mr Veraga) and K86 million (Mr Lakae). Each estimated valuation amounted to approximately twice the true value (see paragraphs 10 and 11).

Mr Maladina then briefed Pacific Capital to prepare proposals for POSF and other PNG institutions, to encourage them to acquire interests in the Waigani land.

Findings 

(a) As soon as the amended letter of offer was approved on October 2, 1998 (backdated to September 28, 1998), Mr Maladina briefed Mr McIntyre of Pacific Capital to prepare an investment memorandum to be submitted to POSF to purchase 40 per cent of the shares in Waim No. 92. If successful, this would raise sufficient money to pay the purchase price of K1.7 million, the cost of preparing development proposals and Carter Newell’s costs of K100,000 for “attending to” legal aspects of the Waigani land tender procedures;
(b) POSF wished to write off its losses on the Waigani land and the Pacific Capital investment proposal was delivered to NPF instead in about late October 1998.
(c) Mr Maladina and Mr Leahy conferred about obtaining valuations on the Waigani land (and the NPF Tower) prior to any discussions with the NPF board and for no proper reason;
(d) Mr Maladina entered into arrangements with valuers Mariano Lakae and Iori Veraga to pay him a 50 per cent commission on fees received;
(e) At the instigation of Mr Leahy, Mr Fabila, in excess of his delegated authority, signed the valuation contract with Mr Lakae and Mr Veraga without NPF board knowledge or approval and without any tender procedure being followed.

TO BE CONTINUED

National Provident Fund Final Report [Part 50]

October 14, 2015 1 comment

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

NPF Final Report

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

Executive Summary Schedule 4N Continued 

Preparation Of ACOM contract Involves Protracted Negotiations 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

External funding: Bank Loan 

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

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

Bridging Finance From NPF 

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

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

Request To PNGBC 

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

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

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

Suspicions About Mr Mekere’s Motives In Supporting Odata

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

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

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

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

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

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

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

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

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

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

Continuing Negotiations For BSP Loan Facility Without NPF Board Authority 

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

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

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

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

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

ACOM Binds Itself In A Management Contract With Odata 

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

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

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

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

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

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

BSP Loan Facility Negotiations Discontinued 

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

NPF Withdraws Construction And Odata Sues ACOM 

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

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

Findings In Accordance With Terms Of Reference 

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

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

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

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

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

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

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

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

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

The other officers involved were Mr Wright and Mr Mekere.

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

Executive Summary Schedule 4O Plantations and Agriculture Investments 

Introduction 

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

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

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

TO BE CONTINUED

National Provident Fund Final Report [Part 46]

October 8, 2015 1 comment

Below is the forty-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 46th 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 4J Continued 

Findings 

(a) The BSP investment was performing well as a high dividend long-term investment with good capital growth potential;
(b) Mr Wright’s reassessment of the value of NPF’s BSP shares should have been supported by a professional review;
(c) Mr Wright gave unprofessional investment advice to sell-off the BSP investment based on extraneous matters; and
(d) The trustees were in breach of their fiduciary duty in uncritically accepting Mr Wright’s advice and resolving to sell NPF’s BSP investment without obtaining independent advice about the decision to sell or the price offered.

Investment In 1998 

Finalisation of the sale to DFRBF was protracted and in the meanwhile, BSP’s results continued to be very favourable. Mr Kaul clearly favoured holding onto the BSP shares and to await the results of a valuation that was being carried out by Coopers & Lybrand.

By the time Minister Lasaro finally approved DFRBF’s request to buy the BSP shares from NPF on September 1, 1998, the DFRBF had decided the price was too high and withdrew from the proposed sale.

While Mr Wright sought legal advice regarding a possible breach of contract by DFRBF, the NPF board adopted a positive view of the situation and decided instead to participate in a K15 million rights issue by BSP, which, together with a relaxation of the BPNG’s prudential guidelines, would free BSP to offer larger loans.

Misleading Conduct By Mr Wright 

Not only did Mr Wright change his mind about the need to sell-off the BSP shares, he went ahead and acquired 333,333 shares in the new issue before seeking the NPF board’s approval.

At the November 6, 1998, NPF board meeting, Mr Wright sought the board’s approval for this purchase, deliberately not informing the board that the transaction had already been completed. This deliberately misleading conduct was improper.

Mr Wright also wrongly advised the trustees that the transaction would not require Ministerial approval as it was valued at K999,999, which was just below the K1 million level already approved by the Minister in June 1995 for transactions which would not require Ministerial approval.

This advice was wrong because the dispensation from seeking Ministerial approval for transactions valued under K1 million, applied only to transactions involving shares listed on authorised stock exchanges. The BSP shares were unlisted so the Minister’s approval was required for transactions above K500,000.

Findings 

(a) The management and the trustees, failed in their fiduciary duties where independent advice was not obtained and no critical appraisal of the proposal to purchase further BSP shares, was performed (Exhibit B96);
(b) Mr Wright and Mr Kaul failed in their fiduciary duty by misrepresenting to the board that they were requesting board approval to purchase 333,333 shares on November 6, 1998, when in fact they were requesting ratification of the 333,333 shares already purchased without board authority on October 29, 1998;
(c) Mr Wright and Mr Kaul failed in their fiduciary duty as they had acted beyond their authorised financial delegation limit by committing the funds prior to obtaining the board’s approval;
(d) Mr Wright failed in his fiduciary duty to the board when he misrepresented to the board that the K1 million limit approved by the Minister, covered NPF’s investment in BSP. However, the dispensation only applied to the purchase and sale of shares listed on approved stock exchanges and the BSP shares were not listed on any stock exchange;
(e) The trustees failed in their fiduciary duty to the members when they failed to obtain Ministerial approval for the transaction thereby contravening Section 61 of the PF(M) Act.

Investment In 1999 

Resignation Of Mr Wright And Engagement Of PwC

Mr Wright was forced to resign in January 1999 and the then recently appointed managing director Henry Fabila, appointed PriceWaterhouse Coopers (PwC) to review NPF’s investments. On March 8, 1999, Mr Marshall of PwC reported to the NPF board that NPF was facing huge unrealised losses and a severe cash flow crisis.

Proposed Sale Of BSP Shares

It was decided to try and sell the BSP shares and notes which were professionally valued by PwC at K5 to K5.90 and K4.25 to K5.20 respectively, which put the total value of NPF’s holdings in BSP at K8 million. NPF then offered 1,192,661 BSP shares to Finance Pacific for K6.5 million. The NPF board also resolved to offer to sell its Government Roadstock, worth K62 million, to Finance Pacific.

Mr Peter O’Neill’s Involvement 

Finance Pacific, of which Peter O’Neill was then executive chairman, then made a package offer to buy the whole of NPF’s Government Roadstock as well as all of its BSP shares for K59.5 million, provided that NPF could obtain an extension of the Government’s expired guarantee of the Roadstock.

It was proposed that the sale would be to the Motor Vehicle Insurance Trust, which was part of the Finance Pacific Group.

The sale price of K59.5 million was exactly equal to the outstanding amount NPF owed to the PNGBC, which was also part of the Finance Pacific Group and so this proposed sale would clear that debt.

Mr Mitchell has given evidence that he was informed by Mr O’Neill and the new NPF chairman Jimmy Maladina, that the purchase of the Government Roadstock was dependent on the sale of NPF’s BSP shares (which would increase Finance Pacific’s holding in BSP to 30 per cent of its issued capital).

In view of the commission’s finding that Mr O’Neill was implicated with Mr Maladina in the NPF Tower fraud and received part of the illegal proceeds, the commission regards this proposed transaction between NPF and Finance Pacific with suspicion.

The sale, however, did not proceed because NPF had not succeeded in obtaining an extension of the Government’s guarantee of the Roadstock before Mr O’Neill was removed from the position of executive chairman of Finance Pacific.

Dividend Income BSP dividend payment history

According to BSP’s historical financial performance schedule, included in its 1999 Annual Report, the bank’s operating profit after tax had grown from K2.984 million in 1993 to K19.570 million in 1999, with 1999 being a record high (Exhibit B141).

As per the 1999 annual report, the total dividend paid between 1995 and 1999 was as follows:

npf 46a

BSP dividends received by NPF

BSP have confirmed that NPF was paid a total dividend of K2,358,082 for the years 1995 to 1999.

Director’s Fees

Directors fees and allowances paid to NPF’s representative directors on the BSP board, Mr Kaul and Mr Fabila successively, were correctly paid into NPF’s accounts.

Concluding Comments

The fact that the BSP investment has been profitable for NPF is due entirely to BSP’s successful management qualities and is not due to NPF’s investment policies or skills. It is probably fortunate that NPF never acquired sufficient equity in BSP to enable it to significantly influence BSP’s management policies.

The investment survived two misguided attempts by NPF to sell it.

Looking below the profitable surface of this dividend producing investment, we see Mr Wright acquiring notes without board authority and giving false and misleading information to the board when retrospectively seeking board approval for what he had already done. Once again, we find that the Board of Trustees failed to maintain control over management.

Executive Summary Schedule 4K Westpac Bank (PNG) Ltd, SP Holdings Ltd and Toyota Tsusho (PNG) Ltd 

Introduction 

The NPF investment in these three PNG companies has been relatively small but profitable in terms of capital gain and dividends.

After their initial investments, there were no further transactions during the period 1995 to December 31, 1999, and the investments have not been the subject of report or discussion at any board meeting.

The initial investments in these companies was as follows:

npf 46b

The unrealised gains made by NPF in these investments at December 31, 1999, are in the ranges as follows:

  • Westpac bank – between K669,600 and K1,103,600;
  • SP Holdings – between K748,000 and K1,468,000; and
  • Toyota Tsusho — between K34,931 and K120,074.

In addition to the significant capital gains made on these investments for the years 1995 to 1999, NPF earned the following in dividend income:

  • Westpac bank – K1,135,375;
  • SP Holdings – K600,000; and
  • Toyota Tsusho – K140,266.

NPF’s investment in these companies is clearly consistent with more traditional investment philosophies of provident funds in most countries.

The full details of these investments are set out in the report.

Executive Summary Schedule 4l Crocodile Catering (PNG) Ltd And Maluk Bay Investment

Introduction

In late 1996, the NPF was approached by representatives of the Crocodile Group of companies, which specialised in remote site catering in Australia and PNG.

The Australian company, Crocodile Pty Ltd (Crocodile Australia) was in financial difficulties and the principals wished to sell off its interests in Crocodile Catering (PNG) Ltd (Crocodile) in order to pay off the debts of Crocodile Australia and to enable them to obtain repayment of personal loans given by them to Crocodile Australia.

In January 1997, prior to obtaining the required Ministerial approval under the Public Finances (Management) Act 1995 (PF(M) Act), NPF acquired the share capital of Crocodile for K300,000.

In the period from January 1, 1997, to December 31, 1999, NPF then invested (in net terms) a further K7.4 million in the form of both equity and loan capital.

Crocodile performed very poorly because of:

  • an apparent lack of management skills, particularly with regard to financial management skills, with the few profitable catering contracts managed by Crocodile “dragged” down by loss making contracts and a high administrative overhead structure (examples included at Transcript pp. 7166, 7208-9, 7290-7294, 7335-7338);
  • a lack of attention to financial results and a failure to initiate appropriate corrective action in a timely fashion (examples included at Transcript pp. 7199-7200, 7202, 7208, 7220, 7242, 7280, 7288);
  • an ineffective board of directors and poor corporate governance (examples included at Transcript pp. 7188-7189, 7192, 7307-8);
  • managing director Garry Jewiss living in Indonesia to the detriment of effectively managing the PNG operations (see report on Maluk Bay);
  • unfavourable economic conditions; and
  • a continued investment in Crocodile without properly appraising this investment Transcript pp. 7177- 7178, 7261, 7091.

Crocodile recorded accounting losses every year from 1996 to 1999 and by December 31, 1999, there was a net unrealised loss of K7.4 million. Source: NPF accounting records/Crocodile accounting records (Exhibit CC700A). See table 3:

npf 46c

Summary of Crocodile financial performance as reported by financial statements in the period 1997 – 1999

npf 46d

Source : NPF accounting records/ Crocodile accounting records (Exhibits CC808B & 959). 

Acquisition Of Crocodile

The due diligence performed by Mr Wright was inadequate in that there was no:-

  • search into the background of the company and its directors;
  • legal due diligence conducted; and
  • financial appraisal of Crocodile’s catering and associated contracts.

Consequently, the information presented to the NPF board at the 104th NPF board meeting on December 9, 1996, was inadequate as a basis for an investment decision because:-

  • It failed to mention Crocodile’s obligations to finance, construct and operate a warehouse at Paiam;
  • Placer had provided free freight from Lae to Porgera and this artificially increased apparent net profits;
  • NPF had no understanding of Crocodile’s business strategy;
  • NPF did not assess Crocodile’s management team;
  • NPF did not assess Crocodile’s business risks;
  • NPF did not conduct a rigorous audit (including the commerciality of the contracts);
  • NPF did not assess its ability to own and manage a remote site catering business or the appropriateness of doing so; and
  • NPF did not consider the future funding requirements of the business and whether it would call upon NPF for funding.

NPF management, particularly Mr Wright and Mr Kaul, failed their duty to properly brief the board and the trustees failed their fiduciary duty to the members, by acquiring this business without insisting upon proper due diligence and analysis beforehand.

As sole shareholder, NPF appointed the following people as directors on the board of Crocodile: David Copland (chairman); Robert Kaul; Noel Wright; Tau Nana; Henry Leonard with Kenneth Frank as corporate secretary.

The practice was to hold Crocodile meetings at NPF headquarters the day before the scheduled NPF meeting.

From the start, it became apparent that it was a mistake to have appointed Mr Jewiss as manager, as he had few managerial and organisational skills and was extremely poor at consulting with and reporting to the Crocodile board.

To try and strengthen financial control, Crocodile’s former financial controller, Ray Barredo, was retained. This did not work and NPF was frequently called upon to make direct injections of financial support.

During 1997, Crocodile struggled to finance and organise the required warehouse at Paiam. It was eventually funded by a PNGBC loan guaranteed by NPF. The cost was about K4 million.

Findings 

(a) NPF breached the PF(M) Act by entering the contract to acquire Crocodile before Ministerial approval had been given;
(b) NPF management, particularly Mr Wright, failed its duty to the NPF board by not performing due diligence on Crocodile prior to buying the company and by failing to critically appraise the business prospects and risks of becoming sole owner and manager of a remote site catering business;

TO BE CONTINUED

National Provident Fund Final Report [Part 40]

September 30, 2015 1 comment

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

NPF Final Report

This is the 40th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4D Continued Investments – 1999 

Concern About NPF’s Unrealised Losses – Termination Of Mr Wright 

After Mr Wright’s employment with NPF was terminated in January 1999, he was replaced on the CXL board by trustee Nathaniel Poiya.

Mr Fabila reported in February on the CXL and STC results. Discussion centred on CXL, which showed a loss of K3.7 million, K2.5 million of which was attributable to a budget blow out in respect of directors’ remuneration. Although Mr Fabila wrote to the CXL chairman on this matter, he failed to provide the NPF trustees with an expert assessment of its CXL investment.

Advice from Ben Semos of Wilson HTM 

By this time, NPF management had begun to realise the enormous unrealised loss suffered on NPF’s investments as interest rates on NPF’s huge debts rose and the value of the kina and of resource stocks fell. Ben Semos of Wilson HTM was asked to advise on NPF’s investments. On February 6, commenting on each investment in turn, he advised selling CXL shares rather than STC. Mr Semos forwarded a mandate document appointing himself as sole agent and broker on the sell down but on February 19, 1999, Mr Fabila wrote cancelling all authority for Wilson HTM to act as broker for NPF.

On March 12, Mr Semos wrote again urging his appointment as sole agent to handle the difficult job of selling off large parcels of shares in STC, CXL and HPL without causing a massive fall in share prices.

On March 16, 1999 at a special NPF board meeting, the board appointed Mr Fabila and Mr Leahy to negotiate the sale of all NPF’s holdings in CXL to the Swires Group for a minimum price of $A3.75 per share (9.3.4). These negotiations were unsuccessful.

Unsuccessful Attempts To Sell CXL Shares 

By March 25, NPF chairman Brown Bai sought Ministerial approval to sell NPF’s CXL shares at $A3.75 and 50 per cent of the Tower Ltd. Unfortunately, Swires would not go beyond $A2 per share and Wilson HTM could only manage $A2.25.

Although Minister Lasaro had approved the sell down on March 25, 1999, his approval was not received by NPF until April 8.

Meanwhile, Mr Fabila had instructed Mr Semos to sell prior to receiving Ministerial approval and Mr Semos was actively involved trying to generate “good buying” for CXL, and for some other NPF holdings.

NPF Moves Away From Substantial Holdings Into Smaller Passive Holdings 

By May 1999, the sell down of equities in order to reduce NPF’s debt to the ANZ Bank had still not got underway. On May 11, Mr Fabila wrote a long explanation to Minister Lasaro, explaining the history of NPF’s disastrous investment strategies of obtaining significant holdings in PNG resource stocks and obtaining controlling interest in CXL and STC.

He explained how this had been financed by massive borrowings from ANZ and he laid the blame squarely on the previous Board of Trustees and on Mr Copland in particular (The letter is quoted in full at paragraph 9.4).

On May 21, 1999, the NPF board resolved to move away from substantial shareholdings in a few companies in favour of passive minority interests and to reduce holdings in any company to 11 per cent of issued capital (except for HPL).

Trustee John Paska spoke against the proposal, particularly against selling STC shares, sensing some “political” motivation. On May 28, 1999, NPF’s investment team, headed by Rod Mitchell submitted an investment fact sheet on STC recommending that its value be reassessed to reflect its much lower true value.

Selldown Of CXL Shares NPF’s Selldown Prompts Swires Takeover Offer For CXL

On June 3, 1999, Mr Fabila instructed Mr Semos to sell off NPF’s holdings of 8,266,679 CXL shares at $A2.56 or better. This prompted Swires to make a take-over bid for CXL by offering to acquire all the issued shares in CXL at $A1.50 per share (paragraph 9.7). Mr Fabila was prompt to accept Swires’ offer and obtained NPF board approval by circular resolution on July 7, 1999. This was ratified by formal board resolution at the 119th NPF board meeting on July 29 and 30, 1999.

CXL Share Valuation

Before finalising the sale, NPF management obtained an expert independent opinion on CXL’s fair market valuation from KPMG which on July 8, 1999, stated:-

“Our valuation of CXL is prepared in order to determine a fair market valuation of each share. The valuation has been prepared using generally accepted valuation principles and is based on information provided to KPMG by CXL. This information has not been verified by KPMG. Based on the information provided, our valuation of CXL is K62,461,000. Given the 21,060,370 shares in issue this equates to a value per share of K2.97.

“Swire PNG’s offer of $A1.50, as set out in their take over notice, equates to K2.68 per share (exchange rate K1= $A0.56).

“When considering the merits of the offer, it is necessary to consider the following:

  • Poor trading results for 1998;
  • Projected poor trading results for 1999;
  • Increasing cash flow requirements to fund trading losses and replacement of inventories;
  • Technical breach of current banking covenants;
  • Law and order issues in PNG;
  • Political instability;
  • The precarious nature of the kina currency; and
  • The lack of alternative investors for a minority investment of the size and nature in question.

“Overall, we are of the opinion that the offer price is not unreasonable and represents a price that whilst not great provides an exit alternative to shareholders, thereby giving a level of certainty which may not otherwise exist.” (Exhibit S152)

Department Of Finance Recommendation On CXL Selldown 

Mete Kahona of the office of Public Enterprises and Asset Management, wrote a brief to the Secretary for Finance supporting the sale of NPF’s CXL shares to Swires at $A1.50 per share. The brief highlights the problems caused by investing in a significant holding in such a company:

“NPF’s Acceptance of the Offer.

“The fund’s management supports the acceptance of the current offer by John Swire & Sons Limited and KPMG’s recommendation with the following argument:

  • That CXL has been touted around the market by a number of stock brokers with no serious interest what so ever in the stock;
  • That the CXL with a falling kina has suffer large diminution in value;
  • NPF debt to equity ratio would be reduced to 20 per cent from 45 per cent;
  • Failure to accept the offer means that NPF will breach current interest cover ratios required by the ANZ Bank; and
  • Acceptance of the offer allows NPF to keep its strategic holding in Steamships Trading Company. NPF’s Board Position

“The board at its previous meeting discussed NPF’s debt problem and agreed to the sale of Collins & Leahy shares down to 11 per cent of its market capitalisation.

“It is for the above arguments that the NPF board supports to accept the current offer by John Swire & Sons for $A1.50 per share held in Collins & Leahy.

“For your information in this regard.” (Exhibit S153)

NPF’s Realised Loss On CXL Investment

The proceeds of the sale, $A12,354,269, were paid to ANZ Nominees, which held the shares as security for the ANZ loan facility and it went towards retiring NPF’s debt to ANZ. The loss suffered by NPF was:

npf 40 a

(This does not include the effects of foreign exchange loss and bank fees).

Sell-Down Of STC Shares Negotiations With Swires 

On September 17, 1999, through capital Stockbrokers Ltd, Mr Mitchell ascertained current market price for STC was $A2.50 per share.

He then negotiated a sale of NPF’s entire STC share holding (7.3 million shares) to Swires at $A2.25 per share ($A16.425 million).

This strategy was approved by the NPF board on November 29, 1999, which resolved on “the sale of 100 per cent of its share holding in STC at a price no less than $A2.25 per share net of all costs”. The following problems occurred arranging the actual sale.

Negotiations With Bromley Group (Lemex International) 

After Mr Mitchell received Swires’ offer of $A2.25, he informed Mr Semos and asked him to contact Sir Michael Bromley to gauge if he was interested. This produced an offer from Lemex International Ltd of $A2.26 per share, which was then increased to $A2.28. Mr Mitchell then made an unauthorised decision for NPF to retain 5 per cent of its STC holding to see whether this would enable Lemex to go higher. On the morning of September 7, Lemex increased its offer to $A2.30 and Mr Mitchell said that he required time to consider the offer. He then left a message for Swires that an offer of $A2.30 had been received and then Mr Mitchell attended another meeting. Some time later, Swires left a message in Mr Mitchell’s office offering $A2.40 for NPF’s entire STC holding.

Acceptance Of Lemex Offer

Before returning to his office, Mr Mitchell accepted Lemex’s offer of $A2.30 per share for 95 per cent of the shares.

Realised And Unrealised Loss On STC Investment

At that price, NPF’s situation on its STC investment as at December 30, 1999, and November 3, 2000 was:

npf 40 b

The realised loss on the sale of 5,762,023 shares as at December 31, 1999 was therefore $A7,160,677 and the unrealised loss on the retained 5 per cent of shares was $A1,315,526. By November 3, 2000, that unrealised loss had increased to $A2,392,291 – making a total realised and unrealised loss in November 2000 of $A9,552,968.

Complaints By Swires

After the sale to Lemex, the Swire Group expressed considerable bitterness that Mr Mitchell had accepted the Lemex offer without formally checking whether Swires had improved on it. Swires wrote a letter of complaint to the chairman of NPF and Mr Semos and others wrote in support of Mr Mitchell.

Findings

(a) Mr Fabila was acting without board authority in seeking to mandate Wilson HTM as sole broker;
(b) Mr Semos’ comments about CXL in his report of February 6, 19996 should have been made much earlier consistent with his duty to “know your customer” (NPF) when Wilson HTM was providing investment advice (Mr Semos’ statements indicate that on occasions, he had given investment advice although on other occasions, he simply executed client’s instructions without giving advice);
(c) Mr Mitchell’s decision to retain 5 per cent of STC was contrary to the board resolution of November 29, 1999, to sell off all NPF’s holding in STC;
(d) Mr Mitchell failed to maximise the price obtainable for the sale of NPF’s STC shares. Mr Mitchell failed to actively conduct a “Dutch auction” to bring forth Swires best offer before accepting Lemex’s offer of $A2.30 per share;
(e) Mr Mitchell was acting in stressful and difficult circumstances when trying to finalise a deal to sell off NPF’s shares in STC. The commission accepts that he was trying to act in the best interests of the members of the fund and that he had no ulterior motives. Nevertheless, his failure to seek out Swire’s last highest offer before accepting the lower Lemax offer was careless and unprofessional. It was a failure of his duty to NPF. At the time of this failure Mr Mitchell was acting managing director and was therefore also a trustee bearing all the onerous fiduciary duties of a trustee. He is therefore personally liable for the losses suffered by the contributors from his breach of fiduciary duty unless he can successfully raise the defence that he was acting in good faith. This would be a matter for a court of law and is beyond the scope of this commission.

Concluding Comments

The NPF’s large scale investment in STC and CXL was inappropriate for a provident fund which should concentrate on small passive, risk-averse equity investments.

By making an amateurish attempt to take over these companies, NPF was obliged to acquire large shareholdings (21 per cent of STC and 38 per cent of CXL) which was bound to motivate the companies’ powerful owners to resist the takeover attempt. This happened.

NPF’s acquisitions were funded by borrowed capital (drawdowns on its ANZ facility) and when economic circumstances made it impossible for NPF to service this debt, it was obliged to sell down its equity portfolio, including its investments in STC and CXL. It was unable to do so at competitive prices because of low demand for the shares. It was then left at the mercy of the powerful Swires Group, which could ensure that the price offered would be low.

Because of Mr Mitchell’s inexperience, NPF sold to Lemex International at 10 cents below Swire’s intended final offer but in any event NPF’s realised losses on these investments, totalling $A23,483,324 and unrealised loss of $A2,392,291 (for a total of $A25,875,615) made huge inroads into members funds. The main procedural short-comings regarding these investments included management’s failure to provide the board with expert investment advice and failure to keep the board advised of the on-market transactions, some of which exceeded management’s delegated authority.

Once again there was failure by the board to seek out proper investment advice and failure to exercise proper control over management.

There was also failure by DoF to provide critical comment on NPF’s strategies. There was improper conduct by Minister Chris Haiveta in enthusiastically approving Mr Copland’s misguided strategy of leading NPF into a K40 million strategy to take over, merge and manage two of PNG’s largest retail and manufacturing corporations, without seeking expert advice from DoF or elsewhere.

The main responsibility for leading NPF into the misguided attempt to takeover CXL and STC must be borne by Mr Copland, who conceived and inspired the policy, Mr Kaul and Mr Wright who implemented it and Minister Haiveta who gave it such enthusiastic and unqualified support without seeking expert advice.

The commission’s major findings in the context of the commission’s Terms of Reference are listed in paragraph 10 of Schedule 4D.

Executive Summary Schedule 4E Macmin NL

Introduction 

NPF was enticed into the Macmin investment by an address given to the NPF board by Macmin managing director Robert McNeil.

Macmin was a small or junior minerals exploration company. It was avowedly a high risk, speculative enterprise, which had interests in the Wapolu and Wild Dog projects in PNG.

Its aim was not so much to be the owner of a rich, income-producing mine as to be alert to bringing in joint venture partners to the early stage of a project with a view to selling its interest when there was a chance of a quick profit. For these endeavours it was chronically under funded. It was essentially a “father and son” corporation.

Mr Copland and Mr Wright and also Mr Kaul became enthusiastic about Macmin’s prospects and set out to obtain a significant interest in the company for NPF.

TO BE CONTINUED

National Provident Fund Final Report [Part 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 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