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March 2010 Edition ----

The objective is still to get out the full message concerning the 2004 Feltex IPO. This is a most disgusting event involving highly corrupt accountants. It is important the the full story be told to the Courts. That is each of the criminal trial against the Feltex Five set down for 12 April, as far as we know, in the Auckland District Court, the civil action being taken by the Feltex liquidators against the same five in the Auckland High Court, and action being taken against a wider group in respect to the Feltex IPO by hundreds of subscribers to the IPO. This latter group badly need to spell out what they are on about. They have a good case but we doubt whether they are being lead in the right direction.

We need to take the story item by item and work with probabilities. Hence the little tables inserted through the text. The logic might be a little loose for a start but we expect to improve on it over time. At this stage it is illustrative only, indicating where the strongest arguments lie.

To reiterate, we claim that politicians from both sides of the political fence conspired with highly unethical accountants and others to greatly overstate the merits of investing in Feltex Carpets Ltd in an IPO prospectus of May 2004, some of the proceeds so gained being used to improperly prepare NZ athletes to enable them to win gold and silver medals at the Athens Olympic Games held in August 2004.

We start with the evidence for the overstatement of projected profits which is to be found on page 81 of the Feltex prospectus. First, under the heading Industry Conditions it is stated that it is assumed that "the size of the carpet market in New Zealand and Australia will grow over the projected period by 1% which is below the average growth rate for the past ten years". This is wrong and deliberately so. The purported evidence for this claim can presumably be found on page 37 where the Australian carpet market sizes for the past 11 years are given. The 1993 size grows into the 2003 size at a 1.7% compounding rate of interest as is stated in the commentary above the graph. No averaging is done in this calculation. Only two figures are taken into account and one of those figures is the least significant of the 11 given and outside the self imposed 10 year limit. The figures look quite random so averaging is a must. Using the least squares trend analysis of the forecast function of Microsoft Excel using the latest 10 years of figures gives a predicted figure for 2005 which is 3% below the actual figure for 2003 not the 1% or 2% above the 2003 figure which Feltex have used for their projection.

Also on page 81 under the heading "Revenue" Feltex predicts that it will "successfully implement strategies outlined under the heading "Business Description", resulting in Feltex's market share increasing by 1% over the projected period". There is nothing special revealed under the heading "Business Description". And no figures are provided showing Feltex's recent history with respect to this parameter of market share which has been given such importance in calculating the projections. It can be calculated however, with some effort, that market share was being lost at the rate of some 5% p.a. There is no reason to believe that it would change. The assumed 1% increase is quite unrealistic. Taking market share and market size mis-assumptions into account the 2005 revenue prediction is overstated by some $50m and we expect that 50% of this would be over-calculated profit.

The reasonable assumption is that improper means were used to allow Feltex to declare a profit for its 2003 and 2004 years and the first half of its 2005 year. Perhaps it received protection from imports by Shaw Industries, arranged by either Feltex or its sole owner in 2003, a Credit Suisse associate. The Australian plant of Feltex was bought from Shaw Industries, the world's largest carpet manufacturer in the year 2000. Presumably Shaw thought it now better to supply Australia by way of imports. An agreement restricting competition for a set period of time normally is acceptable and goes with such a sale. No such agreement with Shaws appears to have been declared in the prospectus. Even if it had expired by then it would have been relevant in interpreting past performance. That does not alter the fact that the public were misled about the market size and market share assumptions and the projections for the 2005 year were not met due to a lack of sales and the company collapsed as a result. There were suspicious circumstances that should have prompted any accountant associated with the issue to take a close look at it and find the deficiencies in the market size and market share disclosures. Carpet manufacture is a relatively labour intensive industry and it was facing lowering tariff protection in Australia and New Zealand. Feltex had but one shareholder who wished to exit the company completely. That shareholder and the promoter of the issue were associated with the Credit Suisse which had closed down its NZ sharebroking operations in recent times despite remaining active in the rest of the world. Credit Suisse had been the broker for both parties when the Accident Compensation Corporation bought National Mail shares just days before National Mail announced that it was closing its mail delivery business which was its prime function. The vendor of the shares, Cliff Cook, was a close associate of a director of National Mail.

There has to be a good reason why certain prominent accountants fail to be critical of Feltex's market share and market size assumptions. Such an accountant with an interest in the issue was Eion Edgar. He was managing director of Forsyth Barr Limited who were one of the two lead brokers for the issue. Prior to the Feltex offer Mr (as he then was) Edgar had been appointed chairman of the NZ Olympic Games committee, charged with giving New Zealand athletes the best opportunities for winning medals at these games. There had been public criticism of NZ's performance in terms of medals at the prior Sydney Olympic games. Mr Edgar had also been made a director of the Accident Compensation Corporation and chairman of its Investments Committee. He held this position for a relatively short time leaving we think after the Feltex profit expectation downgrade was announced. The ACC was almost the only NZ institution to subscribe to the Feltex offer, doing so to the extent of some $9m. We suspect that this placement was used to encourage others to subscribe. Mr Edgar also had a high New Zealand honour conferred upon him at that time. He has accepted a knighthood in relation to that honour in 2009 when he also got a "senior of the year" award. We suspect that the National Party may have told him that they would give him that opportunity of a knighthood (when next in power) when he first received the honour. Knighthoods are very good for warding off accusations. That would be why Sir Allen Stanford had one. New Zealand is alone amongst former British colonies in reverting back to the conferring of knighthood titles. It was not an election policy as far as we know. We believe Sir Eion had assurances from both major political parties that the Feltex IPO would not be genuinely investigated before the venture was finalised. Public funds cannot readily be allocated to cheating. People look to see what has happened to them.

There is widespread acceptance that drug taking and other improper preparation remains rife in international cycling. The cycling performances of NZ medallists at the 2004 Athens Olympics were absolutely astounding. Suspicions were aired by many radio talkback callers but not by the compliant news journalists. It is also significant that NZ got 3 gold and two silver but no bronze medals. There is at least one fourth place but first is probably the most common placing. This would indicate that just a small number of athletes were "supercharged". Possibly it was done in collaboration with some other countries, each being allocated certain events. Successive governments have allocated considerable funds for training of Olympic competitors and the present Government, although generally mean financially, is no exception. David Lange expressed doubt on the merits of such spending "just to see our flag go up the pole" which we agree with, but this seems to be a minority view. Cheating potentially allows some medals to be achieved much cheaper if it can be got away with. Like most professional sport the Olympics are largely street theatre.

It is coverup actions following the demise of Feltex that provide conclusive evidence of a conspiracy.

First in this category is perhaps treatment accorded to Joan Withers. She was brought in as the only female director at the last minute before the prospectus was issued. This is probably so the company would appeal to Mum and Dad investors who were probably the target market. The likelihood is she was told by politicians not to worry about the state of the company and that she would be looked after. When the company announced a serious profit downturn it was determined that she had to be got out of it and an excuse needed to be devised. It is not acceptable to desert such a sinking ship after being there just one year. She was offered an executive job at Fairfax NZ which lasted about 4 years. The person who appointed her, David Kirk, is also no longer with Fairfax but was appointed to the Forsyth Barr board. We are convinced Ms Withers appointment was just a ploy to get her out of Feltex. She had a good portfolio of directorates and it is most rare for such a person to voluntarily go back to employment. Ms Withers has now been appointed by the Government to the board of Television New Zealand and as chairperson of the board of Mighty River Power. Ms Withers did not give up her Auckland Airport directorship to join Fairfax. It would have been more ethical if she had retained Feltex instead because it was far more in need of good directors and IPO subscribers had a right to expect that she would stay more than a year there. Her Airport directorate appointment was perhaps under threat though when a large Canadian applied to purchase a large portion of Auckland Airport's shareholding. This application was eventually turned down by Government ministers after the Airport spent a considerable sum opposing it with Credit Suisse receiving some of these payments. We believe that blackmail would have been involved.

Similar to the Joan Wither's case is that of accountant Kevin Simpkins. He investigated the Feltex IPO for the Securities Commission but purported not to find anything wrong with it of significance. The report is a wilful whitewash job. He purported not to investigate what had been happening with Feltex's market share in recent years to determine whether its assumption in that regard for 2005 was realistic. And he purported not to investigate Feltex's claim of increasing market size and whether it was reasonable to assume from the historic figures that the 2005 size would be greater than that of 2003. For his efforts in purporting not to investigate Mr Simpkins has been made chairman of the Accounting Standards Review Board and this body is in line to become the chief audit regulation body. Other members of the Securities Commission were surely involved in the coverup. The Commissions findings are to be found at http://www.sec-com.govt.nz/publications/documents/feltex/01.shtml#part1

The liquidator of the company, McDonald Vague are also in on the plot. They investigated the IPO but found little different from the Securities Commission "out of respect for it". The Securities Commission and the Companies Office have found serious fault on the part of five directors (four of them directors at the time of the IPO) and the auditor but only for things that happened after Feltex's profit downgrade announcement and the exit of Ms Withers. The liquidators said they had found some misdeeds which happened during the tenure of Ms Withers but they had "forgiven her". They should not be in the forgiveness business. It is not plausible that things suddenly went rotten after the exit of Ms Withers.

It would be expected that the instigators of such a plot would have a bogus man on hand to purport to assist subscribers to the IPO in taking recovery action and so use up their time window of opportunity. The leader of the shareholders action seems to be fitting that bill perfectly. He is not putting the major arguments to the fore. He has changed his solicitors at least once and also changed his expert witness. He is a former executive of Fay Richwhite who I understand these days have headquarters in Switzerland as does Credid Suisse.

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