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National Provident Fund Final Report [Part 80]

November 23, 2015 Leave a comment

Below is the eightieth 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 80th 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

1999

Outsourced legal fees for 1999 are reported in paragraph 6.4.7.

The state of the NPF records makes it difficult to separate fees for general work from investment related legal work so they are considered together.

The total comes to K442,648.12 plus $A871.90 paid to 11 different firms.

The massive amount of K202,023.46 went to Carter Newell (and an extra K17,602.58 described at paragraph 6.4.8).

Maladinas Lawyers was paid K17,653.50 for work which should have been handled “in-house”, including K5000 for fees relating to the Employers Federation challenge to Mr Maladina’s appointment, which should not have been paid by NPF at all.

Both large and small matters were briefed to Carter Newell in 1999.

Findings

(a) Substantial fees were again paid to offshore legal firms in relation to the $A bond (Allen Allen & Helmsley) and the Cue Energy Resources situation (Freehill Hollingdale & Page) on the basis of their complexity and the need for specialised legal expertise;

(b) Fees paid domestically for board restructure advice (from Allens Arthur Robinson) and some of the work referred to Maladinas, Fiocco Posman & Kua and Carter Newell, were properly outsourced because of the complexity and the need for specialised legal expertise;

(c) There is insufficient detailed evidence to enable the commission to comment on matters referred to other firms;

(d) There is a discernable trend whereby more work was referred out to external lawyers, which should have been capably handled by NPF’s “in-house” lawyers; and

(e) The level of fees suggests that matters of lesser significance were also referred to Pattersons, Henaos and Young & Williams.

The commission summarises the evolving situation regarding outsourcing legal frees at paragraph 6.5.

Summary

In the period under consideration, external legal fees paid by NPF for work outsourced grew in the period under review as follows:

npf 80 a

To a very large extent, the massive increases in 1998 and 1999 reflected the need to obtain expert and specialised advice in relation to legal transactions in which NPF became involved.

It is equally apparent that there was an increasing trend to brief out to external lawyers matters, which should have been within the competence of NPF’s “in-house” legal staff. This was reflected in the legal fees paid in 1998 and 1999.

The clear major beneficiary of that trend was Carter Newell Lawyers and, to a lesser extent, Fiocco Posman & Kua and an even lesser extent, Maladinas.

At paragraph 6.4.8.12, we said there may have been further legal fees paid to Blake Dawson Waldron and Carter Newell after August 31, 1999 and that this might explain the difference of about K21,000 in fees referred to on that page.

Additional payments

From NPF’s cheque payment records, the commission further extracted the following payments, which were made after August 31, 1999, and not included in earlier material.

Gadens Lawyers  (Adding to paragraph 6.4.8.1 and Transcript p.7589)

A payment of a further K2342.95 was made on December 21, 1999 for advice for Ambusa on its copra oil purchase and sales agreement and operations management contract.

Blake Dawson Waldron (Adding to paragraph 6.4.8.6 & Transcript p.7592)

Two further payments were made:

(a) on November 8, 1999, for K9995.56 for advice as to a dispute with Boroko Motors; Pacific Finance Superannuation Fund; debt restructure and a review of Garry Jewiss’ contract with Crocodile Catering;

(b) on December 6, 1999, for K26,743.77 payable to Blake Dawson Waldron Melbourne Australia office, for advice on the sale of shares in Cue Energy Resources.

Carter Newell (Adding to paragraph 6.4.8.7 and Transcript p. 7595)

Three further payments were made:

(a) on November 8, 1999, for K6048.04 for advice as to exemptions under Part VII of the NPF Act and for Mr Mitchel’s employment contract;

(b) on December 2, 1999, for K4087.79 for advice on NPF’s Investment Portfolio involving Deutsche Morgan Grenfell; and

(c) on December 21, 1999, for K7466.75 for advice and work done on the sale of shares to NPF in Kundu Catering; general matters on NPF Tower leasing and a claim by Cue Energy Resources.

The supporting vouchers and invoices are Part M of CD1226. The aggregate of these further payments was K56,648.56 and results in the difference of K21,000 becoming an excess of K25,000.

The commission’s accounting advisors have stated that this difference is probably explained by the manner in which NPF has treated the VAT component in the payments made.

Investigations

In late 1999, the finance inspectors and then the NPF board itself, carried out inquiries into irregularities concerning Mr Maladina and Mr Leahy which included questions about their conflict of interest in briefing legal work to Carter Newell, in which firm Mr Maladina was a partner and Mr Leahy’s wife, Angelina Sariman, was employed.

Although their clear conflict of interest was raised with them, Mr Maladina and Mr Leahy vigorously denied any conflict. Failure to put legal outsourcing out to tender was not, however, raised by the inspectors.

As reported in paragraph 6.6.3, NPF started to brief Carter Newell only after Ms Sariman commenced work with that firm. She was recorded as the work author for 46 of the first 50 new files Carter Newell opened for NPF.

A calling for tenders for legal work was belatedly raised in October 1999 by Mr Giregire and an advertisement was placed in the newspapers.

Findings

(a) Mr Leahy’s conflict of interest regarding outsourcing legal services to Carter Newell is clear. When Mr Leahy briefed out work to this firm where his wife was employed as a lawyer. This amounted to nepotism.

(b) When Mr Maladina became chairman of the NPF Board of Trustees, a further conflict of interest clearly arose, as he was also a partner in Carter Newell;

(c) When Mr Leahy referred legal work to Carter Newell, of which the chairman, Mr Maladina, was a managing partner, it was clearly nepotism. This was also improper conduct by Mr Leahy and a breach of his common law duty to the NPF board;

(d) Mr Maladina never declared his conflict of interest to the board of trustees. This amounted to improper conduct and a breach of his fiduciary duties to the members of the fund;

(e) Mr Maladina, as an equity partner in Carter Newell, benefited from legal work being referred by Mr Leahy to Carter Newell;

(f) Mr Leahy benefited by having his wife employed and continuing to be employed for reward by that firm;

(g) Paying overseas law firms through NPF’s account with Wilson HTM Brisbane, breached the BPNG Foreign Currency Exchange Act and was therefore illegal; and

(h) Management breached normal government tender procedures by not going out to public tender for the provision of legal services.

Procurement Of Security Services Pre-1995

The commission’s terms of reference requires it to examine the procurement of security services for the period commencing January 1, 1995 until December 31, 1999. To understand the situation at the beginning of 1995, however, it is necessary to look briefly at earlier events.

Awarding and terminating NPF’s contract with Kress Securities

On October 7, 1993, Mr Kaviagu, the NPF financial controller, awarded a contract to Kress Security Services beyond the scope of his delegated authority and without following proper tender procedures and evaluation. On December 8, 1993, Mr Kaul issued a memorandum directing that tenders for security services must be submitted to him, with recommendations, for his approval.

On December 21, 1993, Mr Kaul declared the Kress contract to be null and void and put the contract out for be re-tender. Kress refused to tender but sued NPF for breach of contract instead. This matter was eventually settled out of court, with NPF awarding a 12-month contract to Kress, (plus K4000 damages in March 1994), for all NPF’s investment properties except head office. NPF also paid K4000 to Kress in damages.

1995

Thus, at the commencement of the period under review, on January 1, 1995, there were two security firms contracted to NPF.

  • Moresby Guards — head office; and
  • Kress — all other properties.

The contracts were to expire in March 1995 and tenders were called from a list of firms. The only tender received for the head office was from Moresby Guards. Kress was the lowest of five tenderers for the other properties.

At the NPF board meeting on April 27, 1995, Kress was awarded the contract for all properties, including head office, at a cost per guard of K14,892 per annum.

Findings

(a) The only security contract let in 1995 was to Kress Security for all NPF properties. Tenders were called and Kress Security was the lowest tenderer. Only one tender was received for NPF head office security and no competitive bids were sought, even from Kress Security. There was non-conformity with prescribed tender procedures but it seems clear that the rate offered by Kress Security was the lowest;

(b) The NPF Board of Trustees was clearly informed and involved and itself made the decision to contract Kress Security.

1996

Kress Security was the only security provider for all NPF’s properties throughout 1996, however, Mr Kaul became dissatisfied with Kress’ performance at the head office.

On July 29, 1996, Mr Kaul received a letter from a firm called Metro Security Services Pty Ltd with a proposal to provide security at a cheap rate of K1.70 per hour. Without performing any due diligence, Mr Kaul then recommended to the NPF board that Metro Security replace Kress at head office. At the 103rd board meeting, on October 10, 1996, the Board resolved:

“to replace the current security service with another security service organisation to be decided on by the management”.

This was a full delegation of its role in this matter to management.

On October 25, 1996, Mr Kaul gave Kress three months notice, terminating its head office contract from January 26, 1997. He expressly assured Kress it would continue to provide security for NPF’s other properties.

The commission has examined records of the payments to Kress throughout 1996 and finds that they were in order. The details are set out at paragraphs 7.4.3.1 and 7.8.3.2.

Findings

(a) The amounts paid to Kress Security for head office security services in 1996 was K29,142.80. This compares to the figure shown in the 1995 Income and Expenditure Statement and the same figure for the comparables in the like statement for 1997;

(b) The amount shown by Century 21 statements for rental property security in 1996 was K148,226.41 as against K149,491 shown in the Income and Expenditure statements. Again, the minor differences are probably explained by the fact the commission’s figures are on a cash basis and those in the Income and Expenditure statements were probably made on an accruals basis; and

(c) No new security contract was actually let in 1996, but after being fully informed the NPF board delegated the decision to management.

1997

Contract with Metro

Mr Kaul awarded the head office contract to Metro on November 19, 1996, to commence on January 26, 1997. Mr Frank then wrongly drafted the contract to also include five other NPF properties over which the Kress contract was still in force. This resulted in double security for some weeks until Metro agreed to withdraw from the extra properties on payment by NPF of K4694.75 compensation.

The commission’s research into payments for security in 1997 is set out at paragraphs 7.5.4, 7.5.5, 7.5.6 and 7.5.7. There appear to be no anomalies except two unexplained payments totalling K11,800 to a company named Phantom Security Services Pty Ltd. No invoices exist for this alleged service. The documents show that Mr Leahy was involved in this matter.

Findings

(a) Tender procedures and requirements were totally ignored by NPF management in the letting of security services in 1997;

(b) The amounts paid for head office security in 1997 were K5395.80 to Kress Security and K35,770.95 to Metro Security aggregating K41,166.75. This compares to the figure shown in the 1997 Income and Expenditure statement of K38,593 and the same comparable figure in the like statement for 1998;

(c) The amounts paid for other security services were Kress Security K11,372.40 (for Nine-Mile) and Phantom Security K11,800 for the Kaubebe St property plus the amount shown in the Century 21 statements for rental property security in 1997 of K150,112.80 aggregating in all K169,435.20. This matches the figure shown in the 1997 Income and Expenditure statement of K169,435 and the same comparable figure in the like statement for 1998;

(d) The only changes which took place in the area of continuous security work in 1997 were:

(i) Metro Securities replacing Kress Security as the provider of security at the NPF head office; and

(ii) Kress Security being given additional security work at Nine- Mile housing project.

(e) No tenders were called in 1997 to provide security and there was no competitive bidding obtained for either of the changes in (c) above; and

(f) There was no competitive bidding for the “one-off” job of “Eviction/Demolition” for which Phantom Security was paid.

1998

This was a stable year in security services. Metro continued to provide security services for the head office throughout 1998 for a total fee of K51,246 and the payments disclose no anomalies.

Security services for all other NPF properties were provided by Kress. Kress received the sum of K145,702 through Century 21 for providing this service.

Findings

(a) The amount paid to Metro Security for NPF head office security in 1998 was K31,905.60. This matches the actual figure of K31,906 shown in the 1998 Income and Expenditure statement but not the comparative figure of K33,361 shown in the statement for 1999. The probable reason is that the latter figure for the second half of December 1998 was probably included even though it was paid in 1999; and

(b) The amount paid to Kress Security for all other security services in 1998 was K145,702.

1999

As previously discussed in paragraphs 3.4.1 – 3.4.5, 1999 was the year when NPF property management services were totally restructured with the termination of Century 21’s long standing exclusive management contract.

This was replaced by the awarding of contracts to Gemini and Haka and the lucrative NPF Tower contract to PMFNRE.

This process was marked by Mr Leahy’s interference in the competitive tendering process, which Mr Fabila accepted and facilitated.

1999 was also the year when Mr Maladina was appointed chairman of NPF at the instigation of the then Prime Minister Hon Bill Skate and it was the year when Mr Maladina and Mr Leahy pursued fraudulent schemes against the NPF with the knowledge and acceptance of Mr Fabila.

These same lawless tendencies also characterised the arrangements for security services in 1999.

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 49]

October 13, 2015 1 comment

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

NPF Final Report

This is the 49th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4L Continued 

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

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

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

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

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

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

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

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

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

Concluding Comments On Crocodile

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

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

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

Executive Summary Schedule 4M Amalpak Limited

Forward

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

Original Investment in Amalpak Ltd

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

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

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

Other Shareholders 

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

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

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

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

Value Of NPF’s Equity 

NPF’s equity in Amalpak was valued as follows:

npf 49 b

Findings 

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

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

npf 49 c

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

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

Executive Summary Schedule 4N 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Defects In NPF’s Due Diligence 

In evidence, Mr Mekere stated:

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

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

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

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

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

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

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

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

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

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

NPF Board Resolves To Participate In ACOM

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

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

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

TO BE CONTINUED

National Provident Fund Final Report [Part 48]

October 12, 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 48th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4L Continued 

4. APPROVALS had to be in place for the construction;
5. CROCODILE would accept a five per cent share in the project if MBI also injected capital into the project;
6. CROCODILE would provide loan finance provided it was given preferential repayment from the profits of the project.

These conditions were never fulfilled and by December 1997 they were completely overlooked by management and the boards of both NPF and Crocodile.

At the December 10, 1997, Crocodile Board meeting, the directors accepted a woefully inadequate feasibility study presented by Mr Jewiss and failed to have it reviewed professionally.

Then, without observing that the conditions previously imposed had not been met, the Crocodile Board approved participation in the project subject only to “satisfactory financial arrangements”.

At the NPF Board meeting on December 11, the board endorsed the decision of the Crocodile Board to proceed with the project, giving no thought to the financial arrangements.

In March 1998, with no source of funding in place, with no title to the land where the hotel was to be built and without any authority to carry on business in Indonesia, Crocodile signed a joint venture agreement with MBI. Mr Jewiss accepted the help of Nicolo Lolong, a former Indonesian Government official, to help guide Crocodile through the legal and bureaucratic requirements.

The arrangements with Mr Lolong were never properly finalised and this led to serious legal complications as Mr Lolong later refused to hand over land titles to Crocodile until his claim was paid.

South East Asian Financial Crisis

At this stage, in March 1998, the catastrophic impact of the South East Asian financial crisis on the Indonesian economy, currency and inflation was daily headline news. Neither Mr Jewiss, the Crocodile Board, the NPF management nor the NPF Trustees paused to critically assess the effect this crisis would have on the Maluk Bay investment. All parties were in gross breach of duty by this failure.

The Joint Venture 

The joint venture agreement was between Crocodile, MBI and MSP (a local company which would hold the land once it was acquired). A joint venture company was to be established as a foreign investment company under the laws of Indonesia. The partners investment in the company would be $US1.6 million consisting of $US1.12 million loan finance and $US480,000 in share capital to be contributed as follows:-

Crocodile – $US240,000
MBI – $US230,000
MSP – $US9,000.

The joint venture agreement also provided that Crocodile would provide a loan for working capital but did not specify how much (paragraph 7.5.4).

Crocodile immediately employed Mr Wilson and Mr Goodfellow (shareholders in MBI) to manage the construction of the hotel “in-house”, remunerated at $US12,000 per month. The Crocodile Board was not consulted about these critical decisions.

Findings 

(a) MR Jewiss failed to clarify Mr Lolong’s role and to enter into clear formal contractual relations with him;
(b) MR Jewiss failed to properly advise the Crocodile Board about the implications of the spreading Indonesian financial crisis and the Board of Crocodile was remiss in not seeking advice about the matter;
(c) THE joint venture agreement between Crocodile, MSP and MBI failed to specify the amount of the loan to be supplied by Crocodile;
(d) THE engagement of Mr Goodfellow and Mr Wilson to manage constructions at Maluk Bay in March 1998 was premature, as approval of the project was still subject to finance. The appointment was also made without Crocodile Board approval. As both men were friends of Mr Jewiss and shareholders in MBI, their appointment raises concerns of nepotism and impropriety;
(e) MR Jewiss and Mr Wright acted improperly in arranging finance for the Maluk Bay project through NPF without obtaining the formal approval of either the Crocodile or NPF Boards;
(f) THE methods of providing finance for Crocodile adopted by Mr Jewiss and Wright were unconventional, improper and secretive. This resulted in the NPF and the Crocodile boards losing control over Crocodile’s operations;
(g) THE use of NPF’s trust account with Wilson HTM was in breach of PNG foreign exchange regulations for which Mr Wright, Mr Jewiss and Mr Wilson HTM are personally liable;
(h) MR Jewiss’ denial of having knowledge of this arrangement at transcript p. 5566 was false and he should be referred to the Police Commissioner for prosecution.

In May 1998, Mr Fabila replaced Mr Kaul as general manager of NPF and he became a director on the Crocodile Board. Unfortunately, this did not strengthen the control over the management of Crocodile.

In June 1998, Mr Wilson, who was supervising the very early stages of the construction of the hotel, prematurely appointed a Ken Williams as general manager of the hotel, ostensibly to run a three month staff training program before the commencement of hotel operations (paragraph 7.6.5).

To satisfy the growing need for funds, Mr Jewiss and Mr Kaul increased the use of the Wilson HTM account, through which approximately $US600,000 of NPF funds was channelled to Indonesia, without the NPF Board’s knowledge or authority. This of course was illegal.

There was also at least one attempt to transfer funds by way of a false invoice prepared by Patrick Goodfellow at Mr Wright’s request – see paragraph 7.6.3 of the report (This invoice was apparently not used and the commission does not know if there were others).

With no financing plan in place, Crocodile management kept up the expenditure in the belief that NPF would foot the bills and that Noel Wright would find ways to achieve this. This process led directly to the loss of $US160,000 that was paid as a deposit on kitchen equipment when there were no funds to pay the balance owing (see paragraph 7.7.2).

Findings 

(a) MR Wright’s extensive use of NPF’s Wilson HTM’s money market account to transfer approximately $US600,000 to the PT Cipta Boga Baya bank account at Mataram, was illegal and completely without the NPF Board’s authority. It resulted in the boards of both the NPF and Crocodile being by-passed and indicates that both boards had lost financial control of their respective management teams;
(b) IT is clear that Mr Jewiss was party to this method of funding Crocodile;
(c) IN view of Mr Copland’s close connections with Mr Wright, as he was chairman of both boards, and as the evidence is that he kept himself informed of major management issues, the commission finds that Mr Copland must also have been aware that finance was being provided to Crocodile by this extra legal means, without board approval;
(d) CROCODILE suffered significant loss when large deposits were paid to purchase equipment when there were no funds to pay the balance of purchase moneys;
(e) NPF’s system of financial control was weak in that it enabled Mr Wright to misuse NPF’s account with Wilson HTM undiscovered, as there were no checks or balances in place.

Not surprisingly, these weak financial controls and unorthodox and secretive methods of providing funds, led to a budget blow out from the approved $US1.6 million to $US4.178 million.

At Mr Copland’s direction, Mr Wright visited Maluk Bay and performed an audit. His audit report was seriously inadequate and failed to highlight the following critical issues to the board, including:-

  • AN assessment of the local economy and the impact of the economic crisis;
  • DETAILS of the contractual arrangements;
  • THERE was no audit of the financial records;
  • THERE was no analysis of the project costs to date, including actual versus budget figures;
  • THERE was no management performance assessment;
  • THERE was no assessment of the business risks and
  • THERE was no update on the land title issue. (Paragraph 7.7.3)

In 1999, the NPF management and Trustees finally began tackling NPF’s financial crisis and enlisted the help of PwC. This exposed the fact that NPF management had been funding the Maluk Bay project by various means without the board’s knowledge.

Mr Jewiss was called before the NPF special board meeting on February 8, 1999. It was resolved to cease funding the Maluk Bay project and to review critical matters like land title, the joint venture agreements, using the Wilson HTM account to pay invoices and to require evidence of the $US50,000 equity contribution from the joint venture partners.

Unfortunately, the shut down of funding was so complete that a care and maintenance budget to protect NPF’s physical assets (including the partially completed hotel), was not provided. This resulted in damage and further loss.

Mr Maladina 

By this time, Mr Maladina was chairman of both the NPF and Crocodile Boards and his dubious influence quickly began to manifest.

In April, Mr Maladina unilaterally appointed a friend, Peter Petroulas, (of “Precise Strategies”) to review the Maluk Bay project.

During the review, Mr Petroulas began setting a scene to make continued NPF funding contingent on buying MBI out of the joint venture by buying 60 per cent of MBI shares for the low sum of $US1,000, claiming to be acting for “a powerful lobby group” close to the NPF.

Also in April, Mr Maladina, unilaterally and without the authority of the Crocodile Board, negotiated a new contract appointing his friend, Mr Barredo, as managing director of Crocodile on very favourable terms, including a grant of 150,000 Crocodile shares each year. The contract was approved by the NPF board but, to be valid, it required a resolution from the Crocodile Board. Mr Maladina, however, signed the contract himself, as chairman of Crocodile and illegally affixed the company seal to it.

Meanwhile, MBI’s interests were being looked after by its prominent shareholder and Crocodile employee, Keith Wilson. Completely without legal authority (but purporting to use a lapsed invalid power of attorney which had been granted for another purpose), Mr Wilson signed, on behalf of Crocodile, a variation to the joint venture agreement, which purported to commit Crocodile to provide all funding in the form of a loan.

The variation, which was very favourable to MBI, also provided that Crocodile would reimburse all shareholders for contributions to the purchase of land. This purported variation to the agreement is invalid (details in paragraph 7.9.3).

Findings 

(a) WHEN rejecting requests for further funding for Maluk Bay, the NPF Board was remiss in not providing even a care and maintenance budget to protect its investment;
(b) MR Maladina’s unilateral decision to appoint his friend, Peter Petroulas, to review the Maluk Bay project was improper, beyond his authority and amounted to nepotism;
(c) MR Jewiss falsely informed Mr MacKenzie of MBI that Crocodile intended to fund the entire project knowing that this was contrary to the agreement and that the Crocodile Board had not resolved to do so;
(d) MR Wilson improperly purported to sign an amendment to the joint venture agreement, favouring MBI, at the expense of Crocodile. As Mr Wilson had an interest in MBI, was not authorised by Crocodile to amend the agreement and had such a clear conflict of interest, his action was improper as well as being legally ineffective.

After ceasing as managing director in April 1999, Mr Jewiss was directed to try and finalise the land title issue at Maluk Bay. No one seemed to have “on the ground” overall responsibility for the Indonesian operations and, with no funding, things came to a standstill.

The private management agreement between Crocodile and Gary Jewiss Ltd was eventually terminated in August 1999.

Financial Controls And Funding Of Crocodile’s Activities In Indonesia 

Because of poor and incomplete records, some of which have not yet been returned to PNG, the commission has not been able to fully account for all funds expended on the Maluk Bay project.

The management and directors of Crocodile were in breach of their duties under the Companies Act 1997 in this regard. As NPF was the sole shareholder of Crocodile, the management and Trustees of NPF must also be held responsible for not ensuring that the Crocodile Board (comprised entirely of NPF Trustees and officers) exercised proper control over the Crocodile management and maintained ultimate financial control.

Commission staff have pieced together the financial history of Maluk Bay and the results of this task are detailed in paragraph 8 of the report. It sets out details of amounts transferred through the Wilson HTM account ($US991,773), through D&J Consultants ($US145,000), through Patrick Goodfellow ($US41,000), the Bank Negara Account of PT Cipta Boga Baya (the “umbrella” company utilised by Crocodile) ($US783,573), Garry Jewiss-rent ($US22,200), direct funding from NPF ($US81,357), funding from Crocodile in PNG (K1,851,958) and funding from the Cikobas catering contract ($US80,550).

Funds Expended On The Maluk Bay Project 

The various records show an investment of approximately K4.3 million in the Maluk Bay project, which has been written down to nil in the Crocodile books. See table below. (Transcript p. 6277)

npf 48 a

A funding statement to PT Cipta Boga Baya was obtained. Commission staff have traced the known transfer of funds from the various sources mentioned above. Our Staff also obtained credit notes to confirm that these funds were received by the specified banks. The commission finds that there was no “leakage” of funds prior to their receipt into Crocodile’s bank accounts in Indonesia.

TO BE CONTINUED

National Provident Fund Final Report [Part 47]

October 9, 2015 1 comment

Below is the forty-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 47th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4L Continued 

(c) The NPF trustees failed in their fiduciary duty to the members of the fund by not insisting upon performance of due diligence, a business risk appraisal and independent expert advice;
(d) NPF trustees and the management were remiss in not critically assessing the competency and integrity of the Crocodile management team;
(e) NPF trustees and the management failed their duty to the members in not assessing Crocodile’s need for further funding and where the funds would come from.

Maluk Bay Project 

When NPF acquired the business in January 1997, Crocodile’s company office, all its contracts and activities and all its prospects were in PNG. It was pursuing catering opportunities in Highlands Pacific Ltd (HPL), camps at Ramu and Freida River, Lihir Gold, OK Tedi Mining, Misima Mines and Trans Island Highlands.

Mr Jewiss, however, immediately after his appointment, developed plans to expand Crocodile into ventures in Indonesia. By February 1997, he had secured qualified approval from the Crocodile board to embark upon a project to construct a hotel at Maluk Bay, Sumbawa Island.

By April, he relocated himself and family to Bali, Indonesia where he was seeking various investment opportunities, particularly the purchase of land at Maluk Bay to build the hotel complex.

Mr Jewiss remained “located” in Bali and was focussing on various Indonesian ventures (particularly Maluk Bay), recruiting staff, sorting out land rights and other legal problems under Indonesian law and dealing with Indonesian bureaucracy and local authorities.

Neither he nor his key staff had visas allowing them to work in Indonesia so this meant they had to fly out and return every month. All this was most disruptive. It constituted a serious flaw in the overall management of Crocodile and its ‘mainstream’ PNG ventures suffered. It was also very costly.

Unauthorised Loans 

Between July and September 1997, NPF advanced K850,000 and then a further K250,000 to Crocodile as capital loans with no formal approval from the NPF board. This was authorised by Mr Wright (acting way beyond his authority). The requisite Ministerial approval was not sought and no loan documents were in place (Mr Leahy was asked to draw these up after the event).

Quite clearly, Mr Copland who as the active chairman of both boards must have known of these loans and Mr Wright and Mr Kaul were in gross breach of duty to the NPF board and members. When the NPF simply ratified these loans after the event, without taking steps to rationalise and control financial relationships between NPF and Crocodile, all the trustees involved were failing their fiduciary duties to the members of NPF.

This was not an equity investment requiring professional expertise that the trustees lacked. This was a matter of business loans and contracts of which several trustees had experience and their silence about what was happening is inexcusable.

Attempts By Crocodile Board To Impose Controls 

The Crocodile board was not entirely inactive however, it resolved not to continue with the loss making Kundu Catering division because of irregularities and it directed Crocodile management to impose cost controls in July 1997 (paragraphs 4.2 & 4.3). Crocodile management made no attempt to comply with these board directions.

On the request of Mr Copland, Mr Jewiss provided the Crocodile board with a proposed revised management structure. Although it was clearly inappropriate it was accepted by the Crocodile board and by NPF, Crocodile’s only shareholder.

Findings 

(a) Mr Wright and Mr Kaul acted improperly and in excess of their delegated authority by advancing “capital loans” of K850,000 and K250,000 to Crocodile without prior NPF board authority;
(b) When ratifying these loan payments NPF trustees failed to reprimand or openly address the serious breach of duty by Mr Wright and Mr Kaul;
(c) NPF failed to obtain Ministerial approval as was required by the PF(M) Act for the K850,000 loan;
(d) Mr Wright and Mr Kaul and possibly also the NPF trustees in office at the time who failed to inquire about Ministerial approval, may be personally liable to repay the amount of the loan to NPF;
(e) Crocodile management failed to implement cost controls as directed by the Crocodile board and the board failed to address this failure by management; and
(f) The Crocodile board failed to ensure an appropriate management structure was put in place to handle both domestic and international operations before commencing the Indonesian operations. The structure that was determined was inadequate.

At the Crocodile board meeting on October 27, 1997, there was concern about the cash flow problem. The minutes show that “it was noted that the managing director is not required on a full time basis in Indonesia. . .” and it was resolved that management focus its attention on the PNG operations (Mr Jewiss continued to reside in Bali, however).

At the NPF board meeting the next day, Mr Kaul advised that Crocodile was defaulting on interest payments to NPF. It was resolved to convert the loans to Crocodile into share capital. This was done without the requisite Ministerial approval (paragraph 4.4.10).

Crocodile management was not performing well and Crocodile was running at a loss. It is of concern therefore that Mr Jewiss provided the senior managers with a computer notebook each as a bonus.

Findings 

(a) Mr Jewiss failed his duty to the Crocodile board by not relocating and focusing his attention in PNG;
(b) The Crocodile board directors failed their duty under the Companies Act by not following up on their direction to Mr Jewiss and ensuring compliance;
(c) Crocodile management and the board failed to deal with Crocodile’s chronic cash flow problems (other than by turning to NPF);
(d) NPF management, particularly Mr Kaul and Mr Wright and the NPF trustees on the Crocodile board failed to fully advise the NPF board about Crocodile’s cash flow problem; and
(e) Mr Jewiss’s decision to grant a bonus to senior management was not justified by their (or Crocodile’s) performance.

Continuing Cash Flow Problems 

After Mr Fabila replaced Mr Kaul at NPF and on the Crocodile board in May 1998, the Crocodile cash flow problems continued, largely because of the financial drain caused by the Maluk Bay project. Crocodile was facing legal proceedings for a debt of $A356,524 it owed to one of its suppliers. In June 1998, PNGBC formally approved a loan of K2.9 million to Crocodile and part of the security was an unlimited guarantee from NPF. In this way, NPF’s exposure to the troubles of Crocodile was steadily increasing.

In late 1998, despite Mr Jewiss’s confident forecasts, the Crocodile board was concerned about poor performance, which Mr Jewiss blamed on delays in completing the Paiam warehouse. Mr Copland was expressing dissatisfaction with Mr Jewiss.

With the PNGBC K2.9 million loan not yet in place, NPF management extended bridging finance to enable Crocodile to meet payments due on the Paiam warehouse. This was arranged entirely without the knowledge or approval of the NPF board (paragraph 4.7.2).

To enable Crocodile to drawdown on the PNGBC K2.9 million facility, NPF gave a limited guarantee to PNGBC on September 4, 1998, (paragraph 4.7.3). Again, this was carried out without the approval of the NPF board through formal resolution, as required.

On September 14, 1998, Crocodile drew down K2.9 million on the PNGBC facility, using the funds to repay K2 million borrowed from NPF and retaining K900,000.

Although Crocodile continued to rely on NPF finance, its board still failed to critically review the business in order to rationalise its operations and reduce costs.

Findings

(a) The provision of bridging finance to Crocodile was made without the knowledge or approval of the NPF board. Mr Wright acted improperly and breached his duty to NPF in this matter. It is highly likely that the NPF managing director Mr Fabila was aware of the transaction. Also, Mr Copland, who was chairman of both boards and taking an active interest in the management of Crocodile must have been aware of the provision of bridging finance;
(b) Providing bridging finance is not a permitted investment under the NPF Act;
(c) NPF’s limited guarantee of the PNGBC K2.9 million loan facility to Crocodile, was not properly approved by NPF board resolution;
(d) Mr Jewiss failed to ensure some of the required essential conditions were included in the catering contract with Tolukuma Gold Mines;
(e) The Crocodile management and board failed to critically review Crocodile’s poor performance in order to reduce costs and rationalise the management of the business.

Falsley Inflated Profits 

Mr Jewiss’s report to the November meetings of the Crocodile and NPF boards used incorrect accounting procedures to show a net profit of K256,612, which was wrongly inflated by K208,333 (paragraph 4.8.1).

He also provided a five-year forecast projecting profits of K31.6 million which was made without any firm foundation.

1999 – Addressing The Problems 

With NPF now recognising its own desperate financial crisis and after the January 1999 departure of Mr Wright, NPF focussed critical attention on Crocodile and its mismanaged, loss-making, finance-draining ventures.

At the February 8, 1999 NPF board meeting, a false profit of K759,733 was reported for the year ending December 1998. Subsequent calculations, using the correct accounting procedures, showed it was really a loss of K600,590.

Mr Fabila, Mr Maladina and Mr Tamarua were installed as directors of Crocodile. At this meeting, management informed the NPF trustees for the first time that NPF had funded payments to the Paiam warehouse builder and, importantly, that secret payments from Wilson HTM’s offshore NPF account had been paid to fund Maluk Bay by Mr Wright, without the NPF board’s knowledge or approval (paragraph 4.9.1).

Appointment Of Ram Business Consultants 

Soon after his appointment to the Crocodile board in February 1999, Mr Maladina, without any authority to do so, unilaterally appointed Ram Business Consultants as investigators and as the independent internal auditor of Crocodile. This was contrary to normal procedures, which required the consent of the Auditor- General as well as approval by the NPF board.

PNGBC now tightened up on its temporary K1.8 million overdraft facility to Crocodile, converting it to a loan.

Findings 

(a) The appointment of Ram Business Consultants was made without the Auditor-General’s consent and was in breach of standard procedures;
(b) In light of evidence linking Mr Maladina with Ram Business Consultants in other matters, the commission finds that this appointment amounted to improper conduct by Mr Maladina and was nepotistic.

By April 1999, attempts to replace Mr Jewiss with Mr Barredo as manager of Crocodile were being hatched by Mr Maladina and Mr Leahy (paragraph 4.10). It resulted in Mr Jewiss being terminated as manager at the end of April 1999, and the complete cancellation of his employment contract in August 1999.

After Mr Jewiss was terminated as manager in late April, Mr Maladina, as chairman of Crocodile, and without any authority to do so, unilaterally signed a contract of employment for Mr Barredo on extremely favourable terms. The terms included a grant of K150,000 of Crocodile shares per annum, which would soon have given Mr Barredo control of the company (On August 24, 1999, Mr Maladina disclosed his unilateral action to the NPF board which resolved that Mr Barredo’s contract should be reviewed by NPF management and then placed before the Crocodile board for approval. This never happened).

As sole shareholder in Crocodile, the NPF trustees could and should have reprimanded Mr Maladina for unilaterally signing the contract.

Findings 

(a) The NPF board’s appointment of Mr Barredo as managing director of Crocodile was not valid, as the Crocodile board did not approve it;
(b) Mr Maladina had no authority to sign the contract of appointment on behalf of the Crocodile board;
(c) Mr Barredo’s contract was vastly overgenerous. The inclusion of a grant of K150,000 worth of Crocodile shares per annum would give him effective control of Crocodile in a short period;
(d) Mr Maladina’s appointment of Mr Barredo was improper and nepotistic;
(e) Mr Maladina’s negotiations with the IPI landowners were conducted without consulting with or obtaining the approval of either the Crocodile or NPF boards;
(f) Crocodile management’s failure to ensure that title to the Paiam warehouse land had been satisfactorily resolved before outlaying substantial expenses was a major failure of duty.

Mr Maladina’s actions regarding Mr Barredo constituted one of the grounds leading to the board’s vote of no confidence in him on October 8, 1999, which led to his suspension as chairman of NPF.

In November 1999, PNGBC showed its concern about Crocodile’s apparent inability to pay its debts when it converted an existing overdraft facility into a loan of K1.8 million, guaranteed by NPF. This was then taken over by NPF and converted to a further equity investment in Crocodile.

Findings 

The fact that NPF was obliged to go further into debt with PNGBC to save Crocodile from financial collapse, at the same time as NPF was selling down the bulk of its equity portfolio at a huge loss to extricate itself from debt to ANZ Bank, emphasises the folly of NPF’s heady involvement in remote catering through its unwise investment in Crocodile.

Maluk Bay Project 

A major factor contributing to Crocodile’s losses was its protracted involvement in the project to build a resort complex at Maluk Bay, Sumbawa Island, Indonesia and this was made a separate term of reference for this inquiry (Term of Reference 1(m)).

The Maluk Bay project is dealt with in detail in Part 2 of the Crocodile Report at Schedule 4L, paragraphs 6 to 9.

Background 

Very soon after NPF acquired Crocodile in January 1997, employing one of the former owners Mr Jewiss as executive manager, Mr Jewiss met up with a former friend and workmate Keith Wilson who was planning to build a small bar and grill at Maluk Bay, Sumbawa Island, Indonesia with a group of his friends.

They had incorporated a company called Maluk Bay Investments Ltd (MBI) for the purpose. Three of the group were employed by Cikoba Konseptama Bangunmutra (Cikoba), which was an Indonesian company operating on Sumbawa Island. Mr Jewiss saw possibilities for a larger hotel complex to serve the needs of nearby mining communities. He saw the possibility of Crocodile participating in the venture and became enthusiastic; believing it would also open the door for catering contracts with the nearby mining companies, whose staff, he believed, would use the hotel for rest and recreation.

After Mr Jewiss and MBI agreed to participate in a joint venture to construct and run the hotel, Mr Jewiss put his proposal to the Crocodile board meeting on February 27, 1997. The board requested more information before making a decision.

Mr Jewiss then falsely informed MBI that Crocodile had agreed to invest $US1 million. Mr Jewiss then took up residence in Bali with his family. The commission assumes that Mr Jewiss enjoyed the life style on Bali, which was also in the vicinity of Sumbawa Island, as there was no valid “business reason” for him to move there.

At the Crocodile board meeting on May 5, 1997, Mr Jewiss reported vaguely about securing four catering contracts in Indonesia but provided no details. Without having received any firm information about the Maluk Bay project, the Crocodile board approved a budget of $US1.3 million, subject to “the numbers, guarantee, costing and other details”. The “numbers, guarantee, costing” never materialised yet Crocodile then proceeded into the project, being “drip-fed” with funds from NPF.

Crocodile seemed to benefit from the relationship with Mr Jewiss’ new friends from Cikoba when that company awarded a catering contract to Crocodile. The contract was never properly formalised, however, and this led to later difficulties and Crocodile lost K200,000 when Cikoba failed to pay its debts.

At the Crocodile board meeting in July 1997, the board approved, in principle, Crocodile’s participation in the Maluk Bay project but subject to the satisfaction of a number of prior conditions:-

  1. Crocodile would not commit to the project until the design, costing and budget had been finalised and provided by the joint venture partner (i.e. MBI);
  2. Any excess over the $US1.3 million guarantee costing would be borne by the joint venture partner;
  3. The joint venture partner would obtain the land title;

TO BE CONTINUED

National Provident Fund Final Report [Part 44]

October 6, 2015 1 comment

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

NPF Final Report

This is the 44th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4G Continued 

This was corrected by regazettal on April 15, 1996, but meanwhile all previous transactions in OSL or NML shares exceeding K500,000 between January 26 and April 15, 1996 were invalid, as they still required specific approval from the Minister.

In paragraph 4.4.6, the commission indicated that several of the sales of OSL shares in 1996 were without NPF board approval.

Furthermore, BPNG approval for the sales had been on the condition that the proceeds of the sale must be brought back into the country. This did not happen as Mr Wright authorised the brokers, Wilson HTM, to use the funds to purchase other ASX listed shares.

Findings 

(a) THE sale on February 14 and 15, 1996 of 1,000,000 shares for $A1,316,288 and the three sales after May 27, 1996, totalling 1,000,000 shares were not authorised by the NPF board;
(b) MR Kaul and Mr Wright were responsible for these unauthorised sales in breach of their duty to the NPF contributors;
(c) THE NPF board contravened Section 61 of the PF(M) Act for any shares sold without Ministerial approval prior to April 15, 1996, where the value of the sale transaction was more than K500,000;
(d) THE NPF board contravened Section 61 of the PF(M) Act for any shares sold without Ministerial approval on and after April 15, 1996, where the value of the transaction was over K1,000,000;
(e) MR Kaul failed in his fiduciary duty to the members regarding sales not authorised by the board;
(f) MR Wright failed in his duty to NPF for his part in these unauthorised sales;
(g) NPF had clearly sold the two million shares before it obtained Internal Revenue Commission of Papua New Guinea (IRC) Tax clearance and the BPNG approval. This contravened the requirements of the BPNG and the IRC; and
(h) BASED on NPF’s Wilson HTM statement (Commission Document 748), the proceeds from the sale were used to purchase other ASX listed shares. The proceeds were not brought back into Papua New Guinea as directed by the BPNG.

Transactions In OSL Shares 1997-1999 

In 1997, NPF held no OSL shares and there were no transactions.

On December 16, 1998, NPF management purchased 222,000 OSL shares through Wilson HTM and then sold them on January 17, 1999, for a loss. The NPF board was never informed about these two transactions. The transactions may have been required by Mr Wright to obtain share scrip as security for his unauthorised transactions in options, which were occurring at that time.

Findings 

(a) THE NPF board did not approve the purchases and sales of 222,000 OSL shares in December 1998/January 1999;
(b) THE officers responsible breached their duty and may be personally liable for the loss, unless it can be shown that their actions were “in good faith”.

Dividends 

OSL paid dividends between 1992 and December 1999 of $A59.046 million. NPF received dividends of K49,500 in 1995 and K20,000 in 1996.

Concluding Comments

The main features of the NPF’s investment in OSL was the fact that it held a relatively safe and profitable dividend-providing investment in a large and proven PNG resource company.

Mr Copland, Mr Kaul and Mr Wright seemed driven to become in-volved in more risky smaller ventures in which NPF could have some control and in which there was a chance of a windfall from corporate takeovers and the like.

To fund such an investment with more “upside”, management decided to sell off the OSL investment. Making a grave error in judgment and without expert investment advice, management sought approval from the Board of Trustees, by circular resolution, to sell off the OSL shares and invest the proceeds of the sale by acquiring shares in NML.

In gross breach of fiduciary duty the trustees approved.

Thereafter, management set the pace for a total sell-down of OSL, often proceeding without board approval and sometimes without the board’s knowledge.

NPF management, particularly Mr Wright and Mr Kaul, and the NPF trustees, were in breach of their duties to the board and to the members of NPF in their handling of this investment.

Executive Summary Schedule 4H Orogen Minerals Limited 

Introduction 

NPF’s investment in Orogen proved to be moderately profitable as shares purchased at $A29,487,447 (K32,241,239) were sold at $A30,809,481 (K42,229,956), resulting in a realised capital gain of $A1.32 million (K9.9 million). In kina terms, this represents an annualised return on capital of 10 per cent per annum for the period NPF held this investment. In addition, NPF received dividends of K2,506,627. Between April and June 1999, the investment had to be sold off to relieve NPF’s debt burden.

From start to finish, however, this investment was marred by NPF management’s cavalier approach to its obligation to properly brief the Board of Trustees about transactions being undertaken on behalf of NPF. Management also failed to obtain expert independent advice regarding its large initial investment in Orogen and subsequent “on market” purchases.

It also failed to seek such advice and provide it to the board when Orogen share prices fell steadily from 1997 onwards.

These breaches in management’s common law duties to the NPF board are dealt with in detail in the text of the report and in the list of findings in paragraph 8.

To some extent, the trustees were therefore “kept in the dark” about unauthorised transactions and management did not properly advised them about the risks and prospects of this investment.

Nevertheless, the trustees also failed in their fiduciary duty to maintain control of management and to challenge management over its failure to provide proper advice to the board.

The trustees also failed to criticise and reprimand management about those unauthorised transactions, which were subsequently disclosed to the board.

The trustees breaches of fiduciary duty to the NPF members are detailed within the text and in the list of findings at the rear of the report.

Investment In Orogen 1996 

The most serious breaches of duty occurred at the commencement of this investment.

There were known risks associated with investing in Orogen as Orogen intended to invest in PNG resource stock, which is inevitably risky.

Despite these known risks the trustees approved an investment of K34,999,640 for 20 million shares in the initial share issue with very little discussion taking place and no expert investment analysis regarding the proposal. Management (Mr Kaul and Mr Wright) and the trustees all failed in their duty, in this regard.

The Department of Finance (DoF) analysis of this investment was very inadequate and it gave an unsubstantiated recommendation for the Minister to approve the investment. Although the full number of 20 million shares was cut back, management acted without board authority to purchase additional shares “on market” (through the stock exchange) at a higher price than the board had approved.

Findings

(a) MANAGEMENT (specifically Mr Wright and Mr Kaul), were in breach of their duty to the board by not providing independent expert investment advice before recommending an initial investment of K34,999,640 in Orogen, which involved significant investment risks;
(b) THE trustees failed their fiduciary duty to the NPF members by approving the investment of K34,999,640, without first seeking independent expert investment advice;
(c) THE NPF management did not obtain board approval before making additional transactions through book building or the additional “on market” transactions at higher prices than the board had approved;
(d) MINISTERIAL approval was obtained after NPF had contracted liability, which it had done so without board authority. The Minister failed to query or reprimand NPF about this breach of Section 61 of the PF(M) Act;
(e) WHERE NPF management acted in excess of their delegated authority and without the Board of Trustees approval, they were in breach of their duty to the NPF. If losses occurred, the officers concerned may be personally liable, unless they can successfully claim that they “acted in good faith”;
(f) THERE is no clear documentary evidence to conclusively show who initiated these transactions, however Yamyam Gire and Haro Mekere have given evidence (Transcript pp. 2558 – 2576 and 4104-4106 respectively) that during the period in question, Mr Wright usually gave instructions to the brokers. Mr Kaul has said that in most cases he was aware of Mr Wright’s transactions and would have approved, at least implicitly (Transcript p. 5090).
Other confidential evidence available to the commission confirms that it was usually Mr Wright who gave instructions to Wilson HTM;
(g) MR Kaul’s letter of the November 15, 1996, (Exhibit OR44), expressly showed that NPF requested Ministerial approval after liability had been contracted. Mr Haiveta’s response (Exhibit OR45) does not say anything in relation to this obvious breach by NPF. Mr Haiveta was remiss in not criticising NPF and demanding that Ministerial approval be obtained before NPF made acquisitions that required such approval.

Investment In Orogen 1997 Sales 1997 

On May 5, the NPF board meeting resolved to “approve in principle as a matter of policy that where required a certain parcel should be realised where the need to use some cash arises in investment initiatives . . .”.

The minutes show that Mr Copland advocated this policy so that NPF could “realise some of the shares into cash and invest in areas where the board will have influence as a matter of policy” (presumably by obtaining a seat on an “policy” investee company’s board).

This resolution was wrongly taken by management as authorising it to sell Orogen shares without reference to the board to approve the sale.

The following sales occurred in 1997: See table 1 below.

image a

Source : NPF accounting records/ Wilson HTM & Merrill Lynch statements (Exhibits OR11 OR13 ).

These sales did not have NPF board approval and were improper breaches of management’s duty to the board.

Findings

(a) MANAGEMENT (especially Mr Kaul and Mr Wright) directed Wilson HTM to sell 10 parcels of shares in June 1997, without the prior approval of the NPF board;
(b) MANAGEMENT, specifically Mr Kaul and Mr Wright, did not subsequently explicitly inform the board about these unauthorised “on market” share sales and the board’s ratification was not obtained. After September 1997 when the Orogen share price began to fall sharply from $A3.9 to bottom at $A1.6 in March 1999, NPF management failed to provide expert evaluation of this investment and the trustees failed to seek it. This was a breach of duty by both management and the Trustees.

Purchases in 1997

Throughout 1997, NPF management continued to acquire Orogen shares and did so without seeking the requisite NPF Board approval.

The purchases were as follows:- See table 2 below.

image b

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

There were references to some of these purchases in the equity portfolio schedules filed with the board papers but the references were out of date and inaccurate. They were sufficient, however, to have put the trustees on notice that unauthorised purchases were occurring. Failure by the trustees to observe these transactions and to reprimand management was a breach of fiduciary duty by all trustees holding office at the time. Clearly, the conduct of management, namely Mr Wright and Mr Kaul, was improper and they were in breach of their duties to the NPF Board.

Findings

(a) NPF management directed 12 “on-market” purchases totalling 1,087,973 shares for a total cost of $A3,917,879, without the requisite prior board approval;
(b) The purchases were later reported on the monthly equity schedules tabled at subsequent board meetings but the information was sometimes inaccurate and well out of time. The attention of the Trustees was not drawn explicitly to the equity schedules;
(c) MANAGEMENT, particularly Mr Wright and Mr Kaul, were in breach, respectively, of their duty and fiduciary duty to NPF members by this failure;
(d) THE trustees were in breach of their fiduciary duty in not monitoring management’s unauthorised activities and bringing them under control;
(e) THERE was a breach of Section 61 of the PF(M) Act with regard to the shares purchased on the October 2, 1997, as Ministerial approval was not sought or given.

TO BE CONTINUED

National Provident Fund Final Report [Part 41]

October 1, 2015 Leave a comment

Below is the forty-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 41st 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 4E Continued 

NPF management did not take any independent, professional investment advice before moving quickly to acquire a placement of 2,000,000 shares with 1,333,333 free options at 20 cents a share for $A400,000. NPF purchased its first two million shares in December 1995 when Macmin’s share price and the gold price were near highest peak, as shown by the following graphs.

Gold Price See Graph One – Source: Bank of PNG Quarterly Economic Bulletin 

npf 41 a

Macmin Share Price See graph two – Source: ASX (Commission Document 754)

npf 41 b

Investment Appraisal And Board Approval 

This was an early example of NPF’s new investment strategy as formulated on June 15, 1994. The strategy was to diversify from a passive investment approach to a more active and hence more risky approach. A competent expert analysis of this investment would have shown several risks associated with it including:

  • Share market fluctuations;
  • Exploration and production risks;
  • Environmental risks;
  • Insurance;
  • Finance risks – the company was not able to raise sufficient capital to undertake projects;
  • Government actions;
  • Gold price – risks that the price of gold would fall and render mine or exploration programs economically non-viable;
  • Foreign exchange rate fluctuations;
  • Risks in PNG including:

– Changes in Government policy or legislation, unfavourable to the enterprise;
– Civil unrest;
– Landowners’ issues;
– Licence cancellation;
– General economic situation and o Foreign exchange and taxation.

NPF’s own investment policy (June 15, 1994) required consideration of the following:

  • The impact of the investment in Macmin on the investment portfolio balance and the investment guidelines;
  • A financial evaluation of Macmin;
  • A critical assessment of Macmin’s business risks;
  • An assessment of Macmin’s management’s capabilities, qualifications, background and an assessment of the directors’ business experience and acumen;
  • The likely investment returns measured against the associated risks of the investment; and
  • Future funding requirements of Macmin and the ability of Macmin to raise funds to fulfil those requirements.

Clearly, an investment in Macmin was a speculative investment. Therefore, these issues should have been considered in relation to NPF’s objectives and the existing structure of its investment portfolio.

The NPF management and board must have completely disregarded this investment policy because the Macmin investment failed each of those criteria.

In not providing proper investment advice, NPF management was in breach of its duty to the board. The trustees, in not insisting upon such advice and in not performing any valid investment analysis, failed to fulfil their fiduciary duty to members of the fund. Throughout 1995 and 1996 and up until May 1997, NPF continued to invest in Macmin despite the alarming fall in its share price. During this period, management frequently made acquisitions without board approval and frequently failed to provide accurate and timely information to the board about what was happening.

NPF’s Board Failure To Monitor Management Activities 

For its part, the Board of Trustees continually failed to keep itself informed about management’s activities and failed to criticise or reprimand management when it became aware of unauthorised transactions.

The trustees seemed not to have realised that the falling share prices, which were causing unrealised losses of several million Australian dollars, made it imperative for them to review the future of the Macmin investment. Instead, they docilely allowed themselves to be led, by Mr Copland and management into further acquisitions until the end of 1997.

NPF held almost 20 per cent of Macmin’s issued capital and was, quite inappropriately, demanding a second seat on the Macmin board.

Board Approval Of Acquisition Of Additional Shares And Loans To Macmin 

In July 1996, in another Macmin share placement, NPF acquired an additional 10 million Macmin shares for $A2.4 million. This was first approved by an invalid circular resolution on May 21, 1996, and the board also resolved to lend $A3 million to Macmin. These approvals were given by the board with no expert advice, in the face of Macmin’s falling fortunes and share price and despite the fact that security for the proposed loan was potently inadequate to protect the interest of the members of the fund.

While negotiations on the details of the security for the $A3 million loan were still being discussed, the NPF board approved yet another (short -term) loan of $A1 million on consideration of the same security arrangements which was depended upon the issue of additional shares in the ailing Macmin to NPF, should Macmin default on its loan commitments.

These security arrangements were being negotiated and agreed to by David Copland who was exceeding his authority as chairman of the NPF board in these endeavours. As a result of further adverse reports about Macmin in February 1997, these loans did not proceed.

“On Market” Purchase Of Shares By NPF 

Also in the period November 29, 1996 to December 24, 1996, NPF purchased “on market”, 2,530,000 shares for $A452,570 increasing NPF’s shareholding to 16.56 per cent of issued share capital. Once again this was authorised by management without due diligence or expert appraisal and without the knowledge or approval of the NPF board. The management and trustees both failed in their duties to NPF and its members regarding these “on market” purchases.

During 1997, NPF continued these “on market purchases’, usually without explicit board approval, bringing its shareholding in Macmin close to 20 per cent.

NPF’s investment in Macmin, during 1997, was as follows:

npf 41 c

The trustees were rarely consulted or given prior knowledge of these purchases. Sometimes management did not include the investment schedule, which would have disclosed the transactions in the papers for the next board meeting, so the trustees had no notice at all.

Board’s Failure To Reprimand Management

It is disturbing that the trustees did not speak out about management’s failure to provide documentation or about the unapproved transactions authorised by Mr Wright and Mr Kaul. Even on the occasions when these activities were belatedly brought to the board’s attention, it did not result in criticism or reprimand. For this, the trustees must bear responsibility, as their failure must have encouraged management to persist in this improper way.

25 Million Share Placement, March 1997

On March 20, 1997, Macmin issued a prospectus for the issue of 25 million shares at 20 cents a share, with one option per share. With no objective review of the proposal and heedless of it being well outside NPF’s investment guidelines, NPF purchased 4,297,409 shares with an equal number of options for $A644,611.

In recommending this purchase to the board, Mr Kaul falsely implied that Macmin’s explorations were going well, despite reports in his possession to the contrary. He also implied that Macmin’s share price was approximately 8 cents, which was higher than the actual price of 6.5 cents.

NPF failed to obtain the Ministerial approval required under s.61(2) Public Finances (Management) Act (PF(M) Act).

Mr Kaul and Mr Wright and all the trustees were again failed in their duty and fiduciary duty to the board and members of the fund in recklessly entering into this extra purchase.

The shares were paid for by using off-shore funds in NPF’s account with its brokers, Wilson HTM. This deliberate breach of the (BPNG) foreign exchange regulations, which was authorised by M. Wright, was improper and illegal. The commission recommends that Mr Wright and Mr Kaul be referred to the Controller of Foreign Exchange, BPNG to consider taking action under the appropriate regulations.

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 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.

Findings

(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.

Findings

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.

TO BE CONTINUED

National Provident Fund Final Report [Part 36]

September 24, 2015 1 comment

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

NPF Final Report

This is the 36th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.

Executive Summary Schedule 4C Continued

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

Offer by Chinese National Petroleum Corp (CNPC)

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

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

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

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

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

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

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

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

NPF Supports Cue’s Indonesian Venture with PT Wirabuana Prajamija

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

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

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

Findings

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

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

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

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

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

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

Findings

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

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

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

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

Mr Haiveta Imposes Conditions On His Approval

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

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

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

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

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

NPF Board Ignores The Ministers Conditions

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

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

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

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

Findings

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

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

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

Management Makes Further Investments Without Board Approval

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

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

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

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

Cue Terminates The Saga Agreement

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

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

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

TO BE CONTINUED