To Contact Us to page back through Previous Editions click here Index is in right hand column

>January 2009 Edition ----

A happy new year to all our fair minded readers. Let us make a big effort to clean up the commercial scene. Most of the problem people are glaringly obvious.

This commentary has been extensively updated on 14 Jan. please re-read.

Well gender features high on the list in this addition. Peri Finnigan (no relation to and not to be confused with Michael Finigan the old man of considerable abilities, Michael C Finnegan managing director of JPMorgan Chase, the south Otago industrial town of Finegand, or the promoter of action against the Feltex IPO, Tony Gavigan) the female partner of the three partner liquidation firm of McVay Partners has said that the liquidators expect to take an action for a meagerly $20m against certain executive and directors of Exftx Ltd, formerly known as Feltex carpets. Well at least that is something. The intended causes of action seem to be wide ranging including misrepresenting the state of the company and failing to sell its assets at an opportune time. We go along with that too. But the strange thing is it relates only to actions occurring after the resignation of Ms Joan Withers as a director. We say this is highly peculiar because the most serious offending was done prior to that time with the production of a seriously misleading IPO. We also say that because Ms Withers was not a director when these alleged offences have taken place is not of itself a reason not to take action against her. Leaving the board is not an option when hard decisions have to be made. The responsibilities of a director are more embracing than that.

Well the liquidator's first concern has got to be for unpaid creditors and it is likely that it was actions in the final stages of the company's active life that was responsible for putting some creditors out of pocket. To the extent that these creditors include the ANZ bank however the liability is less clear cut because this firm has probably had good knowledge of what was going on for a long time. We think it is probably possible for a bank in such a situation to arrange an improper profit feast by charging penal interest rates yet knowing overall that its funds are quite secure and so "use up" remaining shareholders funds. We are not saying that this happened but that the issue can be rather subjective. ANZ seemed to be guilty of delaying tactics when it denied the liquidators access to its records of Feltex right up until a court case on the matter was about to commence when it suddenly dropped such opposition and seemed to become quite co-operative.

But liquidators also have responsibilities to the shareholders. In this regard we say the Exftx liquidator's "respect" for the Securities Commission is entirely misplaced. There is nothing sacred about the Commission that should command such huge respect. The members have all been appointed by one person, former Minister of Commerce Lianne Dalzeil. Ms Dalzeil has a select set of political leanings. She had a mandate to try and put her views into operation but by overt rather than covert means. There are five males and five females on the Securities Commission which does not reflect the composition of the NZ corporate scene. Australia has had three males on its equivalent body but with the change of government the junior of the three positions is now held by a female. We say Ms Dalzeil's Securities Commission selections are largely political selections and hence they should follow her out of office. That would allow a new lot in who could review the findings on the Feltex fiasco. The selections are like the selections of national honours recipients which the NZ Herald is complaining about. Australia apparently has a non party political selection panel for this and the prime Minister is not involved in the process. Anyway the liquidators need to think for themselves and not take this Commission's official views into account.

Well to perhaps be fair the liquidators have gone a little further than the Commission in their allegations and seem to be sighting causes of action such as failure to sell off the assets at an earlier date which the Commission did not seem to refer to. . And they have identified some minor incidence of misconduct which actually goes back to when Ms Withers was on the board. They have forgiven her for this. Rather obviously they have realised that the idea that a mass of malpractice commenced the moment she left is unrealistic especially since media focus was on Feltex from that time, for a while at least. Actually the IPO was likely hatched before Ms Withers joined the board. We accept that she would not have been responsible for the gross misrepresentation of the company's sales prospects. But she should have studied up what was going on and detected this before deciding to join the board. Ms Finnigan mentions that the action of the Gavigan camp has complications for their intended action but she "refused to elaborate". We would suspect that it is intended to have Ms Withers as a prime witness but because she is a defendant in the other action she cannot afford to admit any guilt.

We must reiterate however that there is no excuse for either the Securities Commission or the liquidators not finding fault with the IPO prospectus. It forecast and projected 1% growth p.a. for both the market size and Feltex's market share. The 2003 market size figure was some two percentage points above the 10 year average so a fall at least to that needed to be provided for. The average was increasing at only about 0.38% p.a.. And market share had been falling at 5% p.a. and the idea of this changing to a 1% p.a. increase was completely around the bend. Both assumptions were completely unrealistic and the Securities Regulations require realism. Government protection for the industry was being reduced in both countries and it should have been no surprise that this would likely make some companies unprofitable.

There has to be some powerful motive to stop them both taking action over the IPO. We speculate that it is because the people from the Securities Commission have been responsible for getting Ms Withers involved in Feltex as part of its unofficial policy of getting more women involved as company directors. We think she was probably told it was a "piece of cake" and it was just a matter of getting her photo taken for the prospectus, collecting her fees and bathing in the glory. It will certainly be something of a setback to women directors if her public liability insurance gets drained. They have, we think, decided that it is better if the shareholders, many of them women, holding jointly with their partners, not get back any of their lost $250m than for this to happen. Also better that the country's reputation for fair markets should continue to languish.

To this end they seem to have "retained" the services of one accountant namely Kevin Simpkins. Mr Simpkins has moved around a lot and has been National Director of Accounting at Ernst and Young. He is now a "senior fellow" at the School of Accounting and Commercial Law at Victoria University of Wellington and presumable was when the Securities Commission retained him presumably to give advice on the Feltex case. We have absolutely no confidence whatsoever in this school. It is we think prepared to do anything and everything to get the Government out of any perception fix. Don Trow ruled the roost there when in 1993 he came out criticizing the Accountants Society for having no rules, after representing the state controlled Bank of New Zealand as an expert witness in the Securities Commission hearing into certain arrangements of the Bank. The Societies requirements were expressed as principles rather than rules as is still the case with the Institute today.

This word "retain" is interesting. It has the well known meaning of "hold on to" but in addition that of engaging a solicitor by payment in advance. We think if you admired a certain solicitor and wished him to represent you should any need for a solicitor arise in the future you could pay him a fee to "retain" him so he is obliged to act for you when the occasion arises. What happens if he has also been retained by the other party to your future dispute we do not know. Perhaps Mr Simpkins is being retained by the Commission such that he is obliged to assist with any job that they want him for. There is no proof that they were following Mr Simpkins official advice when they said there was no significant problems with the Feltex IPO but that can surely be assumed. But we strongly suspect his advice is what an influential core of the Commission want him to say so that between them they believe they have enough personal weight to carry the day. We think that unofficially that is probably the basis upon which he is retained.

The incoming Government does not want to be too mean . Rectifying a scandal is likely to expose it and who knows they might get themselves into a similar fix. But the mass injustice to those who lost the $250m needs to break through. Sure the Securities Commission or elements of it were just trying to boost female participation in company directorships which might be seen to be quite low. It was being responsible allowing an experienced director to get the job. It thought this job was a piece of cake which was very naive . If something is blocking you from getting a type of job the benefits of such a job loom large and the tightrope the job might be is not so evident. There are lots of qualities other than being female that render us largely unacceptable to be a public company director. But gender is a highly objective and obvious classification in terms of which category one is in. Hence it is ripe for political lobbying but this gives no indication as to the suitability of either gender for any type of job and does not say that the two categories are equally suited to anything or are in anyway close to being so. The way out is for Commission to acknowledge that the directors have a serious case to answer with respect to the IPO, join with the Gavigan camp to recover the funds, then have the government bail out whatever liability Ms Withers is determined to have.

Mr Gavigan himself appears to have recently brought to light the fact that he was once a Fay Richwhite employee And Ms Finnigan has taken the opportunity to further publicise this, presumably with the aim of discrediting him somewhat. Certainly Mr Gavigan is quite a one man band and this former association with these current Swiss gnomes is somewhat disconcerting and further increases the possibility that he is a double agent, perhaps hired by his "defendants" to soak up all the opposition and put up a pathetic case on their behalf. He shares his Fay Richwhite employment history and involvement with yachts with one Jim Hoare. Chairman of the Diciplinary committee of the Accountants Institute who we believe is performing some sort of double agent role. The Institute with its ex Ernst and Young Chief Executive is still trying to put together the case against Feltex auditor Gordon Fulton. How trying can you get? We think former Institute CEO Gary Muriwai might have went down the road because he was going to do something. We know of no connections between Credit Suisse and Fay Richwhite other than their connection with Switzerland but their dealings sure have the same smell about them so we suspect that they collude, But Ms Finnigan and her fellow two liquidators have a heavy responsibility for this one man band Gavigan situation developing by denying other people access to the shareholder lists. Shareholders were left with a choice of one over where to place their recovery efforts. We suggest that subscribers to the IPO put pressure on Mr Gavigan to form a team to decide tactics in return for some more funding.

We regret we have been slow to pick up on a letter which can be accessed from here which the liquidators have issued to shareholders, and perhaps ex shareholders, who have claimed as creditors. Well normally shareholders are not classed as creditors and rank below them for the distribution of proceeds in a winding up. But the argument can be put that that if the shareholders were defrauded by the company into taking up the shares then the company owes them just like it owes any other creditor. This principle seems to have been verified in the recent Australian case some of these claiming shareholders have referred to called Sons of Gwalia. The liquidators have spelt it as Sons of Gwallia but we believe that is wrong. Well the liquidators have no funds for ordinary creditors and hence no funds which shareholders might be able to tap into by this method. But if shareholders could establish that they were defrauded by the company and the company owed them the liquidators would be obliged to claim this off the directors at the time and perhaps some key staff, if the can finance the case. It can be argued that if the directors misbehaved as directors then it is the company that is liable in the first instance but it in turn can claim from the directors .

We suggest the following text for shareholders in a letter to the liquidators to claim or to confim their claim to be treated as a creditor, at the same time asserting the basis upon which the liquidators should take action against the former directors and perhaps some executives of the company. They should omit the quote marks and choose the appropriate option with respect to their identity type. Here goes:

"I/We subscribed for (or bought) ......... shares in what was Feltex Carprts Ltd on ..... at the price of $.......... which I/We still hold (or sold for $.... On .........) so incurring a loss of $......... as things stand.

"By reference to the [news media and/or the prospectus and/or my/our broker] I/We gained the impression that the company, Feltex, had fairly determined its likely profitability for its 2004 and 2005 years and for its IPO had multiplied this by a market profit yield to determine the maximum number of shares which it would issue. I/We believe that the company directors at the time of the issue (and hence also the company at that time) would agree that that was the impression given and was the impression that was intended to be given.

"I/We have since established that what was claimed to be the likely profitability for these financial years was in fact a deliberate gross overestimation of future profit which has caused the company to collapse by it trying to service, by way of a dividend, the excessive capital issued to try to delay obvious evidence of trouble.

"I/We therefore claim the amount of my/our loss from owning the shares and claim that in the circumstances I/we should be treated as a creditor for this amount. While I/we accept that presently you have no funds to pay any such amount my loss has resulted from director misconduct and I/we submit that you are obliged to obtain the funds from them.

"I/We now set out my/our evidence for the gross overestimation of profit which I/we allege.

"The forecast revenue for its 2004 year of $335,398 shows and increase of 6.7% over its actual declared revenue for its 2003 year of $314,352 while the projected revenue for its 2005 year shows a 3.7% increase over the forecast for 2004. Allowing 3% p.a. for inflation the increases provided for are thus 3.7% and 0.7%.

"The company claims to have adopted assumptions of a 1% rise in market size and a 1% rise in its sales due to an increase in market share in arriving at its projected revenue for its 2005 year. For its 2004 year it says it was relying upon what had happened in the year to date. Well it would know the result for the first half of the year. This is given in the graph on page 81 of the prospectus which shows the 6 months sales to Dec 2003 as $171.7m, an increase of 3.5% over the Dec 2002 six months of $165.9m a 0.5 increase when one allows for inflation. The forecast for the six months to June 2004 however comes in at $159.1, an 8% increase over the June 2003 figure of $147, 3, 5% after allowing for inflation. The results for little more than 3 of those 6 months would be available to them. There would seem to be no excuse for coming up with this mammoth increase as an approximation of the actual.

"The only justifiable changes in revenue of the forecast and projection are very large reductions. Let us first look at the Australian market size on graph page 37 of the prospectus. It can be seen by looking at the pattern there that a significant fall was due in 2004 or 2005 but Feltex for their own purposes chose not to look at it that way. In its paragraph above the graph the company says that the 1993 figure "grew' by 1.7% p.a. to the 2003 figure. Their calculation is correct but it is completely wrong to imply that this has some significance in considering market growth. It should be noted that 1993 was the lowest figure at least since 1989 and indeed the 1990 figure was quite high. But regardless of that, the 1993 figure is too old to be just one of two figures to be taken into account . Indeed the up and down pattern means that many, preferably all recent figures need to be used. Feltex would no doubt argue that its calculation is over ten intervals and ten is a round figure and hence in their view an objective quantity. I/we say that is nonsense and fraudulent. You cannot claim that an issue is good just because such a 10 interval calculation happens to show up good. I/we say the correct analytical tool is a least squares regression calculation of the last 10 years. This gives an increase of 0.156b per year from a start of 49.63b sq metres in 1993. This comes out at compounding growth rate of 0.35% p.a.. But this average figure for 2003 is 51.1b, some 2b or 3.8% below the actual 2003 figure of 53.1b. The average line at 2005 is 51.5b. Roughly speaking one would expect actual figures to stray an equal percentage above and below the average line. Thus the 2005 figure should be budgeted for at 51.5 less 3.8% which is 49.54b or 6.6% less than the 2003 figure not 2% or more above it as Feltex was working on.

"Let us now consider market share. If you add together the market size on page 37 of the prospectus for Australia and New Zealand one gets 57.9b, 57.9b and 63.5b for the years 2001 to 2003 respectively. Feltex's sales for these years are 328.8m 301.9m and 330.8m. We add an inflation adjustment of 4% to the 2001 sales and 2% to the 2002 sales to get sales in 2003 dollar terms of 342m 307.9m and 330.8m respectively. Dividing sales by total market size we get Feltex' revenue per sq meter of total carpet supplied to the market of 5.90 5.31 and 4.93 respectively. This shows that Feltex's market share has fallen 5% in 2002 and 5.2% in 2003 which is consistent with falling tariff protection for carpet in both countries.

"So instead of a 4.4 projected increase in sales for 2005 over that recorded in 2003 the project should have allowed for an 6.6% reduction sales due to reduced market size and a 10% reduction in sales due to reduced market share. The percentage overstatement is some 20.6% which could be multiplied several times in calculating the overstatement of profit. Securities regulations require projections to be realistic. I/we submit that this is definitely not the case here. I/we submit that this gross overstatement has caused my/our loss."

Well it is pleasing to see that Don Brash, ex National Party leader and ex Reserve Bank Governor, has again come out requesting an inquiry into the validity of the convictions of former Christchurch crèche worker Peter Ellis for child abuse. We believe Mr Ellis (and thousands of other men to some lesser degree) is a victim of a terrible convention which has built up among those in authority, not to question the actions or competence of female professionals.

Dr Brash was succeeded at the bank by Dr Bollard who in turn had his place as Secretary of the Treasury taken by Mr John Whitehead. Mr Whitehead has recently spoken out with a pessimistic perspective on the economy which has made us enquire as to who he was and how he got there. We found an article announcing his appointment coming from the NZ Herald on 8 April 2003. We take the liberty of quoting from it the following two sentences. " Mr Whitehead's rivals were rumoured to be deputy secretary Iain Rennie and former treasury staffer Mary Anne Thompson, number two in the Prime Minister's department. Dr Thompson was highly regarded, had the ear of Prime Minister Helen Clark and would have been a groundbreaker as the first woman to head the treasury".

Well it seems Mary Anne almost got there. But the "Dr" bit it transpires was not justified. We think that she will need to go away for a little while, with no need for an itinerary. A precedent was set when a Canadian, one John Davies we think put a MBA on his CV which gained him the position of CEO of Maori Television for a time. But a NZ Herald female reporter for some reason had its doubts about the authenticity of his claimed qualifications and was able to demonstrate that the MBA was not valid. He got 3 months we think and deportation. The time should be somewhat greater for a PhD one would think. It is recognised as a higher level and it has a title which she assumed. Mr Whitehead does not have such a title so it might have been a close run all right. We are inclined to think that the validity of the title might have come into question at that time the Treasury Secretary position was decided. She would have to apply, one would think, to be seriously considered and it seems like she did not quote her assumed qualification. The matter might have been hushed to save embarrassment which would be quite the wrong thing because other offending has taken place, not all of which has necessarily been identified. We ask what was it about Mr Davie's situation in comparison with Ms Thompson's that has caused the NZ Herald to followup on one qualification but not the other. Ms Thompson comes from a small Pacific island we think or at least some of her family do. Academics tend not to be thick on the ground in such places. How she achieved it would tend to be a story in its own right.

The Herald has brought to light the case of the seemingly brilliant radio journalist Noel McCarthy however. Her career continues but is likely now to be short of that cutting edge which adopting work snippets of UK journalists had given.

It was probably by having one of those Prime Minister's ears that got Ms Thompson the job in the PM's department. The State Services Commissioner at that time would be we think one Michael Wintringham who we think was appointed from outside the public service. We think the public service ethos has collapsed and we have now a system of supposedly apolitical appointments which effectively are not so. There is a tacit understanding that appointees will follow ministers directions which are communicated to them in some indirect way. This gives ministers the ability it influence day to day functioning without carrying the can for it, or at least trying to make it seem that way.

The Securities Commission, a core problem from our viewpoint, has all its members appointed by the Minister of Commerce. The outgone Minister, Lianne Dalziel, while the Minister came out saying it was more than her life's worth, or a similar expression, for her to interfere with or question the findings of this independent Commission. Yet the Commission does not follow many of the basic rules of operation such as declaring which members have a vested interest in any issue which it has considered. It seems to have never issued any minority opinions or declared a split of opinions in relation to any issue. One gets the feeling that all members are tied in by some sort of blackmail. The member Mai Chen for instance was once a free and easy commentator on all sorts of issues but now seems never to make a sound on anything.

We strongly believe that the Securities Commission has adopted this secret agenda of putting women onto company boards. If a law was passed that all companies had to have one or two female directors at least everyone would know where things stood. But the Securities Commission has very important issues of commercial corruption to consider and there is no room for mixing other secret agendas up with it. We think they have been offering exemptions from certain requirements as an incentive to appoint a female director. Then when it turns out that they have done this to a corrupt company they rally to protect the integrity of the female director who has naively and somewhat negligently accepted the appointment by saying nothing wrong happened on her watch, caring not for whoever may have been harmed by the wayward company.

While the Securities Commissioners are appointed directly by the Minister and State Services Commissioner was appointed or at least recommended by a government appointed seemingly politically neutral panel. Well that might be as good as it can get, but we still cannot work out how one Dame Margaret Bazley can get on to such a panel. She selected this Mr Bazley for a husband at about the age of 25. He went on to become an associate of Mr Asia and to acquire several convictions at spaced intervals for a considerable variety of criminal behaviour. Interestingly after they split up he seems to have gone straight. A key piece of advice to criminals wishing to reform is we think for them to play close attention to the company they keep. A Dominion Post article reported a while back that they each were still being dogged by public knowledge of these convictions. Good on it for bringing the matter up but we are unimpressed by some suggestion of unfairness that seemed to be implied in the article or the heading. Like about 80% of the population they need to accept that high office or perhaps not so high office is not for them. A necessary attribute is missing. However a most worthwhile remainder of life is still very much available to them. We don't go along with the argument of lost potential. A missing link is a missing link. What might have been is an irrelevance. A miss is as good as a mile. It can't be fixed with a damehood or anything like that. Track record is really all there is to go on.