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January 2010 Edition ----

We wish to restate our major accusation or revelation of 2009 and restate the evidence which we have for it.

We say 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. Perhaps cheating is an important part of sport but such arrangements cause massive confusion with respect to accounting standards and the need to comply with them and are the reason NZ has a very small securities market and terrible losses are experienced by some of those who participate in it.

Much of the evidence for the overstatement of projected profits 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”. The 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 state 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 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, and 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 !% 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 lost profit.

The suspicion 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, arranged by either Feltex or its owner in 2003. 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 Cedit 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 was closing its mail delivery business which was its prime function. The vendor of the shares 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 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. The ACC was about the only NZ institution to subscribe to the Feltex offer, doing so to the extent of some $9m. 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. We suspect that the National Party may have told him that they would give him that opportunity (when next in power) when he first received the honour. Knighthoods are very good for warding off accusations. We think that is why Sir Allen Stanford had one. New Zealand is alone amongst former British colonies in reverting back to the conferring of knighthood titles.

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.

The evidence is further enhanced by the 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. We say 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 is also no longer with Fairfax but was appointed to the Forsyth Barr board. Ms Withers has been appointed by the Government to the board of Television New Zealand and as chairperson of the board of Mighty River Power which generates about a quarter of the country’s electricity. Ms Withers did not give up her Auckland Airport directorship to join Fairfax. Since leaving Fairfax. This 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.

Similar to the Joan Withers case is that of accountant Kevin Simpkins. He investigated the Feltex IPO for the Securities Commission but did not find anything wrong with it of significance. 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 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.

Well that’s the story except that we say it would we think be expected that the instigators of the scheme would have someone secretly on hand under its governance for protesting shareholders to unite under. That person would make sufficient accusations to attract the shareholders but not sufficient for them to be successful. They would probably have difficulties with solicitors and witnesses in fulfilling this function. We say shareholders need to tell the full story to get a refund and individually they should seek to see that this happens.

Well according to the Dominion Post and Businessday the ex feltex directors have lost their appeal to the Court of Appeal over issues surrounding a case taken against them by subscribers to the May 2004 Feltex (Initial) Public Offer. Although it is not big news the Business day report we think was a little too rough. It said the seven directors had largely lost their appeal but made no mention of the other parties which were appealing ie the promoter, the vendor, and each of the two lead brokers associated with the IPO. We suspect something is a little strange. This is amplified when we see that the author of the article is no other than Marta Steeman. It was Ms Steeman who announced to the world on 15 Nov 2005 that NZ’s exports per capita were “almost half that of Australia and 2.5 times less than the United States”. The true comparison is “25% greater than that of Australia and 75% greater than the US”. They refuse to make a correction. We think this media organisation is co-operating with big business and business professionals to confuse the public.

Well the year of 2009 represents a new low in business ethics. We have seen fit to openly accuse the two main political parties or elements of them of buying corrupt accounting services from corrupt accountants with the promise that they will be “looked after” if they ignore certain accounting standards to allow the politicians to achieve certain short term political objectives; such as making the Bank of New Zealand look as if it had recovered from its 1987 crash troubles in 1990, and getting a reasonable haul of gold medals at the 2004 Olympic Games. (As recent editions explain we are now convinced that a flawed Feltex IPO was deliberately used by politicians with the help of certain accountants and others to raise funds to improperly prepare certain athletes for these games.) We only get to know of such occurrences when the plots go seriously wrong. The BNZ was not just making a slow recovery in 1990. It had bad Australian loans which it could not recover from on its own. And Feltex carpets did not just languish with lower than projected profitability. It was unviable and crashed.

The sharemarket is completely unhealthy because there is no consistency in the enforcement of standards. The Feltex IPO is declared AOK and the next failure is not. The rank and file don’t learn anything while those who know what is going on refuse to do anything about it.

The report of the Capital Market Development Taskforce is all about improving systems and the quality of advisors and nothing about jailing corrupt auditors, promoters and directors. They go on about advisors who are not independent but who is going to pay for these “advisors” if it is not people wishing to sell their product. And they are not going to pay “advisors” who do not recommend their product, one can be sure of that. Putting all the responsibility on the “advisors” when the crooks further up the chain get off scott free is just not viable. If all the products were good advisors who help investors choose between them will have minimal influence on outcomes.

We say accountants who compromise accounting standards to please politicians have to go to jail, and for a very long time. As it is now they tend to be hanging out on Institute of Chartered Accountants committees.

There is nothing “independent” about appointments made to boards and commissions by a cabinet minister. Invariably the appointee wants to retain that position and probably wants to receive more such appointments and the way to do that is to implement what it is perceived the minister wants to happen. Certainly someone has to govern and the minister was elected to govern but it is wrong to infer that independent experts are doing the work. The best method is a system whereby the experts are publicly point scoring, one against the others, with eventually prizes going to those seen to have made the greatest contribution.

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