National Provident Fund Commission of Inquiry Final Report (Serialization Parts 1-40)
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National Provident Fund Final Report [Part 1]
SUMMARY OF EVENTS – 1995-1999 Pre 1995 – background The NPF commenced operations in 1980. After troubles with the management of the fund in the late 1980’s involving unauthorised expenditure by management and serious cost blowouts, the management of operations and investments was contracted in 1988 to Niugini Asset Management, a subsidiary of McIntosh Securities Ltd for a five-year period.
At the end of the contract period in 1993, the period of external management ceased and NPF carried on as a self-managing entity. According to the Five-Year Development Plan 1995-99 (Schedule 1, paragraph 6.1) the Niugini Asset Management regime had stabilised the fund and introduced good corporate governance, with management reporting properly to the NPF Board and being properly supervised by the board.
It had been intended that senior management positions would be staffed by experienced expatriates tasked with training nationals as middle-level management to replace them when ready.
NPF was unable to recruit and hold the expatriate senior managers. In July 1993, Robert Kaul was appointed as managing director with expatriates Brendan Kelly and Jeffery Bunn as general manager and operations manager, respectively.
Noel Wright, a former employee of Niugini Asset Management, stayed on as finance and investment manager. The chairman of the board was the experienced secretary of the DoF, Gerea Aopi.
The other members of the management team were Herman Leahy as corporate secretary/legal counsel and the following inexperienced officers, Ian Tarutia (assistance compliance manager), Nellie Andoiye (assistant operations manager) and Salome Dopeke (assistant finance and investment manager).
Appointment of new management team — 1995 This team did not last because Mr Kelly and Mr Bunn departed the NPF before the end of 1995. Mr Wright was soon promoted to deputy general manager and Mrs Andoiye, Ms Dopeke and Mr Tarutia were promoted into senior management positions for which they did not have the training, skills or experience. Mr Aopi ceased to be Secretary of the DoF and chairman of NPF on October 3, 1995, and was succeeded in both roles by Rupa Mulina on October 4, 1995. Mr Mulina preferred not to act as chairman of the NPF (perceiving a conflict of interest in the two roles of Secretary of the DoF and chairman of the NPF Board).
Mr Mulina agreed to be replaced as chairman by Evoa Lalatute who was irregularly appointed by Minister Chris Haiveta on January 11, 1996 (Schedule 1, paragraph 220.127.116.11.1 and paragraph 1 in Appendix 1). Mr Lalatute chaired only one meeting before his appointment was revoked by Minister Haiveta who wished to appoint Trustee David Copland as chairman.
DoF Secretary Mulina gave evidence that he co-operated willingly and nominated Mr Copland as chairman and this was promptly approved by Minister Haiveta on April 18, 1996 (Schedule 1 paragraph 18.104.22.168 and Appendix 2, Paragraph 2).
1996 team with Mr Copland as Chairman Thus, by April 18, 1996, the key players in the management of the NPF were Mr Copland (former managing director of Steamships Trading Company Limited (STC) as chairman of the Board of Trustees, Mr Kaul as managing director, Mr Wright as deputy general manager/ investment manager and Mr Leahy as corporate secretary/legal counsel.
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This team had a close relationship with Minister Chris Haiveta, who frequently used an office in the NPF premises (The names of the Trustees at any time can be ascertained from the table set out at paragraph 5.1.1 above) or from the graph at Schedule 1, Appendix 22 (Also at Appendix of this report).
Prior to this date, NPF was following a conservative investment strategy and its only borrowing was that it operated on a K6.5 million-overdraft facility granted by the PNGBC (Schedule 2A, paragraph 2.4). There was no power for NPF to operate on overdraft and this overdraft had never been disclosed to or approved by the NPF Board. See the opinion of Allens Arthur Robinson at Schedule 2E, Appendix 6 referred to at Schedule 2E paragraph 14.6 and the Commission’s findings at Schedule 2E paragraph 18.3.
New investment strategy approved by Minister Haiveta The new NPF team of Mr Copland, Mr Kaul, Mr Wright and Mr Leahy prepared a strategy to increase the growth of the fund by investing in PNG resource stock, which could be sold off profitably to make a tax-free capital gain.
They also determined to take advantage of an imminent sale by the Defence Force Retirement Benefits Fund Board (DFRBF) and POSF of their holdings in STC and CXL.
This strategy was devised in order to take advantage of existing market and interest rate conditions and with a nationalistic but misguided intention to enable Papua New Guineans to be able to participate (through their NPF membership) in the resource companies with interests in PNG.
The intention was to obtain significant holdings in some of the smaller companies, so as to acquire seats on their boards and a massive holding in STC and CXL, in a bid to take them over and amalgamate and manage them as one company.
This latter aim was related to Mr Copland’s personal agenda, which was rooted in the circumstances of his departure from his former position at STC.
Rather than selling NPF’s holdings in IBD’s (which were then producing a good investment return) they opted to fund the proposed purchases of PNG equities by massive borrowings from the commercial banks, as interest rates were then favourable.
Utilising borrowed funds for this purpose had been discussed previously in 1994 and Mr Leahy had then given totally wrong advice that it was within NPF’s power to borrow (Schedule 2A paragraph 2.2).
There seems to have been no consideration that interest rates on borrowed capital might rise or that share prices might fall.
The strategy was discussed with an enthusiastic Minister Haiveta who gave immediate verbal approval at a meeting at the Gateway Hotel in April 1996.
Formal board approval was given on May 30, 1996, with no briefing papers for the board and little discussion. This was followed by immediate ministerial approval by Mr Haiveta, who did not seek the advice of the DoF. In this way, with little thought and no expert advice, the NPF board and Mr Haiveta approved the use of funds borrowed illegally from the ANZ Bank to purchase K39.7 million worth of shares in STC and CXL.
It was improper conduct for which the Commission has recommended that Mr Haiveta and the NPF Trustees in office at the time, should be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code (Schedule 4D, paragraphs 4.4.1 to 4.4.6). Borrowings-based investments
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During the rest of 1996 and 1997, the NPF proceeded to increase its borrowings in order to invest in PNG resource stock and in STC and CXL.
It also invested in unlisted companies such as Crocodile Catering (Schedule 4L), BSP (Schedule 4J) and made investment loans to the State to fund the Poreporena Freeway (Schedule 7B) and Eda Ranu (Schedule 7C). In 1997, NPF borrowed K50 million from the PNGBC to construct the NPF Tower (increased to K59 million in 1999 – Schedule 2B, paragraph 13.15).
Although a few of these investments were moderately successful (namely, Schedule 4H, OML and Schedule 4F, NML) most of them resulted in massive losses for the NPF.
Failures of management Throughout the period 1995-1999, common features of the equity investments included management’s failure to keep the NPF board informed of its activities and management making decisions in excess of their delegated authority.
Management made many investments without ever specifically advising the Board of Trustees.
The main responsibility for such matters lies with the managing directors, Mr Kaul and Henry Fabila and with the deputy general manager and investment manager Mr Wright, all of whom committed frequent breaches of their fiduciary or common law duties. These events are chronicled in detail in the relevant Schedules to this Report.
Failures of the Trustees The trustees must also bear responsibility for failing to oversee and control the management. Even when the trustees were eventually informed of management’s unauthorised activities, they failed to criticise or reprimand.
Also, had they bothered to examine the schedules of investments tabled at each board meeting, the trustees could have ascertained what was going on. Their failure to do so was a breach of their fiduciary duty to the members.
Failure to report and breach of investment guidelines NPF was bound by Section 26(1) of the NPF Act to invest its funds only in accordance with the 1993 Investment Guidelines, as varied by Minister Haiveta in April 1996 (regarding overseas investment in equities listed on a stock exchange up to K1 million per transaction) (Schedule 1 paragraph 8.4 and Appendix 21). The NPF was also bound by Section 63(2)(b) of the PF(M) Act to maintain, update and report annually on a Five-Year Rolling Development Plan. It was also bound to report quarterly on all investment decisions and on investment performance annually (Executive Summary 1, paragraph 10). The NPF management and Board of Trustees failed to meet any of these requirements.
Adhering to no expressed investment policy, NPF seems to have merely followed the gambler investor’s instincts of Mr Wright and Mr Copland and invested many millions of illegally borrowed funds in high-risk, volatile, non-earning PNG resource stock. It did this without independent expert advice. The advice it sometimes received from its share broker, Wilson HTM, was not independent, as Wilson HTM was itself benefiting from NPF’s high-risk buying spree (Schedule 4B paragraph 7.6).
NPF management and trustees completely lost sight of the investment guidelines, as can be seen from the graphs and working documents appended to Schedule 1 as Appendix 24 NPF’s portfolio changed alarmingly from having only 8 per cent of its portfolio invested in high-risk equities in 1994, increasing to 20 per cent in 1995 which had risen to 58 per cent in 1996, 64 per cent in 1997 and 60 per cent in 1998.
During the same period, debt as a percentage of net assets rose from 5 per cent in 1994 to 70 per cent in 1998. By that stage, because of NPF’s heavy illegal borrowings, the debt to equity ratio was 69.9 per cent.
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There was one fleeting attempt by managing director Mr Kaul to raise the awkward question of the disregarded Investment Guidelines in April 1996 (Schedule 1 paragraph 12.3.7).
This warning was simply ignored by Mr Copland and Mr Wright, except that at the 104th board meeting in December 1996, the board resolved to seek amendments to the investment guidelines to distinguish between long term and speculative investments (paragraphs 22.214.171.124 and 126.96.36.199).
It did not bother them that their expenditure of NPF funds on investments which were outside the investment guidelines, was illegal and was also a breach of their fiduciary duty as trustees, for which they could be personally liable. When William (Bill) Skate replaced Sir Julius Chan as prime minister in July 1997, Iairo Lasaro also replaced Mr Haiveta as the Minister responsible for the NPF.
Financial crisis looming in 1998 By early 1998, there were signs that NPF was in financial trouble because of the extreme imbalance and volatility of its investment portfolio, its falling value and the increasing burden of the interest being paid on the loans.
The chronic weaknesses in NPF’s governance continued with management under the control of Mr Kaul continuing to make significant decisions beyond their delegated powers and still failing to keep the NPF board properly informed on borrowings and investments. The trustees continued to give undue deference to chairman Copland and deputy managing director Noel Wright and failed their fiduciary duty to maintain supervision over management.
As reports by the Auditor-General, PwC and KPMG (See Schedule 1 paragraphs 10.5.2 to 10.5.8) demonstrate, senior management was incompetent and failing in the basic duties of maintaining a proper system of accounts, maintaining proper records of member’s contributions and administering proper procedures for acquiring goods and services and disposing of assets (Schedule 1 and Schedule 9). There were also gross abuses of the payments of board fees and allowances (Schedule 1 paragraph 5.3.7 and 188.8.131.52 and Appendixes 16 and 19 referred to where irregularities are described in detail regarding Trustees and officers). Appointment of Mr Skate’s protégé Henry Fabila as Managing Director In May 1998, Prime Minister Skate arranged for his good friend and former colleague at the National Capital District Commission (NCDC) Henry Fabila to replace Mr Kaul as managing director, thereby invoking a substantial wrongful termination payout (Schedule 1, paragraph 184.108.40.206). Although Mr Fabila had experience as a former banker and public administrator, he did not succeed in injecting strict rules of governance and accountability into the NPF. He found himself powerless to control his deputy Mr Wright and unable to work with Mr Wright’s protector, chairman Copland.
Together with Mr Leahy, he set about obtaining the removal of both men. Mr Fabila was also beholden to Prime Minister Skate for his job, which compromised his independence as managing director and trustee of the NPF.
Meanwhile, the economic tide had turned well and truly against NPF. As described in executive summary 2E paragraph 13 and Appendix 5, the value of NPF’s substantial concentration of investments in PNG resource stock was tumbling, the interest rates were rising and the value of the kina was falling.
NPF had used borrowed funds to acquire its risky equity portfolio and was obliged to pledge more and more of its assets to the banks as security for its increasing debt burden, as it had undertaken to maintain a very high ratio of security to debt with the banks (This is described in detail in Schedule 2E, paragraphs 3.2; 5 and 6).
Banks seek to call in NPF’s debts – 1998
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The ANZ was becoming alarmed at the increasingly frequent breaches by NPF of its loan covenants and was demanding that NPF reduce the debt. The Asian economic crisis was in full swing and NPF had encumbered itself with the huge NPF Office Tower construction project, funded by a K50 million loan from the PNGBC. The project struck time-consuming trouble with the beneath ground foundations (Schedule 6, paragraphs 4.1-4.9 and executive summary 3.2) and chose to pay a K1.4 million acceleration payment to make up the lost time. Then the falling kina eroded into the profits of the construction company Kumagai Gumi Co Ltd (Kumagai), leading to a K6.6 million kina devaluation claim, which was settled by agreement at K3.3 million.
As the construction costs mounted and the completion date blew out, NPF was faced with the fact that it had not secured in advance a single tenant and the demand for office space in Port Moresby was contracting with the economic crisis (The final cost of the Tower was K59.68 million).
With the lender banks turning hostile towards the end of 1998, Mr Wright desperately sought to bring his impractical and misguided attempt for NPF to issue a $A54 million bond to completion, so as to raise much needed cash (Schedule 2F and see paragraph 9 below).
Dismissal of Mr Copland and resignation of Mr Wright In September 1998, Mr Fabila’s attempt to rid himself of Mr Copland as chairman succeeded and he was terminated because he had long ago ceased to be an employer in PNG and was therefore no longer qualified to be a trustee. He was succeeded by Brown Bai, the newly appointed Secretary of DoF, as chairman. At the 115th NPF board meeting on November 6, 1998, the new chairman, Mr Bai, jolted the NPF management and trustees out of their apparent stupor by asking if they knew what they were doing.
He asked how they intended to tell the members of the mounting losses then believed to be in excess of K40 million. The NPF Tower was incomplete and was suffering cost overruns. There was a cash crisis and Mr Wright was failing to bring the unworkable $A54 million bond to fruition. Mr Copland had gone and Mr Wright was forced to resign in January 1999.
Also in January 1999, at Mr Bai’s instigation, PwC was commissioned to report upon NPF’s financial situation. Paul Marshall of PwC soon told the NPF board about the disastrous imbalance in the investment portfolio. NPF was trapped in a vicious circle caused by the tumbling value of its equity portfolio (which required more and more scrip to be pledged as security for the bank loans) and the rising interest rate burden on NPF’s massive debts to the banks, then running at more than K1 million per month.
Even before his report was published, Mr Marshall was proactively negotiating with the banks and this led eventually to the commencement of the massive selldown of NPF’s assets agreed to by the NPF board by circular resolution in March 1999.
While these attempts to save the financially stricken NPF were under way, others had a very different agenda.
Appointment of Jimmy Maladina as Chairman of NPF orchestrated by Prime Minister Skate — January 1999 Prime Minister Skate had already decided to have Jimmy Maladina appointed as chairman of the NPF and this was known to both Mr Maladina and Mr Leahy by September 1998.
The NPF Tower and Waigani land frauds In December 1998, Mr Maladina contacted Mr Tanaguchi of Kumagai, the NPF Tower construction company and put in motion a scheme, using that company, to defraud NPF of K2.5 million. In December 1998, Mr Skate directed Mr Bai to stand down as NPF chairman and nominate Mr Maladina in his place. This was done and Mr Maladina was appointed chairman on January 27, 1999.
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Together with Mr Leahy, they immediately arranged (by trickery) for the NPF board to reverse its previous decision and it resolved to purchase the Waigani Land (by purchasing shares in Waim No. 92 Pty Ltd which held the lease). This would bring a fraudulent profit of several million kina to Mr Maladina who secretly owned the shares in Waim No. 92 Pty Ltd. Thus, even prior to his appointment to the NPF board, Mr Maladina, in criminal association with NPF’s legal officer/corporate secretary, Mr Leahy, was involved in two attempted frauds against the NPF, concerning the NPF Tower (Schedule 6) and the Waigani Land (Schedule 5) both of which are reported upon at paragraphs 15.11 and 15.12 respectively, below. When news of the proposed sale of the Waigani Land to the NPF broke in the national press, Prime Minister Skate publicly forced the NPF to pull out of the deal.
Full extent of NPF’s financial crisis emerges In February 1999, NPF engaged PwC to review its investment portfolio. In March, PwC reported on the volatile imbalance of NPF’s high-risk portfolio and the burden of the heavy borrowings.
PwC was engaged to address the cash flow crisis and by mid-March, was discussing selldown of assets with the banks. The selldown strategy was approved by circular resolution and began immediately.
The conspirators, meanwhile, were trying to sell 50 per cent of the NPF Tower to the PNG Harbours Board (PNGHB), thereby hoping to make a fraudulent commission (through Maurice Sullivan of PMFNRE) of 5 per cent aggregating K5 million (see Schedule 6, paragraph 13.1.4 and paragraph 15.11.1 below). By mid-year, Rod Mitchell had been appointed as general manager in place of Mr Wright, and John Jeffery had been newly appointed as a trustee. They were in close contact with Mr Marshall of PwC. Mr Bai, as Secretary of DoF, appointed a team of finance inspectors to inquire into the financial affairs of the NPF and to look at worrying aspects of the proposed Waigani Land deal, which were becoming public knowledge. To start with, Mr Fabila and Mr Leahy failed to co-operate with the finance inspectors, until threatened with serious consequences by Mr Bai.
Around this time, the balance of power and the atmosphere at NPF headquarters began to change.
A second PwC report was commissioned and the finance inspectors report was published and Mr Mitchell and Mr Jeffery raised questions about Mr Maladina and Mr Leahy in September 1999.
At an October meeting of the NPF board, Mr Mitchell and Mr Jeffery tabled a special report on many irregularities, including the Waigani land deal. Mr Maladina sought, unsuccessfully, to block the meeting and did not attend.
Complaints levelled at Mr Maladina and Mr Leahy Serious charges were levelled at both men, especially about their part in the Waigani land affair. This led eventually to the termination of their appointments as corporate secretary and chairman of NPF respectively. To conclude matters, KPMG were appointed by the Auditor-General to carry out an audit and report on the NPF as there was talk about a forced 50 per cent write down of members’ assets.
Assets selldown amidst confusion The selldown of assets was completed at huge realised losses to NPF in the vicinity of K150 million. As 1999 drew to a close, NPF, with Mr Fabila as managing director, was in a state of confusion and near bankruptcy. It closed down Crocodile’s Maluk Bay operation without providing a caretaker budget for the assets.
While trying to sell off assets to raise much needed cash it nevertheless continued to try and finance the doomed Ambusa Copra Oil Mill project under Mr Mekere’s insistence (Schedule 4N) and unexpectedly purchased a new motor vehicle fleet (Executive Summary 9, paragraph 2.6).
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Gradually, Mr Mitchell brought financial reality to the fore and was appointed as managing director to replace Mr Fabila on July 17, 2000.
Establishment of Commission of Inquiry Amidst great disturbance, among NPF members and significant political unrest, Sir Mekere Morauta then established this Commission of Inquiry into the affairs of the NPF in accordance with the Terms of Reference published above at paragraph 2.1, which include a requirement to recommend structural reforms.
Superannuation Taskforce Without waiting for the commission to report, the Prime Minister set up a Superannuation Taskforce to make recommendations for a new Superannuation Act. The commissioners, counsel assisting and consultants held consultations with the taskforce and the commission provided a forum by way of a seminar on the structural reform of NPF where there was a very good exchange of ideas by people with experience in the affairs of NPF and superannuation generally.
The taskforce recommendations led to the drafting of the Superannuation Bill 2000, which was enacted into law, coming into force in 2002. The commission is in general agreement with the provisions of the new Act as discussed at Schedule 1, paragraph 21.
Attempts to “cover-up” Mr Maladina’s offences and interfere with the Inquiry During the commission’s investigations into these two frauds in 2000, there were attempts made to “cover-up” the activities of Mr Maladina. These involved two lawyers, Simon Ketan and Jack Patterson, who, at Mr Maladina’s instructions, fabricated documents and removed documents from files, which had been summonsed by the commission. Both admitted the offences and have been referred to the Commissioner of Police for investigation. David Lightfoot and Barbara Perks, both of Carter Newell Lawyers, have also been referred to the Commissioner of Police to investigate their possible role in this “cover-up”. Possible similar scams to defraud other PNG institutions While investigating these matters and while examining bank accounts of the companies and persons involved, the commission located evidence that other very large sums of money were being “laundered” during that period through the books of Carter Newell and PMFNRE and that similar scams involving the Investment Corporation, the PNG Harbours Board and the DFRBF were occurring. The commission is aware and has taken judicial notice of the fact that this was the period leading up to the time when a vote of no-confidence against the Prime Minister in the National Parliament would be possible under the law. It is usual that large sums of money change hands during such times in order to obtain support from members. There was evidence that “political camps” were established and that Mr Maladina was an active political organiser at that time. Perhaps, some of the moneys raised in the two frauds against the NPF were intended for political purposes, but the commission lacks the evidence to make such a finding.
A second Commission of Inquiry has been set up to investigate the funds lost from the DFRBF and the affairs of its chairman Kelly Naru, who is one of Mr Maladina’s fellow legal partners in Carter Newell lawyers (now Pacific Legal Group).
National Provident Fund Final Report [Part 2]
Sale of the Waigani Land and tracing the proceeds The commission investigated the subsequent sale of the Waigani land to a Rimbunan Hijausubsidiary company by sale of shares in Waigani City Centre Ltd (formerly Waim No.92) and reported upon further corrupt procedures and crimes in the Lands Ministry and the Lands Board involving Dr [Fabian] Pok, Mr [Ralph] Guise and Mr [Jimmy] Maladina, for which all have
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been recommended for referral to the Police and the Ombudsman Commission (See Schedule 5, paragraph 31.4 and the list of referrals below at paragraph 15.6). The commission also traced the way the moneys obtained by the NPF Tower fraud were “laundered” through the books of Carter Newell and PMFNRE. This showed up the involvement of Peter O’Neill as one of those who benefitted from the Waigani Land and NPF Tower frauds.
The investments that caused the greatest losses and those which illustrate outstanding examples of corporate maladministration will be examined briefly below in paragraph 10.
BORROWINGS Commissioner Manoa’s conflict of interest From the mid 1990s to 2000, Commissioner Manoa was a member of the Board of ANZ. He declared this to the commission at a public hearing on August 9, 2000 (Transcript p.1352) and thereafter took no part in hearing or deliberations involving the ANZ.
Features of the borrowings Each of the main borrowings (from PNGBC, ANZ and BSP) is reported upon in the Schedules in category 2. The features common to all the borrowings include:-
(a) The banks failed to perform adequate due diligence and so entered into loan facility agreements without ascertaining that NPF lacked the power to borrow or to pledge its assets (Schedules 2A, 2B and 2C). ANZ eventually obtained this advice from Allens Arthur Robinson on May 26, 1999, (Schedule 2E paragraph 19.6 – Appendix 6).
Being ultra vires the NPF Act, the loans were invalid and it is doubtful whether interest was payable. As a result of the loans, which were advanced for specified purposes agreed between the banks and the NPF, money was spent on those purposes, interest payments were made and, during 1999, the NPF was obliged to sell off shares and other assets at a massive loss in order to repay the banks. This applied particularly to the ANZ, which obliged NPF to transfer share scrip as securities and to embark upon the big asset selldown.
It is possible that ANZ would be vulnerable to a suit brought by or on behalf of the NPF members directly for losses suffered by way of interest and bank charges and possibly for losses incurred as a result of ANZ’s pressure on NPF to sell off its assets at a loss (Schedule 2E see discussions at paragraph 11.2 and the criticisms of ANZ in paragraph 17).
The NPF Trustees were also in breach of their fiduciary duty to the members by entering the loan agreements with the various banks without obtaining independent expert advice about NPF’s power to borrow. They also could be liable to the members for losses suffered by their breach of duty (unless they can establish that they acted in good faith). If such an action was brought by the members as a class action against the NPF board, the bank could perhaps be joined as a third party (Executive Summary 2E, paragraphs 10.5, 13).
(b) On many occasions, management failed its duty to fully inform the board and seek approval before entering the loan facility agreements and before making drawdowns (Schedule 2A, paragraph 8.4,
Schedule 2E, paragraph 5.10 and paragraph 5.21 and 6.2). For instance, the PNGBC overdraft, which had risen to K6.77 million by 1998, had been in existence for several years before management made even partial disclosure of its existence to the board. In fact, its existence had been hidden in the NPF books of account by incorrect accounting procedures (Schedule 2A, paragraphs 4.1.9 & 4.3).
(c) There were several instances when loans were agreed or drawdowns were approved by the bank concerned without required ministerial approval (Schedule 2A, paragraph 9.3 and Schedule 2E, paragraph 5.15).
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(d) NPF management rarely kept the board informed about the state of the loan accounts (Schedule 2E, paragraph 5.10 failure to advise board of additional K20 million facility obtained from ANZ; Executive Summary, paragraph 8.5.1). It was normal, for instance, that ANZ managers had far more knowledge of NPF management’s plans and strategies for using the drawdowns than had been disclosed to the NPF Board.
(e) Mr [Noel] Wright frequently pledged large parcels of share scrip to banks as security without consulting or advising the NPF board (Executive Summary 2E, paragraph 8.5.1(d)). (f) The DoF was rarely consulted by NPF or the Minister and provided minimal input (Executive Summary 2E, paragraph 8.7.1).
(g) The ANZ’s review of the loan facilities extended to NPF were often superficial, without considering obvious risk factors (Executive Summary 2E, paragraph 8.10).
ATTEMPT TO ISSUE $A54m BOND Management fails to advise NPF Board about negative expert advice
In October 1997, Mr [David] Copland and Mr Wright supported by then chairman Gerea Aopi, proposed issuing an $A54 million bond. If this happened, it would be the first such bond issue in PNG and NPF management lacked the necessary skills. It was also commercially impractical. Expert advice from Consultant Jacob Weiss, BPNG and the ANZ opposed the idea, believing NPF could lose heavily if the kina depreciated in value. Mr Copland and Mr Wright persevered, however, and gained the NPF board’s immediate approval of the idea on a simplistic board submission, without disclosing the cautionary advice from the experts. The board accepted the idea enthusiastically, without insisting on expert opinion. The dubious Canadian Jai Ryan (associated with Ambusa Sawmill) introduced an even more dubious Canadian Rudi Cooper, of Warrington International, a company registered in the tax haven of Antigua. Warrington became the proposed purchaser of the bond. Every inquiry and every step taken raised further suspicion about Warrington, which was pointed out by NPF’s international lawyer, Clifford Chance. However, Mr Copland and Mr Wright kept up the pressure to proceed with the bond. Governor of the BPNG intervenes under pressure For a while the BPNG delayed the scheme when its Foreign Exchange Controller Benny Popoitai withheld essential approvals. This blockage was removed when Mr Copland, using his influence as a former director on the BPNG board, approached the Governor of the BPNG Mr Taratadirectly and applied pressure. Mr Popoitai was then overruled by the Governor, who signed the approval papers himself (Schedule 2F, paragraphs 14.15, 13.1 and 13.2). Similar pressure was later brought successfully on Mr Tarata’s successor as Governor, John Vulupindi, when NPF was seeking an extension of the approval given by Mr Tarata (Schedule 2F, paragraph 14.15). Mr Wright acts without authority Negotiations to complete the agreement with Warrington proceeded for many months. During this process, Mr Wright frequently exceeded his authority in his desperate endeavours to complete the deal (He needed the money to pay outstanding interest on NPF’s debts and to provide more securities for the banks). Mr Wright’s unauthorised actions included- • Approaching Nara Investments (Mr Ryan) and granting a 5 per cent commission (Schedule 2F, paragraph 6.1); • Paying Mr Ryan an unauthorised advance of $US15,000 (Schedule 2F, paragraph 6.3); • Assuring Warrington that its profits would be tax free and giving a guarantee that NPF would itself meet any tax liability imposed on Warrington • Offering NPF share scrip worth $A77 million as security for the bond (Schedule 2F, paragraph 11.3) and transferring share scrip without authority (Schedule 2F, paragraph 14.3 & 14.8). Advised by Clifford Chance, NPF’s lawyers held out against Warrington’s pressure by insisting that an appropriate security guarantor must be found.
Brown Bai leads NPF to terminate negotiations
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When Warrington notified NPF it intended to assign NPF’s securities to a shady entity known as the RH Foundation of Anacirema, Mr Leahy and Mr Fabila confronted Mr Wright and Mr Coplandin an endeavour to have NPF withdraw from the negotiations. Eventually, on the eve of the signing of the agreement, Mr Bai, who had recently become chairman of NPF, guided the NPF board to terminate the agreement with Warrington at the 115th NPF board meeting on November 6, 1998. It had, however, been a wild and giddy ride and Mr Wright and Mr Copland almost succeeded in exposing NPF to a dubious international organisation, which may well have been involved in illegal activities and money laundering. Had the bond been issued, there seems no way that NPF could have met the $A54 million bond plus 14.67 per cent interest in nine years time. This would have endangered NPF assets.
Mr Wright, Mr Copland and Mr Leahy and all NPF Trustees at the time were in serious breach of fiduciary duty to the members of the Fund (See comments and findings Schedule 2F, paragraph 16 titled concluding comments and paragraph 17 which discusses the roles and responsibility of the major participants). Fortunately, it did not succeed but in the process it showed the BPNG can be moved by insistent lobbying. The attempt to issue the bond cost the NPF K244,762 in legal fees and a great deal of management time and effort.
The commission has found that Mr Wright was guilty of improper conduct by making false representation and by exceeding his authority on many occasions. There were numerous serious breaches of fiduciary duty by the trustees and by Mr Leahy, who failed to advise the trustees that NPF had no power to borrow or issue a bond and by Mr Wright for not passing on Gadens lawyers advice that NPF lacked the power to borrow. FUNDING THE STATE Occasions arose throughout the period under review when the NPF was called upon to provide money to the State to fund infrastructure projects and to meet other requirements or obligations of the State. Occurrences of this nature which the commission was asked to investigate were the:
• Loans to fund the Poreporena Freeway (Schedule 7B) • NCD Water and Sewerage loan (Schedule 7C) • K17 million Southern Highlands 4 Roads Project (Schedule 7D) and • Niugini Insurance Corporation K2 million loan (Schedule 7A). There was also a loan component associated with the transfer of former POSF members to NPF upon the corporatisation of Air Niugini, PostPNG Ltd and Telikom PNG Ltd. This was because the State was unable to fund its obligation to pay its unpaid employer’s contributions and, in effect, NPF “loaned” back the K24.4 million due to NPF at a commercial rate of interest (Schedule 8).
In each of these loan to the State projects, there were common features:
(a) The Government’s need was great and considerable political pressure was therefore applied to NPF to provide the funds.
(b) NPF had to borrow the funds from the commercial banks at a commercial rate of interest in order to be able to on-lend to the State.
(c) There were serious conflicts of interest when senior DoF officials made recommendations to the Minister advising the Minister to approve loans from NPF to the State. Both the Minister and the public servants had duties to consider the interest of the State as well as to the NPF.
The conflicts of interest were particularly acute for the Secretary of DoF, who was also the chairman or nominator of the chairman of NPF as well as being responsible for administering the finances of the State. Vele Iamo as Deputy Secretary for DoF and a very long time Trustee of the NPF had a similar conflict. (d) The loan arrangements and even the ministerial approvals were often put in place between DoF officers and NPF management prior to consultations with the NPF board.
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(e) NPF management failed to keep the NPF board properly informed and to always obtain board approval.
(f) NPF management and trustees failed to seek independent expert advice outside of DoF (which in these situations was biased in favour of the State and unable to give truly independent advice to NPF).
(g) There was a mismatch between the arrangements between NPF and the lending banks on the one hand, which were at variable rate of interest repayable at call and the arrangements between NPF and the State on the other hand, which were at a fixed interest rate for a fixed term of years. There was thus a potential risk for NPF if interest rates payable by NPF to the bank rose, as it would erode the profit on its fixed rate of interest from the State.
This potential risk eventuated and these “investment loans” became less and less profitable for NPF.
There was also the problem that the so called “road stock”, which NPF acquired through the Poreporena Freeway loans aggregating K62 million, were not readily assignable, as the State guarantee was not transferable.
(i) Because of Government pressure for NPF to provide funding in this way NPF distorted the balance of its portfolio in favour of this government “stock”.
(j) Despite these problems these investment loans were “safe” and provided a reasonable return, in marked contrast to most of NPF’s other investments.
Each of these loans to the State is reported upon in detail in a separate schedule. The executive summaries provide easy access to the schedules by stating main themes and giving references to relevant paragraphs in the schedules.
The transfer of members from POSF to NPF described in Schedule 8, raises many other issues as well as the issue of the loan which NPF was reluctantly obliged to provide.
The whole transfer process was badly planned and it started before basic political and administrative decisions had been made. The State had not been paying its employer contributions to POSF so members transferring to NPF were justifiably anxious about their entitlements and did not trust the State’s intention or ability to pay them. This stimulated demands for extra-legal payouts of entitlements under threat of industrial action. NPF was pressured by the Sate to agree to payouts to some employees, which were contrary to the NPF Act. This raised serious questions of improper political interference (Schedule 8, paragraphs 4.22, 4.22.1). Having reluctantly organised the lending of K24.4 million of borrowed funds to the State, NPF management was negligent in administering the loan, causing a loss of K4 million.
As further corporatisation of public institutions is likely, these issues need to be addressed. See concluding comments (Executive Summary 8, paragraph 33).
THE BIG LOSS-MAKING EQUITY INVESTMENTS — STC and CXL – Schedule 4D Acquisition of STC shares “on-market”:
NPF commenced to buy STC and CXL shares on-market in March 1996. The NPF board had approved by circular resolution, the purchase of K1 million worth of STC shares in 100,000 share lots for a price between $A2.85 and $A3 per share. Mr [Robert] Kaul, however, misrepresented this resolution and obtained Minister [Chris] Haiveta’s approval to buy one million shares at that price. He also failed to mention the limitation on the size of the parcels, which had been imposed by the board. Mr Haiveta approved the application without seeking or obtaining DoF or any other expert advice. Management then proceeded to buy one million shares in larger sized parcels. This was far more shares and at far greater cost than the board had authorised.
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The authorisation had been by circular resolution, which was not a valid means of decision- making. The purchase was not subsequently ratified by the board at a face-to-face meeting. This single approval demonstrated many of the faults which plagued NPF investments throughout the period:
(a) It was a risky and inappropriate investment.
(b) The NPF board approved the resolution by way of illegal circular resolution with little briefing by management and no expert financial advice.
(c) Management then misrepresented the limited nature of the board’s approval and obtained ministerial approval for the expenditure of a far larger sum
(d) Mr Haiveta neither sought nor received expert advice from DoF or elsewhere before granting the excessive approval. (e) Management then purchased the excessive number of shares at prices, which sometimes exceeded the maximum price approved by the board
(f) the circular resolution was not ratified by a subsequent face-to-face board meeting
(g) The NPF Board of Trustees did not criticise or reprimand management for failing its duty to the board by exceeding their authority
(h) BPNG foreign currency exchange approval was not obtained for all of the transactions (Schedule 4D, paragraphs 4.1 and 4.2).
Acquisition of CXL shares “on-market” Also in April, the NPF approved, by circular resolution, the purchase of up to K1 million worth of CXL shares. Again, Mr Kaul twisted the wording of the board’s resolution and obtained Mr Haiveta’s approval to buy one million CXL shares. This time the DoF did provide a recommendation to the Minister. However, it contained no critical analysis of NPF’s request but merely repeated the points made by NPF. Mr Haiveta then gave an open-ended approval for NPF to acquire CXL shares for prices between $A2.20 and $A2.50 in 100,000 share lots without setting a total purchase limit. Again, management acquired many more shares than authorised by the board for significantly more cost.
National Provident Fund Final Report [Part 3]
Approval to mount take-over attempt of STC and CXL In early April 1996, Mr [Robert] Kaul and Mr [David} Copland met with Minister [Chris] Haiveta at the Gateway Hotel (Schedule 4D, paragraph 4.4.1) and obtained the Minister’s instant verbal approval to mount a campaign to buy a controlling interest in STC and CXL and to then amalgamate and manage the two companies. This would require the expenditure of approximately K40 million of funds borrowed from the ANZ to buy the STC and CXL shares then on offer from the DFRBF and the POSF. Incredibly, the NPF board approved the purchase after only 30 minutes discussion. There were no briefing papers and the board took no expert advice.
The boards of DFRBF and POSF did not even meet face-to-face to discuss the proposed sale to NPF and Minister Haiveta approved the sales by DFRBF and POSF and the purchase by NPF without seeking or receiving DoF or other expert advice (Schedule 4D, paragraph 4.4.1). It seems the Minister was not even given a written brief on these transactions, which he had already approved verbally at the Islander Hotel. Both POSF and DFRBF approved the sale by circular resolution and Minister Haiveta gave his immediate approval without even waiting for a request.
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Clearly, Minister Haiveta was very proud of his achievement in promoting these transactions as demonstrated in his self-congratulatory letter to Prime Minister Sir Julius Chan on June 4, 1996, and in his explanation to Parliament on July 30, 1996 (Schedule 4D, paragraphs 4.4.5 and 4.4.6). Minister Haiveta’s improper conduct and referral The commission, however, finds that Minister Haiveta’s active role in these matters, his instant approvals and total failure to seek expert advice amounts to improper conduct and may constitute a breach of the Leadership Code. Similarly, the trustees who voted for this circular resolution to spend K39.7 million of borrowed funds, without seeking any independent expert advice, were guilty of a gross breach of their fiduciary duty to the members of the fund, for which they may be personally liable. Breach of fiduciary duties by all Trustees When considered together with their many other similar breaches of fiduciary duty, the commission has recommended that all trustees, with the exception of John Jeffery, who was only appointed late in 1999, should also be referred to the Ombudsman Commission to consider whether they were in breach of the Leadership Code (Schedule 1, paragraphs 10.5.5 & 18.5(c)). As trustees of the NPF board, they were subject, as leaders, to the Leadership Code. Some are still leaders in some other leadership position whereas some are no longer leaders. If any of the former trustees are being considered for subsequent leadership positions, however, their previous failure of fiduciary duty to the NPF members should be taken into account and assessed by the Ombudsman Commission. Continued “on-market” purchases without Board approval The NPF continued to purchase STC and CXL shares during 1997, often not informing the trustees.
In 1998, Mr [Noel] Wright continued to purchase STC and CXL shares on market. The STC purchases were frequently without board approval and totalled $A4.1 million. The CXL purchases which totalled $A793,839 did not require specific NPF board approval because of the its previous open-ended approval (Executive Summary 4D, paragraph 4.1). Referral of Ben Semos and Mr Wright to ASIC At Schedule 4D, paragraph 8.3, the commission recommends the referral of Mr [Ben] Semos of Wilson HTM and Mr Wright to Australian Securities and Investment Commission (ASIC) to investigate whether they acted to manipulate the share prices of STC and CXL. During 1997 and 1998, NPF was the major buyer of CXL and STC shares on the Australian Stock Exchange (ASX) and no doubt helped to maintain the price above its natural level (Schedule 4D, paragraph 8.3.3).
Mr Wright fails to review investment as share prices fall By July 1998, CXL performance was poor. At that stage, NPF owned 38 per cent of the equity in CXL.
Mr Wright should therefore, have reviewed CXL’s results and instigated a reconsideration of NPF’s takeover strategy. In November 1998, CXL’s profits were still very low and falling. Instead of reconsidering the investment, Mr Wright purchased an additional 43,280 shares at $A5 per share. By the end of 1998, NPF held 38 per cent of CXL’s share capital and 21 per cent of STC and the profitability of both companies was under pressure. Their share prices were being maintained by NPF’s own acquisitions. NPF management and trustees remained inactive despite CXL’s rapidly deteriorating performance. This amounted to a paralysis of management, which plagued NPF’s management regarding all its investments during this time of financial crisis.
In January 1999, NPF was facing up to its own serious unrealised losses caused mainly by the crippling burden of interest payments on its huge debts to PNGBC and ANZ, the fall in the value of the kina and in the value of its non-producing investments in PNG resource stock. Mr Semosrecommended the sale of NPF’s CXL holdings and a partial sale of STC. Attempts to sell STC and CXL shares as price falls
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The hopeless march to take over STC and CXL was now put into reverse because of NPF’s own financial crisis. Having such large holdings in both these relatively small companies, however, was making it very hard for NPF to selldown without promoting a significant fall in the market share price. Meanwhile, John Swire and Sons (Swires), which owned STC and CXL, sat and waited until it could buy back NPF’s holdings in its companies at rock bottom prices. There seemed to be no other potential buyers.
In March 1999, NPF was under extreme pressure from ANZ to sell equities in order to repay debt, as it was repeatedly in breach of its agreement to maintain a 160 per cent security cover. By July 1999, NPF’s unsuccessful attempts to sell its CXL holdings had brought the price down and prompted a take over bid by John Swire and Sons at $A1.50 per share. NPF obtained an independent opinion from KPMG in favour of accepting the Swire offer. NPF then sold its CXL holdings to John Swire and Sons making a realised loss of $A16,322,647 as follows:-
Total shares acquired 8,236,179 Total shares sold 8,236,179 Cost of shares sold 28,676,916 Consideration received (12,354,269) Total loss on sale $A16,322,647 (Schedule 4D, paragraph 9.7.6) NPF experienced similar problems selling off its STC holdings. Its test of the market in September 1999, indicated a market price of $A2.50 per share.
By November 2000, NPF had sold all but 5 per cent of its STC shares to Lemex International Ltd for a realised and unrealised loss of $A9,552,968 as follows: (on the table below).
The sale to Lemex International Ltd attracted complaints by Mr Pratt of John Swire and Sons against Rod Mitchell for failing to accept a better price from Swires. These complaints are reported in Executive Summary 4D at paragraphs 10.5 and 10.6. Responsibility for K25,875,615 loss The commission finds that it was a combination of Mr Copland’s personal agenda against STC, Minister Haiveta’s misguided enthusiasm for the nationalistic “big picture” approach, MrWright’s egotistic and misplaced over-confidence and the trustee’s complacent reliance on MrCopland’s reputation as an expert in commercial and financial matters which led NPF into this foolish and risky endeavour to acquire, amalgamate and manage STC’s multi-faceted trading enterprise, which caused a loss of K25,875,615 in NPF members’ assets. Highlands Pacific Ltd – Schedule 4B The heaviest single loss
NPF suffered a realised loss of $A27.3 million from its investment in HPL and an unrealised loss on shares still held at December 31,1999, of $A19 million for a total loss of $A42,296,654. It was NPF’s single biggest equity investment loss.
This investment was largely motivated by a misguided sense of PNG nationalism and was driven by Mr Copland, Mr Wright and Mr Kaul, with the very enthusiastic support of Minister Haiveta. These people formed a plan in 1995 to increase NPF’s small passive holding in Highlands Gold Ltd (“HGL”) with the hope of benefiting from an expected takeover bid for HGL by Placer Dome. Evidence of share ramping During its investigations, the commission uncovered evidence of share ramping in December 1996 directed at raising the price of HGL shares at year-end and thereby increasing the end of year bonus payable to NPF senior management. The commission recommended that this matter be referred to ASIC for investigation (Schedule 4B, paragraph 5.11).
In January 1997, during the takeover transaction, Placer Dome retained HGL’s Porgera interests and Oregon receivables and the new entity Highlands Pacific Ltd (“HPL”) was established to acquire and hold HGL’s other, less valuable and non-income producing interests.
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NPF leads PNG consortium to acquire HPL In January 1997, (Schedule 4B, paragraph 5.14.3) NPF led a consortium of PNG institutions to acquire HPL. NPF applied its takings from the sale of its HGL shares, together with $A22.4 million borrowed from its ANZ facility, to acquire $A50 million worth of HPL shares in January 1996. During 1996 and 1997, NPF purchased further HPL shares on-market for a total investment of $A69.5 million, despite the fact that the market value of HPL shares was steadily falling.
Possible liability of Wilson HTM for recommending high-risk HPL investment This was an extremely high-risk, speculative investment, with no hope of any income return in the medium term future and it was acquired mainly with borrowed funds, which attracted a rising interest rate, as the ILR rose in succeeding years. It was a totally inappropriate investment for a superannuation fund and well outside the 1993 investment guidelines. The commission finds at Schedule 4B, paragraph 7.1, that NPF’s share brokers, Wilson HTM, who advised NPF to make this thoroughly unsuitable investment may have liability at common law or under Australian Security law, for not giving suitable advice to its client, NPF, which it knew was a superannuation fund.
Irregularities in acquisition of HPL shares The initial investment of $A50 million in HPL was decided by the NPF board by way of an illegal circular resolution with only Trustee Taureka voting against it. No independent expert advice was given or sought by the trustees before this so called resolution (Had the matter been considered at a proper face-to-face board meeting, there is a chance that Trustee Taureka’s well founded reasons may have prevailed).
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As described in Schedule 4B, many of the subsequent acquisitions of HPL shares were either without the NPF board’s knowledge or occurred prior to its approval. Mr Wright and Mr Kaul were in breach of duty in making these unapproved purchases. No expert investment advice was obtained (Paragraph 6.7, Schedule 4B).
Responsibility of Trustees and Minister Haiveta The trustees passively acquiesced in these unauthorised purchases by management and failed to criticise, reprimand or endeavour to restrain management once they became aware of the unauthorised acquisitions after the event. They were thus in serious breach of their fiduciary duty to the members of the fund. Once again, Minister Haiveta’s conduct in granting approval to massive expenditure on HPL shares, without seeking DoF or other expert advice, was improper conduct and, possibly, a breach of the Leadership Code. All trustees who approved or acquiesced in these acquisitions without insisting that management obtain expert advice and who failed to control management’s unauthorised share acquisitions, were in breach of their fiduciary duty to the members (See Schedule 4B, paragraphs 4.3, 5.2 & 5.9).
Conflict of interest of Mr Copland and Mr Aopi Initially, Mr Copland and Mr Aopi were appointed as NPF’s trustees on the board of HPL. They, however, took the view that they were appointed in their own right as independent directors. This placed them in a conflict of interest situation (Schedule 4B, paragraphs 6.4 & 6.5(a)). They both received directors’ fees and options which they improperly retained for their personal benefit (Schedule 4B, paragraph 6.8). NPF’s acquisitions in HPL commenced at $A1 per share and the HPL share price fell steadily thereafter to a low of $A0.30 per share in 1999.
Management paralysis as value of investment falls NPF management and trustees seemed paralysed in the face of this looming financial disaster. By the end of 1998, the HPL shares had so little value that the ANZ refused to accept them as security for the loan facility, describing them as having virtually “junk bond status” (Schedule 2E, paragraphs 12.3.1). In August 1998, Deutsche Securities reported very critically upon NPF’s unbalanced portfolio and concentration in PNG related investments, but no action was taken.
Sell-down at huge realised loss In March 1999, PwC recommended the sale of NPF’s loss-incurring HPL shares and in May 1999, NPF sold one million HPL shares at 30 cents per share. The board attempted to sell a further 19 per cent of its HPL holdings but this proved very difficult to achieve (Schedule 4B, paragraph 13.11.2).
At December 31, 1999, NPF had suffered a net loss on HPL share sales of $A27,322,554 and an unrealised loss on HPL shares
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Investment in Vengold Foolish investment This investment was one of NPF’s greatest follies.
It was driven by the desires of Mr Copland and Mr Wright and the easily persuadable Robert Kaul to place NPF in a position where it could benefit from a possible takeover bid by Placer Dome, which was trying to maximise its interests in the Lihir Gold Mining venture. Advised and encouraged by Ben Semos of Wilson HTM, NPF swapped its LGL shares for shares in Vengold Inc, a small Canadian mining and mineral exploration company. NPF then invested heavily in Vengold by on-market share purchases. Vengold held significant shares in LGL and this increased NPF’s LGL interests through its significant Vengold holding.
NPF acquired $A45 million worth of shares in Vengold between April 1997 and September 1998 (Schedule 4A, paragraph 6).
It thereby achieved and maintained a 19.9 per cent share of Vengold’s capital and a seat on the Vengold board of directors. NPF’s initial Vengold director was Robert Kaul who was followed byHenry Fabila. These directors very properly paid their directors fees into an NPF account. When Mr [Jimmy] Maladina was appointed to the Vengold board in 1999, on his own insistence, he retained the directors’ fees and options paid to him and also exercised the options making an illegal profit of approximately $A852,183 and directors fees of K5000, which is recoverable by NPF (Schedule 4A, paragraph 8). Trustees fail to reprimand management for unauthorised acquisitions
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The NPF management’s acquisition of Vengold shares was often without the approval of the NPF Board of Trustees and, once again, the trustees failed to reprimand and control management for exceeding its authority and failing to keep the board informed (Executive Summary paragraph 8 and Schedule 4A, paragraph 5.16).
This continued into 1998, despite the falling gold price and falling value of Vengold shares (Schedule 4A, paragraph 6.12).
At no stage did management provide the NPF board with expert advice about this investment and the board failed to seek it, thereby breaching its fiduciary duty to the NPF members (Schedule 4A, paragraphs 6.11 & 6.12).
This investment advice was badly needed as Vengold was making share issues, which diluted NPF’s holding. Vengold also purchased 61.3 million LGL shares from Orogen, which increased the risk to Vengold because of the volatile nature of LGL shares.
Also during this period, Placer Dome bought heavily into Vengold. Despite all this activity regarding Vengold, NPF just adopted a “wait and see” attitude, when it really needed sound expert advice (Schedule 4A, paragraph 6.12(d)).
Mr Wright’s illegal trade in LGL options During the period October 1995 to November 1997, Noel Wright illegally traded in LGL options through the Wilson HTM overseas account. He continued to do this even after a NPF board direction to cease the practice (Schedule 4I). Mr Maladina’s profits from directorship of Vengold — referred to Police Commissioner Mr Maladina was appointed chairman of the NPF board in January 1999 and he quickly arranged for himself to replace Mr Fabila as NPF’s director on the Vengold board. By February 1999, Wilson HTM advised NPF to sell 4.2 million Vengold shares, then trading at $A0.50 cents. NPF held onto the shares for a further four months. During this period, MrMaladina was appointed to the Vengold board but failed to attend several meetings and Vengold share value dropped to between 7 and 10 cents. The company was close to bankruptcy but paid directors fees and distributed options to directors, as it planned to change its focus from mining to an information technology company (Schedule 4A, paragraph 7.4). Mr Maladina attended his first Vengold board meeting in December 1999. He collected his fees but failed to notify the NPF, which was desperately selling off its Vengold holdings at 7 to 8 cents, that Vengold was being transformed in a way, which may revitalise its share price. NPF’s sale of the last of Vengold shares was at 27 cents per share, as the price was beginning to rise. Mr Maladina converted his options and then sold his shares when Vengold share price had risen to Canadian $4.50. He made a profit of K1.4 million from the sale, which he did not pass on to NPF. The money was banked to his company Ferragamo Ltd (Schedule 4A, paragraph 8). NPF made a realised net loss of $A29,559,580 from its investment in Vengold (after taking account of the profits from selling off its LGL shares) (Schedule 4A, paragraph 7.11; Executive Summary paragraphs 15 and 15.1).
The commission has found that Mr Maladina’s conduct in these regards was criminal in nature and has recommended that he be referred to the Commissioner for Police for investigation (Schedule 4A, paragraph 7.11; Executive Summary paragraphs 15 and 15.1 and 16). The full details of the Vengold investment are given in Schedule 4A which also has a comprehensive Executive Summary.
SMALLER LOSS MAKING EQUITY INVESTMENTS The other loss making equity investments were Cue Energy Resources Ltd (“Cue”) reported on in Schedule 4C and Macmin NL (“Macmin”) in Schedule 4E.
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In both, these small companies, NPF made significant investments and obtained seats on the board of directors in order to influence company policy.
They were high-risk investments in non-income earning companies and quite inappropriate for a superannuation fund.
With Cue, NPF management went to extreme lengths to support the cash hungry company, even borrowing in order to on-loan to Cue.
Mr Copland, Mr Kaul and Mr Wright all held undisclosed interests in Cue. As Cue made unwise investment decisions in Indonesia, the NPF increased its support for Cue when it should have been selling down the investment in order to protect members’ funds. At one stage, acting on the self-interested advice from Mr Semos of Wilson HTM, Mr Kaulexposed $A25 million of NPF member’s funds to help Cue acquire assets in Indonesia, by sealing an irrevocable underwriting offer (Executive Summary 4C, paragraph 2.5).
National Provident Fund Final Report [Part 4]
These two investments demonstrated all the flaws detailed above. However, as the investments were less massive, the losses as at December 31, 1999, were smaller:
• in Macmin NPF invested $A4,370,349 and made a realised and unrealised loss of $A3,469,977 • In Cue, NPF invested $A11.7 million and made a net realised loss of $A7.4 million (Executive Summary 4C, paragraph 2.5). PROFITABLE PASSIVE EQUITY INVESTMENTS In contrast to the above loss-making, high-risk, aggressively active equity investments in companies listed on registered stock exchanges, NPF also held passive investments in large income earning companies, which were reasonably profitable. They would have been appropriate investments for a superannuation fund if they had formed part of a balanced portfolio. These included Oil Search Limited (OSL), Schedule 4G, Niugini Mining Limited (NML) Schedule 4F and Orogen Minerals Limited (Orogen) Schedule 4H.
NPF sold off its OSL shares at a modest profit to finance the purchase of shares in NML, which were in turn sold off at a modest profit so that NPF could invest more aggressively in LGL and Vengold. NPF’s K29.5 million investment in Orogen resulted in a realised capital gain of K9.9 million when it was sold off between April and June 1999. Dividends of K2.5 million were also received.
INVESTMENT IN UNLISTED ENTITIES During the period under review, NPF also invested in some unlisted entities. Some of these were passive investments in well run companies such as the Bank South Pacific (Schedule 4J), Westpac bank PNG Ltd, SP Holdings and Toyota Tsusho PNG (Schedule 4K) and Amalgamated Packaging / Amalpak (Schedule 4M).
These were all safe, profitable and appropriate investments for a superannuation fund.
There were also investments in four plantation companies described in Schedule 4O. These had been acquired well before 1995 and for reasons beyond NPF’s control, were now non-productive loss-making investments. NPF disposed of them in the best way possible in the circumstances.
There were also two foolish investments undertaken and mishandled during the period under review. The first was Crocodile Catering PNG Pty Ltd (Crocodile), which is the subject of separate findings pursuant to Terms of Reference 1(l) and 1(m). The second was Ambusa Copra Oil Mill Ltd – see paragraph 3.5.4 at page 11 above and Schedule 4L and its Executive Summary.
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Ambusa was an investment where, prompted by newly appointed investment advisor Haro Mekere and without due diligence NPF entered a joint venture with Ambusa Pty Ltd to operate a Copra Oil Mill to be constructed by a Canadian Company Odata Pty Ltd. NPF lost K1.1 million which had largely been transferred to the project in an unplanned way. Despite NPF’s financial crises in 1999, it guaranteed a K3,150,000 loan from BSP — Executive Summary 4L, paragraph 13. Mr Mekere’s motive for supporting this inappropriate investment with such fervour may have been influenced by the fact that his wife had been appointed to the Board of Odata (PNG) Ltd, and this fact had not been disclosed (Executive Summary 4L, paragraph 12). REPORT ON THE COMMISSION’S SPECIFIC TERMS OF REFERENCE Term of Reference 1 “Whether in connection with the management of the fund, there has been any illegal or improper conduct by any person, business, company, legal entity or agency between 1995 and 1999”
The commission has interpreted “illegal conduct” to mean conduct which is prescribed or forbidden according to a law in force in PNG, which includes the NPF Act, the PF(M) Act, the Criminal Code, the Organic Law on the Duties and Responsibilities of Leadership (the Leadership Code) and the Trustee Act and the Common Law as adopted at independence.
“Improper conduct” includes any conduct forbidden by law (criminal conduct) but also conduct, which is a breach of a person’s fiduciary or common law duty or a leader’s failure to conduct himself in accordance with the requirements of the Organic Law on the Duties and Responsibilities of Leadership. Thus, a Trustees breach of fiduciary duty (as governed by the Common Law or the Trustee Act) may also amount to improper conduct.
When therefore the NPF board borrowed money from a bank the commission has found that was ultra vires the NPF Act. That is an example of illegal conduct by an entity, the NPF. The trustees who resolved to approve the borrowing and pledge NPF’s assets, without seeking expert advice on, or even thinking about, NPF’s power to borrow are in breach of their fiduciary duty to members of the fund. Repeated, reckless breaches of fiduciary duty is considered as improper conduct to be referred to the Ombudsman Commission as a breach of the Leadership Code. In the commission’s view, the banks which repeatedly lent money to the NPF to enable it to fund its share acquisitions, without obtaining competent legal advice about whether NPF had the power to borrow, and knowing that NPF was a superannuation fund, are guilty of improper conduct and may in fact have civil liability to NPF members for losses the members have suffered from the bank’s negligent failure to carry out due diligence in this respect.
Other examples of illegal or improper conduct include the criminal offences described in Schedules 5 and 6; making false claims and misrepresentations to the NPF board or the Minister; falsifying