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 minutes of proceedings; creating false invoices; the appointment by Mr [Jimmy] Maladina of Mr Petroulas and Mr Barredo to Crocodile (Schedule 4L, paragraph 11.1.8) and transferring funds illegally through the Wilson HTM account. At the end of each schedule, the commission provides a final paragraph headed “Findings in Context of the Terms of Reference”. This paragraph has a separate sub-paragraph for each term of reference, which groups together all findings in the body of the report regarding the relevant term of reference. Sub-paragraph 1 deals with illegal and improper conduct and major instances of such conduct are referred to.
Sub paragraph 2 deals with breaches of fiduciary duty and there is some overlap between sub paragraphs 1 and 2. Instances when the commission has recommenced referral to another authority are listed in the subparagraph dealing with Term of Reference 3. Instances of personal liability for loss are listed under Term of Reference 4 and so on.
The Terms of Reference then list specific conduct, activities or situations where such illegal or improper conduct may have occurred and into which the commission is directed to inquire, such as (a) the failure of the trustees and management to carry out the expected fiduciary duties of trustees and management under the NPF Act. These are listed as 1(a) to 1(o). Specific findings on
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these matters are also listed in “Findings in Context of the Terms of Reference” paragraph at the rear of each schedule. Terms of Reference 2, 3, 4, 5 and 6 are reported upon in the same way in the schedules.
Term of Reference 1(a) “The failure to carry out the expected fiduciary duties of trustees and management under the National Provident Fund Act”.
A fiduciary duty is a duty owed by a trustee to the beneficiary of a trust. In this context, the trustees of the NPF Board of Trustees owed a fiduciary duty to the members of the fund. At law, it is a very onerous duty governed by the Trustees Act and the Common Law. The officers of the NPF are not trustees (except the managing director who is a trustee by virtue of being a member of the board). Officers owed a Common Law duty to the NPF board by virtue of their contract of employment.
Each schedule is liberally sprinkled with findings on breaches of fiduciary duties to members of the fund by trustees and of common law breaches of duty to the NPF board by officers of the NPF (often referred to generically as “management”).
When the breach is specific to an individual trustee or officer the person is usually named. It would not be meaningful to name each specific breach here in the main report, outside the context in which the breach occurred, so this section deals with such breaches in general and the general consequences of the breaches as a whole. Each individual breach of duty is, however, dealt with in its context in the schedules to this report by way of findings paragraph by paragraph. In the paragraph “Findings in Context of the Terms of Reference”, at the end of each topic schedule, these breaches of duty pursuant to Term of Reference 1(a) are listed with reference to the relevant paragraph where the breach is described and the finding is made.
Frequently, breaches by “management” or individual officers are described first – such as acting in excess of delegated authority (such as unauthorised transactions; failing to obtain required ministerial approval; failing to keep the NPF board informed, failing to perform due diligence; failing to obtain expert advice . . . etc).
These findings will often be followed by related findings against the trustees for the same failures or for failing to reprimand and control management, failing to insist that management obtain independent expert advice . . . etc.
Some findings are made against individual trustees for their personal conduct while other findings are made against all trustees in office at a particular time or all trustees who supported a particular resolution.
For some matters, the failure by the trustees to address an issue over a long period – for instance the trustees’ continuing failure to address management repeatedly acting in excess of its authority – is found by the commission to amount to improper conduct by the trustees. When management’s serious breaches of duty have been repeatedly brought to the trustees’ attention and they have repeatedly not addressed the matter, the commission has found that it is not only improper conduct but it should be referred to the Ombudsman as a breach of the Leadership Code (to which all NPF trustees were subject (For example see Schedule 4B, paragraphs 5.12(e); 5.14.2(e); 6.3 & 6.7(b); Schedule 1 paragraph 220.127.116.11) – where the trustees deliberately chose to acquire shares outside the investment guidelines it was not only a breach of fiduciary duty to the members but was illegal and improper conduct amounting to a breach of the Leadership Code for which the commission recommended that they be referred to the Ombudsman Commission). In these instances, the conduct is listed as a breach of fiduciary duty and also under the subparagraph dealing with Term of Reference 3 – referral to other authority (Schedule 1 paragraph 18.104.22.168).
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Similarly, the trustees’ longstanding failure to notice and rectify management’s failure to follow appropriate tender procedures has been referred to the Ombudsman Commission as a possible breach of the Leadership Code (Schedule 9, paragraph 14).
Some terms of reference encompass conduct which is relevant to more than one term of reference, thus, the same action might be a breach of duty, a failure to disclose a conflict of interest and benefiting from the trust property. It could also be an offence or breach of statutory duty (Schedule 1, paragraph 14 provides a full report on breach of duty and leadership offences regarding repeated, blatant and deliberate breaches of investment guidelines).
Term of Reference 1(b) “Breaches of the Act and National Provident Fund Rules relating to borrowings and placement of charges over members’ asset”
It is quite clear that the NPF had no power to borrow or pledge members’ assets, as these powers are not granted to it under the NPF Act or any other law. As NPF was created by statute it possesses only those powers expressly given to it. The legal opinion of Allen Arthur Robinson, with which the commission is in full agreement, is set out at Appendix 6 to Schedule 2E (The erroneous opinion of Herman Leahy, which concluded there was a power to borrow, is reported at Schedule 2E paragraphs 3.9 and 3.10(i)). Carter Newell’s inadequate and incorrect opinion is at Schedule 2E, paragraph 3.4. There being no power to borrow or pledge assets, the following breaches of the NPF Act with regard to borrowing occurred:
• Overdraft with the PNGBC which peaked at K6 million (Schedule 2A); • The ANZ loan facilities which peaked at $A20 million and K40 million fully drawn (Schedule 2E); and • The BSP loan facility of K30 million fully drawn (Schedule 2C). As a condition to these loans, NPF was obliged to pledge its assets in the form of share scrip and to maintain an agreed security to loan ratio. As the value of the scrip fell over the years, more and more assets had to be pledged in order to maintain the security to loan ratio.
All these loans and pledges were in breach of the NPF Act and were therefore ultra vires.
The commission believes that the banks were in serious dereliction of their duty by not performing due diligence before entering into the loan agreements to assure themselves that NPF had the power to borrow, especially as the banks were well aware that NPF was a superannuation fund and that it was therefore inherently likely that it would not have power to borrow. The banks were also aware of the purposes for which NPF intended to draw upon the loan funds. The ANZ, for instance, was fully aware of NPF’s intention to use the borrowed funds to finance its massive investments in volatile, risky, non-income producing PNG resource stocks. When it finally obtained competent legal opinion from Allens that NPF lacked the power to borrow it kept that information from NPF and aggressively called in the debt, forcing NPF to sell off assets at a loss (Schedule 2E, paragraph 13). NPF members suffered losses in excess of K100,000,000 as a result of those investments. In addition to the losses on the investments, NPF members suffered the loss of many millions of kina in interest and bank fees and charges. For instance, interest and bank fees on the ANZ loan facilities alone amounted to K14,102,276.09 (Schedule 2E, paragraph 12).
NPF members may have rights to recover some of these losses in a class action brought against the NPF board and against individual trustees who were in breach of their fiduciary duties to the members by entering into these loan agreements. The members may have similar rights against the banks concerned (These possibilities are discussed in Schedule 2E paragraph 17 and Executive Summary paragraph 13).
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Term of Reference 1(c) “Provision of false or misleading information provided by or to trustees and management, including over the financial state of the funds in relation to the provision of the year end performance bonuses”
Misleading silence The investigations disclosed many instances when particular officers, or management generally, provided false or misleading information to the NPF board on a variety of topics. Equally importantly, perhaps, was management’s misleading silence with regard to things that should have been disclosed.
This includes silence about unauthorised overdrafts (Schedule 2A), drawdowns, (Schedule 2E, paragraph 13.3) acquisitions, (Executive Summary 4D, paragraph 4.1) agreements and commitments (Executive Summary 2E, paragraph 7.7.1).
False and misleading information generally Specific instances of giving false and misleading information can be examined by consulting the “Findings in the context of the Terms of Reference” at the rear of each schedule under Term of Reference 1(c). Examples include:-
• false information about obtaining SCMC approval (Schedule 1 paragraph 22.214.171.124); • Mr Leahy lied to the NPF board about Mrs Andoiye’s departure from NPF (Schedule 1 paragraph 20.1); • Concealing from the NPF board the existence of an unauthorised PNGBC overdraft by adopting misleading accounting procedures and netting the overdraft against credits in other accounts (Schedule 2A paragraph 4.3); • Mr Wright falsely told both the BSP and the Minister that the proceeds of a K30 million drawdown were to be used for local infrastructure projects. He did not disclose the intention to use the loan money to purchase Orogen shares (Schedule 2C paragraphs 4.1.4 and 4.1.5(c)); • Mr [Robert] Kaul falsely advised the NPF board that the board had previously approved a K30 million ANZ facility whereas the approval had really been for K20 million (Schedule 2E paragraphs 5.23 & 5.24); • Misleading information given by Mr Wright to the NPF board about the profits to be expected from issuing the Australian dollar bond (Schedule 2F paragraphs 5.1; 7; 7.1 & 7.2); • False information given by Mr Wright to the BPNG about by NPF board’s approved use for the Australian dollar bond money (Schedule 2F paragraphs 11.10; 11.12(b) and (c)); Management provided overly optimistic briefings on Vengold without referring to the risks involved (Schedule 4A paragraph 10.4); • Mr Kaul misled the NPF board and the Minister about the date he signed the HPL sub-underwriting agreement (Schedule 4B paragraphs 5.3 and 5.4(b)); • Mr Kaul gave false information to the NPF board understating the number of unauthorised HPL shares that had been acquired (Schedule 4B paragraphs 4.2 and 4.3(d)); • Mr Leahy falsely advised the newly appointed NPF board members that the proposal to purchase the Waigani Land had been raised at the previous board meeting but not resolved – whereas the proposal had been rejected (Schedule 5 paragraph 21.2.7); • Management provided false information to the NPF board about the purchase of a motor vehicle for the managing director (Schedule 9 paragraphs 4.4.3; 4.4.4(a) and 4.4.4(d)); • Mr Leahy requested the board to approve the Tower management contract with PMFNRE without disclosing the contract had already been agreed by management (Schedule 9 paragraphs 5.8 and 5.10(i)); False information specifically about the financial state of the Fund and end of year performance bonuses The two main examples of this type of false information were:-
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• Bank of Hawaii transaction. The accounts drawn up by Mr Wright for the 1997 year included the whole of the K18.5 million received from the Bank of Hawaii transaction as profit in 1997 instead of spreading it over the lifetime of the loan. This false reporting resulted in senior management receiving an undeserved end of year bonus based on a falsely reported profit (Schedule 1 Appendix 20 – paragraph 126.96.36.199 – end of year bonus); • K10 million “reserve” provision: Management set aside a K10 million reserve in 1996, contrary to International Accounting Standard AS26. This reserve was utilised in 1997 thereby showing a false profit with the result that an undeserved end of year bonus was paid to senior management (Schedule 1 Appendix 20 – paragraph 188.8.131.52); Concealing relevant information on the state of the Fund The commission’s inquiries have disclosed many instances when NPF management concealed relevant information on investments. This regularly occurred when management had made unauthorised acquisitions or sales of shares and then failed to specifically mention this at subsequent board meetings. For most meetings, however, management-briefing papers would be distributed in advance to trustees, which would usually include a schedule of investments.
This was a list of NPF’s investments so a really conscientious trustee who took the time, should have been able to work out recent transactions by comparing the amount in the schedule of investments with the previous schedule.
Evidence from the trustees indicates that few, if any, trustees checked out the investment schedules, so management succeeded in concealing information about these investments (Often, the schedules were several months out of date anyway).
Further concealment of relevant information consisted in the endemic failure by management to keep the Board of Trustees informed of the state of the various loan accounts with the NPF’s lender banks. This non-disclosure constituted a failure of management’s common law duty to make open disclosure to the board. The main offenders would be the managing director, who had ultimate responsibility for management’s performance and Noel Wright who was in charge of finance and investments.
Term of Reference 1(d) This Term of Reference was repealed. Term of Reference 1(e) “The failure to adhere to prescribed Investment Guidelines” After NPF adopted its new aggressive investment strategy in 1995 with firm guidance from Mr[David] Copland and his protégé Mr Wright, NPF departed further and further from the investment guidelines proclaimed by Sir Julius Chan in 1993. The story is told in Schedule 1, paragraphs 14.1 to 14.5.1 and Executive Summary 1, paragraphs 8 to 8.4.1. The departure from the guidelines was pointed out by Mr Kaul in 1996 but the trustees and management determined to proceed with the strategy of acquiring the high-risk PNG resource stock, using borrowed funds to do so (Schedule 1, paragraph 14.5.1(e)). When the board became aware that NPF was seriously in breach of the guidelines, particularly in having its portfolio weighted heavily in favour of the high-risk equities, the Board of Trustees resolved to try and get the guidelines changed, but to continue with their foolhardy strategy in any event (Schedule 1, paragraph 14.5.1(e)).
The result was that the expenditure of NPF’s funds in this way was illegal and the trustees who permitted this to occur were all in breach of their fiduciary duty to the NPF members. Given their awareness of what they were doing and their conscious decision to continue, it is likely that the trustees would be personally liable for the huge losses suffered by the members from the trustees’ breach of fiduciary duty. It is very unlikely they could succeed in a defence of “acting in good faith”. (Executive Summary, paragraph 8.5 and Schedule 1, paragraphs 184.108.40.206 to 220.127.116.11).
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It was NPF’s failure to adhere to the investment guidelines and its strategy of borrowing funds to finance these high-risk investments, which accounted for by far the greatest proportion of the K150 million losses suffered by NPF.
Term of Reference 1(f) “The failure to adhere to prescribed foreign exchange regulations under the Central Banking Act, particularly with respect to the investment in Maluk Bay Resort in Indonesia”
The NPF management found it convenient at times to utilise unorthodox methods of making payments overseas.
The prime example of this was providing funds to support the activities of Crocodile in Indonesia, particularly the construction of the resort at Maluk Bay. Crocodile was not properly registered to carry on business in Indonesia and was therefore unable to operate an Indonesian bank account. Also, the NPF board had never considered a comprehensive strategy for fundingCrocodile and that process was occurring on an ad hoc basis, often behind the back of the NPF and Crocodile boards. Mr Wright utilised the fact that NPF’s sharebroker, Wilson HTM, held money in its accounts for NPF from proceeds of share sales and dividend payments. Rather than account for the money in PNG, as he should have, Mr Wright arranged for Wilson HTM to make payments from this account directly to Crocodile’s overseas contractors and creditors. Approximately $US891,773 was transferred in this way (Executive Summary 4L, paragraph 12, Schedule 4L, paragraphs 7.5.5, 7.5.6, 7.5.7 and 7.7.4). NPF management also made payment of $A40,282 to Odata for construction of the Ambusa Copra Oil Mill through its account with Wilson HTM (Executive Summary 4N, paragraph 7, Schedule 4N, paragraphs 5.6 and 5.7). Using the Wilson HTM account to make overseas payments in this way had two advantages for Mr Wright. Firstly, it enabled him to avoid the time-consuming inconvenience of seeking approval from BPNG’s controller of Foreign Exchange (In the $A54 million bond affair, the Controller Mr Popoitai delayed granting foreign exchange approval because of his well-founded concerns about the proposed purchaser of the bond, Warrington International. Mr Copland brought pressure on the Governor of the BPNG to obtain foreign exchange approval (Schedule 2F, paragraphs 13.2, 13.3 and Executive Summary, paragraph 8). Secondly, it enabled Mr Wright to make overseas payments “behind the back” of the NPF board more easily. It is likely that NPF management made other overseas transactions through Wilson HTM in breach of foreign exchange regulations and this should be checked by the BPNG.
National Provident Fund Final Report [Part 5]
Term of Reference 1(g) “All investment transactions including those relating to Highlands Pacific Limited, Itemus Inc. (formerly Vengold Inc.), Lihir Gold Limited, Cue Energy Resources N.L., Macmin N.L., Steamships Trading Company Limited and Collins & Leahy Limited and the failure to inform the full Board of Trustees of the transaction”
Each of these investment is reported upon in a separate schedule to this report, each of which has its own executive summary. The major loss making investments of STC and CXL, HPL and Vengold are briefly covered also in this report at paragraph 11 above, as are the smaller investments in Macmin and Cue. As pointed out repeatedly in the schedules, the failure by management to inform the full Board of Trustees of the transactions was endemic. This is illustrated by the tables in the schedules.
Term of Reference 1(h)
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“The decision to finance the Poreporena Freeway, and the role of any trustee or officer or employee of the fund or of any other person or entity in reaching this decision”
Creation of intermediary company Curtain Burns Peak The full report on the loans provided by NPF to finance the construction of the Poreporena Freeway is set out in Schedule 7B. The executive summary is quite comprehensive and refers to relevant paragraphs in the schedule.
It describes how the State initially intended to borrow the necessary funds offshore but faced opposition from the World Bank.
To overcome this opposition, it decided to set up a company to be jointly owned by the State and the construction company (Curtain Bros Papua New Guinea) to be called Curtain Burns Peak Pty Ltd, which would then borrow the funds and finance the construction work, with the State providing a guarantee to the lender.
The State sought loans from DFRBF, POSF and NPF. It was a difficult situation for the State, which had recently failed in a lawsuit with Curtain Bros.
The other superannuation funds refused to be involved because their lawyers pointed to possible constitutional problems with the way the State proposed to fund the construction by off-budget, non-appropriated payments through Curtain Burns Peak Pty Ltd as an intermediary.
Blake Dawson Waldron had advised POSF and DFRBF that this method of funding, with a guarantee being given by the State, violated Section 209(1) of the Constitution.
State applies pressure despite conflict of Interest The Minister for Finance Mr [Chris] Haiveta, the Secretary of DoF Gerea Aopi, and the First Secretary of DoF’s Commercial Investments Division Vele Iamo were all actively seeking funds to commence the troubled venture and NPF effectively became the banker of last resort. Mr Aopi and Mr Iamo were also chairman and Public Service representative trustee of NPF respectively, so their conflict of interest was acute. The first loan agreement for K3 million was worked out in discussions between Mr Aopi and NPF managing director Robert Kaul.
From then on, it was clear that the State was pushing hard for NPF to provide further funding. The next K10 million loan was approved by Minister Haiveta even before the NPF board had resolved to seek it. This was a large commitment for NPF, which rose eventually to a loan of K62 million. There were real doubts about the constitutional validity of the loan and whether the way the loan was structured could eventually be disadvantageous to NPF, as there was a mismatch between the terms of the loan agreement between the NPF and the lender bank (ANZ) and the terms on which NPF on-lent to Curtain Burns Peak.
The NPF board was divided whether to provide the loan or not.
Contrary Legal opinion withheld from NPF Board The Blake Dawson Waldron opinion was provided to NPF management and it then sought and obtained a contrary legal opinion from John Batch on November 7. Although Mr Batch felt the loan was not unconstitutional, he pointed out that if the court decided otherwise, the loan would not be repayable to NPF nor would the State guarantee be enforceable in favour of NPF.
When the NPF board deliberated on the matter, management did not advise it of the very worrying Blake Dawson Waldron opinion. Nor was any expert investment advice given to, or sought by the NPF board.
Mr Aopi and Mr Iamo played an active part in the NPF board’s deliberations, without disclosing the conflicting double role they were playing. The employee representatives, Mr Paska, Mr Gwaibo
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and Mr Leonard, voted against providing the loan. Had Mr Aopi and Mr Iamo refrained from voting because of their conflict of interest, as they should have, the resolution may not have been carried. The key players in initiating this loan were Mr Aopi and Mr Iamo, both of whom were in breach of their fiduciary duties to NPF members by taking part in the vote and by not disclosing their conflict of interest. Another key player was managing director Robert Kaul who must have witnessed that conflict of interest in action yet failed to seek independent investment advice for the Board of Trustees. Noel Wright also failed to advise the NPF that there was senior legal opinion that the loan would be unconstitutional and that NPF risked losing the amount of the loan and the interest owing. Advantages and disadvantages of the investment As reported in Schedule 7B, successive loans raised the amount to K62 million and it seriously distorted NPF’s investment portfolio by creating an over exposure to the State. When economic conditions turned against NPF, it proved difficult to “sell” the loan as the State guarantee was not transferable. As the “mismatch” problem did eventuate, making the loan no longer favourable to NPF, it was eventually transferred to the Bank of Hawaii, at a discounted profit. Later again, the Bank of Hawaii transaction had to be unravelled.
In fairness to those who supported these loans to the State, it needs to be said that they genuinely believed that NPF was getting a good deal. In fact, these Freeway loans turned out to be far more profitable than most of NPF’s investments.
All these matters are fully reported in Schedule 7B and its Executive Summary.
Term of Reference 1(i) “Whether there was any manipulation or attempted manipulation of the fund’s financial results or its financial position and whether any such transaction benefited any trustee, officer or employee of the fund or any other person or entity”
The two main instances of manipulating the funds financial results have been discussed above under term of reference 1(c) namely the:-
• Bank of Hawaii transaction when the K18.5 million profit was all brought to book in 1997, thereby contributing to the payment of a bonus to senior management (Schedule 1 Appendix 20 paragraph 18.104.22.168) and; The K10 million “reserve” provision where, by using incorrect accounting, K10 million of the 1996 large profit was taken out of the 1996 accounts (when maximum bonus was already payable) and brought to account in the less profitable 1997 accounting year which boosted the book value of the 1987 end of profit. This enabled the payment of a bonus of K52,941 for senior management which would not otherwise have been payable. This contributed to an increase in senior staff bonus payments (Schedule 1 Appendix 20 for a detailed discussion of problems associated with the bonus scheme. The K10 million reserve is reported at paragraph 20.6.4(d)(vi) and findings at paragraph 20.7.2).
Term of Reference 1(j) “The construction, contract negotiations and renegotiations of the Tower building and the role of any trustee or officer or employee of the fund or of any other person or entity”
The commission’s investigations into the NPF Tower were greatly facilitated by an excellent report provided by the DoF Finance inspectors who had previously investigated many matters connected with the construction of the Tower.
They pointed the way for this commission to follow, using its greater powers of investigation. Schedule 2B and 6 contain different topics of the report on the Tower.
Schedule 2B – NPF Tower Financing and Construction
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Schedule 2B reports on the decision to construct the NPF Tower, the construction contracts and the PNGBC loan facility which financed its construction. The decision to borrow K50 million for this purpose was taken by the NPF board on a very poor briefing by management, which failed to explore the commercial viability of the large project.
NPF went into this project with no expert advice about the demand for office space in Port Moresby, no pre-agreed “signed-up” tenants and no expert advice about the dangers inherent in the terms of the loan agreement.
The PNGBC entered the agreement without carrying out adequate due diligence into those matters and above all, without assuring itself that NPF had the power to borrow funds for this purpose.
It was initially intended that PNGBC would lend funds to the Tower Ltd, a company incorporated by NPF to build and own the Tower building. At the last moment, however, the loan agreement was signed with the NPF itself and this invalidated the agreement because NPF had no power to borrow.
Schedule 2B reports upon management’s poor performance in reporting to the board on the administration of the loan and in particular its failure to obtain board approval for increases in the loan facility, which eventually expanded to more than K59 million. The schedule introduces six (6) suspicious matters, which the Finance inspectors thought required special investigations. The commission’s investigation into those matters is reported at Schedule 6.
The executive summary provides a detailed summary of the main themes and paragraph references to Schedule 2B.
Schedule 6 – NPF Tower Investigations Schedule 6 reports upon the six matters, which the Finance inspectors had reported required specific investigation, as follows:-
In-ground works variation costs of K3,006,270.26 These costs were incurred on top of the agreed construction cost because of engineering problems in the foundations caused by the difficult soil substrata on the building site.
The commission concluded that the costs were genuine and recommended no further action.
Builders and other works variations The commission accepted the professional opinion of Rider Hunt and Pacific Architects Consortium (PAC) and found that the variation costs were genuine and recommended no further action.
The first acceleration fee – K1.4 million This fee of K1.4 million was paid in order to speed up the work in order to recover time lost because of the in-ground work delays.
Though there is reason to doubt whether NPF gained much benefit from this expenditure, the commission is satisfied that the decision to seek the acceleration was genuinely made and that the acceleration costs agreed upon were within reasonable bounds.
Professional fees The commission investigated to see whether NPF had been overcharged pursuant to the consultancy agreement for professional fees. It found that there is ambiguity in the terminology used in the 23-page consultancy agreement and its appendices on the one hand and the wording in an appendix to a letter dated August 23, 1994, which is referred to in the consultancy agreement. The ambiguity has caused a difference of opinion about whether or not NPF has been overcharged for professional services.
The commission finds that it is a genuine dispute, common to such projects, which may need to be resolved through court processes.
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A Kina fluctuation claim A second acceleration claim The contract was a fixed cost agreement with no provision to vary it because of fluctuations in the value of the kina.
The kina did, however, undergo significant devaluation, which seriously eroded the builders profit margin.
NPF’s consulting engineers, Rider Hunt, and PAC, advised NPF that it would be advisable to payKumagai an appropriate amount to compensate for the kina devaluation as otherwise it could mean cessation of work on the project. Negotiations occurred which made it clear that an increase in the contract price to K51.5 million would satisfy Kumagai. At that stage, however, Mr [Jimmy] Maladina and Mr [Herman] Leahy removed PAC from the negotiations, and discussions continued between them and Kumagai direct. At this stage also a spurious second acceleration claim was introduced. After hearing evidence from the senior managers of Kumagai and PAC and after thoroughly studying the relevant correspondence and documentation, the commission found that Mr Leahydeliberately misled the (newly appointed) NPF board members to agree to a settlement price between K53 million and K55 million to settle both the kina devaluation and the second acceleration claim; when K51.5 million was on record as being Kumagai’s agreed settlement price. The result was that an extra K2.5 million of NPF’s funds was paid to Kumagai. This had previously been agreed by Kumagai management at the insistence of Mr Maladina just prior to his appointment to the NPF Board of Trustees. He had threatened to deny Kumagai the currency depreciation payment (after his expected appointment) unless they co-operated. The agreement between Mr Maladina and Mr Leahy withKumagai managers was that Kumagai would return the extra K2.5 million of NPF funds to MrMaladina plus an extra K150,000 of Kumagai’s own money as Mr Maladina’s personal “commission”. An elaborate scheme was put in place, including the fabrication of false documents, so thatKumagai’s return payments to Mr Maladina could be laundered through the personal account ofKen Yapane and the account of his company Ken Yapane and Associates. The pretext for these payments was to be a spurious sub-contract between Kumagai and Ken Yapane and Associates whereby Mr Yapane would pretend to provide extra labour and to do fictitious on-site work. Kumagai duly received the “padded” K2.5 million as settlement of its kina devaluation/second acceleration claim and in return, made six progress payments for Mr Maladina’s benefit. The first four payments were to Mr Yapane or his firm. The last two payments went directly to Mr Maladina’s law firm Carter Newell (After Mr Yapane refused to allow his bank account to be used to launder these payments). The “cover-up” After the Commission of Inquiry was established in April 2000, there was an attempt to “cover-up” what had occurred by fabricating false documents and correspondence between Kumagaiand Ken Yapane and concealing Mr Maladina’s involvement. Ms [Barbara] Perks and David Lightfoot of Carter Newell were involved in providing false documents to the commission and they have been referred to the Commissioner of Police to investigate whether their involvement was criminal. Mr Lightfoot has also been referred to the PNG Law Society. Mr Yapane initially gave false evidence to the commission in support of these false arrangements. When confronted with the consequences of his statements, and after receiving good legal advice, Mr Yapane changed his testimony and disclosed what had really happened. The commission has recommended that he be referred to the Commissioner for Police to investigate his part in the fraud committed against the NPF. The money trail
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The commission embarked upon an intensely detailed exercise to trace the money paid byKumagai’s six progress “payments”, totalling K2,649,999.70 to the ultimate recipients. The tracing is described in paragraphs 7.1 to 7.6.2 in Schedule 6 and is also depicted diagrammatically by charts, which are attached to both Schedule 6 and its executive summary.
In essence, the commission has found that the money was “laundered” through the books of account of Carter Newell Lawyers and PMFNRE. The investigations showed that PMFNRE is actually beneficially owned by Peter O’Neill and that he and Mr Maladina obtained substantial benefits from the proceeds of the NPF Tower frauds, either personally or through their companies and families. Other beneficiaries of the NPF Tower fraud money can be ascertained by following the money trail on the NPF Tower charts, which are attached to Schedule 6 and its executive summary.
Term of Reference 1(k) “The Waigani land proposal, and the role of any trustee or officer or employee of the fund or of any other person or entity taking account of the Department of Finance and Treasury inspectors’ recent investigation report”
By Term of Reference 1(k), the commission was specifically directed to investigate the attempted sale of land at Allotment 2 Section 429 Hohola, referred to here as the Waigani Land.
It was a long and difficult investigation, which was made more difficult by the “cover-up” activities of the parties involved and lawyers acting on their behalf.
Allocation of Waigani Land lease to Waim No.92 Pty Ltd At Schedule 5, the commission reports how Mr Maladina before and during the time he was chairman of NPF, was the secret owner of Waim No.92 Pty Ltd the shares of which he initially owned through his wife Janet Karl, and an accountant Phillip Eludeme. Ms Karl’s share was later transferred to Phillip Mamando who resided at the Mr Maladina’s residence.
Mr Maladina was responsible for bribing Land Board chairman Ralph Guise and Lands MinisterViviso Seravo, to ensure Waim No.92 was granted the lease of the Waigani Land on very favourable terms. Part of the bribe was the performance by Mr Eludeme of free professional services for Mr Seravo prior to the allocation of the lease in order to obtain the Minister’s support. Inflated land valuations and valuation fees Mr Maladina then organised two inflated valuations of the land from valuers Mariano Lakae andIori Veraga. He arranged for NPF to pay the valuers a “double fee” which he then shared with them.
Mr Maladina’s secret commission on the valuation fees, amounting to K60,000, was paid into the account of Carter Newell and subsequently paid for his own benefit and to pay off Mr Guise and Mr Seravo and for the benefit of Herman Leahy, his co-conspirator. At approximately the same time, Mr Maladina was also using the same two valuers to obtain inflated valuations of the NPF Tower as part of a scheme to sell off 50 per cent of the Tower (Schedule 6). He organised for NPF to pay them double fees for the Tower valuations and took half of it for himself, amounting to K175,000.00. Mr Maladina’s was laundered through the accounts of Carter Newell and PMFNRE. The Tower valuation fees are reported in Schedule 5, along with the Waigani Land valuation fees.
National Provident Fund Final Report [Part 6]
Failed attempt to sel-Waigani land shares to NPF
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Jimmy Maladina and Herman Leahy then attempted to sel-the shares in Waim No.92 to NPF and other PNG institutions. To reverse an unfavourable decision by NPF, Mr Maladina brought about or took advantage of changes made in the membership of the NPF board to re-submit the proposa-to buy the Waigani land. He was assisted in this scheme by Mr Leahy and Henry Fabila who arranged the meeting so that two trustees, John Paska and Mr Nana who had previously opposed the purchase, were unable to attend. The NPF board approved the purchase of the Waigani land at an exorbitant price but before it progressed much further, the news of the purchase broke in the press and it was called off at the direction of then Prime Minister Bil-Skate.
Sale of Waigani land share to Trinco No. 6 Pty Ltd Having failed to sell-the Waigani land to the NPF or any other PNG institution the shares of the land holding company (now known as Waigani City Centre Ltd), Mr Maladina utilised the services of Simon Ketan of Ketan Lawyers to sell-to Trinco No.6 Pty Ltd (a company owned by theRimbunan Hijau group). The sale was agreed, subject to certain conditions attached to the lease document being modified. To organise this, Mr Maladina arranged for Land Board chairman Mr Guise to be bribed as wel-as the new Lands Minister Dr Fabian Pok. By this means, he arranged for minutes of a former Land Board hearing to be altered to achieve the desired alterations to the lease conditions, which the Lands Minister Dr Pok, duly approved (Dr Pok subsequently received the benefit of a motor vehicle and the sums of K10,000 (paragraph 22.214.171.124) for his part in this fraudulent scheme (Schedule 5, paragraph 32.8.9)). DrPok also appears to have received the sum of K220,000 to his company, Biga Holdings, which was received from Mr Maladina’s Niugini Aviation Consultants company in Hong Kong (which payment should be referred to the Ombudsman Commission for investigation). “Cover-up” activities When the commission commenced investigating these matters, Mr Maladina and Mr Eludemeboth left PNG to reside in Australia (Mr Eludeme returned much later and gave evidence under summons on February 19 and 20, 2002 (Transcript pp. 10346-10404 & 10407- 10444). MrMaladina has not returned and has given no evidence). At Mr Maladina’s instruction, lawyers Jack Patterson and Simon Ketan both concealed and fabricated documents on Mr Maladina’s instruction in order to protect Mr Maladina. They have been referred to the Commissioner for Police to consider prosecution for fabricating documents contrary to Section 122 of the Crimina-Code. Mr Eludeme and Mr Lightfoot and Ms Perks of Carter Newel-(now Pacific Lega-Group) have also been referred to the Commissioner for Police to consider their part in the cover-up. The ful- details of these direct referrals directed by the commission are set out at Executive Summary 5, paragraph 2.7, Section B. The Waigani land fraud deprived the NPF of only K120,000 for the valuations and lega-costs because the sale of the WCC Ltd shares to the NPF was stopped before money changed hands. It is significant though because it clearly revealed the crimina-intentions and conduct of MrMaladina and Mr Leahy and the depth of corruption in the Lands Ministry. Term of Reference 1(l) and 1(m) Term of Reference 1(l) “The purchase of Crocodile Catering and the role of any trustee or manager of the fund or of any other person or entity” These two terms of reference are reported upon as one item as there is so much overlap between them.
Crocodile was a fully owned subsidiary of Crocodile (Australia) Pty Ltd. Its business was to provide catering services to the canteens of mining and exploration companies in remote areas of the PNG mainland.
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When NPF acquired the shares in Crocodile, it was operating pursuant to severa-catering contracts, such as the Porgera Joint Venture in the Enga Province and Tolukuma Gold Mine in the Goilala region of the Centra-Province. Crocodile Catering The purchase of Crocodile Catering is reported upon fully in Schedule 4L. Easy access to the commission’s deliberations and findings is accessible through the executive summary to Schedule 4L, which summarises the main points, with references to paragraphs in the schedule for a more detailed report. The executive summary also reproduces the main findings of the commission concerningCrocodile Catering. The main feature of the purchase of Crocodile was its folly. It was never going to be a good idea for NPF to buy 100 per cent of the shares in a remote catering business and then seek to run it. NPF management had absolutely no experience or skil-in the difficult task of catering for a series of mining camp messes in remote areas. The idea seems to have been strongly supported by trustee Copland and Mr Wright and MrKaul. It was not a flourishing and profitable business when NPF acquired the company from its near bankrupt Australian parent company. There was a serious failure of due diligence by NPF management into the profitability of Crocodile’s existing contracts or how Crocodile was to be funded. NPF was aware that Crocodile had an obligation to build a warehouse at Paiam in the Enga Province as an incident of its catering contract with the Porgera Joint Venture. They assumed that the cost of construction would be funded by the former owners and failed to ascertain the scale of the project. Consequently, Crocodile was unexpectedly obliged to itself fund the construction of a warehouse at a cost of K4 million which had not been allowed for in the budget. No consideration was given to how Crocodile’s future funding would be organised or from whence it would come. Without assessing Mr Jewiss’ qualifications or manageria-skills or his previous performance as a manager of Crocodile in PNG, the Crocodile board simply appointed Mr Jewiss as managing director of Crocodile. He was a very unsuitable appointment as he was a very poor manager who failed to establish and maintain even a proper system for recording Crocodile’s accounts or for planning its business and financia-future. His reporting to the Crocodile board and the NPF board was seriously over optimistic, misleading and dishonest. Within two months of his appointment, he relocated himself and family to live on Bali Island so he could seek business for Crocodile in Indonesia. He unsuccessfully tried to manage Crocodile’s PNG mainland projects from Bali. He soon became distracted by the dream of constructing a large resort complex at Maluk Bay on nearby Sumbawa Island.
At paragraph 2.1, of Executive Summary 4-and at paragraph 4.2 of Schedule 4L, the commission sets out its findings condemning Mr Wright for his failure to perform due diligence and al-the trustees for breaching their fiduciary duty to the members of the NPF by not critically assessing this proposal, not seeking expert advice, not checking out the Crocodile management team and for not determining where future funds were to come from. Allowing Mr Jewiss to remain in Bali as his headquarters was a major failing of the NPF andCrocodile boards. At Executive Summary 4L, paragraph 4, the commission criticises NPF management, particularly Mr Kau-and Mr Wright for secretly organising transfer of capita-and loan funds from NPF toCrocodile without NPF board approval. The trustees were in breach of duty to the members by meekly ratifying these unauthorised transfers or funds without reprimanding management or bringing them under board contro-(See forma-findings at Executive Summary paragraph 5.1; Schedule 4L).
When Mr Wright provided $US2 million bridging finance to Crocodile without board knowledge or approval, it was a serious breach of duty and it was an illega-exercise of power, of which
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MrCopland must have been aware, as he was the very actively involved chairman of both NPF and Crocodile boards (See Schedule 4L, paragraph 4.7.3). Mr Maladina makes unauthorised appointments As chairman of NPF from January 1999, Mr Maladina abused and exceeded his power by appointing Ram Business Consultants as investigators and interna-auditors of Crocodile in early 1999 (Executive Summary paragraphs 9 and 9.1 and Schedule 4L, paragraph 4.9.6). He also exceeded and abused his authority as chairman in Apri-1999 by appointing his friend,Peter Petroulas of Precise Strategies to perform an interna-review of Crocodile in Indonesia and by appointing another friend, Ray Barredo, as managing director of Crocodile in Apri-1999 and personally approving and illegally sealing his contract conditions, which included annua-transfers of 150,000 Crocodile shares in an attempt to give Mr Barredo ownership of Crocodilewithin a few years. NPF suffered a loss of K7.4 million as a result of poor management decisions and breaches by al- trustees of their fiduciary duties. They may be personally liable for some of these losses.
Term of Reference 1(m) “The participation in the resort complex in Indonesia, and the role of any trustee or officer or employee of the fund or of any other person or entity”
Maluk Bay Resort Prompted by friends employed by PT Cikoba Konseptama Bangunmutra on Sumbawa Island near Bali, Mr Jewiss somehow persuaded the Crocodile board of the merits of constructing a smal-bar and gril-complex, with simple cabin type accommodation at Maluk Bay on Sumbawa Island to service the rest and recreation needs of the employees of the nearby mining company. The germ of this idea spread in Mr Jewiss’s imagination unti-it became a plan to build a major 70- room resort complex at Maluk Bay with his friends, Patrick Goodfellow and Keith Wilson, in charge of construction and the training of loca-staff. Mr Jewiss’ accounting records, his estimates of cost and time of construction, of future occupancy rates and profitability were so flawed that they may wel-have been figments of his imagination. They were sufficient, however, to persuade the Crocodile board and the interlinked NPF board to go along with the idea. Pursuing this dream of constructing, owning and managing a major resort on a tropica-island in Indonesia was a serious distraction of Crocodile management’s focus away from its catering contracts in Papua New Guinea. Crocodile did not even have title to the land at Maluk Bay when construction started, it had no source of funds for the venture except NPF and it had no Indonesian bank account or legitimate means of transferring funds to Indonesia to finance this unregistered venture, which was illega- under Indonesian law. How “informal” and illega-methods of funding the Indonesian venture were arranged on an ad hoc basis, through travellers cheques, persona-bank accounts and transfers from NPF’s overseas account with its stockbrokers Wilson HTM are described in detail in Schedule 4L, paragraphs 8 and Executive Summary, paragraphs 11 and 12. The story is set out in broad outline in the Executive Summary 4L. Both the schedule and its executive summary are presented in two parts: the first dealing withCrocodile’s PNG operations and the administrative and financial relationship between the boards of NPF and Crocodile and the second part dealing specifically with the financial and managerial morass of the Maluk Bay project. The two aspects are, however, inextricably related. The failure to define clear legal and financial boundaries between NPF (the legal entity which was established to invest and safeguard members’ funds) and Crocodile (a trading enterprise acquired to make profit from PNG catering contracts, which was now wafting into an Indonesian island resort dream) would seriously endanger the assets of NPF which NPF management and trustees were obliged to protect. Term of Reference 1(n)
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“Whether there was any non-disclosure of a conflict of interest by a trustee or officer or employee of the fund in respect of any investment or transaction to which the fund or the any of the subsidiary companies was a party”
Many instances of non-disclosure of a conflict of interest can be discovered by studying this term of reference in the “Findings in the Context of the Terms of Reference” paragraph at the end of each Schedule.
The most serious examples of such non-disclosure included:-
• Mr Maladina’s failure to disclose his interest in Waim No.92 Pty Ltd when the company was trying to sell the Waigani Land to the NPF. • The failure by NPF’s purchasing officer Simon Wanji to disclose the interest of himself and his wife in the stationery companies that were selling stationery to NPF (Schedule 9, paragraph 13.5 and Executive Summary paragraph 10); • The failure by Mr Copland to disclose that he was sitting as an independent member of the board of Cue (Schedule 4C, paragraph 11); • The failure by Mr Copland, Mr Kaul and Mr Wright to disclose that they held personal interests in Cue Energy N.L. and Vengold (Schedule 4C, paragraph 13.8); • The failure by trustee Vele Iamo and other public service representative trustees to disclose the extent of their conflict of interest when continuing to participate in NPF board deliberations on transactions with DoF, with which they were intricately involved, as part of their service as DoF officers. In some instances, their undisclosed conflict of interest was acute (Executive Summary 7B, paragraph 4.1). The employee representative trustees voted against lending to the State for the freeway — Mr Aopi and Mr Iamo, who were intimately involved as DoF officers in securing the loan for the State, did not disclose their conflict of interest and voted as NPF trustees for NPF to agree to the loan. Without their vote, the motion would have been lost. • David Copland’s failure to always disclose his conflict of interest as managing director of Steamships and his failure to withdraw from NPF board deliberations on the purchase of motor vehicles from Toba Motors — a STC company. At one stage, virtually all new vehicles were being purchased from Toba Motors with no proper system of open tenders in place (Schedule 9, paragraph 4.7 and Executive Summary paragraph 2.7).
Term of Reference 1(o) “The failure to comply with prescribed tendering processes, and whether such failure benefited any person and if so who, and the role of any trustee or officer or employee of the fund or of any other person or entity”
As pointed out in Schedule 9, NPF was not subject to the tenders procedures applied to the public service and most other public bodies under the Public Finances (Management) Act (PF(M) Act).
The NPF Board of Trustees did, however, have a duty to ensure that management was applying appropriate procedures to control the purchase of goods and services and the disposal of assets. In order to be even-handed, fair and cost effective and to avoid nepotism, it was necessary therefore, to administer a well run tenders system.
As late as 1993-94, NPF had a tenders committee and NPF managers (incorrectly) believed they were subject to the public service tenders regime.
By 1995, however, the tenders committee had ceased to function and there was no coherent and consistent system of tenders in place.
The commission examined the situation in the following fields of activity, reported in Schedule 9:-
• Acquisition and disposal of motor vehicles (Schedule 9, paragraph 2);
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• Property and management services (Schedule 9, paragraph 3); • Legal services (Schedule 9, paragraph 4); • Security services (Schedule 9, paragraph 5); • Accounting services (Schedule 9, paragraph 6); • Other professional services (Schedule 9, paragraph 7); • Computer hardware and software (Schedule 9, paragraph 9); • Disposal of assets (Schedule 9, paragraph 8); and • Stationery and office supplies (Schedule 9, paragraph 10); Schedule 9 reports in detail on these matters and the executive summary gives a full outline and sets out the commission’s findings.
At paragraph 14 of Schedule 9, the commission sets out some general conclusions as follows:
“The commission’s investigations have shown that at the beginning of the period under review, there was some attention given to calling for tenders and seeking competitive quotations for procurement of some of the goods and services examined in this report. As time went on, these frail attempts to comply with proper procedures lapsed and management increasingly ignored the concept of obtaining competitive quotations. Management also ignored the need to keep the NPF board informed or seek its approval.
This gross laxity allowed the development of nepotism and criminal acts to steal from the NPF. It is a very sad story for which NPF senior management is primarily to blame.
The NPF trustees, however, had a fiduciary duty to ensure the fund was well managed and its finances were protected. They failed this duty totally. The abuses were so noticeable that the trustees’ failure to notice and address it constitutes a breach of their fiduciary duty to the members of the fund and may constitute a breach of the Leadership Code by all trustees who held office during the period under review. This matter should be referred for consideration by the Ombudsman.”
Term of Reference 2 “Whether there was any inappropriate intervention by persons or entities in relation to illegal or unsuitable borrowings and investments, or other improper actions”.
The commission has reported upon a number of inappropriate interventions in relation to illegal or unsuitable borrowings and investments and other improper actions.
Some of these interventions occurred when a chairman or officer of NPF intervened by some unauthorised activity which was the legal function of the NPF board. Some of the interventions were by people outside of NPF — such as a Minister.
National Provident Fund Final Report [Part 7]
Borrowings All the borrowings were illegal and unsuitable because NPF had no power to borrow. When Noel Wright or the managing director of NPF exceeded their delegated authority to obtain a loan for NPF or to draw down on an existing facility, this amounted to an inappropriate intervention, as these actions were the function of the NPF board. Examples were:
• The agreements with PNGBC to utilise an overdraft facility (Schedule 2A, paragraph 4.3 and Executive Summary paragraph 4); • The agreement between NPF management and the ANZ to grant an additional K20 million facility without the knowledge or approval of the NPF board (Schedule 2E, paragraph 4.3 and Executive Summary, paragraph 7.1); and
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• Many examples when NPF management exceeded their authority by making drawdowns or transferring securities on the loan facilities without NPF board approvals. Investments The schedules dealing with NPF’s equity investments contain many, many examples when NPF management (Mr Wright and Mr Kaul mostly) acquired shares on-market, way beyond their delegated powers. These were inappropriate interventions in the functions of the NPF board.
• STC and CXL – Executive Summary 4D, paragraph 6.1 • Cue – Executive Summary 4C, paragraphs 6 & 7 • Macmin – Executive Summary 4E, paragraph 5 and 6 Sometimes these inappropriate interventions by management to acquire shares were subsequently ratified by specific resolutions of the NPF board. Many times there was no such ratification. For example, Mr Kaul’s unauthorised action in sealing an irrevocable offer to sub-underwrite a Cue share placement to the extent of A$25 million (Executive Summary 4C, paragraph 2.5). Directions by Ministers Intervention by Prime Minister Bill Skate The intervention by Prime Minister Bill Skate to direct DoF Secretary Brown Bai, to stand down as chairman of NPF and to appoint Jimmy Maladina in his place (Schedule 1, paragraphs 126.96.36.199 and 188.8.131.52). The intervention by Prime Minister Skate and Minister Lasaro to arrange for the termination ofRobert Kaul’s appointment as managing director and to secure the appointment of Henry Fabila in his place (Schedule 1, paragraphs 4.4.13 and 184.108.40.206). The intervention by Prime Minister Skate by directing NPF managing director not to travel overseas.
Intervention regarding the purchase of Government stock It seems that almost annually the NPF was asked to take up government stock or Treasury Bills for the purposes of the national budget by the Minister responsible for NPF.
Such requests are, in the commission’s view, improper and an interference with the investment powers of the NPF board.
Intervention by Jimmy Maladina Before his appointment as a trustee of the NPF, Jimmy Maladina intervened in December 1998 to force Mr Taniguchi of Kumagai to agree to participate in the NPF Tower fraud, threatening him that he would otherwise deny Kumagai payment of its existing claims when he became chairman of NPF in the near future. Intervention by Herman Leahy When preparing to implement the NPF Tower fraud, Mr Leahy intervened in existing contractual arrangements by directing PAC to withdraw from the negotiations process it was conducting withKumagai on NPF’s behalf. This enabled Mr Leahy to take over the negotiations and arrive at a settlement price which was inflated by K2,505,000. Intervention by Noel Wright There were many instances when Mr Wright intervened in the lawful functions of the NPF board by taking actions way beyond his delegated authority. Examples include:
• Dealing in Lihir options, despite a board resolution to desist from the practise (Schedule 4I, paragraph 4.4.2); • Directing Wilson HTM to transfer funds to Crocodile in Indonesia (Schedule 4I, paragraph 7.5.7(g); • Securing an additional K20 million facility from ANZ; and • Pledging and transferring huge volume of NPF share scrip as security for ANZ loans Intervention by Henry Fabila
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Mr Fabila and Mr Leahy intervened in the lawful tender process for awarding contracts for managing NPF properties, which included awarding the lucrative contract to manage the NPF Tower to PMFNRE (Schedule 9, paragraph 5.6.1(c). Agreeing to appoint PMFNRE as NPF’s agent to sell 50 per cent of the NPF Tower to the Papua New Guinea Harbours Board (PNGHB) and to pay a 5 per cent commission worth K2 million to MrSullivan – without the knowledge or approval of the NPF board (Schedule 6, paragraphs 13 to 13.1.4). Term of Reference 3 “Whether in connection with action or failure to act of any trustee, officer or employee of the fund or any other person should be referred to the relevant authorities for investigation with a view to criminal prosecution or other action”
To the Ombudsman Commission Throughout its investigation, the commission has made many findings about the conduct of trustees and other leaders, which it considers constitutes a breach of the Leadership Code, which has been promulgated pursuant to the Organic Law on the Duties and Responsibilities of Leadership.
In many cases, this has led the commission to recommend to the Prime Minister that those leaders be referred to the Ombudsman Commission. In some cases, the leader is referred to by name for a particular failure by that leader personally. In some cases, the referral has been in respect of all trustees in office at the time because the failure has been a collective failure of such magnitude that it constitutes a breach of the Leadership Code, not merely a breach of fiduciary duties to the members of the fund. Examples of individual referrals to the Ombudsman Commission include:
• Minister Haiveta’s repeated failure to obtain expert independent advice from DoF or elsewhere before granting approvals for transactions having a significant impact on the affairs of NPF. For example general approval for NPF to invest in companies registered on stock exchanges up to K1 million per transaction (Schedule 1, paragraphs 14.4.3 and 220.127.116.11(a). Approval for NPF to invest in STC and CXL up to K40 million as part of a take over strategy (Schedule 4D, paragraph 4.4.1).
• Trustee Nathaniel Poiya’s acceptance of K150,000 paid to him personally (Schedule 6 paragraph 12) and another payment of K100,000 to the company Mecca No.36 Ltd (Schedule 6 paragraph 18.104.22.168.7(v), which was jointly owned by himself and Peter O’Neill, was from proceeds of the NPF fraud. Examples of the trustees being referred to the Ombudsman Commission as a group include their repeated failure to supervise, reprimand and control NPF management’s unauthorised activities.
To the professional regulatory bodies When people have been guilty of professional misconduct as a lawyer, accountant, valuer, etc, the commission has recommended that they be referred to the body responsible for investigating professional misconduct – such as the PNG Law Society and the PNG Institute of Accountants.
To the Commissioner for Police If the commission finds that there is substantial evidence that a person has committed a crime it has recommended that the Prime Minister refer that person to the Commissioner for Police for investigation and to determine whether the person should be charged with a criminal offence.
Direct referrals In cases where a person has committed an offence, in effect, against the commission itself – such as fabricating documents, committing perjury and generally interfering with the investigation, contrary to the Commission’s of Inquiry Act or the Criminal Code, the commission itself, through counsel assisting, has referred the matter directly to the Commissioner for Police or other relevant authority.
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Method of reporting referrals Each of the referrals is reported in the schedule, which deals with the topic under investigation. The referrals are therefore listed in the body of the schedule as a “finding”. They are also mentioned in the paragraph at the rear of the schedule, which brings together all findings in the context of the commission’s terms of reference. These referrals are listed in those paragraphs under the heading of Term of Reference 3.
An attempt has been made to list all people who have been referred from the schedules in the following Table of Referrals. Part 1 lists referrals recommended to the Prime Minster by the commission. Part 2 lists referrals made by the commission itself to the relevant authority.
Term of Reference 4 “Whether in connection with any failure to act in good faith, any trustee or officer or employee of the fund or any other person should be held personally responsible for decisions and outcomes”
If a trustee fails in a fiduciary duty or an officer fails a common law duty to the NPF board, that person may face personal liability for any loss caused by that failure of duty depending upon the circumstances. It may be a defence to an action claiming personal liability brought by the NPF board or members of the fund, if the trustee or officer can establish that he or she acted in good faith.
Throughout the schedules, the commission has found many, many instances where management as a whole, individual officers, the trustees as a whole and individual trustees, were in breach of fiduciary or common law duty. The commission has noted that fact.
In instances where the failure of duty has led to loss suffered by the fund and by its members, this is pointed out by the commission in the text and in the findings.
The commission has not, however, proceeded to determine whether or not there is personal liability or whether a defence of “acting in good faith” would succeed. This matter is left for the current NPF board, individual members and the membership as a “class” to consider.
There may be circumstances where it would be appropriate to institute court proceedings but it is not the commission’s role to make findings about personal liability.
Term of Reference 5 “Whether, under the Constitution or any Act, the responsible government agencies, including the Department of Finance and Treasury and the Auditor-General and failed in their regulatory, supervisory or reporting responsibilities, and what was the extent of this failure”
This matter has been fully reported in Schedule 1, paragraph 15 and it is outlined in Executive Summary 1, paragraphs 9 and 15.
By legislation, the NPF was obliged to invest only in accordance with the investment guidelines and had strict obligations to make quarterly and annual reports and to maintain and work to a five- year plan updated annually.
It failed to perform on all these obligations throughout the five-year period under review.
The fact that these failures persisted unrectified for five years enabled the NPF to pursue its reckless investment policies to the brink of financial ruin and somewhat over the brink, in that it suffered losses in excess of K150 million.
No agency of Government accepted the clear responsibility to supervise, report on and enforce NPF’s compliance with its planning, investing and reporting obligations.
Department of Finance
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Under the PF(M) Act, the DoF was not obliged to perform this role in relation to the NPF (because it was not a “public body” for the purpose) unless so directed by the Minister, and no such direction was given.
The DoF did, however, have an obligation to make recommendations to the Minister when required by the Minister to do so. This included the duty to give the Minister sound, analytical, expert advice on applications for approval by NPF. In most cases, it conspicuously failed its duty in this regard.
Mostly, its advice to the Minister consisted of parrot-like summaries of NPF’s submissions, lacking any critical analysis.
Evidence from senior DoF officers showed that DoF lacked the professional expertise to provide expert advice on investments and it failed to brief this role out to independent expert consultants.
Under Section 64 of the PF(M) Act, the Secretary of the DoF was empowered to oblige the NPF (and other public bodies) to report to him on the state of their finances. Under Section 64, the Secretary could instigate an investigation into its affairs.
Brown Bai utilised this section with great effect in 1999, by commissioning the Finance Inspectors’ inquiry and report. Prior to this, however, this effective tool, which could have been the salvation of NPF, was left unused. The Minister The Minister for Finance was the Minister responsible for NPF and under the PF(M) Act, was Minister responsible for monitoring all public bodies which for some (but not all) purposes, included the NPF. The Minister was also empowered to issue guidelines on investments and to give broad policy directions.
Sir Julius Chan promulgated carefully considered and appropriate guidelines in 1993.
After that, the power was unused except for one hasty and ill-advised variation by MinisterHaiveta in 1996, which allowed NPF to acquire equities in companies listed on registered stock exchanges up to K1 million per transaction, without the need to seek his approval. This opened the door to a massive increase in investments in equities in a series of less than K1 million transactions.
Mr Haiveta sought no expert advice before making this decision (Schedule 1, paragraphs 22.214.171.124, 126.96.36.199, Executive Summary, paragraph 15.12). Accounts and audit obligations The obligations and the breakdown in their performance are briefly described in Executive Summary 1 at paragraph 1 and fully reported in Schedule 1 paragraph 15.
Because NPF failed to present its annual reports from 1997 onwards, the Auditor-General was unable to perform the annual audit for presentation to the Minister and tabling in the National Parliament. This was a complete systemic breakdown from 1997 onwards.
The commission’s finding at Schedule 1, paragraph 15.4.3 are repeated in Executive Summary paragraph 9.8.
Term of Reference 6 – Structural Reforms “Whether the present reporting, monitoring and supervisory regime is adequate and whether any, and if so what, structural reforms should be implemented”
The commission was asked to report upon the adequacy of NPF’s reporting, monitoring and supervisory regime under the NPF Act and has done so at paragraphs 21 and 22 of Schedule 1, which are summarised at Executive Summary 1, paragraph 15.
After the completion of the commission’s inquiries and public hearings into structural matters were completed, the Superannuation Act 2000, was brought into force.
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The NPF has registered under the new Act as Nasfund and the NPF Act has been repealed.
The commission has nevertheless published its report about structural weaknesses and problems under the NPF Act and its recommendations for reform, which had been worked up prior to the coming into force of the new Act. This approach has validity, partly because some of the previous weaknesses and problems may still persist and our findings may therefore have direct relevance.
Also, in many ways, the NPF’s problems were not caused by weaknesses in the formal structure established under the legislation and directions made under it.
The problems were mainly caused by the way the NPF was able to ignore and disobey the clear structural requirements – regarding such things as its investment policies and reporting obligations and there was no agency to monitor its non-compliance.
The effectiveness of the Superannuation Act 2000, will to a large extent depend upon whether an effective monitoring and enforcement agency is put in place.
Throughout the schedules to this report, the commission has pointed to weaknesses caused by the power of the Minister over some of NPF’s affairs and occasional inappropriate intervention. Other weaknesses described include the inadequacies of the NPF Board of Trustees and the lack of an effective supervision and monitoring body.
The commission’s recommendations are discussed and recorded fully in paragraphs 21 and 22 of Schedule 1. In Executive Summary 1, paragraphs 15.5 to 15.34 is a full list of the commission’s recommendations for structural reform.
In general terms, the major recommendations are, in essence, to:
(a) Remove the NPF from the detailed control and influence of the Minister and the DoF, as it is a private superannuation fund;
(b) Reduce the degree of external control over the management of NPF’s affairs and investments but increase the capacity of management;
(c) Vest the control in a better-qualified board of trustees;
(d) Establish the BPNG as the external regulator of NPF and give it the staff and powers to regulate effectively;
(e) For matters still requiring imposition of external controls or guidelines the necessary powers to monitor and control should be transferred from the Minister and DoF to the Regulator (the BPNG).
(f) In order to ensure better qualified Trustees:
(i) remove all political interference from the selection and appointments process and vest power of appointment in specified organisations of employers and employees with all appointments to the board and senior management to be approved as fit and proper persons by the regulator.
(ii) Take active measures to help trustees understand and perform their roles and to understand the nature of their fiduciary duty to members of the fund. These measures should include detailed orientation or new appointees, a hand book or manual and seminars on essential aspects of trustees’ functions.
(g) Strengthen the accounting and reporting requirements and require the regulator to accept responsibility to monitor and enforce compliance.
Trustees need such help in order to understand such things as the principles of investment, the relationship between trustees and management, the nature of fiduciary duty, personal liability, the structure of NPF, benefits for members.
(h) Provide for prudential investment guidelines to be promulgated and enforced by the regulator.
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(i) Enable NPF to appoint professional fund managers onto the board of NPF or, preferably, to brief investment management to a firm of professional fund managers, which would be obliged to act within the prudential guidelines promulgated by the regulator and within policy directions of the board.
(j) Strengthen and facilitate two-way communication between members and management so that an active and informed membership can find ways to monitor the conduct and performance of management and to monitor the fund’s investment policies and strategies.
CONCLUDING COMMENTS To a very large extent, the crisis which befell the NPF was caused by a dramatic departure from the normal prudential guidelines applicable to superannuation funds, which had been spelled out explicitly in the 1993 Investment Guidelines. The reasons why this occurred lay in the personalities of the fund’s chairmen, trustees and managers in 1996 to 1999, the reckless high-risk investment strategy they pursued and the fact that they financed the investments with borrowed funds.
When the inevitable down turn in economic conditions occurred in 1997-1998, NPF was trapped.
The rapid fall in the value of its equities meant more and more scrip needed to be pledged to the banks as security for the loans.
As interest rates rose and the value of the kina fell NPF’s interest rate burden, of more than K1 million per month became unbearable. Inevitably, NPF began to default on its loan agreements with the banks and the banks then required the loans to be reduced.
This in turn required NPF’s equity assets to be sold off at a time when they had very little value – leading to massive realised losses in the members’ assets.
More than K150 million of NPF’s funds were lost in this way.
This recipe for financial disaster continued un-remedied for so long because NPF management totally failed to meet its reporting obligations and the board of trustees failed their fiduciary duties to monitor and control management.
On top of this, when NPF was at its lowest point, those charged with its management, namely its chairman Jimmy Maladina its corporate secretary/ legal officer Herman Leahy and to a lesser extent its managing director the late Henry Fabila, were involved in a criminal conspiracy and other criminal conduct. They succeeded in defrauding the NPF of millions of kina by means of excessive valuation fees, a fraudulent second acceleration claim on the NPF Tower, payment of a currency fluctuation claim on the NPF Tower, which was not legally payable and Mr Maladina’s retention of the proceeds of sale of shares in Vengold. DoF Secretary Brown Bai started the investigation and clean-up process in early 1999 and the new manager Rod Mitchell started to impose appropriate financial and managerial controls by mid- year. NPF then quickly began to address its problems. With good advice from PwC and KPMG, a rescue package was worked out.
This involved government assistance and increased employer contributions. It also involved members foregoing entitlements.
NPF then commenced the climb back to profitability, which it appears now to have been achieved as “Nasfund” under the regime created by the Superannuation Act 2000.
National Provident Fund Final Report [Part 8]
INTRODUCTION AND OVERVIEW
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Schedule 1 reports upon the legislative and policy framework within which it was intended that the National Provident Fund (NPF) should operate.
It records how NPF management and trustees frequently operated outside of that structure and how, by 1999, that structure had, to a significant extent, broken down in key areas, such as the constitutional integrity of the NPF board, internal governance, accounting, compliance by contributors, investment strategies, reporting obligations and external monitoring and controls. Specific matters, which received detailed investigation, are reported upon in Appendices 1 to 21 that are attached to Schedule 1.
On August 11 and 15, 2000, the commission conducted a seminar in the form of a public hearing to seek the views of 78 participants about the effectiveness of the legislative and administrative structure for the NPF. The proceedings were recorded at transcript pp. 1-121. The report on the seminar is included as Appendix 23 to Schedule 1.
Just prior to presenting this report, the new Superannuation Act 2000 was brought into force and NPF restructured itself and was licensed under the new Act under the name of Nasfund. The NPF Act was then repealed in its entirety and Nasfund now operates under the provisions of the Superannuation Act 2000.
In this schedule, the commission presents its findings and recommendations regarding the legislative structure which applied to the NPF in the years January 1, 1995 to December 31, 1999. Despite the fact that the Act has been repealed, the schedule continues to talk about the NPF and the NPF Act in the present tense, as if the NPF Act and the NPF still exist.
This is partly to ensure that the commission’s report is faithful to its terms of reference and partly because it will be of current benefit to understand how the previous structure was largely by- passed by the former trustees and management with impunity and to consider whether the new structure put in place under the Superannuation Act 2000 successfully overcomes the previous weaknesses.
NPF Act and Rules NPF is given corporate status and its powers and functions are strictly defined under the NPF Act.
Expenditure of funds is limited to NPF’s objectives and powers as defined in the NPF Act, or other legislation. It is, for instance and importantly, not given the power to borrow or pledge its assets.
It was naturally assumed that NPF’s governing board of trustees would be properly constituted in accordance with the provisions of the Act so that its decisions would be legally valid.
The Act established the NPF as an accumulated benefits superannuation fund for private sector employees. All private employment establishments employing 25 or more employees are required to join the fund, with employers and employees all contributing a percentage of the employee’s wages to be received by the fund and credited to the member’s account. NPF’s funds must be properly accounted for and deposited into a certified bank and invested in accordance with guidelines promulgated by the Minister.
The Act provides that the Minister with responsibility for financial matters, have portfolio responsibility for NPF, with powers regarding appointments to the managing board and some powers regarding termination of appointments.
Under the Public Finances (Management) Act 1995 (PF(M) Act 1995), the Minister was given powers to approve major transactions and investments. Under Section 26 of the NPF Act, the Minister is empowered to promulgate guidelines for NPF’s investments.
It was envisaged that the Minister would receive reports and financial statements on the progress and health of the fund and that these reports and statements would be audited by the Auditor- General and tabled in Parliament.
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The Act established that the governing body of the NPF would be a board of trustees consisting of a mix of trustees from the public service (two), from private enterprise (three) and representing employees (three). The managing director would also serve on the board as a trustee.
The legislation The major pieces of relevant legislation are:-
1. The PF(M) Act; 2. The Audit Act and 3. The Salaries and Conditions Monitoring Act. The NPF Act 1995 establishes the NPF as an accumulated benefits fund for all workers employed in private enterprise employment establishments employing 25 or more employees unless an exemption has been granted under Section 3(6) or 42, of the Act. Participation is compulsory (The amendment repealing subsection 3(6) was not brought into force).
The NPF falls within the portfolio of the Minister responsible for PNG financial affairs (the Minister) and it is governed by a board of trustees (the NPF board), consisting of two representatives of the public service, three representatives of employers and three representatives of employees. The NPF board is chaired by the Secretary for the department responsible for managing the country’s financial affairs, referred to here as the Department of Finance (DoF).
The Managing Director The management of NPF is headed by a managing director appointed by the Minister after prior consultation with the board (Section 15), who is also a member of the board of trustees and is therefore himself a trustee pursuant to Section 6(1)(d).
Officers The managing director has control of the officers appointed by the NPF board on the recommendation of the managing director (Section 19).
Employees Beneath the officers are the employees of the fund, appointed by the managing director with the approval of the board (Section 21).
Contributions and compliance Part V of the NPF Act provides for employers to contribute an amount equal to 7 per cent and employees to contribute 5 per cent of each employee’s monthly wage actually drawn. Section 35 obliges the NPF to credit to each member all amounts paid on his behalf.
Section 37 enables the managing director to charge a penalty interest to employers on overdue contributions. Failure to comply is also an offence (Section 36).
Withdrawals and payments from the Fund Section 49 provides a mechanism whereby the managing director may approve a withdrawal to purchase a dwelling house or site or materials for a dwelling to a maximum limit of 24 times the member’s monthly pay.
Section 52 provides for withdrawal of the full amount standing to the credit of the member’s account on retirement after attaining 55 years, on attaining 55 years after previous retirement, on retirement due to total and permanent incapacity; or immediately prior to permanent emigration from PNG.
Reporting and external supervision Although the NPF is designed to be independent of government control and interference, the legislation provides for a framework of external monitoring and supervision and for broad policy guidelines and directives on investment policies to be issued by the Minister (Section 26(2)) within which the NPF board and management is obliged to operate.
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The NPF Act specifies rules for banking and investing the funds and the Minister is empowered to issue policy guidelines on investments (Section 26 of the NPF Act). Section 30 (now subsumed by Section 63 of the PF(M) Act) requires NPF to submit an annual report to the Minister and to also submit the report to the Auditor-General who, pursuant to Section 29, shall report the result of his audit to be Minister, who, in turn, is obliged to submit the audited report to Parliament each year.
Section 63(2)(b) of the PF(M) Act requires NPF to report quarterly to the Minister on all investment decisions and to provide an annual report on investment performance and an updated five year rolling plan on investment strategies and administrative systems. How this structure, which requires NPF to have in place and to report upon investment strategies and plans, was ignored, is set out in paragraph 16 of Schedule 1.
The formal legislative and administrative structure in place for NPF between 1995 and 1999 is shown in Table 1 below.
Trustees Schedule 1 reports how the members of the NPF board failed to appreciate and to perform their fiduciary duty as trustees and how this leaves them open to personal liability for loss suffered by the fund and its members, arising from their breach of fiduciary duty. It reports in detail how the repeated irregularities in the appointment and termination of trustees seriously compromised the legal validity of the NPF board. It clearly demonstrates that no single agency was responsible for ensuring that the board was validly established at all times and that appointments and terminations were constitutional.
Problems regarding the determination of trustees’ expenses and allowances are studied in detail, as are the failures to properly administer and account for payments of these allowances to trustees. These are reported at paragraph five and in Appendix 16.
Managing Director Similar problems with the appointment, termination of appointment and determination of terms and conditions of employment of the managing director are reported in paragraphs 5.4 and 5.4.5 of Schedule 1 which shows how the provisions of Section 15(2) of the NPF Act, requiring a determination by the Minister acting with the advice of the board were ignored in favour of signing a contract of employment with very favourable terms for early termination in defiance of the statutory provisions.
Officers The appointment, termination and conditions of employment of the other officers are reported upon in paragraph 6 of the Schedule and how the necessity to obtain the approval of the Salaries and Conditions Monitoring Committee (SCMC) was ignored, which had the effect of making the contracts void.
The senior officers were given additional remuneration in the form of a senior officers bonus scheme, which was inappropriate and led to irregular accounting techniques in order to artificially boost the profit-based bonus payments.
In reporting upon the nature and defects of the bonus scheme the commission has made a detailed study of the ineffectiveness of NPF management and financial planning which is reported in detail as specific matter number 20 in Appendix 20.
As with the trustees, the commission has found that there were serious irregularities regarding the determination and administration of expenses and allowances for officers. These are reported at paragraph 8.6.
Employees The fairly favourable conditions of employment of employees and their access to a home ownership scheme and staff performance benefits are reported in paragraph 9 of Schedule 1.
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After the departure of experienced and well trained staff prior to January 1995, NPF suffered from a serious lack of experienced and well trained work force and this is clearly reflected in the lack of efficiency reported upon by the Auditor-General, Pricewaterhouse Coopers (PwC) and KPMG.
There were attempts to restructure all staff positions at NPF. This resulted, however, only in a restructure and salary increase for senior officers.
Overview of officers and employees Paragraph 10 of Schedule 1 provides a detailed overview of NPF’s management problems and deficiencies as reported by the Auditor-General, PwC and KPMG, which the commission adopts as part of its own findings.
Board forum and decision-making The structure created for NPF envisioned that decisions would be made by the NPF board in properly constituted board meetings, unless delegated to management.
In paragraph 11, the commission reports on ultra vires decision-making by management; failure by management to properly brief and inform the board prior to seeking a board resolution; decision-making by “circular resolutions” and the board’s frequent failure to obtain the required approval by the Minister for decisions involving transactions over K300,000 (later increased to K500,000).
The problem caused by the participation in board meetings of invalidly “appointed” Trustees is also discussed.
The relationship between structural problems and losses suffered by NPF NPF failed to develop investment policies and strategies and to report upon them quarterly as required.
Instead, it embarked upon a wholly inappropriate series of high-risk investments in PNG resource and other shares.
It ignored the structural requirement to confine its activities within the boundaries of its statute- given powers. Most notably it borrowed the funds to make these investments, which was beyond its powers.
The NPF board was required to confine its investments within the guidelines set by Sir Julius Chan in November 1993. Its failure to do so was a breach of fiduciary duty by each trustee in office during the period in which these investments were made and retained. Most of
NPF’s huge losses resulted from stepping outside the set structure governing its activities in this way.
The reason these activities and the mounting losses continued for so long is that NPF also ignored the obligatory structural requirement that it report quarterly and annually to the Minister. DoF must have been aware of this but felt no obligation to monitor and rectify the situation.
This was a serious gap in the structure of reporting. With NPF’s reporting to the Minister having broken down, it meant that the Auditor-General’s audit and reporting system also failed to operate, as it required the receipt from NPF of its report to the Minister to set the audit procedures in motion.
Weak governance within NPF was a significant contributing factor to the losses, which NPF suffered.
For most of the time, trustees were badly informed by management and seemed content to passively attend meetings, draw their allowances, sign circular resolutions and not inquire what management was doing.
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The managing directors and investment managers rarely sought expert advice, relying on their own ego-driven and extreme views of what were suitable investments and activities for a provident fund.
The trustees almost never questioned or criticised management and never insisted on being given independent expert advice. In this manner, the trustees meekly went along with management’s recommendations to borrow funds for high-risk equity transactions, to invest millions of kina inCrocodile Catering and its foolish Indonesian adventures, to attempt to issue a $A54 million bond and to construct the NPF Tower. Having embarked upon those ventures, the trustees did not insist upon strict accounting and reports by management as to their progress and NPF’s financial situation.
Criminal conspiracies In 1999, while NPF’s financial lifeblood was haemorrhaging and it was facing bankruptcy and the complete loss of its member’s funds, its chairman Jimmy Maladina and its legal counsel/board secretary Herman Leahy, with the complicity of its managing director Henry Fabila, in defiance of all legal constraints, set about defrauding the NPF by means of the Waigani land deal and the NPF Tower construction fraud. These criminal conspiracies caused a further loss of just under K3 million to the Fund. This executive summary will now present the major findings made by the commission in Schedule 1 with a brief summary of the relevant context. References to the relevant paragraphs in Schedule 1 and to the relevant appendix are given.
IRREGULARITIES IN APPOINTMENTS, TERMINATIONS AND CONDITIONS OF TRUSTEES AND OFFICERS The structural framework for appointing, removing and remunerating trustees and officers, was carefully specified in the NPF Act. The administration of the process was so poor, however, that it undermined the constitutional legality of the board and the integrity and efficiency of the officers.
Schedule 1 examines these processes in great detail in paragraphs 4, 5 and 6. This executive summary first postulates the formal structure as intended by the Act and then tabulates the period of incumbency of successive trustees, chairmen, managing directors and officer holders, pointing out any irregularities in tabular form.
Finally, this section of the summary sets out the commission’s findings on appointments, terminations and remunerations with brief contextual comments.
The structural framework for appointments, removals and the remuneration of office holders The Board of Trustees The tripartite structure of the board is designed to give representation to the public service (two trustees), the employers (three trustees) and the employees (three trustees).
Appointment of Trustees The public service representative trustees are appointed by the Minister to ensure that the board contains their professional expertise and to allow for an informal avenue of co-ordination and communication between the NPF and the public service and government (the intention was frustrated because the senior public service representative Iamo Vele rarely attended board meetings. On several significant matters his role as a trustee was in direct conflict with his role as a senior DoF officer). The employer representative trustees are to be appointed by the Minister from a panel of names submitted by organisations representing employers. This is designed to ensure that this category of trustee is made up of trustees acceptable to the contributing employer establishments (The appointment of Mr Maladina as a trustee was in breach of this requirement).
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The employee representative trustees are to be appointed by the Minister from a panel of names submitted by an organisation representing employees (traditionally the PNG Federation of Trade Unions).
Termination of appointment of Trustees The employer and employee representative trustees are appointed for fixed three year terms subject to terminations upon grounds set out in the Act, and not otherwise.
Section 10 provides mandatory grounds upon which the Minister shall terminate a trustee’s appointment if (relevantly), the trustee:
(c) resigns his office by writing under his hand addressed to the Minister;
(d) absents himself from three consecutive meetings without the written consent of the chairman;
(e) . . .
(f) . . .
(g) being a person appointed under Section 6(1)(e), ceases to be an employee;
(h) being a person appointed under Section 6(1)(f) ceases to be an employer.
Section 10(2) allows the Minister to terminate a trustee’s appointment on the clearly stated grounds of:
“. . . inability, inefficiency, incapacity or misbehaviour”.
These are the only legitimate grounds for termination, yet there were many purported terminations on other grounds.
Where the Minister terminates an appointment, Sub-section 10(3) provides that the Minister shall, by notice in the Gazette, declare the office vacant and sub-section 10(4) provides it shall then be filled in accordance with Section 6.
Schedule 1 traces the history of the appointment and termination of appointment of trustees in detail.
As there were so many irregularities and so little care taken to follow the provisions of the Act, that the board was improperly constituted for long periods of time, which throws the legality of major board decisions into doubt. These irregularities are set out in Table 1 of this executive summary and the commission’s findings on this aspect are set out at paragraph 3 of this Executive Summary.
The chairman Section (6)(1)(a) provides that the chairman shall be the Secretary of the DoF or his nominee approved by the Minister (An amendment to Section 6 which was enacted by Act No. 40 of 1986, was never brought into force).
Expenses and allowances of Trustees The Act provides for board expenses and allowances to be determined by the Prime Minister and this power was never delegated.
Schedule 1 shows how the power was illegally exercised by Acting Minister Konga (paragraph 5.3.5) and how the NPF board itself illegally increased its own expenses and allowances (paragraph 5.2.2).
The Finance inspectors’ report has traced serious irregularities in the way board expenses and allowances were administered and calculated and the commission has recommended a full audit and recovery action to be implemented in order to recover the vast increase in expenses and allowances (paragraph 188.8.131.52 and Appendix 16).
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There are no provisions for granting additional allowances for the chairman (i.e. the Secretary of the DoF or his nominee).
The managing director Section 15 of the NPF Act provides that the managing director will be the chief executive of the board and head of the staff.
He is appointed by the Minister by notice in the Gazette after prior consultation with the board.
Sub-section 15(2) provides that the managing director’s salary and conditions shall be determined by the Minister, acting with the advice of the board.
Vacation and termination of office are provided for in Section 16 if the managing director:-
(a) becomes incapable;
(c) undertakes outside work without board’s consent;
(d) becomes bankrupt;
(e) is guilty of moral turpitude; the board shall terminate his employment.
Under sub-section 16(2), the board may, with the approval of the Minister, terminate the managing director’s appointment for “inability, inefficiency, incapacity or misbehaviour”.
There is no room for the managing director to be engaged on different terms pursuant to a contract of employment or for his appointment to be terminated on grounds other than those specified in section 16, yet these things happened.
Officers Section 19 provides that the board may appoint officers of the board on the recommendation of the managing director. Conditions of service of officers may be prescribed in the rules.
Though not stated in the NPF Act, it is clear that the remuneration of officers is subject to the SCMC Act. SCMC approval was, however, rarely sought for officers’ remuneration and conditions, including the benefit of the senior staff bonus scheme.
Other employees By Section 21 of the NPF Act, the managing director may, with the approval of the board, appoint other employees on terms and conditions determined by the board. Their remuneration is also subject to SCMC approval, which was rarely sought.
Periods of appointment The periods of office of the successive Minister, secretaries of DoF, chairmen of the NPF board, trustees and managing directors are set out in a graph at Appendix 22 to this executive schedule.
Dates of appointment The dates of appointment to and vacation of office of the successive Ministers, chairmen of the NPF board, trustees and managing directors and officers of the board are set out in the following table, noting all major irregularities, with references to paragraphs in
Schedule 1 and its appendices.
DATES OF APPOINTMENT AND VACATION OF OFFICE NOTING MAJOR IRREGULARITIES Position: Minister Name: Chris Haiveta Period: January 1, 1995 – August 26, 1997
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Position: Minister Name: Iairo Lasaro Period: September 29, 1997 to August 2, 1999
Position: Minister Name: Sir Mekere Morauta Period: August 1, 1999 to December 31, 1999
Position: Chairman Name: Gerea Aopi Period: January 1, 1995 to October 3, 1995
Irregularity: Held position of chairman by virtue of being Secretary of the DoF and vacated the chairmanship on ceasing to be Secretary.
Position: Chairman Name: Rupa Mulina Period: October 3, 1995 to January 11, 1996
Irregularity: Mr Mulina became chairman by virtue of his appointment as Secretary of the DoF. He sensed a conflict of interest and willingly complied with Minister Haiveta’s request to nominate Evoa Lalatute in his place. Minister Haiveta proceeded, however, to appoint MrLalatute himself, illegally on December 13, 1995. On January 19, 1996, Mr Mulina then signed a nomination of Mr Lalatute which was backdated to December 1995 Position: Chairman Name: Evoa Lalatute Period: January 11, 1996 to October 18, 1996
Irregularity: Minister Haiveta’s appointment of Mr Lalatute was beyond power and invalid. This mistake was purportedly corrected when Mr Mulina nominated Mr Lalatute on January 19, 1996 by backdated nomination. Mr Lalatute’s appointment was later wrongly terminated by MinisterHaiveta. Only the Secretary of the DoF, Mr Mulina, had the power to terminate Mr Lalatute’s chairmanship which he should have done by revoking his nomination. The termination of MrLalatute’s appointment by Minister Haiveta was, therefore, ineffective. Position: Chairman Name: David Copland Period: April 18, 1996 to January 15, 1998
Irregularity: Mr Copland’s initial appointment was tainted by the failure to properly terminate Mr Lalatute’s appointment. Mr Copland’s appointment was probably ineffective. Mr Copland’s subsequent periods as acting chairman was by resolution of board meetings from which Mr Vele was absent. Mr Copland’s appointment was purportedly terminated by Minister Lasaro but no proper ground was stated and it was not gazetted as required by the Act. Position: Chairman Name: Morea Vele Period: January 15, 1998 to August 4, 1998
Irregularity: Mr Vele assumed the role of chairman after his appointment as Secretary of DoF. He then absented himself for nine months without nomination of a successor.
Position: Chairman Name: Brown Bai Period: September 1, 1998 to January 27, 1999
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Irregularity: Mr Bai actively assumed the role as Secretary of the DoF/chairman when appointed as Secretary DoF. Under pressure from Minister Lasaro and Prime Minister Bill Skate, he stood down and nominated Jimmy Maladina as chairman. Position: Chairman Name: Jimmy Maladina Period: January 27, 1999 to December 31, 1999
Irregularity: Mr Maladina’s appointment was planned by Prime Minister Skate and MinisterLasaro with the assistance of Herman Leahy. Mr Maladina’s appointment as chairman (and as employer representative trustee) was strongly opposed by the Employers Federation who issued a Writ seeking a Court injunction. Position: Public Service Trustees (Not more than two) Name: Vele Iamo Period: February 12, 1993 to january 1, 1999
Irregularity: Mr Iamo was a senior officer in the DoF. He was frequently absent without permission for more than three consecutive board meetings, which should have resulted in obligatory termination of his appointment by the Minister (Section 10 – NPF Act). This did not happen. He was eventually terminated for political reasons by Minister Lasaro for no stated ground and without gazettal as required under the Act. The termination was invalid. Name: Alphmeledy Joel Period: January 28, 1994 to February 9, 1995
Irregularity: No irregularities
Name: Evoa Lalatute Period: May 18, 1995 — no formal termination
Irregularity: Carried on as trustee after his chairmanship was revoked. No resignation, formal termination or gazettal. Uncertainty about cessation of his appointment taints the appointment of his successor with legal uncertainty.
Name: Gerea Aopi Period: February 8 to August 28, 1998
Irregularity: Mr Aopi was appointed as public service representative trustee prior to completion of Mr Lalatute vacating office as a trustee. As there were still two public service trustees, there was no vacancy for Mr Aopi in this category, so his appointment was invalid. Name: Abel Koivi Period: April 1, 1996 to January 19, 1999
Irregularity: Appointment was invalid because there was no vacancy in this category of trustee. Mr Koivi was an officer with Air Niugini when it was privatised at which time he ceased to be a public servant and was no longer qualified to be a public servant representative trustee, but he remained in the position. Two years and five moths later, Herman Leahy attempted to rectify the situation by having Mr Koivi’s Air Niugini position declared to be an office in the public service. The termination of his office as trustee by Mr Skate as acting Minister was without prescribed ground and was not gazetted as required. Name: Brown Bai Period: January 19, 1999 to December 31, 1999
Irregularity:After he stood down as chairman (under pressure) Mr Bai remained Secretary of the DoF and he was also appointed as a public service representative trustee. Whether Mr Bai’s appointment was valid depends upon whether the irregular termination of the appointments of MrIamo and Mr Koivi were effective.
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After appointment Mr Bai absented himself without permission from many more than three consecutive meetings making himself liable for obligatory termination by the Minister. This did not happen. Name: Mickey Tamarua Period: January 19, 1999 to October 29, 1999
Irregularity: The validly of Mr Tamarua’s appointment depends on whether the termination of the appointments of Mr Iamo and Mr Koivi were valid — otherwise there was no vacant public service representative trustee position for him to fill. Mr Tamarua’s termination as a trustee was sudden, with no grounds given and no gazettal. Consequently, formal date of his termination and its legality is uncertain.
* Three Employee Representative Trustees Name: John Paska Period: February 12, 1993 to February 7, 1999 and February 19, 1999 to December 31, 1999
Irregularity: Mr Paska’s appointment was allowed to expire on February 6, 1999, leaving a gap before his reappointment. Mr Fabila and Mr Leahy exploited this situation to reintroduce the proposal to buy the Waigani land in Mr Paska’s absence Name: Michael Gwaibo Period: February 12 1993 to February 7, 1999
Irregularity: No irregularity. His appointment was allowed to expire. For a long period, there was no third employee representative trustee.
National Provident Fund Final Report [Part 9]
Three Employee Representative Trustees Position: Trustee Name: Henry Leonard Period: May 18, 1995 to May 17, 1998 and January 1, 1999 to December 21, 1999 Irregularity The only irregularity is that after his first term expired on May 17, 1998, a period of seven months was allowed to elapse before his reappointment. During that period, there were only two employee representative trustees. Three Employer Representative Trustees Position: Trustee Name: Graham Hogg Period: February 12, 1993 to February 11, 1996 Irregularity No irregularities Position: Trustee Name: Isikeli Taureka Period: February 12, 1993 to December 1997 Irregularity Mr Taureka apparently resigned in about December 1997. It was not gazetted as required by the NPF Act. The vacancy was not filled for over 12 months. Position: Trustee Name: David Copland Period: September 1, 1998 Irregularity Mr Copland was allowed to continue as an employer representative trustee long after he ceased to be an employer – in contravention of the Act. The stated ground for termination was not a prescribed ground under the Act.
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Position: Trustee Name: Tau Nana Period: February 8, 1996 to February 7, 1999 and April 20, 1999 to December 31, 1999 Irregularity Once again, there was a gap between the end of Mr Nana’s first term and his reappointment. For a period Mr Nana was the only employer representative trustee. Mr Nana’s second appointment was invalid as there was no vacant employer trustee position available. Position: Trustee Name: Nathaniel Poiya Period: January 19, 1999 to December 31, 1999 Irregularity No irregularity Position: Trustee Name: Jimmy Maladina Period: January 19, 1999 to December 31, 1999 Irregularity This controversial appointment was opposed by the employers federation on the ground that his name had not been put forward by an organisation representing employers. Court action was settled on the basis that Mr Maladina would resign as trustee. He did not do so. Position: Trustee Name: Wayne Golding Period: February 18, 1999 to March 13, 1999 Irregularity Mr Golding was appointed by Minister Lasaro as an employer’s representative trustee. The appointment was invalid as there was no vacancy for an employer’s representative trustee and because his name had not been put forward by an organisation representing employers. When the employers federation threatened court action, his appointment was terminated. Position: Managing Director Name: Robert Kaul Period: July 5, 1993 to May 5, 1998 Irregularity His initial appointment was in accordance with the NPF Act but his conditions of employment were agreed by way of a personal contract of employment, with generous early termination clause. This was contrary to the provisions of Section 15 of the NPF Act, which required a Ministerial determination after prior consultation with the NPF board. Revocation of his appointment by Minister Lasaro was improper and ineffective. It coincided with conflict between Mr Kaul and Mr Lasaro over claim for exemption by Masurina Group of Companies. Position: Managing Director Name: Henry Fabila Period: ? Irregularity His initial appointment was invalid as Mr Kaul had not vacated the position. The signing of personal contract of employment was contrary to the NPF Act. Findings regarding the appointment of chairmen to the NPF Board Appointment of Evoa Lalatute Minister Haiveta’s precipitate conduct in purporting to appoint Mr Lalatute, as chairman of the NPF board was improper and ineffective. The proper way to make the appointment was for the Secretary of the DoF Rupa Mulina to nominate him as chairman and for the Minister to then approve the nomination. Mr Mulina’s attempt to regularise the appointment by way of a backdated nomination may be ineffective. Findings
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(a) Minister Haiveta had no legal power to appoint a chairman to the NPF board. His appointment of Mr Lalatute as chairman on December 13, 1995 was therefore illegal and improper. (b) It is not appropriate for NPF management to be involved in giving advice to the Minister and DoF on the appointment of a trustee and to draft the required legal documents. (c) The improper appointment resulted from Mr Haiveta’s enthusiasm for achieving results by exercising power and because DoF and Mr Mulina did not insist on asserting DoF’s primary role as Ministerial advisor and implementer of Minister’s decisions. There was nothing sinister in the replacement of Mr Mulina by Mr Lalatute, however. (d) In an attempt to regularise Mr Lalatute’s appointment, Mr Mulina nominated MrLalatute to replace himself as chairman on January 19, 1996 pursuant to Section 6(1)(b) of the NPF Act. The instrument of nomination was however, backdated to December 1, 1996, in order to give the appearance that the initial appointment of Mr Lalatute had been done in accordance with the Act. The validity of Mr Lalatute’s appointment is questionable.
Revocation of Mr Lalatute’s appointment as Chairman The proper way to revoke this appointment was for Mr Lalatute to resign or else for the Secretary of the DoF Mr Mulina, to withdraw his nomination. Instead, Minister Haiveta purported to rescind the appointment and published a notice in the Gazette approving the revocation of Mr Lalatute’s appointment as chairman.
Mr Mulina did not withdraw Mr Lalatute’s nomination as chairman and there is no documentary evidence that Mr Lalatute ever resigned in writing given to the Minister, as required by the Act. No termination of Mr Lalatute’s appointment was ever gazetted. Nor is there evidence that MrLalatute’s appointment as a trustee was ever properly terminated. The uncertainty about Mr Lalatute’s termination as a public service representative trustee and as chairman throws up doubts about the legality of the appointments of his successors as chairman and trustee. Findings
(a) Mr Lalatute’s appointment as chairman of the NPF board on the nomination of the previous chairman Rupa Mulina was never properly revoked or otherwise terminated prior to the appointment of his replacement as chairman – David Copland. (b) The appointment of Mr Copland as chairman of the NPF board was not valid as the position was not vacant. (c) The appointment of Mr Lalatute as a trustee representing the public service was not validly terminated. (d) The appointment of Gerea Aopi to replace Mr Lalatute as a public service representative trustee was not valid as there was no vacancy in that category of trustee position at that time. (e) The managing director of NPF had no power to recommend trustees to the Minister and DoF to be appointed to the NPF board. (f) DoF failed to assert itself as the prime authority to advise and support the Minister in these matters. This left a bureaucratic vacuum, which NPF management attempted to fill. (g) In consequence there is serious doubt about the legality of Mr Lalatute’s vacating the office of chairman and consequently there is also doubt about the validity of Mr Copland’s appointment as chairman. Role of Morea Vele The new Secretary of the DoF assumed the role of chairman by revoking Mr Copland’s nomination but then failed to attend meetings. Findings
(a) Mr Vele’s failure for a period of almost six months (February 15 to August 4, 1998) to attend to his duties as NPF chairman or, alternatively, to nominate a person to occupy the position of chairman at and between meetings was a breach of his fiduciary duty to the members of the fund. (b) There is no evidence that Mr Vele was under any political or other external pressure to not perform his role as chairman.
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David Copland – termination of appointment as a Trustee In the absence of Mr Vele from meetings, Mr Copland was repeatedly appointed acting chairman, even after he ceased to be an employer. When he was finally terminated as a trustee no valid ground was stated. The correct grounds for terminating Mr Copland should have been under Section 10(1)(h) of the Act (ceasing to be an employer). Findings
(a) After Mr Copland ceased to be a representative employer in PNG he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act. (b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds. Brown Bai After Mr Bai became Secretary of the DoF on September 1, 1998, he performed actively as chairman of the NPF board. He stood down reluctantly and nominated Jimmy Maladina as chairman under pressure from Minister Lasaro and Prime Minister Bill Skate, who exerted strong and improper pressure to have Mr Maladina appointed as a trustee and as chairman. Findings
(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1)(e) of the NPF Act. (b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator, Mr Maladina. (c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion. (d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper. (e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board. (f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Minister Lasaro and Prime MinisterSkate. (g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees. (h) Mr Bai’s failure to attend meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund. (i) Mr Maladina’s failure to formally resign his position of employer representative trustee, as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment, as there was no vacancy for him to fill. Findings regarding appointments of Trustees to the NPF Board
Vele Iamo Mr Iamo’s repeated absences from NPF board meetings deprived the board of the benefit of his expertise. Even though it was caused by pressure of other important work it was a breach of his fiduciary duty to the members of the fund. After absenting himself without permission of the chairman for more than three consecutive meetings, it was obligatory for the Minister to terminate Mr Vele’s appointment. This did not happen for several years. The belated termination of Mr Iamo’s office of trustee was irregular.
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(a) Mr Iamo failed in his fiduciary duty to NPF when he failed to regularly attend board meetings. (b) Mr Frank and Mr Leahy failed in their fiduciary duties by not advising the board about the legal position concerning Mr Iamo’s continuous absences from board meetings. (c) Minister Lasaro failed to make a clear-cut and publicly gazetted termination of Mr Iamo’s appointment, before advertising for applications to fill the non-existing vacancy in his position. (d) Mr Iamo’s frequent absences from NPF board meetings were because of his extremely busy schedule as a senior officer of the DoF, which obliged him to attend a great many board and other meetings. Expecting senior officers to hold responsible positions on so many boards amounted to a structural weakness in the NPF Act. (e) There were many instances where Mr Iamo’s role as a senior officer of DoF was in direct conflict with his role as a trustee of NPF, especially when he was promoting the Government’s interests while advising/requesting NPF to assist the State by, for instance, purchasing Government bonds or road stock. Evoa Lalatute There was confusion about Mr Lalatute’s position as a trustee after he ceased to be chairman because proper procedures were not followed.
As Mr Lalatute never resigned as a trustee and as his appointment was never formally terminated, it throws legal doubt about the subsequent appointment of Gerea Aopi as a public service representative trustee, as there was no vacancy in that category of trustee at the time of his purported appointment. Gerea Aopi Mr Aopi’s appointment as a public service trustee occurred before there was a vacancy, as Mr Lalatute was still a public service trustee. There were, therefore, too many public service trustees for over 21/2 years, from February 8, 1996 until August 28, 1998.
(a) The failure to follow the prescribed procedures in the NPF Act regarding appointment and termination of trustees continued to undermine the constitutional validity of the NPF Board of Trustees up until Mr Aopi’s resignation on August 28, 1998. (b) Primary responsibility for this situation is the failure of DoF to accept responsibility for managing these changes to the NPF board and Mr Leahy’s failure to proactively provide timely and professional advice as legal counsel and corporate secretary. (c) It seems there was more than the maximum allowed number of public service representative trustees for more than 21/2 years throwing doubt on the legality of the NPF board and all its decisions in that period. Abel Koivi Mr Koivi was appointed as a public service representative trustee because he held a position with Air Niugini when it was Government owned. The appointment was invalid because there was no vacancy for a public service representative trustee at that time.
When Air Niugini was privatised, Mr Koivi was no longer a public servant and therefore he was not qualified to hold this position.
Mr Leahy attempted to “qualify” him by arranging for his job with Air Niugini to be declared an office in the public service.
(a) Mr Koivi was initially appointed to the NPF board on April 1, 1996, when there was no vacancy for a public service representative trustee and without following prescribed procedures. His appointment was therefore invalid.
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(b) This irregularity became known to Mr Leahy who on August 5, 1997, advised managing director Kaul of the fact and the legal consequences, but did not pursue the matter to rectification. (c) When an attempt was made to regularise Mr Koivi’s appointment as a public service representative trustee he was no longer in the public service. (d) Following Mr Leahy’s advice, NPF management sought to overcome this impediment by declaring the position to be a public service office by declaration under Section 3(5) of the Interpretation Act. This was done surreptitiously, without notifying DoF or the Minister about the reasons for this deft legal manoeuvre. It is not certain whether or not this finally regularised Mr Koivi’s appointment, two years and five months after it had been made. (e) When it was decided to terminate Mr Koivi’s appointment, he was given no notice and it was done by Prime Minister and Acting Minister Skate, irregularly and not upon any grounds specified under Section 10 of the NPF Act, as required. The effectiveness of the formal termination of appointment is therefore in doubt. Brown Bai When appointed a trustee after he stood down as chairman, Mr Bai continuously failed to attend meetings. His appointment was not terminated as required by Section 10(1)(d) of the NPF Act.
(a) Because of slackness in the way appointments and terminations of office of trustees were handled, the NPF board of trustees was improperly constituted for almost two years and five months from early 1996 until August 28, 1998. (b) This situation was known by Mr Vele, Mr Kaul, Mr Fabila and mr Leahy. (c) It raises doubts about the legality of NPF board decisions and contracts during a period when there were very significant transactions involving many millions of kina. (d) Mr Leahy failed in his duties by not taking immediate and appropriate action to ensure the board was properly constituted as far as public service trustees are concerned. (e) The DoF failed in its duties by not ensuring that the matter of the constitution of the NPF board under Section 6(1)(c) of the NPF Act was properly managed. (f) The commission recommends that the monitoring of the constitutional integrity of statutory corporations should be the responsibility of a single agency and that the statutory instruments should always be prepared in the office of the First Legislative Counsel. Findings regarding the appointments of three employee representative Trustees There were no substantial irregularities in the appointment and terminations of appointment of the employee representative trustees — Mr Paska, Mr Gwaibo and Mr Leonard. The only serious irregularity was that for substantial periods, there were only two employee representative trustees instead of the prescribed three.
Findings regarding the appointments of three employer representative Trustees Graham Hogg There were no irregularities. Isikeli Taureka Mr Taureka resigned for personal reasons about December 1997. There is an air of uncertainty, as his resignation was not gazetted as required under Section 10(3) of the NPF Act. The vacancy caused by his departure was allowed to remain vacant for 12 months.
David Copland After being illegally allowed to continue as an employer representative trustee, after ceasing to be an employer, Mr Copland’s appointment was terminated on a ground, which was not prescribed in Section 10 of the NPF Act.
(a) After Mr Copland ceased to be a representative employer in PNG, he was allowed to continue as a trustee in contravention of Section 10(1)(h) of the NPF Act. (b) The reason given in the letter to Mr Copland for his termination was not one of the reasons for
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termination prescribed in the NPF Act. This illustrates the inherent dangers of relying on NPF management for advice instead of taking advice on matters about the appointment and termination of trustees from the appropriate line department or agency, to ensure action is taken on proper legal grounds. Mr Copland’s vacancy was not filled immediately and for a period, Mr Nana was the only employer representative trustee on the board.
Tau Nana There were no irregularities except the two-month delay in reappointing him. For a period, Mr Nana was the only employer representative trustee.
Jimmy Maladina There was considerable controversy surrounding Mr Maladina’s appointment as employer representative trustee as for a long while no valid organisation representative of employers was willing to nominate him for consideration by the Minister. It involved much political pressure and contrived nominations.
In evidence before the commission, Mr Skate and Mr Lasaro each blamed the other for the appointment of Mr Maladina.
(a) The nomination of Mr Maladina to be an employers’ representative trustee was not from an organisation of employers and hence did not satisfy the requirements of Section 6(1) (e) of the NPF Act. (b) Mr Leahy’s legal advice on this subject was seriously flawed in favour of the appointment of his friend and fellow conspirator Mr Maladina. (c) The involvement of NPF management in giving advice to the Minister regarding Mr Maladina’s appointment as a trustee and in preparing instruments for gazettal was inappropriate. It led to wrong advice, faulty instruments, legally ineffective appointments and great confusion. (d) There was direct contact and plotting between Mr Leahy and Mr Maladina during the struggle to achieve Mr Maladina’s appointment as trustee and chairman of the board. This was inappropriate and improper. (e) Minister Lasaro and Prime Minister Skate exercised improper influence to obtain the appointment of Mr Maladina as a trustee and then as chairman of the board. (f) Mr Bai’s decision to stand down as chairman of NPF and to nominate Mr Maladina in his place was due to the improper pressure exerted by Mr Lasaro and Prime Minister Skate. (g) It is recommended to the constituting authority that Mr Skate and Mr Lasaro be referred to the Ombudsman Commission to investigate whether there has been a breach of the Leadership Code in connection with the nomination and appointment of Mr Maladina as a trustee and then as chairman of the NPF Board of Trustees. (h) Mr Bai’s failure to attend any meetings of the NPF board after his appointment as a trustee in February 1999 was a breach of his fiduciary duty to the members of the fund. (i) Mr Maladina’s failure to formally resign his position of employer representative trustee as he had promised, casts doubt about the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill. The employers federation strongly resisted the appointment of Mr Maladina as an employer representative trustee on the nomination of Waghi Mek Plantations, saying this was not an organisation of employers representing employers and a Writ was issued. It was settled on the basis that Mr Maladina would resign as an employer representative trustee, allowing for the appointment of Mr Jeffery in his place, with Mr Maladina to remain with NPF solely in his capacity as chairman. When Mr Maladina failed to carry out the formalities required in order to validly resign, it threw doubt on the legality of Mr Jeffery’s subsequent appointment — as there was no vacancy for him to fill.
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Mr Golding’s appointment by Minister Lasaro was invalid from the start. He was not nominated by an organisation of employers representing employers, nor was there a position for him. Nevertheless, he assumed duties and voted at meetings before his appointment was terminated in the face of threatened court action by the employers federation.
(a) The appointment of Mr Golding as an employer’s representative trustee by Mr Skate as Acting Minister for Finance, without a nomination by an organisation of employers representing employers, was improper and invalid, being contrary to the requirements of Section 6 of the NPF Act. (b) It was inappropriate that Mr Fabila and Mr Leahy were dealing directly with the Minister in organising the appointment of Mr Golding, by-passing the DoF. (c) The DoF failed to assert itself by insisting on advising the Acting Minister on this appointment. This is understandable considering that Mr Skate had already indicated he would act despite DoF’s contrary advice. (d) The procedures adopted by Mr Lasaro and Mr Fabila to terminate the (invalid) appointment of Mr Golding were not in accordance with the NPF Act and were very confusing. (e) It seems that Mr Golding participated in NPF decision-making, despite his initial appointment being invalid and after steps had been taken to terminate the appointment. No independent monitor of statutory compliance Many of the irregularities which occurred regarding the appointment and termination of trustees arose from the fact that no agency of government assumed responsibility for ensuring that the NPF board was properly constituted at all times.
It was left to the NPF corporate secretary/legal counsel to monitor the completion of terms of appointment, to ensure nominations for appointment and reappointment occurred in compliance with the Act and to prepare instruments of appointment for signature by Prime Minster or Minister and to organise gazettal as appropriate. Similarly, it was left to Mr Leahy and NPF management to ensure that all categories of trustee position were filled, with the prescribed number of trustees of that category.
This system clearly broke down.
As neither DoF nor the First Legislative Counsel had clear responsibility in these matters, the gross constitutional defects which occurred in the composition of the NPF board throughout the period under review were not noted and corrected.
(a) The failure of DoF or any other government agency to advise the Minister and manage appointments and termination of trustees continued to undermine the constitutional validity of the NPF board when the resignation of Mr Maladina as an employers representative trustee did not proceed as agreed. (b) The appointment of Mr Nana and Mr Jeffrey on June 3, 1999, resulted in there being four trustees in that category and consequently the board was invalidly constituted from June 3, 1999, until the end of the period under review on December 31, 1999. (c) The fact that there was no validly appointed NPF board of trustees casts legal doubt upon the validity of the major board decisions made after June 3, 1999, which included the transfer of NPF assets. There is no validating clause in the NPF Act to protect decisions made by an unconstitutional board containing too many members in any one category of trustee (Section 11 only validates decisions of a board which has two few trustees in a particular category). (d) The primary responsibility for ensuring that the trustees are validly appointed to the NPF board and that the composition of the board is in accordance with the requirements of the Act lies with the corporate secretary and principle legal officer Herman Leahy. Mr Leahy was in serious and repeated breach of that duty.
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(e) The DoF did not accept responsibility to oversee and monitor the process of appointments to the board. (f) Mr Lasaro and his advisors within the NPF, Mr Fabila and Mr Leahy as well as the DoF, which failed its responsibility to advise and manage this process, are all responsible for the serious legal confusion. (g) The commission recommends that all instruments of appointment or termination of appointment should be prepared by the office of the First Legislative Counsel. Appointment of Managing Director Legislation
Section 15 provides that the appointment of the managing director is by the Minister after prior consultation with the NPF board. Under Section 16, termination is by the board. Terms and conditions are as determined by the Minister after prior consultation with the NPF board. Robert Kaul Mr Kaul’s initial employment in 1993 was regular but his terms and conditions were agreed to by a contract of employment with NPF rather than by Ministerial determination as required by Section 15(2) of the NPF Act. This was repeated on his reappointment on July 4, 1996, with generous payout terms for early termination.
His early termination in 1998 was a result of improper political direction from Minister Lasaro and Prime Minister Skate, which resulted in a significant payout of his unexpired contract. Proper procedures were not followed. The termination was the result of a political scheme involving Mr Skate and Mr Lasaro, assisted by Mr Leahy, to appoint Henry Fabila to the office of managing director.
The irregular termination of Mr Kaul’s appointment was legally ineffective, which in turn invalidated Mr Fabila’s appointment, as the position of managing director had not yet become vacant.
(a) Gerea Aopi and the NPF management and board ignored the provisions of Section 15 of the NPF Act regarding appointments and the conditions of a managing director and inappropriately appointed Mr Kaul in 1993 pursuant to a personal contract of employment, containing generous payout provisions for early termination. (b) After the formation of the “Skate” government in 1997, Prime Minister Skate and Minister Iairo Lasaro wished to replace Robert Kaul with Henry Fabila as managing director NPF. (c) Prime Minister Skate had strong personal links with Mr Fabila and Minister Lasaro had strong personal reasons for replacing Mr Kaul, who was strongly resisting the Minister’s improper pressure to grant an exemption to the Masurina Group of Companies. (d) Minister Lasaro gave an improper direction to the chairman of the NPF board/Secretary DoF Mr Vele to terminate the appointment of Mr Kaul without any prescribed grounds, which was beyond his power as this power lay with the board. (e) Minister Lasaro’s direction to NPF to submit a list of names, including the name of Mr Fabila for his consideration, in circumstances where he had already made up his mind to appoint Mr Fabila and had issued a press release to that effect, did not constitute prior consultation with the NPF board as required by Section 15(1)(a) of the NPF Act. (f) It was not possible to appoint Mr Fabila until Mr Kaul’s appointment had been terminated. This early termination required a payout to Mr Kaul of K141,983.51 for early termination according to his contract of employment. (g) The DoF gave inadequate and incorrect advice to the Minister on the termination of Mr Kaul and appointment of Mr Fabila. (h) Mr Leahy failed his duty as legal counsel and corporate secretary to advise the NPF board as to its rights and duties and that the Minister was exceeding his power in directing the termination of Mr Kaul’s appointment.
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This was a serious breach of duty for which Mr Leahy, as a qualified and practising lawyer, was professionally liable. He may be personally liable for damages at the suit of the NPF board, including liability for loss suffered by NPF members caused by the excessive payout to Mr Kaul. (i) The decision to terminate Mr Kaul and appoint Mr Fabila amounted to improper interference with the management of the NPF for which both Minister Lasaro and Prime Minister Skate were responsible. (j) The commission recommends that the constituting authority refer William Skate and Iairo Lasaro to the Ombudsman Commission to investigate whether there have been breaches of the Leadership Code in relation to the termination of Mr Kaul’s appointment and the appointment of Mr Fabila as managing director of the NPF. (k) The action of Acting Minister Sir Mekere Morauta in signing the instrument of appointment of Mr Fabila to the position of managing director of the NPF was not improper, as he acted in good faith, on the advice of the DoF, that the appointment was appropriate and in order. (l) The statutory instrument of appointment of Mr Fabila was not prepared by the office of the First Legislative Counsel. It was probably prepared by Mr Leahy at the NPF. The instrument fails to recite the words of section 15(1)(a) “after prior consultation with the board” and there had been no such prior consultation — merely directions given by the Minister. (m) The commission recommends that the office of First Legislative Counsel be given clear authority to prepare all instruments of revocation and appointment. (n) Carter Newell were remiss in their professional duty for simply producing a contract for Mr Fabila’s terms and conditions, without proper research and without taking account of statutory provisions including Sections 16 and 17 of the Act, which set out grounds for termination.
National Provident Fund Final Report [Part 10]
Henry Fabila Prior to the effective termination of Mr Kaul’s appointment, Minister Lasaro purported to terminate Mr Kaul’s appointment and to appoint Mr Fabila without prior consultation with the NPF board as required.
He issued a press statement to this effect. Subsequently, a token consultation with the board was undertaken and the Minister directed the reluctant board to add Mr Fabila’s name to a panel of people recommended for appointment.
At the last minute, Minister Lasaro absented himself from PNG and the previously prepared statutory instrument revoking the appointment of Mr Kaul and appointing Mr Fabila was signed by Acting Minister Sir Mekere Morauta.
Mr Fabila then signed a contract of servic