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We don't believe that this was really a case of insider trading. We believe the "professional" fund managers who purchased the shares with other people's funds were well aware that a permanent price crash was imminent. We think they would also have had reason to believe that a share of the proceeds would be coming their way in their personal capacity and it will have done so. They knew the Tranz Rail accounts were one big have. Not that the accounts fooled any half expert or expert. They only provided an excuse for buying the grossly overpriced shares which they think will survive any legal challenge. We think that few of these "bright boys" hold an accounting qualification but a good understanding of accounting is an obvious requirement for the job. They need five years inside each to turn attitudes in the industry around and establish that these managers were not bright at all.

The account had financial leases treated as normal leases, and track renewal capitalised without extra allowances for track depreciation. Revenue from the sale of the Auckland corridor and the partial sale of the Tranz Scenic operation were treated as revenue. The company was getting publicity from the run down nature of its plant which had caused several accidents. It was well known that these rail operations needed considerable government support and the Government was not promising anything. There was no reason to justify such a buy. Nearly all the managers of the big funds were in on this steal. They take a large management fee but that is not enough for them. So they queue up to buy from vendors some of whom have been the subject of numerous enquiries and inquiries. The holdings of the various funds did not show up on subsequent annual reports of Tranz Rail but instead two nominee companies were deemed to hold these funds. The Dominion Post reports that the Accident Compensation Corporation was among those who purchased. This goes along with ACC's purchase of National Mail shares and subscription of Feltex shares, all three of which we say were scams designed to rob the public funds with the assistance of fund managers, and we say all three of which did.

The auditors of the 2002 Trans Rail accounts eventually got the sack from that company but that is not near sufficient. They too need 5 years inside. They allowed just about every accounting rule in the book to be broken. It was too obvious to fool any of these fund managers, who should each have spent a couple of days studying the accounts before making an investment of that size. But the accounts provided an excuse to raid the tills in no small way. But anyway the immediate realistic question is "what do the Funds do with the $17m?" Do they find the owners who took the losses when the shares devalued? Or do they just credit the particular funds or their equivalent? We say the former is warranted. The compensation must go to the people who lost out. We suggest to anyone who had a bigger holding in these managed funds in 2002 and 2003 than they do now to write to the fund concerned asking or demanding that they be paid a fair share of the $17m based upon their holdings at the time that the Tranz Rail shares lost official value. All funds which were entitled to hold company shares are likely to be affected. If you don't get satisfaction the small claims tribunal should be the next step.

In most cases we think the same funds managers who made the purchase have had a change of employer. They need to be locked up however to protect people' funds and tidy up the place.

Well the Gavigan site www.ftxit.com is interesting to follow these days. By contrast the Feltex liquidators site www.mvp.co.nz which set up a special Feltex section and undertook to keep investors informed does not seemed to have been touched since November last year. They should now be full steam ahead recovering funds for both genuine creditors and shareholders. They eventually gained access to the ANZ records but have not said what they found. It appears that they will not do anything out of respect for the Securities Commission. We say that such a lack of independence is unacceptable for chartered accountants.

The Gavigan site claims to have come across evidence of "channel stuffing" in the Feltex records. This is a new term to us but it seems to just be a way of trying to make the blatant overstating of company sales excusable or less detectable, we understand, by "bringing forward" anticipated future sales. We don't think that the Securities Commission has inspected the records looking for that sort of thing for fear that they should find it. We think they have just used the tool which they have something of a monopoly on, the ability the compulsorily question people under oath, and give the impression that this tool is vastly superior to all others. We say that it is relatively useless except as a follow-up to the finding of discrepancies by other methods.

But if they believe there has been Channel Stuffing the Gavigan camp should have its sights on the Feltex auditors, Ernst and Young, as much as anyone. Why should they get off the hook. We say that although Feltex shareholders are justifiably going along with the action of the Gavigan camp this should not prevent them taking independent action against the auditors. It should be remembered that even if the action underway recovers the full $200m odd claimed the promoters will be deducting about 33% as their fee. That 33% seems a fair portion to be recovered from the auditors. Well we have no direct evidence of channel stuffing or the like although it seems to be fully consistent with the history of the accounts, but we believe that we do have good evidence of the auditors misleading potential investors as to their opinion on the reasonableness of the projections contained in the 2004 prospectus. We wish now to restate the situation using different words.

The Companies Act provides that auditors need not express an opinion on the reasonableness of assumptions upon which any projections contained in an IPO projections are based. Companies (or auditors) invariably take advantage of this and express no such opinion as to the assumptions however the are required to know of the assumptions and confirm that the projections logically follow from these assumptions.

All is well so far except that because the auditors have a duty to know and understand the assumptions used to formulate the projections it is worth considering the situation where on learning of the assumptions it was patently obvious that they were not realistic. We think that accounting ethics would require that they have nothing to do with auditing any of the prospectus. We think they would also have legal liability if they gave a positive audit report to such a prospectus even although what is said in the audit report might be correct. We are not accusing the Feltex auditors of malpractice on this score although it would not surprise us if they knew full well that the projections would not be met. It could be that evidence of them saying that the projections could not be met is about.

But rather than just avoiding to express any opinion as to the reasonableness of these assumptions it seems to have been decided more recently that the audit report should specifically say that the auditors express no opinion as to the validity of these assumptions and hence the projections. The statement concerned can be referred to as a disclaimer. We have no problem with this and fully agree that there should be such a disclaimer. But a pure disclaimer is rather stark and we think issuers were concerned that it was or could be frightening investors away unnecessarily. We can sort of see the problem but say that the disclaimer is correct and facts must be faced and potential investors would eventually understand what is being said.

It seems that the auditing fraternity has unofficially got together and decided that it would be OK to explain why the disclaimer is needed as part of the disclaimer. We doubt that there is a good reason other than it probably saves the auditors a few headaches. But the trouble is that it is difficult to give the reason for the disclaimer being in place without modifying the disclaimer and the Feltex disclaimer represents a very poor job which would have misled many investors and we believe that there was deliberate intention to mislead.

What they claim to have said is that they have not expressed an opinion on these projections or the projections in any other prospectus because commercial uncertainties make it too difficult a task. What they did say (and we say knew they said) is that they are not expressing an opinion on the projections in this particular prospectus but only because they have a policy of never expressing such an opinion (because of commercial uncertainties). It follows that if they had reservations concerning these projections that of course would be a more relevant reason and hence would be the one which they would give.

The auditors state that they have expressed no opinion as to the reasonableness of the projections so shareholders should only need to demonstrate that they were told otherwise to get some recompense. The small claims tribunal would be the appropriate forum in many instances. Shareholders are welcome to get in touch.

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