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Well now its back to almost pure wayward accounting with our latest assessment of the Feltex affair.

Well there has been major developments from the Gavigan camp but nothing or negativity from more official areas from where action should be coming.

It is pleasing to see that the claim for $254m centers upon the purported IPO prospectus of May 2004 and includes the vendors of the company, who got away with most of the money, as defendants. We also like the principle of all subscribers to the issue being claimants unless they opt out.

What we are not happy about is that the auditors appear to be escaping and that purchasers of shares after the first profit downgrade warning of 1 April 2005 are not being included as claimants. We herewith expand a bit on both these issues.

We say the auditor misled many, perhaps near all of the readers of the prospectus, by the second to last paragraph of their Audit Report which contained a statement that they did not express an opinion on whether the particular forecasts and opinions contained in this particular prospectus would be achieved because of inherent uncertainties contained in all such forecasts and projections. It would be readily interpreted that these auditors had fully examined the reasonableness of the projections and found them to be reasonable and therefore fallen back on their ultimate reason for not expressing an opinion on the reasonableness of the projections, which applies in all cases. If they had not assessed the projections for reasonableness (which is in fact is what they now say is the case) it would be correctly assumed by the reader that that would be a far more relevant and important reason for not expressing such an opinion and would have been the prime reason which would have been given. Hence the reader is incorrectly assured that the auditors have checked the forecasts and projections and found them to be reasonable. Even if the subscriber had not read the audit report he or she would have been influenced by advisors or journalists who had done so. Indeed we believe that it is likely that certain of the defendants, particularly the brokers, will claim that they had reasonably been influenced into thinking that the projections were reasonable because of that statement in the auditors report. If the auditors were also defendants it would be a simple matter for the Court to push such liability onto them.

The next reason why the auditors should also be defendants is because they are seriously involved in the under-reporting of the seriousness of the company's breach of its banking covenant later in 2005. This is after the period which the claim covers but it is stretching it to say they only became bad auditors after the profit downgrade. The whole case centres upon bad accounting and it would be most unlikely that it was all bad accounting which the auditors did not have an obligation to assess.

This brings us on to the bit about those who brought shares on the secondary market after the profit downgrade warning of 1 April 2005 having not been included as claimants. It is probably true that the prospectus was not addressed to such buyers. And certainly events had by then overtaken the prospectus to some extent. But there has never been any admission by the company that there is anything wrong with the prospectus and it is a public document. Certain of these buyers have the best case for receiving compensation, namely those who bought after the company seemed to suggest that the ANZ bank had forgiven it for the breach of the covenant and had reinstated it and all was back to normal on that score. There apparently was nothing back to normal about the interest rate it had to pay. It was now a high risk client of the bank. The Securities Commission seems to have reported this matter well, in sharp contrast to its report of the IPO prospectus.

Then there is the matter of how well the company's final months prior to receivership were managed. It appears it could at one stage have sold to Godfrey Hirst and paid a significant final dividend from the proceeds. Then the idea came that the proceeds would not be very significant and the shareholders might choose to use it for a fighting fund. The Turner brothers and others got involved in preparing a bid which never eventuated and we suspect that this was just to use up all the fighting fund by virtue of the delay. We think the bank did not want to see a fighting fund as well. Covering all this ground in Court might well uncover anomalies which go back to the time of the IPO.

Mr Gavigan seems to have got his reputation from fighting on behalf of the shareholders of Southern Petroleum. About the time he took on the Feltex cause he scored a win in Court on behalf of his Southern Petroleum cause. But as far as we are aware he has not recovered any cash for those shareholders and the cause would seem to have been allowed to come to an end. We understand that Mr Gavigan is being paid by the fund he has established which has made this claim on associates of the Exftx (Feltex) IPO and we suspect that he was also paid by the Southern Petroleum fund. There is nothing directly wrong with this of course and in many ways it is only reasonable but it does open the possibility of the funds becoming salary funds with cases taken to score the odd win without much or any drive to achieve anything. Presumably the major backers will ensure that this is not the case.

Solicitors for the contributed Feltex fund were putting some very week arguments to the public concerning the alleged false impression which the IPO prospectus gave of the company. An argument we heard was it gave the impression that the company was producing high quality sophisticated wool carpets whereas in fact most of its carpets were low cost basic ones. We say that while there are a huge amount of photos of carpets in the prospectus the carpets shown are invariably of very plain designs and appearance. It might be a tactic to give the impression that they are going to put up a weak case but we do not think it will work very well. There is plenty of substance to criticize.

That is enough negative comments about the contributed fighting fund. Overall it is in fact very encouraging. Let us have a look at what other parties are doing. In brief; not a lot.

It will be interesting to see whether the Accident Compensation Corporation opts out of the case. We understand that the Corporation subscribed about $9m of public money although the story goes that institutions in general were too smart to be taken in by the Feltex IPO. We think ACC were too smart to be taken in as well but kick backs have come into play which were too tempting whether they were smart or not. Mr Edgar the then chairman of Forsyth Barr, one of the lead brokers for the issue was also a board member of ACC and chairman of its Investment Committee at the time of the Feltex offer as we understand it. That should be a very good reason for the Corporation minus interested parties to take a very close and smart look at whether to subscribe one would think. We rather suspect that many others have subscribed based upon the ACC decision. Just what role the Investment Committee is allowed to play in any investment decision is hard to say. We understand that the committee only sets performance benchmarks but that seems to be a very minor role for a committee of that name to play. And the trouble with benchmarks is if investing staff know they are well ahead of them they might well believe they can whittle off some funds into there own pocket without attracting any attention. The whole practice of having senior commercial people on state sector boards and committees is very flawed.

And the ACC had another good reason to be doubly or tripplely careful with this Feltex offer. The vendor and the other lead broker was a close associate of the firm which sold it half a million dud National Mail shares a few years back. This firm also represented the vendor, which should not have been allowed. It would claim that it had Chinese walls of course. It used the name Credit Suisse F B to one party and C S First Boston to the other. National Mail was trying a very risky venture in an industry which tends to be a natural monopoly and had not reported for some time. ACC investing staff knew that a director of National Mail was a close associate of the vendor of the shares, being the chairman and largest shareholder/director respectively of the listed company Metlifecare.

From the information given it would of course be safe to assume that we believe that in both the National Mail and Feltex cases Credit Suisse and certain ACC staff have conspired to lift funds out of the public purse. The Credit Suisse name pulled out of NZ between the two incidences. We also think that this is probably a reason why the Securities Commission is unable to see anything wrong with the Feltex IPO. Its members have been appointed by the Government and we think are prepared to take direction from it.

Whether to opt out of the recovery action is probably not the ACC's decision however. We have observed that the Reserve Bank now has a large holding of Exftx shares in a particular fund and we suspect that it has taken over the ACC's holding, possibly because of some statutory requirement. But it is the owner of the shares at 1.4.05 that counts unless there is some over-riding provision elsewhere in this instance. It is a good aspect of this claim that any recovery will go to the owners of the shares at the designated date so people who have bought up the shares for virtually nothing because of the possibility of a bonanza do not stand to gain.

We also believe that the Shareholders Association or its leaders have been pressured into taking no further action in the Feltex case or in fact into going back on what it has said previously. As Mr Gavigan points out the association was instrumental in the appointment of the particular liquidators, McDonald Vague Partners. They do not seem to have updated their web site pages on the issue since November. The liqiidators got special funds for investigating defunct companies which they spent in part we think investigating aspects of the IPO but this would all seem to be a waste of time because it seems they are not prepared to say anything that might embarrass the Securities Commission. Apparently creditors are owed about $30m by their records. Then there are those who bought shares later and were misled over the company's relationship with the bank who they might be prepared to help. We say they have an obligation to assist the claimants with their case and get all claims heard together.

We wish to now come back to the Security Commission's report of 11 October 2007 and in particular paragraph 61(a). It says that the company adopted 1% market growth for its forecasts and projection and adds that this was stated to be less than its average growth for the past 10 years. Yes that is what the company said but the Commission is supposed to be investigating whether it is true. We say it is not. On page 37 of the prospectus a graph of Total Market Size is presented for both Australia Mew Zealand. We assumed that this would be based on sales but it is not in that it does not take into account changes in stock levels. If stocks build up or run down in a year these graphed figures could be a major distortion to what the market is doing. Perhaps these are the best figures available but their limitations need to be explained. Then we have the statement in the text above the graph of Australian Market size that for Australia the average growth from 1993 to 2003 was 1.7% compounding. Yes if one takes the 1993 market size and multiply it by 1.017 to the power of 10 you get the 2003 market size. But this way of calculating average growth is not acceptable. It depends entirely on what the figures at either end of the range are. There could have been industrial action or some such which brought the 1993 figure to near zero. And a figure from at least 10 years ago is not particularly relevant to the current situation. Many would say that if the 1993 figure was near zero it would not be used be used because the result would lack credibility. They would use 1992 perhaps, or a later year. But this brings up the question of when you use a year and when you don't. The matter is completely subjective. As the lowest of 14 years which we know we say that 1993 was too low to give a fair result and 2003 was a little too high. The only acceptable way it get such average growth is least squares regression analysis. Each year in the span counts except perhaps the middle one if there is an odd number of years. If 10 years is an objectively sized sample then 1993 is not included in the regression analysis for this particular exercise. On this basis we get 0.35 growth. The ideal calculation would put emphasis on recent figures than earlier ones we suspect but we do no know of such a one. But then again if the most recent figure is out of line then a bounce back rather than more of the same should be predicted. We say the Feltex method is completely unacceptable and the Securities Commission should have said so in no uncertain terms.

We have redone our graph to show more things. We acknowledge that the Australian market growth figures which came out after the prospectus were in fact higher than Feltex had predicted. But we still say that their prediction of growth was disgustingly overoptimistic based upon what they said they took into account. We reject entirely those who say as long as they got it right it does not matter how. We suspect that the growth has be cause by a concerted sales campaign by carpet importers capitalising upon relatively newly lowered tariffs. Growth caused in this manner would not help Feltex. On the contrary.

To understand the graph it should be understood that we are just showing the top fifth of it. And shorter bars are superimposed over longer ones. The green bars are what is predicted by least squares analysis and the top of the light blue is what Feltex predicted by drawing a line from the top of 1993 to the top of 2003. The amount of light blue showing is the amount of deceit.

The situation is worse when it comes the "1% increase in market share" which Feltex adopted for calculating the projections. We think what they mean is a 1% increase in sales due to increased market share. The way it is expressed we would have thought it meant increasing share from say 20% to 21% of the total market which of course would be a 5% increase in the company's sales. As far as we are aware the prospectus does not discuss what the market share was and how it was trending in recent years. The Securities Commission says that during its enquiry it was given details of the companies marketing strategy and left the reader of their report to assume that in their opinion it sounded very good. But they do not say that they were given or derived details of the company's market share history as would be known at the time the projections were prepared. That information would be far more precise and objective. We believe that the Commission's paragraph 61 is highly misleading and for some reason deliberately so.

Here is our graph.

So Roger Douglas is seeking a political comeback. Some freeing up of the economy and dropping of expert subsidies was necessary when he took office in 1984 but the extreme right wing policies which he implemented and evoked the following National Government into furthering have been disastrous in our opinion. The leaky homes debacle has drained or wealth by $5-8b has been caused by stupid over the top deregulation of the type Sir Roger was pursuing, and his creation of the Serious Fraud office which can choose its cases has cost far more we say. It has become a virtual license to steal but only for big business. The idea he promotes of catching up with Australia is complete nonsense. Catching up is not possible unless something goes seriously wrong over there. We just have to accept that some people are richer than us and some countries are richer than. Sure if we believe we have identified sound and fair methods of getting richer we should adopt them but that should apply regardless of whether we have rich neighbours.

Sir Roger appointed Sir Ron Brierley as chairman of the Bank of New Zealand. Talk about putting the fox in charge of the chicken coop. There follow about a billion dollars of inappropriate lending by the bank making one of the biggest share price bubbles in world history we suspect. Attempts to recover it from the borrowers seemed to be near zero.

Sir Roger claims his reforms must have been right because they have not been reversed. Well there might be few exact reversals but most have been creeping back with little differences. Latest is Government and employer contributions for locked in savings.

We have had cause to mention Deputy Commissioner Rob Pope on the site. It has now been revealed that he is the subject of two inquiries. They have been going on for up to four years. Well the definition of an inquiry is the holding on to a complaint and observing public opinion to judge whether one can get away with dismissing it. We were surprised when concerning the Xue affair Mr Pope seemed to be saying that when someone is missing they needed to go slow with their looking so they could record everything that might be relevant for any future trial. The Australian police joined in with some rare criticism an then some more junior officer conceded that they could have gone faster. We think there would be quite a few people doing their own searching and investigations at danger and inconvenience to themselves, since the lady could have been alive somewhere. They are not expected to always do everything right but Mr Pope needs to stop insulting the public with his spin.

And now we see that Dame Margaret Bazley is on the panel to appoint or recommend a new replacement for Mark Prebble as State Services Commissioner. We say that Dame Margaret made an appallingly poor choice of husband at the age of 25. Going for a close associate of "Mr Asia" who has clocked up a variety of convictions. We say that that should disqualify her from such an appointment which is only about finding the right. Perhaps most of us have made such bad mistakes in our lives. But there still will be left a sizeable pool from which the panel could have been selected.

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