Posts Tagged ‘Steamships Trading Company’

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.


(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


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.


National Provident Fund Final Report [Part 39]

September 29, 2015 1 comment

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

NPF Final Report

This is the 39th 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

1997 On-Market Acquisition Of STC And CXL Shares: Failure to keep NPF Board informed 

In accordance with the board’s strategy to increase NPF’s holdings in STC and CXL, Mr Wright directed NPF’s brokers Wilson HTM to buy in small parcels. On many occasions, Mr Wright exceeded his K25,000 delegated financial limit and he seems not to have obtained Mr Kaul’s written authority to purchase up to Mr Kaul’s K100,000 delegated limit. This is demonstrated in the following tables. See table below.

npf 39 a

Once again, management did not keep the NPF trustees informed of these transactions, nor apparently did the trustees examine the investment schedules and inquire into these transactions. Even when Mr Kaul notified the NPF board on October 28, 1997, that STC’s performance was poor, with profits down K3 million, no questions were asked.

CXL on the other hand, returned good profits during 1997.

By adopting IAS28 method of accounting however, the value of STC and CXL investments was reduced in the 1997 Financial reports by K3.5 million (see paragraph 5.3.3).

Fruitless Discussions On Purchase Of North Waigani Stop ‘n’ Shop 

From October to December 1998, active discussions between STC and NPF were occurring for NPF to purchase for K6 million a Stop ‘n’ Shop store, which was being constructed by STC in North Waigani. It would then be leased back to STC for a very favourable rent.

Considerable research was done into what seemed a very promising, low-risk, income producing investment. The board, however, failed to approve it at its December 1998 meeting and the idea was dropped. (By comparison, in February 1999, with no research, the new NPF board was prepared to invest K8 million in the Waigani Land deal), which would require expenditure of an additional K3 million before there would be any hope of a return.

1998 On-Market Transactions: Unauthorised Purchases by Management 

During 1998, Mr Wright continued to authorise purchases in STC and CXL, frequently exceeding his financial delegation. In those instances, he did not obtain written authority from managing director Mr Kaul. In the case of CXL shares, those purchases were covered by the previous open-ended board approval of April 10, 1996, but for STC purchases such open-ended board approval had not been given. The situation is set out in the following tables. See table below.

npf 39 b

Once again, management did not expressly advise the NPF board about these transactions, which amounted to a breach of duty.

All but one of the above transactions were below the K1 million standing Ministerial approval of June 1995. The purchase of 185,538 STC shares on June 24, 1998, for $A933,701 exceeded K1 million and therefore required Ministerial approval. No Ministerial approval was obtained.

Market manipulation

There is evidence that Mr Wright and Mr Semos may have co-operated to artificially maintain the price of STC and CXL shares at $A4.20 and $A4.85 respectively in order to maintain their value as security for the proposed $A bond (See paragraphs 8.3.1 and 8.3.2.). At paragraph 8.3.2, the commission recommends that this matter be referred to ASIC for investigation.

Failure to provide analysis of investments in 1998

During 1998, STC continued to record reasonable profits, although there was a worrying increase in foreign debt, which would cause problems as the value of the kina was falling. The previously profitable CXL, however, began to record losses.

Although these trends were pointed out to the NPF board, Mr. Wright and the recently appointed new managing director Henry Fabila completely failed to provide the board with an expert analysis of these two investments.

This was a serious failure of their duty to NPF as it was time to consider selling down NPF’s CXL holdings and to give careful thought to STC’s future profitability. Instead, NPF acquired an additional 43,280 CXL shares at $A5 per share (average).

Despite the poor performances, during 1998 the market share price of both companies remained high. The reason for this seems to have been that NPF continued to be the main purchaser, buying 57.6 per cent of all CXL shares traded and 82.7 per cent of all STC shares traded during 1998. The artificially high price was being maintained by NPF’s own trading in the shares.


(a) Mr Wright instructed the purchase of $A4,136,176 worth of STC shares in small parcels but without formally and explicitly notifying the NPF board. This was a breach of his duty to fully advise the board about investments;

npf 39 cnpf 39 dnpf 39 e

(b) As CXL share prices fell consistently in 1998, Mr Wright and Mr Fabila failed in their duty to provide an expert assessment on the strength of this very large investment;
(c) The 1998 financial statements adopted IAS26 procedure for the first time and misrepresented that the accounting policies were consistent with previous years. The effect of the change in NPF’s asset valuation basis was not quantified; and
(d) It is likely that the STC and CXL share prices had been increased by NPF’s own acquisitions as it was by far the largest purchaser. The result was a market price created by supply and demand, which was in excess of NTA backing.

Directors Fees Paid To Trustee Gerea Aopi As A Member Of The STC Board 

A conflict developed between trustee Gerea Aopi and the NPF in relation to directors fees of K18,000 paid to him between the date of his appointment to the STC board in May 1997 and the date of his resignation on August 28, 1998.

Trustee Aopi claimed he was appointed as an independent director by virtue of his own personal standing. NPF claimed he was appointed after it nominated him to represent NPF on the STC board and that therefore directors fees were payable to NPF. The same situation developed with regard to Mr. Wright’s directorship with CXL.


Mr Aopi and Mr Wright held their directorships in STC and CXL respectively as representatives of NPF. Accordingly, they are liable to account to NPF for any directors’ fees or other benefits received by them as directors.


National Provident Fund Final Report [Part 38]

September 28, 2015 1 comment

Below we continue the re-publication of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.

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

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

NPF Final Report

This is the 38th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4d Continued 


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

Minister’s standing approval of transactions up to K1 million 

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

There was no power for Mr Haiveta to do this.

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

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

The agreed price for the shares was above market price:

table 1

NPF Board approval

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

Minister Haiveta’s improper conduct

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

Board representation – NPF bid for greater influence fails 

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


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

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

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

Wrong accounting treatment

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

table 2


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

table 3

table 4

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


National Provident Fund Final Report [Part 37]

September 25, 2015 1 comment

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

NPF Final Report

This is the 37th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4C Continued 

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

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

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

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

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

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

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

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

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

Saga issues Writ against Cue

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

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


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

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

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

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

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

NPF allies itself with Mr Jacobs in selldown of Cue shares 

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

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

Mr Maladina fails to disclose a buy offer from CIBC 

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

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

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

Failure to obtain expert advice in selldown 

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


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

Concluding Comments 

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

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

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

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

Executive Summary Schedule 4D Continued Introduction

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

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

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

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

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

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

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

On-Market Investment 1996 Approvals for investment in STC 

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

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

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

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

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

Initial investment in STC – 1996 

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

npf 37 table 1

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

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


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

Initial investments in CXL — 1996 

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

npf 37 table 2

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

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

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

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

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

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

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