Taking Stock 27 September 2012

Corruption is a condition that destroys society. It destroys trust, it destroys respect, it destroys faith, and it destroys hope, (if not charity).

It is the precursor of greed, of an each-for-himself society, and is a key ingredient in psychopaths, where self-interest completely eliminates concern for others.

So when an international accounting firm’s specialist recently warned New Zealand that the earthquake recovery effort, combined with the 2008 financial collapse, created the ideal breeding ground for corruption, every caring adult should have paid attention.

Every caring adult should also be doing everything he/she can to prevent the embedding of corruption of New Zealand. Whistle-blowing should be obligatory.

There is no question that we endured pockets of corruption during the market collapse of 2008.

We have seen executives who should know better, abusing their insider knowledge, for personal gain. I have seen this described as arbitrage.

Arbitrage is simply the word used to describe exploitation of a pricing differential and is not a corrupt practice.

If someone notices that at some stage there are sellers of BHP shares in London at lesser prices than a buyer of BHP shares will pay in Auckland, then exploiting that pricing anomaly would be nothing other than clever.

Abusing one’s power or business relationships to switch a security for a better-yielding security with less risk, and claiming “brokerage” for doing this, is not arbitrage.

It is corrupt, the more so if it is done furtively, with the hope of not being discovered. It is corrupt because the opportunity comes through insider relationships. It reveals a very greedy core.

Paying for one’s pleasures with other people’s money is corrupt, be those pleasures prostitutes or million dollar yachts.

Charging ridiculous sums for one’s services, especially when there is no watchdog, is corrupt.

Imagine if a finance company executive repossessed a non-paying customer’s car and stored it in his garage, charging $100 a day for storage, or $1,000 to clean it so it could be sold.

Imagine if a repossessed car was then on-sold to a family member or friend for a price well below market value.

Imagine if a block of apartments, or some unsold sections in a property development, were sold to associates or friends for a fraction of their saleable price (and a brown paper bag full of $100 notes).

Imagine if you were a corporate adviser and you advised your client to hide or alter documents that were requested by the Securities Commission.

Imagine if you had the power to write off a loan made by your employer to a liquor store, or a restaurant, and agreed to write it off, but then claimed free meals or free liquor every month for your “favour”. (“Loan review fees”.)

That is corruption.

Imagine if you were in a position of trust and gained knowledge that might be exploited by a third party, so you swapped your knowledge for a “consulting” fee, or some similar favour, from the third party.

That is corruption.

Imagine if one of your fellow directors was paid a fee to “guarantee” a transaction, but when the transaction began to fail, you arranged for your fellow director to be released from his guarantee.

That is corruption.

Imagine if a borrower could not provide adequate information to justify a loan but to gain a loan approval, he paid for the moneylender to have holidays overseas, perhaps with “escorts” for the most vulgar moneylenders.

It is nauseating to recall such incidents, and infuriating that none of the auditors, receivers, trustees or regulators seem to have been able to prove and prosecute these corrupt practices. Perhaps I should add “yet” to that sentence.

I guess what the international corruption analyst was observing came from his experience – that when there is extreme stress as occurred in financial markets in 2007 and 2008, morally weak people will succumb to corrupt practices.

The analyst then might have observed that the horrific earthquakes in Christchurch destroyed records, interrupted due processes, created extreme shortages of skilled people, imposed on people the need to make immediate decisions, and gave almost unbridled power to people often without the experience or qualities that produce sound, moral processes. Add the two factors together and you get fertile ground for obnoxious crops.

As an obvious example, how can the Earthquake and War Commission (EQC) check every quote, every transaction?

Surely the EQC would have had to offer a broad agreement to proceed with tasks below a certain value – say $10,000.

If there are literally thousands of tasks in Christchurch that might cost hundreds of thousands to complete, how could EQC justify checking every small repair job on a damaged $10,000 garage, or a $1,000 concrete path?

It is highly likely that the EQC would issue a blanket authority to proceed on smaller jobs, perhaps with a random spot-checking process.

In this environment it is not difficult to imagine the EQC being “gamed” with $700 jobs becoming $6,970 jobs.

It is not difficult to imagine any required materials that were in short supply being re-priced to reflect the urgency of the task.

One imagines that a sack of cement, a cubic metre of mix, a concrete-mixer for hire … might all be priced differently. Where the pricing reflects under supply and excess demand, will there be a test of fairness? Who controls the supply?

Could this be the environment that caused the international specialist to warn us of the potential for widespread corruption?

In my view one of the required checks and balances might arrive soon as a result of a decision of Vinci, a giant European construction company, roughly 10 times the size of Fletcher Building.

Fletchers will be able to call in Vinci’s access to capital, access to technology, expertise and gear to ensure that Fletchers, which control the rebuilding of Christchurch, observe genuine pricing tension when they seek out contractors for major projects.

Vinci has bought 55% of the Christchurch-based family company March Construction (a great honour, for a family company).

Vinci specialize in things like water piping, sewerage, road-building, piling and all those tasks that Christchurch needs to be done quickly at fair prices.

Vinci’s capital is in tens of billions, its group has 186,000 staff, its annual turnover is in hundreds of billions.

Perhaps its arrival will relieve some of the concerns of the international consultant. This might be a piece of luck, if it helps keep prices down.

The very last thing Christchurch needs is the fertilizing of the environment that breeds corruption.

(If readers have evidence of abusive practices they are welcome to pass them on to me.)

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Of course, there will be times in these stressful days when luck comes into things.

Take this example.

Before the crisis Strategic Finance often sought high margin lending deals on property developments, sometimes $2.5 million developments of, say, six apartments in Auckland.

Its board would have committed to sensible rules requiring, say, 80% pre-sales before financing a project.

One project, needing I think five pre-sales, achieved only three so as often happened two Strategic parties each agreed to buy an apartment, to get the developer to a stage where he could borrow from Strategic and proceed. Their “underwriting” came with a fee payable to them personally.

In this particular case I do not know if their underwriting fee was 6% or 8% of the roughly $800,000 promise to buy each of the two apartments, nor do I know if the up-front payment of the underwriting fee was paid in cash to the two Strategic parties by the developer, or simply added to the loan (of investors’ money).

What I do know is that the finally completed project failed to achieve real sales so a bulk buyer emerged who agreed to buy the unsold apartments, paying roughly $800,000 for two of the apartments, and a lot less for the others. Perhaps the others had black and white television sets instead of colour.

Fortunately for the Strategic underwriters the two for which the buyer paid most were the ones underwritten, so the underwriting agreement was released.

This must have been luck.

Obviously the buyer could not have known about undisclosed underwriting agreements, so the structure of his offer was fortuitous for the underwriters.

They got their fee and did not have to buy the apartment, or subsidize the sale.

The trustee and the monitoring accountant approved the transaction so we can all feel satisfied that this was just luck.

But imagine if the offer was to buy all the unsold units at the same price per unit.

There might have been quite a shortfall on the underwritten apartments. The underwriters can feel lucky.

Strategic had a strong board, with independent directors and a every experienced chairman in Denis Thom, once the senior partner at Phillips Fox, a national law firm.

Thom cut his director’s teeth with the Jones float in 1982 and later was chairman of the Hodges/Waltus company Urbus (which sold to ING which turned into Argosy), and was chairman of Wellington International Airport and Kirkcaldies.

After all the stresses of Strategic, Thom, wisely, resigned from his posts with WIAL and Kirkcaldies, as Greg Muir, Hanover chairman, did with his Pumpkin Patch directorship, and his role with Auckland football.

The Strategic board included David Wolfenden whose career highlight was a stint as chief executive of Countrywide Bank, which later became part of the National Bank of New Zealand.

Wolfenden’s low point before Strategic’s hideous collapse was his directorship of Numeria Finance, which became a part of the disgraceful Capital & Merchant Finance nonsense, three of the CMF directors now living at Her Majesty’s expense.

Strategic’s board also included the late Jock Hobbs, who would certainly have been knighted had his career not been tainted by Strategic, and Graham Jackson, who I regarded as knowledgeable, competent and straightforward.

One of the key people was Brian Fitzgerald, a property developer/investor who gained his corporal’s stripes with Allan Hawkins in the 1980s company, Equiticorp, and who was a mover and shaker in Auckland in the 1990s, and half-owner of the Hilton Hotel, whose mezzanine investors did well.

By my definition, Fitzgerald was a shadow director of SFL with Marc Lindale, also a director of the Hilton Hotel, which has failed its bond investors, despite some promises made, in March this year, in a Lindale email to me. He stated that all investors “will” be repaid in full, with interest. (The investors “will” not get anything of the sort.)

As far as I could see Fitzgerald and Lindale were the drivers of Strategic and used Kerry Finnigan, a one-time KPMG accountant, to front deals, as the Chief Executive.

Finnigan had arrived after his erratic career with Hanover ended when his relationship with Mark Hotchin soured. Strangely in recent times Finnigan is back again working with Hotchin. Finnigan will also be remembered for his falling for a Rotorua ponzi scheme (as did Hotchin).

When I read my notes now, made from information supplied by Finnigan, and compare them with reality, I conclude that Finnigan, as a front man, seemed to have insufficient knowledge of the transactions he was fronting.

For example he believed that SFL investors were entitled to a large portion of villa sales in Fiji when in fact SFL seems to have sold to its parent Allco Hit, the loan that might have been repaid by villa sales. Allco Hit never fully paid SFL for the loan it said it would take over.

It seems Allco Hit had demanded a dividend from Strategic Finance in February 2008, when both companies, as internal memoranda might prove, were finding that their antennae were picking up some scary signals. (Sadly the antennae were not accessible to the public.)

Allco Hit demanded the roughly $12 million dividend, stripping SFL of important revenue reserves that probably were from paper profits, rather than cash profits, meaning the dividend was paid out of borrowings, in effect.

SFL in turn demanded that Allco Hit use the dividend money to pay out SFL by taking over a portion of the loan SFL had made on the disastrous Fijian Denarau loan. (The best secured portion.)

Allco “bought” the loan but to this day has not fully paid for it and now never will. Allco Hit is tout finis, as the French would say, “stuffed”, as Aussies would say.

Finnigan cannot have known all of this for as late as 2009 he was still telling me that the villa sales money held in trust would become available to SFL investors. He said this often. There would be $47 million in trust, he said, of which most was for SFL investors.

The flow chart is complex but if SFL ends up being repaid tens of millions from Fiji, I will drink warm beer through a straw – after each round of golf I play next year.

Strategic’s unfolding story is not pretty.

It had the veneer of a polished company, with very low gearing, an apparently independent and credible board, an external credit rating, support (and trust) from the Bank of Scotland (BOSI), and a liquidity schedule that featured a wide range of short term, repayable loans, more than matching maturity deposits.

I guess that the realized liquidity schedule was rather less favourable than the one with which we were presented.

Reviewable loans did not mean repayable loans; could not mean that, because undercapitalised, over-optimistic, troubled projects can only ever repay by refinancing, and BOSI was the only lender in New Zealand in 2008 which saw merit in financing hopelessly troubled projects, forgetting South Canterbury Finance, which was, believe it or not, further down the repayment list in the Denarau loan than even Strategic Finance, itself further down than Strategic Nominees, private investors, and BOSI.

Eventually even BOSI baulked.

The information sources available to me now, sadly, were not available in 2008, when the trustee, Strategic’s new auditor, and the moratorium advising accountant were all rather less informed than they are today.

Strategic’s audit by BDO Spicer, for the year to June 2007, found no issues with Strategic. They were replaced by KPMG for June 2008, and by then their audit comments, which came out too late to be helpful, were fairly cautious, reflecting the moratorium Strategic entered in August 2008.

Sadly Strategic’s board and shareholders did not request their December 2007 accounts to be audited. One can only wonder why.

Should the directors be found to have made culpable errors in 2007 and 2008 – i.e. negligent lending – then they should be covered by Directors and Officers Insurance.

After the 2008 moratorium this insurance became expensive and less comprehensive.

In 2009 there was debate as to whether the bill – probably millions – should be paid by the directors it covered, or by the SFL investors. The directors wanted the investors to pay it.

My information is that the trustees, Perpetual Trust, agreed to pay it out of investors’ money.

If the insurance proves to be Claytons Insurance that does not necessarily mean that should there be errors found, litigation would be ineffective. It does not mean any award would not be paid.

No matter how the directors, shadow directors, and officers might have structured their affairs, any awards must be paid, or bankruptcy would be inevitable.

Given there is yet no litigation filed, I am well ahead of myself in discussing this and I recognize that relationships between receivers, auditors and directors do not easily lend to vexation or litigation.

But investors are entitled to know of these unresolved issues, and of the possible outcomes.

On their, and my own behalf (as an investor), I shall continue to be nosey and report back, via this email, to my clients.

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Perpetual Trust is waiting to be granted what it hopes will be a temporary and conditional licence to practise as a corporate trustee company.

Others received unconditional licences last week, the balance will be known by Monday.

I expect Perpetual Trust will need to show the approving agency, the Financial Markets Authority, that it will sell its trust business to a new owner which will be owned and run by fit and proper people, and will employ people with the qualifications, skills and experience to perform the work properly.

If the FMA is not confident about this it can cut the licence today, and appoint a replacement.

Of great interest will be the indemnity clause in that sale (how PGC, as owners of PT, will accept liability for past errors) and of even greater interest will be the timing of Perpetual’s proposed legal action against directors and auditors of the companies for which it acted as trustee.

PGC’s owner, George Kerr, a property developer and self described distressed asset buyer, has seen potential for gain in funding litigation against directors and auditors of failed finance companies.

Whether he will be allowed to control such litigation, or even invest in it, is something on which one can only speculate.

Perhaps he will convince PricewaterhouseCoopers to run the litigation with the help of investors from the Virgin Islands, and an English litigation funder.

PWC and PGC clearly have good lines of communication, PGC having awarded PWC receiverships from which PWC has taken more than $10 million in fees.

PWC is also PGC’s auditor and has recently given PGC a clean audit report.

One imagines the Chinese walls in PWC are constructed from solid materials.

If Kerr were not to use PWC to fire the shots, he may do it while Perpetual is still the trustee.

But if he is even to contemplate it, he will need to decide soon. Once Perpetual is sold, he would have no say. I suspect the decision must be close, if not already underway.

This space (this email) is likely to be informative, in upcoming weeks. Compensation, one way or another, is a growing issue.

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Ed is in Las Vegas, celebrating the 30th of our IT consultant, and returns October 8.

I will be in Christchurch on October, 9, 10 and welcome appointments for that visit.

Chris Lee

Director

Chris Lee & Partners Ltd

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Taking Stock 20 September 2012

The Fisher & Paykel/Haier takeover transaction has a range of critics, with a variety of motives, some stemming from xenophobia, some from greed, some from envy, and some from grief.

The takeover offer began when FPA’s poor results in 2008/2009 left it in danger of collapse, requiring a heavily discounted rights issue at just 41 cents to satisfy its bankers.

Part of its problem had been a badly-executed move of a manufacturing plant to Thailand, where FPA made almost every imaginable error, failing to do its homework in a business culture quite distinct from New Zealand. The rising NZD had also created problems, as has the cost of labour difference between NZ and China, Thailand, Mexico.

The rights issue and the introduction of a powerful Chinese shareholder (Haier) brought stability during a period when new housing slowed, leading to lower white goods sales.

The full Haier bid was anticipated since 2010 and has now arrived, bringing criticism from people who in some cases should know better.

For example Tower, a modest performer in its various business endeavours, has claimed FPA’s takeover price should be 25 per cent higher.

It was Tower, of course, that scuppered the THL bid in the recent past. This bid (for THL) was at $2.70. Tower rejected the price.

The bid was withdrawn, THL’s share price is now around 70 cents.

Fund managers can play a useful hand in stabilizing share registries and often underpin higher prices for minority shareholders, by building large holdings in illiquid stock, as Carmel Fisher’s Fisher Funds have often done, sometimes with spectacular success.

Fund managers have also had occasional successes in sharpening corporate governance, using their voting power to threaten boards and management. The ACC has played this sort of role, well.

But Tower, itself a puppet of the unsuccessful and unconventional GPG group, is a small player, increasingly in search of a new partner, lacking the scale itself or the achievement to be a significant voice in the market, despite some respected analysts.

It has had a series of under-performing chief executives, going back to James Boonzaier, and has incinerated tens of millions of funds on a series of computer systems that failed. Yet it pays its staff like Prime Ministers.

In more recent years its dividends have been rare, suggesting that its analysts would never have wanted to buy its own shares, unless there was a way of gaining from the GPG-inspired discounted cash issues, underwritten gratefully by GPG, in all likelihood.

So Tower’s response to the FPA/Haier takeover is unlikely to be of biblical significance, more likely, as Tower sensibly conceded, a “talking of its book”’ meaning self-interest.

In disclosing its book, Tower might also consider disclosing its recent buying and selling of FPA.

Others are opposed to selling our “research and development icon” to the Chinese.

To my knowledge there has been no impediment to buying the shares at prices from around 30 to 60 cents, in large quantities, over the last three years.

No party has done this with any recognition of “iconic” value so it is fair to say the current reaction is more likely a search for a higher bidder, than a display of nationalism or recognition of excellence.

The group with a real beef over the sale would be the factory workers who inevitably will either move to Mexico or Thailand for $10 an hour work rates, or will lose their jobs.

Their voice is entitled to be heard.

Meanwhile Fisher & Paykel Appliances, Haier, and their advisers have played the issue by the rules.

After acquiring 19.9%, Haier has not played its hand unfairly and has given every fund manager ample time to spot the value and acquire meaningful holdings.

Few wanted the shares in FPA six months ago.

Haier should easily get to 50.1%, but may struggle to get to 100%.

If that is the case Tower, and all the other critics, can hold on to their shares awaiting the day when profits and dividends can service a $1.20 share price.

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One pleasing aspect of Haier’s bid was that the bid was not preceded by insider trading.

FPA’s share price was 40% lower than the bid price in the days before the $1.20 bid was announced, indicating respect for the power of the NZX market surveillance people.

This respect has been hard won, and has taken at least 25 years to occur, following the most appalling events in the 1980s that soured many investors for ever.

In those days directors of one NZX Top Ten company regularly had a third party buy shares for their personal superannuation fund in any takeover target they were lining up.

Their crooked superannuation fund manager would buy up shares in company X at $3.80 a few days before the takeover of company X was announced at $5.40, probably buying for himself and his cronies, as well as the directors who had forewarned him. It was a contemptible era, in which many people of little merit became rock stars by trading on information that should have been kept confidential.

Insider trading was simply not policed effectively, one company chairman, to his endless shame, failing to act on a QC’s legal view that proved beyond doubt that a director was indulging in insider trading on a major scale.

I have a copy of that report and will publish it at the appropriate time.

Today, the standards are better.

The NZX provides market surveillance, wrongly in my view, as I see it as a function best provided by a government regulator.

Nevertheless the NZX seems to be aware of its obligations and must be keeping a watchful eye on all participants in the market, even on its own staff.

When the previous stock exchange manager Mark Weldon sold down some of his NZX shares recently he would have done so with his board’s full knowledge and agreement, and would have done so in the brief periods of the year when the market was fully informed of the NZX’s profit performance.

Obviously the NZX would not have allowed Weldon to sell his shares in the NZX at an inappropriate time. That would have brought instant dismissal for the offender and ignominy for the NZX directors, in today’s environment.

I am not so sure that the Australian Exchange has the same diligence when it comes to policing the activities of some of their scores of minor companies.

Just as we could recite a dozen names of N.Z. corporate cheats from the 1980s, the Australians had their own Ned Kellys, Alan Bond, Christopher Skase and many, many others on the take.

Today, one imagines that if a public company executive sold his shares at an inappropriate time, the sale would be reversed, if the buyer was disadvantaged.

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The Nelson courts have now received notice of action by the liquidator of F & I Investments, Iain Shephard.

Following Justice Fogarty’s observations about the injustices imposed on F & I investors, Shephard has filed action against Perpetual Trust, the LDC directors, a Nelson accounting firm and a Lower Hutt accounting firm, according to the Nelson court.

Shephard has had to act quickly to avoid losing his legal rights threatened by the restraints of the Statute of Limitations.

One assumes that he has more time to consider filing actions against the other two parties that Justice Fogarty heavily criticized, PricewaterhouseCoopers and Buddle Findlay.

Fogarty recorded his views on PWC’s and BF’s behaviour, not so much leaving the door open for further action against them, but standing at the door, waving litigants in.

PWC has advised it will appeal Fogarty’s finding but the bundled papers which disclosed the behaviour that outraged Fogarty will presumably be public documents and now in the hands of the Financial Markets Authority.

If they were not tabled in court, and then bundled, they seem certain to appear in the appeal court if PWC appeals Fogarty’s finding.

PWC’s lawyer, David Goddard, has indicated an appeal.

There should be standing room only in the Court of Appeal if the public are not excluded,

if this appeal proceeds.

Perpetual Trust will also be in focus.

Justice Fogarty criticized the skill levels and qualifications of a Perpetual employee serving as trustee for F & I investors.

This criticism, left unchallenged, would seem to lead to a wider argument that I have discussed loudly in these Taking Stock emails for many years – that Perpetual Trust for some years has not had the skills, the experience, the street wisdom, the knowledge or the energy that I would expect of a trustee acting for retail investors. Perpetual must be very vulnerable to the claim that it failed in its duty to debenture investors.

In fairness, trustees were often armed with weak trust deeds, and often had to counter dishonest, devious directors, who set out to conceal the truth.

Unbelievably, some corporate advisers helped with the deception, and sadly the audit skill levels were disgraceful in some cases, auditors censured and fined by their own peers for their inadequate work, in two cases.

Nor was it just the small audit firms that failed, as Fogarty noted.

It was Ernst Young that signed off on South Canterbury Finance’s December 2009 accounts, alleging a nett asset surplus of $200 million.

Eight months later the assets were demonstrably $1.2 billion less than liabilities so someone somewhere should be re-sitting school certificate book-keeping.

The two cases that will stir New Zealand will likely be the LDC/F and I case that flows from Fogarty’s observations, and the case that Korda Mentha receivers Brendan Gibson, Grant Graham and Michael Stiassny bring against the jailed directors of Capital & Merchant Finance, one of whom, Owen Tallentire, would be the benchmark for any competition I ever run, to find the halfwit of the decade, though I can think of several other corporate candidates.

While LDC/F and I, and CMF will be the headline cases, the elephant dozing in the lounge remains Strategic Finance, where the losses seem astonishingly greater than signalled by some well-pressed, expensive suits.

By year end I suspect there will be a good menu for those with the time to sit in high courts, and listen to the explanations for the massive losses, made by well qualified boards and managers.

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Minister of Finance Bill English was loudly congratulated when the Treasury sacked some inept receivers and set up a Crown entity to manage residual assets from Finance company receiverships specifically.  Many, including me, were very critical of Kerryn Downey, of McGrathNicol, whose errors might make a manual for students in years to come.

Downey allowed the SCF loan recovery team to handle the sale of various assets. This was one of his errors, in my opinion.

The sale processes were not disclosed to the public, perhaps making it inevitable that there would be suspicion that the loan recovery team did not have the support needed to achieve a respectable result.

Surprisingly the South Island real estate firm Colliers is till quoting the former SCF loan recovery team leader Ian Thompson, as the key person today in selling one of SCF’s biggest remaining assets, Belfast Park, where a huge number of sections will be available for people caught in red zones. How come?

Thompson, and Christchurch asset broker Phil Burmester, are both quoted as having some sort of control over this $20 million asset.

Perhaps Bill English should explain why this sort of process is not being conducted by Treasury and the entity it created to take over the clean-up of residual assets.

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Dunedin rate-payers have responded with fury to the revelations about Delta, a key trading company subsidiary of the Dunedin City Council, that has developed a taste for slow-moving land developments.

The public reacted to our recent Taking Stock discussion of Delta’s errors, one correspondent wanting the Auditor General to oversee its decision-making processes.

Nor is Delta the only contentious part of council.

The new rugby stadium in Dunedin has cost rate-payers the thick end of $100 million and has led to debates about Otago rugby that seem destined to be part of a defamation case being bought against Dunedin’s mayor.

It is hard to see rates being held down in Dunedin while all these expensive issues are resolved.

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When is the Commerce Commission going to announce the actions of its investigation into the Credit Sails investment offer of 2006?

The CC gave the Dunedin broker Forsyth Barr a month to respond to its draft finding in June this year?

On my calendar July follows the month of June. It is now September.

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Germany’s pragmatic decision to accept that the European Central Bank can keep printing money to stabilize the Eurozone is pretty much what was expected by those I visited in Munich and Berlin in July.

A “no” vote might have been the first step towards an escalation of problems to a level no sane person would want.

Bond yields have fallen for Spain and Italy so less of their tax-takes will be spent on servicing new issues of bonds, meaning more might be available to maintain public services.

But the problems were caused by people using credit to enjoy unearned living standards.

One hopes that the time bought will be used to introduce some policies that promote more sustainable living standards.

Printing money does have a natural consequence, even if it buys peace for a while.

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For years it has been apparent that employment is the key to sustaining lifestyles.

My European travel notes, displayed on our website under “Articles” shows some interesting figures, even if they are “official” figures, with only the most tenuous link to reality, as countries invent ways to call people employed.

The travel notes are extensive, tens of pages of snippets, but may illustrate the challenges facing us.

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Travel

I will be in Christchurch on Tuesday 25 September, at the Burnside Bowling Club, to talk to investors interested in Europe, and its effect on our investment strategies.

Kevin will be available to Christchurch clients and investors on Friday 28 September.

Appointments with Kevin, or attendance at Burnside, can be arranged by email (Lynette @ chrislee.co.nz).

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Our quarterly confidential newsletter will be mailed out later this week.

Chris Lee

Director

Chris Lee & Partners Ltd

Next Week

Strategic Finance – what parties failed in their responsibilities; what happened to the underwriting agreements; which parties carried insurance cover? The FMA has re-licensed some trust companies. Perpetual is not one of them. Will it be culled or included in a second draft?

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Taking Stock 13 September 2012

When 200,000 New Zealanders found that many of the biggest finance companies in the country had destroyed four billion dollars of New Zealanders savings, their hopes transferred from the promises made to them by directors, to the recovery skills of receivers.

As the rotten finance companies and their look-alikes inevitably collapsed (i.e. Nathans, Capital & Merchant, Bridgecorp, Lombard, MFS, Belgrave, Belvedere, Five Star, Orange, First Step, Blue Chip) the witch-hunt began. Receivers were paid a king’s ransom to recover investors’ money from all possible avenues.

When those companies with credible external credit raters, “big four” auditors, and “name” independent directors also collapsed, a hope arose that the assets of the better companies would be realized at a value sufficient to justify the reputation of those directors, auditors and credit raters like Rapid Ratings, Fitch and Standard & Poor’s.

We now all are aware that the investors in the “good” finance companies (with very few honorable exceptions) were treated just as dishonestly, or just as arrogantly, as investors in the rotten companies.

Values were not realizable at anything like the levels advised by directors, and accepted by auditors, trustees, credit raters, regulators and the NZX.

Loans were not collectible.

Securities held on those loans were dreadfully documented in some cases, often not backed by guarantors, often made to serial commercial hazards, and often based on valuations that were doctored to “satisfy” lending covenants and trustees.

Loans were not maturing in the time frames implied by maturity schedules, cynically drawn up to fool investors.

Renewal rates of deposits were often deceitfully described to engender false confidence about liquidity.

Related party lending was disguised by the use of conduits and “nominees”.

Dividends were paid from borrowings because profits were not real, certainly not earned in cash.

When trouble brewed, chief executives, directors and chairmen often lied to the NZX, and to regulators, to investors and to analysts, brokers and the media.

Does anyone interested in the finance company sector think I am exaggerating? I could, and if in court would, cite example after example of the lies and deception I now can prove.

Here is the point of republishing all of this.

At least three receivers of some of the lousy finance companies have not found a single reason to sue the directors, chief executives and auditors or trustees.

Not a single reason. Investors, harden up – nobody has broken any rules. Nobody misled anyone. The receivers are satisfied.

Perhaps receivers delude themselves into believing that their job is to act for “the company” and, that sueing directors, would not be helping “the company”.

Perhaps they hide behind the gutless line that because no court outcome is certain, there is too much “risk” in using precious funds to meet legal costs.

Have they never heard of litigation funders?

Okay, let us forget the receivers as a source of help, lamenting the passing of the era when the real men like Fred Watson and John Tuck sued directors and auditors and won tens of millions for investors.

Do we need liquidators to replace weak receivers?

Let us now move on to the next of the investors’ “allies”, the Financial Markets Authority, which replaced the poorly-led Securities Commission.

The FMA is instructed to take legal action when no other party will do so, when there is evidence that a court action should be taken.

I will happily share my research and collection of evidence should the FMA need proof that they should take over. I doubt they will need it. They may be close to announcing some high profile actions, against those who misled investors in 2008 and in 2010.

Time is running out – the Statute of Limitation generally excludes litigation relating to a commercial error that occurred more than six years ago.

It is now six years since the cynical, designed to eliminate accountability, mis-described, mis-sold and mis-managed First Step fund failed. No-one did anything wrongly, it seems. There have been no recoveries from the miscreants.

It is four years since Strategic failed. Surely the investigative work must reach a conclusion soon.

The clock is ticking.

In April 2008, St Laurence advised that it had just had another profitable year, had an impressive level of capital, ample liquidity, a matching maturity schedule, and minimal bad debt, no mention of lending failures in Australia.

St Laurence’s auditors agreed with this astonishing mis-assessment. The auditors presumably stand by their affirmation of the accounts.

In June 2008, Dominion Finance announced a profit, paid a dividend, and its weak chief executive Paul Cropp berated other finance companies, for not being subject to the same scrutiny and discipline that applied to the NZX-listed companies like Dominion Finance.

Strategic Finance, in the same months of 2008, produced a clean audit and claimed its capital was intact and at high levels, and that its maturing loans more than matched its maturing deposits. It said it had strong liquidity.

May I remind any readers of this item that by August 2008 Dominion, Strategic and St Laurence were asking for a moratorium, to collect their loans and repay investors in full, over time (they said). 

Within a few weeks, all of the information they had provided was seen as clearly incorrect and misleading, especially the claim that loans were to be “collected” when in fact they were to be rolled over. Most will never be collected.

Their audited accounts supported their plea for a moratorium.

Want to know what really happened, rather than what the directors, shadow directors and the “clean audit” implied?

Dominion Finance investors will get around 20 cents in the dollar, and no interest.

Strategic will get around 20 cents in the dollar, and no interest.

St Laurence investors will get around 30 cents in the dollar and no interest.

So the receivers digest all of the above and still believe there is no cause for action?

Really?

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Of course it was not only directors and auditors who misled investors.

In the case of Bridgecorp its Sales Manager, Andy Harris, consistently offered assurance to investors and the insurance-selling people who sought the double brokerage and sold Bridgecorp to investors.

He told brokers, the media, and investors that its most vocal critic had a mental illness and was incompetent, and was fabricating a case against Bridgecorp.

He flew to Christchurch to try to dissuade an investor who had sought my help and was declining to renew an investment. Harris tried, and failed, to change the client’s mind.

Harris nurtured his relationship with his IFA contacts, Bridgecorp paying advisers’ golf club fees, and creating competitions for those who chose to herd client money into Bridgecorp, ignoring the evidence of Bridgecorp’s toxicity levels.

Winners of these competitions sometimes scored triple brokerage and were given prizes of tickets to the Rugby World Cup. Others used Bridgecorp’s million dollar boat in their weekends.

(Investors would have been better to shout their advisers to the rugby and get other advice.)

Bridgecorp was the worst offender but Capital & Merchant Finance and MFS also paid double brokerage.

At least two “financial planners” have been identified in court as dissuading clients from withdrawing their deposits before maturity because the advisers would have had to repay their commission.

How much better off would the investors have been, either by saying “diddums” to the adviser, or at a stretch, offering to pay the brokerage clawback themselves.

Would not Bridgecorp’s “Directors and Officers” insurance policy have been designed to cater for these “errors”?

And it was not only finance companies that misled.

ING, and its 50% owner (then) ANZ, misled investors about their Regular Income Fund and their Diversified Yield Fund. To ANZ’s credit, it compensated its clients, eventually.

Insurance salesmen, with very little, in fact no, understanding of the underlying securities, sold the product to investors, and defended the product, imploring people to ignore critics, one hapless advisor, without financial market experience, famously endorsing the product vigorously in her newspaper advertisement, while the ANZ bank itself, through its Private Wealth division, was suggesting to its clients that the two ING products were not useable.

NZ Funds Management with a worse product (Super Yield) marketed this just as infamously, with the help of Money Managers and other self-serving selling chains. (NZFM finally bought Money Managers. It has now closed down.)

Compensation for the Super Yield losses has been patchy – squeaky door syndrome.

ING’s product fooled even those who one might have thought would have known better.

I recall a former Renouf & Co sharebroker and EQC investment manager, now mercifully retired, extolling this product as being “9%, after tax, and at call” without pausing to wonder how this return was achieved.

To date, no company sales manager has been called to account for the rubbish peddled.

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Investors have been uniting to establish a cause of action to seek compensation from the designers, directors and managers of the grossly under-performing EPIC fund, the fund that stupidly decided not to hedge its sterling-denominated asset.

I have been asked to address a group of investors who have a resolve to recover their “losses”, by sueing the directors, the fund manager and Macquaries, who scooped $17 million from the original $76m float. (Yes, seventeen.)

As an aside, this beats the 8% charge once made by a broking firm for raising $10 million for a university.

In EPIC’s case, a little more time may be needed to establish what the loss will be, for there is now talk (but not yet evidence) that EPIC may recover lost value.

EPIC’s $1.00 shares had an asset backing of between 23 and 45 cents, (according to KordaMentha when it valued EPIC in June 2012), an astonishing result of unintelligent or self-focussed management.

However, its only significant asset, a 17.5% holding in the UK motorway retailer Moto, has itself recently been revalued, increasing EPIC’s asset backing to 59 cents, adjusted for the recent issues of shares given to George Kerr’s EPIC/PGC firm, as a termination fee and bonus, as required by a particularly inappropriate contract signed some years ago.

(How often has New Zealand allowed people to benefit from absurd management contracts?)

The last market sale of EPIC shares was around 23 cents, implying that the seller was not expecting a revaluation of Moto. (To be fair, Kerr had expected a revaluation, and had argued that EPIC should invest more in Moto.)

I have requested that EPIC suspend trading in its shares till September 28, to allow EPIC to discuss with its shareholders the strategic review Moto has recently completed.

Moto’s land is said to be worth about 756 million pounds and that its operating business is worth about 200 million.

It has cash in hand of around 40 million, so its gross assets might be realizable for a billion pounds.

Its debt totals 560 million pounds, so its theoretical nett worth might be 440 million pounds, say 880 million NZ dollars, give or take a shilling or two depending on exchange rates.

EPIC owns 17.5% of Moto and has about 140 million shares on issue.

A holding of 17.5% of 860 million NZ dollars implies a value per share just over $1.00, (before bonuses), a long way from the last sale price (23c) or the published asset backing (59c).

EPIC investors would be well advised to attend the AGM on September 27 at Auckland’s Pullman Hotel, or give their proxy to someone who can attend.

(I will be attending the meeting and will certainly be speaking, if the chairman of the meeting does not give sensible leadership to investors. Happy to accept proxies.)

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About a year ago, this website client letter (Taking Stock) noted the inane and conflicted behaviour of Delta Corporation, the commercial trading arm of the Dunedin City Council which inherited the Council’s electricity network assets and other contracting services (roadworks, etc.)

Delta at that time had on its board Stuart McLauchlan and Mike Coburn, both of whom had been given roles in South Canterbury Finance when Eion Edgar, Neil Paviour-Smith and Samford Maier Junior were running SCF, Edgar and Paviour-Smith in the background, as shadow, but not appointed, directors.

Edgar and his team had been extremely well paid, through Forsyth Barr, to “advise” Allan Hubbard and SCF but for reasons yet to be understood (by me, anyway) Hubbard had allowed them to advise on matters like the appointment of a CEO and the selection of directors.

They “suggested” that McLauchlan, Bill Bayliss and Denham Shale form SCF’s board.

Coburn was soon after appointed a consultant to the board.

These names seem to appear often.

Delta’s board, a year or so ago, decided to buy bare land at Jack’s Point in Queenstown and at Luggate, near Wanaka, both subdivisions long past their scheduled completion dates, both having failed to sell at the prices anticipated many years ago.

Coburn had been a director/shareholder of Jack’s Point and McLauchlan had worked alongside Coburn on other ventures. There seem to be many projects sharing these names, with Kerr and John Darby.

The Delta land purchases were inane and inexplicable, and in a short time appear to have cost Delta many millions, the price paid being much more than current value. No acceptable explanation for the purchase has yet been made.

So Delta, presumably having failed to impress the Dunedin City Council (its owner), changed its board, McLauchlan and Coburn departing.

Replacing them were … Bayliss and Shale, the same two who Forsyth Barr had nominated for the SCF board, with McLauchlan (director).  Coburn, was chosen by the new SCF Board as a “consultant”.

The Dunedin City Council made the new Delta appointments. One wonders where the DCC gets its advice.

Delta has now another very odd land involvement.

At Yaldhurst in Christchurch it has agreed to perform some contractual work in a languishing Tom Kain subdivision.  Delta’s payment appears to be not in cash, but in a transfer of some of the sections.

What you might ask, is Delta doing, in accepting land instead of cash, for its electrical and roading/piping contracting work? Has Delta made a strategic move into property development investment?

Is this a new strategy to help developers or is it a risky way of obtaining a premium for its work, realizable in cash, with a fair bit of luck, at some unknown future date?

Is this Council policy? Or Delta policy? Or ad hoc behaviour?

Who pulls the strings at Delta? The Council?

Who pulls the strings at the Council?

The mayor, David Cull?

If I paid rates in Dunedin I would want to see some analysis of the behaviour of Delta and would want to be sure that all decisions were made by people appointed to provide visible leadership to these organizations.

Dunedin is a small city.

Disclosure breeds trust.

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Footnote:

Delta has announced this week that it will make redundant around 30 workers in its contracting business (roading, electrical, contracting etc) as a result of the “downturn in the economy”.

No comment was made on its banal and costly property speculation.

Delta has been challenged to itemize its costs, sponsoring and subsidizing the Forsyth Barr rugby stadium in Dunedin.

Forsyth Barr bought the naming rights for the stadium for a cost of much less than a million.  Dunedin ratepayers have contributed around $50 million to the cost of the Forsyth Barr stadium. Perhaps it should be called the Delta stadium.

Travel:

On Tuesday September 25, I will talk to investors and clients on the subject of Europe and its effect on investment strategies here. Venue, Burnside Bowling Club: Time 1.30 p.m. Investors and clients welcome. Please confirm attendance (lynette @chrislee.co.nz) so the afternoon tea can match numbers.

Kevin Gloag will be in Christchurch on Friday September 28, available for clients.

September Newsletter:

The September confidential newsletter for clients who have authorized us to give advice will be mailed next week.

Next Week’s Taking Stock:

1. In most English-speaking countries, the market regulator investigates share sales by directors/executives that occur in the weeks before a poor financial result is announced. Who does that job here? Are they paying attention? Do their findings get announced?

2. A German panel of judges decide this week whether Germany can allow the ECB to proceed to buy distressed Eurobonds with German-guaranteed money. Watch the result, should the judges decide such behaviour would not conform with Germany’s constitution.

3. The High Court has over-ruled a PGC/Perpetual Trust bid to recover various documents unfairly seized by the FMA. The FMA’s demand for the papers should have given a time and date to supply the papers, rather than demand them “immediately”. But the Court, tellingly, has said the FMA can keep them. What was in those papers? Do they relate to the LDC/ F and I case, where Justice Fogarty has left open some game-changing issues for Perpetual, PricewaterhouseCoopers, and Buddle Findlay?

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Taking Stock 6 September 2012

 

At a time when the most anticipated news for investors was to have been the timing of the opportunity to buy state-owned assets, specifically Mighty River Power, the real excitement is currently reserved for the 200,000 N.Z. investors who lost $4 billion through finance company failures.

Mighty River Power’s sale is of great importance to the government and those who accept the power of the credit rating agencies to dictate our cost of borrowings.

Financial markets people, like John Key and Bill English, will fret over the risk of increases to debt servicing, a use of taxpayers’ money that buys very few votes. They will fear a rating downgrade.

But it seems increasingly likely that the Crown will have to make some extreme concessions in share pricing, and in settlements with indigenous claimants, if MRP’s sale is to precede a High Court (Supreme Court?) resolution of the claims, which might take years.

Happily, there will be excitement for another class of investors.

This month the Financial Markets Authority, an organisation directed by people whose skillsets range from market specialists to seminar presenters, will announce the names of those organisations licensed to act as trustees, under the Trustees Act.

At face value this would seem to be unexciting.

But there is more to this than is obvious, and the process through which the FMA has been working may have uncovered a plan for investors that is so important it has delayed the licensing process by some months.

The evaluation of trustee performance is simple.

Covenant badly let down investors in Bridgecorp, North South, Nathans and Five Star, failing to respond to obvious signals that indicated a gap between investor expectations, and what would be delivered to investors by directors and managers, who in some cases were selfish and cynical.

Perpetual Trust was worse. It presided over Strategic Finance failing to notice that Strategic Nominees was taking cream and leaving curd; it presided over Capital and Merchant Finance, some directors and its CEO common thieves, (now jailed); it presided over Lombard (skill levels of primary school standards, some directors appealing criminal prosecutions), it presided over MFS (simple Australian con job, claiming “put options” to the penniless were an “asset”) and it presided over  St Laurence Property and Finance (Irongate) whose lending, like that of St Laurence, was to people and on projects that were revealed as brainless, insultingly stupid in some cases.

NZ Guardian Trust supervised the Hanover Group, enough said, and Trustees Executors stood over South Canterbury Finance, and allowed SCF to present 2008 December accounts that it knew, if it could read the analysis of Korda Mentha and Ernst & Young, were absurdly optimistic about loan and asset values, and thus grossly misleading.

The Public Trust, which owns NZ Permanent Trustee, was trustee for the Forsyth Barr/Calyon disaster, Credit Sails, now in the last days of an arrangement that should result in some substantial compensation to investors.

Just to illustrate the complications of these considerations, Trevor Janes, as chairman of Public Trust, is to be asked in Court to take on the trustee role at Capital & Merchant Finance, from which he wisely resigned as chairman, having worked with its now jailed directors and CEO until his resignation in 2006. CMF was a cesspit when I visited it in 2007.

Janes is also deputy chairman of Mighty River Power and the ACC, the latter a recent appointment.

He seems likely to be a central figure in the compensation issue, given he is also a director of a local litigation funding company (LPF), likely to be a significant player. LPF stands for Level Playing Field.

Being a political appointment to Crown-owned companies, Janes will be a key figure, one imagines, in progressing the compensation claims through the courts. 

Well, all of that was by way of background.

Not a single trust company has succeeded in protecting all of its investors from those directors and executives who were either crooked, greedy, grossly incompetent, negligent or cynically self-focussed.

The FMA has to announce which of these trustees can continue, and has extended its deadline, presumably because its greatest task has narrowed down to the biggest in the finance company debacle, Perpetual, owned by PGC, itself majority owned by a George Kerr related entity. Kerr founded the disastrous EPIC fund and has been the hidden hand behind some high profile property developments, or planned property developments.

PGC has also badly hurt its own investors, having written off around $200 million in the last two years, and even that does not take account of any interests it may have directly or indirectly, in Strait Resources, whose share price has plunged from 62 cents to 7 cents, since PGC/Kerr entities began buying.

(One hopes PGC’s involvement was as a manager of Torchlight. Losses could be in multi millions, if market speculation is right.)

Perhaps the FMA announcement is delayed because Kerr may be seeking to persuade the FMA to renew Perpetual’s licence by committing to advance the compensation issue, in Court, if Perpetual remains a player. He may be offering to initiate litigation against various auditors and directors with whom Perpetual worked.

He may argue persuasively. There is a lot at stake for him.

It is highly likely that Kerr/PGC will want Perpetual to be licensed and by some, this will be seen to be in the interests of finance company investors, many of whom have hopes of compensation.

By others Perpetual is seen as a villain. Justice Robert Fogarty, in a recent judgement, is one who was highly critical of Perpetual Trust.

PGC and its subsidiary Torchlight, whose affairs are not required to be disclosed, have announced a desire to invest in a litigation fund, which one Australian banker tells me is based in Singapore, or Australia.

Kerr may direct Perpetual, providing it is relicensed this month, to commit to finance that litigation funder to arrange a case against any errant directors and auditors of any of the finance companies over which Perpetual presided. Perpetual might claim that the hour or two it spent each year with each auditor did not educe valuable insight into problems.

Hitherto, this has been thought to be an unlikely action by Perpetual as there is nothing more certain that as soon as such an attack was made, the auditors and the directors would seek to have Perpetual itself included in the action, as co-defendants.

Perpetual would therefore be sueing itself, in effect.

Why would it do that?

The answer would be “money”. Lots of it!

If Perpetual has insurance cover, its own exposure to any losses from court awards against Perpetual would be limited to an excess which might be just $10 – 20 million in total.

If the insurance cover were, say, $2.5 billion (aggregate cover of all directors, auditors and trustees) then the combined court cases might produce awards of anywhere from nothing, to $2.5 billion.

Let us take $1.25 billion as the mid-point, to illustrate how much money Perpetual/Kerr might be visualizing.

Perpetual, if it were the litigation funder, might get 30% of anything awarded, as its reward for funding the cases for investors.

Thirty per cent of $1.25 billion is $375 million. Nice little earner as Arthur Daley would say.

Take off litigation costs, say $20 million, and their own excesses, say $15 million, and Torchlight/PGC, might have a nett profit of $340 million for sueing itself, though I suspect that money would not go to PGC shareholders, but to Torchlight investors, who surely must be identified one day.

Why would anyone allow this to happen? Good question.

The FMA would, one imagines, prefer someone else to fund the litigation but to date some weak receivers, perhaps worried about destabilizing the corporate world, perhaps unsure of the likelihood of litigation success, have shown little inclination to sue anyone. Perhaps they find it hard to identify the culprits. Perhaps the fire in their bellies has lost its flame.

Korda Mentha, through Grant Graham, Brendon Gibson and Michael Stiassny, is an exception, moving to sue Perpetual Trust, which appointed Korda Mentha as second receivers of Capital & Merchant Finance. Korda Mentha deserves our respect.

Another exception is Iain Shephard, the investor-appointed interim liquidator of LDC Investment. He might file action against the big boys, Perpetual and PricewaterhouseCoopers (advisers and receivers). Anyone who read Justice Fogarty’s decision in favour of F & I investors would be in full support of Shephard’s action.

To date there has been no evidence that the receivers of companies like Strategic (PWC) have plans to test these waters. PWC is PGC’s auditor. PGC owns Perpetual Trust. One wonders why PGC does not hand over the Strategic receivership to a liquidator like Shephard.

The FMA is virtually obliged to initiate legal action if no other party steps up, so one imagines it would be pleased to see another party step forward.

The issue might then narrow down to the identity of any willing party, and the suitability of that party to control the litigation.

Kerr lives in Australia and is unlikely to be seen as a natural guardian of retail investors. He is a highly controversial fellow. His announcement to enter into litigation funding will be seen as a pre-emptive move, to control the litigation.

PGC’s performance has damaged retail investors. Kerr is a Torchlight person by nature, not a retail guardian, though he deserves credit, with First NZ Capital, for rescuing Marac in 2009.

Torchlight is designed to operate for its private investors with minimal disclosure. Correction. No disclosure.

Would the FMA, the politicians, and the courts allow Kerr and Torchlight to take up the fight, with the obvious motivations being a share of the massive loot?

Would investors care? Perhaps the compensation achieved is the only care for investors.

These are questions that are occupying ivory tower minds.

I have read, thanks to the help of a wonderfully public-spirited and gifted QC, the views of Australian and British courts on litigation funders.

Their views on this subject are inconclusive, as far as I can discern.

The courts there regard litigation funders as “bottom feeders” but respect the role they play if their motives are to help an injured party get justice. They have no single rule to assess suitability.

The politicians will need to weigh up the political advantages of getting the FMA to fund the cases, leaving all, not 70 per cent, of the “loot” for investors. Against that advantage is the cost of FMA involvement, and the need for trustee cooperation in presenting a winning case.

Investors might hold the view that 70% of something is rather more than 100% of nothing, and might be prepared to look the other way, when Kerr is in focus.

After all, 70% of $1.25 billion is $875 million, now in the pockets of insurers who must be hoping that these matters fade into history.

Obviously the optimal solution would be the use of a litigation funder, controlled by less controversial people, and perhaps more obviously motivated by investor justice, perhaps with a sliding scale (downwards) limiting the cut taken by the funder.

This month will be exciting for investors because some of these key questions will be answered, directly or indirectly in the FMA’s decisions.

If the FMA declines to renew Perpetual’s licence to act, some other trust company will need to take over the ongoing trustee role for investors in failed companies. Perhaps that new trustee would act decisively.

Perhaps the Janes-chaired Public Trust might be asked to step up, Janes clearly admired by the Cabinet for his ability and his business ethics.

One assumes that the Public Trust would have the courage and resources to take on this important task. 

The FMA’s answer will be implied in its decision, due to be announced this month.

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The reluctance of receivers to sue directors, auditors and trustees is a problem recognized by some eminent receivers and liquidators of the past, some of whom have contacted me.

Their discussions with me have been characterized by amazement and disgust that so little has been done, over such a long (four-year) period.

A growing concern is the Statute of Limitation.

If LDC’s newly-appointed interim liquidator Iain Shephard files proceedings against Perpetual and PWC this week he may beat the final date by days.

Successful receivers from the past are insistent that if receivers do not take action, the FMA or investors ought to intervene and appoint a liquidator. They are stunned by the constipated response, to date.

In my view liquidators should be appointed now to ensure Strategic Finance’s shadow directors, actual directors, and its professional partners, are given the chance to explain in the High Court why Strategic Finance’s investors were so thoroughly disrobed of their attire, right down to their socks.

Strategic’s principal, Brian Fitzgerald, in February 2010 was still telling me that investors would get back all their capital.

Strategic’s 2008 auditors should be allowed to explain their work in 2008.

John Fisk, the PWC receiver, says the returns will be between 10 and 20 per cent of the investors’ capital.

Fitzgerald and the Strategic people deserve the opportunity to explain how this disaster has grown, and investors deserve the opportunity to compare their repayments with the recoveries made by those who invested at very high rates (18% plus) through Strategic Nominees.

The FMA, one hopes, will be acting to appoint liquidators of all the companies that lost unreasonable sums, before the Statute of Limitations undermine investor rights. I have to hope we get no patsy appointments, where the new boys’ first objective might be to protect the old boys.

We live in a small country.

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Last week, I mis-described the intentions of Auckland journalist Bernie Hickey, who intends to set up a media internet site for paid members. Matters “of public interest” will be his subject and there will be no focus on business/investment matters, and no pay-for-use portal, he tells me.

He will seek “members” and will publish views and news on a wide range of subjects. His “members” will pay a fee, annually (I think).

He will not fill the hole that has been left by the vacuous Sunday Papers and by the erosion of advertising revenue, and falling circulation, of business-focussed papers. I am sad about this.

Someone should.

Perhaps the Australian Financial Review should set up a NZ office, properly manned, and have a weekly edition that includes, say, a 12-page insert on New Zealand, focussing on matters of interest to investors.

Those matters would include compensation for investors, investigation into the behaviour of corporate leaders, analysis of successful, sustainable companies, and exposure of cynical or dishonest corporate behaviour.

If the AFR takes up this role, at a sensible price, it may not need the advertising revenue that clearly compromises the work of the media. 

Anyone recall the magazines and newspapers that funded their activities with glossy ads from Bridgecorp, Capital & Merchant Finance, Lombard etc, etc?

Ever wonder why such obviously hazardous companies were so rarely subject to media scrutiny?

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Because lending demand has been relatively weak (little confidence of growth in the economy) banks have been pushed into lending more on housing (back to lower deposits, low lending margins) and more to corporates at lower margins and with lesser covenants (limits on risk-taking).

The result has been that companies like Fletcher Building has been able to borrow fixed rate money for 15 years at just 3%, and many corporates have borrowed at low rates for many years at rates of less than 6%. Overseas John Deere raised money at rates below US Treasury rates! 

Perhaps this explains why corporates have had so few issues of bonds, capital notes, or even perpetual notes, this year.

The recent Z Energy and Trustpower bond issues were heavily oversubscribed, and I expect that if Infratil and Insurance Australia Group were to have issues this year, they too would be strongly supported, as would a Chorus issue.

The Australian bond market, undeveloped and less sophisticated that ours, has been in the spotlight as Australian fund managers, and retail investors, have come to accept that share prices do not rise exponentially, and that dividend returns are not set for years in advance, as interest rates are.

The result has been a recent splurge of issues of 90 or 180-day reset securities, priced at sensible levels, and likely to deliver gross returns of 7 – 9% p.a. for several years.

Woolworths, Caltex, APA Pipelines, Crown Casino and Origin Energy have all issued this type of instrument, this year.

Caltex, APA and Crown have issued securities that qualify as “capital” for balance sheet (and credit rating) purposes for five years, signalling a possible repayment date intention.

New Zealand investors, given the starvation ration here, may have to consider Australian dollar issues, for allocations of their income-producing portfolio.

Investors would be wise to discuss this with their brokers, for each issue is likely to have distinctive covenants, and different implied repayment dates.

However, it is pleasing to note that there is a pipeline of options coming from across the Tasman.

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Travel

Edward will run our South Island branch next week, Kevin and Sonja on leave.

I will address interested investors in Christchurch at the Burnside Bowling Club, Burnside, at 1.30 p.m. on Tuesday 25 September. All investors and clients are welcome. The subject will be European developments and what they mean to investors in N.Z.

We need to know numbers (for tea cups) so please advise any intention to attend.

Chris Lee

Director

Chris Lee & Partners Ltd

 

Next week:

 

1. EPIC. I met with its sole director, the Macquaries/Kerr survivor, after the other directors walked the plank. There is optimism about EPIC’s future.

2. Why receivers/liquidators or the FMA should sue the directors/auditors and trustees of most failed finance companies. (Liquidity schedules, bad debt appraisals, hidden related party lending, inept documentation, insincere valuations of assets, misleading statements to investors.)

3. Delta Corporation in Dunedin. The ratepayers have been badly let down by poor investment decisions. Who is the master puppeteer?

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