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April 2012 Edition ----

Please peruse our resently updated evidence (or proof) of the Government backed Feltex IPO robbery. Click here.

The news at the moment concerns directors of a large number of defunct finance companies getting into trouble for misleading amateur investors in their prospectuses. We say these cases have all been caused by the Government initiated Feltex Carpets prospectus of May 2004 which sold the worthless company to amateur investors to fund cheating to enable the country to "win" gold and silver medals at the Athens Olympic Games held three months later. Corrupt politicians along with corrupt accountants and judges have pulled this one off and have been successful in getting away with it, to date. The directors of the finance companies have seen the directors of Feltex getting away with this massive con job, and thought that they too should be able to get away with something similar. They had a "if its good enough for one its good enough for all" mentality. They probably did not intend that their finance company fail but thought that if anything like that did happen the corrupt political and professional elements would bail them out as well, especially those with high profiles because of having such things as a knighthood. But of course a country cannot go on like that and the government is trying to put an end to it along with their cohorts in the SFO and FMA but they are not prepared to go back to the root cause and jail all those involved in the Feltex scam, especially no doubt if they themselves were involved in it.

A large section of the public would no doubt not want the see the country confess to cheating in sport. They presumable prefer the alternative which is a country in economic misery with huge differences in wealth between the conned and the conners (con meaning confidence trick).

We digress a bit for a while to discuss an interesting piece or news. Well we will have to be careful because one Simon Bell has been found guilty of harassment as a result of his investigations into what he sees as a crime. The suspected crime concerns the disappearance of young people Olivia Hope and Ben Smart in very early 1998 and the subsequent conviction of Scott Watson for their murder. We have a lot of sympathy for Mr Bell although of course it is not acceptable to frighten people.

Mr Bell alleges that a woman who has recently come to live in Blenheim, home town we think of Olivia's parents and of Olivia until her disappearance, is in fact Olivia. Mr Bell we think could pretty much prove his case if he could establish that this woman went into the Hope's home or the Hope's went into the women's home. But it is hard to track and document movements without people knowing and Mr Bell has fallen foul of the law. Now he has given the two parties another reason to meet and associate if they wish.

In a photo of Ben and Olivia provided with this story Ben looks like something of a magician. He was we think having some difficulty in getting access to Olivia in late 1997 and so he might have been able to stage a joint disappearance, perhaps with the help of a fairy godfather from Australia or somewhere with a boat, possibly a ketch. Eventually one or both of them might have wished to face the music for all the trouble they had caused and come home. But that would be to the considerable embarrassment of the crime authorities and any politicians who had encouraged these authorities to "get someone" for the suspected murder. The police of course are involved in giving new identities to people, so the solution could have been for Olivia to come back with a new identity and so have contact with her parents under controlled conditions.

Well this scenario does seem a little far fetched but the official version of the situation is not held in high regard either especially by some witnesses at the Scot Watson trial as was Mr Bell. We think Mrs Hope and this harassed women could have shown a little more sympathy for Mr Bell's objectives and consented to an publicly audited DNA test to prove that they are not mother and daughter. Mrs Hope apparently called him a madman which we think increases the chance that Mr Bell might be on to something.

Well this case has little to do with accounting and we are "just" accounting but it helps us understand the unhealthy relationship between politicians and so called "professionals" which is the big stumbling block in the way of decent accounting, including the practice of promoting culprits to effect, or increase the chances of, a cover-up. Mr Pope, the police officer in charge of Watson case is a prime example. He was appointed Deputy Police Commissioner a year or two after Watson's conviction. But he resigned a year or two ago in circumstances that suggest that he was not the correct man for that job.

Another prime example is Ernst and Young's New Zealand auditor of Feltex Carpets Ltd, Gordon Fulton. After the NZ Securities Commission cited E & Y over Feltex's 2005 half yearly accounts he became chairman of the firm for a time. The firm was sort of saying "Do you know who you are dealing with here?". John Judge would still have been Chief Executive of Ernst and Young at that time. It would be early 2009 when the then new ACC minister Nick Smith picked him out to be the new ACC chairman despite E & Y having been the ACC auditors, probably since its inception. But Mr Smith went as minister in the 2012 line-up and the new minister we hear is not very happy with Mr Judge. And the old minister has lost his ministerialship position over issues associated with ACC. ACC leaks money like a sponge leaks water when it has just been lifted out of the bath. We say the government keeps it that way and that is why Ernst and Young audit it. Everybody and his dog gravitate to it wanting a payout for nothing. Cliff Cook got half a mil for "selling" National Mail shares to ACC before the failure of that company was announced. Credit Suisse $9m for selling shares in the worthless company Feltex to ACC, Then a Mr Hutt has got thousands if not millions by being the unofficial monopoly supplier of office fitouts, They no doubt all have had to share some of their winnings with associates who have made it all possible.

Then their was the Court of Appeal's ruling in KSB V ACC. This case was supposed to be about whether a women was entitled to ACC compensation for problems while awaiting the outcome of an HIV test. She apparently suffered a bad anxiety disorder while awaiting these results, A large number of men to not know they have HIV and of course some lie or fail to disclose their positive status to prospective sexual partners. This woman was presumably happy to take this risk but when she was later told he was HIV positive we are led to believe that she developed mental problems. The odds of her becoming HIV infected had not shortened all that much because of the news. Women are not particularly susceptible to contracting HIV.

Anyway the upshot of the ruling is that if a person who is HIV positive is convicted of failing to declare the fact in advance to sexual partners then those partners can claim compensation for anxiety, similar we think to what a person walking down the street who is violently attacked and raped might receive. The ruling puts the two crimes in the same category which we say is a nonsense designed to open the floodgates further. Next in line will be people who don't know that they have HIV but know that they have engaged in very risky behaviour and might have caught it. Failure to disclose that to an intending sexual partner should also be a crime but that does not mean the ignorant partners should get payouts.

Anyway that story was just to suggest that the Court of Appeal is also caught up in this "rob the ACC" mentality, probably at the behest of the political "masters" who have appointed them.

NZ's reputation for a fine Public Service operation has been brought about but the fact the public servants were not directly appointed by the Government but more and more this principle is being eroded. The judiciary and the members of all commissions and authorities tend to be direct Government appointments.

To continue with the theme of the people doing probably unprofessional acts on behalf of the Government getting promoted we note that the judge in the trial of the Feltex Five ( directors who declared in the half yearly accounts to Dec 2005 that Feltex's bank borrowing was non-current when it was current and failed to declare that the company was in breach of its banking covenant) is now "Her Honour Chief Judge Jan-Marie Doogue". There are about 140 District Court judges and this one just "happened" to be picked to fill the vacancy of Chief Judge soon after her verdict in MED v Feeney. That brings up the issue of why this case was heard in the District Court and not the High Court. Well an "appropriately qualified" judge had to be found of course, wherever they might be. Judge Doogue has a speciality of Family Court work. Just the right background for handling financial issues one would say wouldn't one? Not only did she acquit the five, she gave them all a glowing reference despite knowing that further cases against them were pending. She found that they had fulfilled their responsibilities by appointing the company's auditors and reviewers to look into the issues concerned, for them. It apparently did not concern her that the job of auditors and reviewers is to report to the shareholders and the public independently of the directors. If they have also advised the directors there can be no such independence. We complained about this to the Judicial Conduct Commissioner, but Sir David, loyal we think to the people who have appointed him, apparently could see no problem with this lack of independence either.

The argument no doubt was that the "immunity" applied to the Feltex IPO could fairly have been expected to apply to Feltex in 2005 also. But the Securities Commission were keen to demonstrate that they were no mugs. Hence they got caught up in this court case but got an honourable discharge.

Then we have the case of the longest serving High Court Judge. Justice Lowell Goddard QC . Judge Goddard was the judge in the year 2001 case of Hedley v Kiwi co-operative dairies ltd which we have featured on this site many times because it is a disgusting case of bad accounting. It goes back to around 1996 when the fast growing Kiwi Co-operative Dairies launched a "merger" proposal for Tui Milk Products. These companies, both farmer owned co-operatives, were we think the second and third biggest milk processing companies in New Zealand. At that time all exported milk products were bought and sold overseas by the NZ Dairy Board, a monopoly by way of legislation. Such a legislative monopoly was becoming unacceptable in the international market place. We think the Government was party to a plan to replace the Dairy Board with a giant farmer owned processing and exporting co-operative, by way of company mergers, which duly happened. The Government could not really use legislation, its only real tool, to create the mergers of course or the big company formed might also be called a legislative monopoly. It could only massage the mergers from the sideline. But corrupt accounting should not be one of the tools available to it. It had possibly decided that the Kiwi management, effectively lead by over-ambitious accountant Craig Norgate, should form the core of the mega-company, which duly happened. Mr Norgate served just one term as Fontera CEO and then went on to lose investor money in other, high geared, rural projects. He now sits on the executive board of the Institute of Chartered Accountants of NZ along with Neil Paviour-Smith who is CEO of Forsyth Barr and as so when as a lead broker it sold the dud Feltex stock to amateur NZ investors and (Vice President could one possibly believe) Elizabeth Hickey who as E & Y's technical expert allowed the Bank of New Zealand to misuse the accounting for revenue on zero coupon bonds to report a false $100m profit for its 1990 year, Mr Norgate has more recently hit the headlines when he hosted a pre-ball party for secondary school students, giving them we think opportunities to experiment with liquor consumption, with rather disastrous consequences.

Anyway this merger proposal come takeover offer assumed that Kiwi shares were the more valuable and to balance the situation proceeds due to ex Tui shareholder in the proposed new company would be subject to a deduction of a "differential" of 10cents, 20 cents, 20 cents, and 10cents per kg of milk solids respectively for the first four years. It was referred to as the 60cents differential although it is barely acceptable to add cents of different years together. Tui shareholders were in general not happy about this. The merger proposal was put to a vote of Tui shareholders and the 75% majority required to be in favour for a merger was not met. Here the controversy started. Tui directors who had opposed the merger on those terms swapped sides and it was "decided" that Ernst and Young and others do reports and then another vote be held. This time the proposal passed but a sizeable number of Tui shareholders took this court action over the differential provisions.

Our objection to what went on is with the Ernst and Young report and the way the Court treated it.

The report used Net Present Value analysis but that method is difficult because selecting the appropriate interest rate is difficult. In this case we think 11% p.a. was chosen because that was the typical rate which farmers were paying on their bank overdrafts at the time. Farmers of course would tend to think that this 11% reality should be used. But this rate likely included compensation for inflation. The assessed benefits from the merger were just assessed to be so much (16c) per kg of milk solids with no increase over the years for inflation. This was probably because they did not want to get into a debate about what rate of inflation to use. 11% therefore is likely to be too high as an interest rate and hence the Net Present Value was too low. To partly rectify this problem we believe E & Young decided to make a "mistake" in their calculations. The first 4 years of the NPV benefits were calculated individually because the amount of the benefit varied. But the next 15 years was calculated in one block because the amount of the benefit in terms of dollars of the time was assumed to stay the same at 16cents. But instead of doing the calculation for years 5 to 19 they did it for years 3 to 17. That made quite a big difference because the early years count most.

But the big indiscretion of Ernst and Young was in their presentation. Although they mentioned Net Present Value early in their preamble they did not mention NPV in presenting their results of 89 cents per kg milk solids with the retention, and 141 cents without it. Hence the 89 cents could readily be assumed to be the extra payment to be received by the ex Tui shareholders on each and every kg of milk solids supplied from then on for 19 or 20 years, as a result of the merger taking place. In fact it was supposed to be an imaginary once only payment there and then which was the equivalent of benefits to be received from the merger for the supplying of 1 kg of milk solids each year for 19 years.

While any Tui shareholder who asked would no doubt have it explained to them that the 89 cents was the net present value of supplying one kg of milk indefinitely many shareholders would not want to seek reassurance for fear of getting the jibe "You didn't think you would get an extra 89 cents for every kg of milk you supplied each year from now on did you?". Worse still would be the thought that other shareholders would be laughing at their naivety. Then there would be some shareholders who did not like, or believe in, discussion and just read reports and voted. In all cases these shareholders would tend to decide that they would not miss out on a stated financial bonanza because of their failure to believe in it.

It can be seen that the difference between the 141 cents and the 89 cents = 52 cents which is the 60 cents differential, discounted, because some of it was not charged immediately.

We have been told and believe that the actual differential was not as harsh as the report would indicate. While the ex Tui shareholders had the full 60 cents of deductions made from their payouts the money did not go to the pre-merger Kiwi shareholders but remained with the new company enabling it to make a bigger payout, totalling about 20 cents. While this was good for the Tui shareholders directly the use of the practice in general may not have been. When Kiwi took over Moa Nui dairy company in 1992 (earning Mr Norgate the title "Young Accountant of the Year") the differential negotiated was 90 cents spread over several years. We suspect that this differential was also used to lift Kiwi's official payout making it look good compared with Tui's in the years preceding the merger with Tui, as given in paragraph 26 of the judgement. It was the payout but not all shareholders got it and it was not all from the processing of milk and selling of milk. The boost to the Kiwi payout would naturally make Kiwi the popular choice for new suppliers and those able to switch. These individuals did not face a differential. This popularity would have allowed Kiwi to maximise its plant utilisation so allowing it to achieve a greater payout advantage. Well perhaps them are the breaks, or perhaps that is the recipe for eventually falling flat on your face. The payout boost from the Tui differential possibly put the merger with NZ Dairy Group on better terms but also possibly enabled the Kiwi management team to dominate Fonterra which might not have been a good thing.

Our complaint about the extensive judgement in Hedley V Kiwi was that it did not mention Net Present Value except in stating the terms of reference for Ernst and Young's report. And it only discussed the results of the NPF analysis in one sentence as far as we can ascertain despite MPV being at the heart of this E & Y report which was central to court case. This was the last sentence of paragraph 226 and it quotes Mr John Hagen. Mr Hagen was one of the Feltex Five referred to above. He had been involved in the Dairy Industry and was an expert witness for the defendants in Hedley V Kiwi. The sentence reads "He [Mr Hagen] said that EY's analysis showed that, without the differential, the Tui shareholders were projected to be approximately 141 c per kilogram of milk ahead of their stand-alone position and even after the differential, approximately 90c ahead." The big problem is with the phrase "kilogram of milk". The sentence was used to advance the argument that the Tui shareholders had done very well out of the merger and the question of the differential was rather splitting hairs. A kilogram of milk is near enough to one litre. The public is familiar with a one litre pack of milk. The judgement would have the public believe that Tui shareholders were gaining 89 cents for each litre they produced because of the merger. But the 89 cents referred to milk solids not milk so 10 litres of milk had to produced to get the 89 cents. But to get the 89 cents they had to produce not one kg of milk solids but one kg of milk solids each year for 19 years. So in fact 190 litres of milk had to be produced to get the extra 89 cents. We say it is not acceptable for a judge to mislead the reader to that extent. That might have been the words of the expert witness who was her assistant but knowing who appointed him she had a duty to check out his logic. In paragraph 298 she says the Ernst and Young report " contains no misstatements, negligent or otherwise". How much checking did she do or get done in order to make that statement?

We may tend to agree that the merger on those terms was in the best interest of Tui shareholders but it is not for us or the judge to decide on that. What she had to decide was whether the issue was fairly explained to the shareholders prior to the vote. We say it certainly was not.

Five years after that judgement Justice Goddard became chairperson of the Police Conduct Authority. Some might think it a stretch to link the Hedley case to this appointment but perhaps the pressure was going on then. Our prime evidence for this contention is parliamentary proceedings of 5 April 2012. Justice Goddard was not appointed to the Police Conduct Authority for a further term and the reason appears to be that actions of the authority can be appealed to the High Court and there could of course be a perceived conflict of interest if the High Court was ruling on the judgement of one of its members. Now this situation was also the case five years ago when Justice Goddard was appointed to the authority but "apparently" the potential conflict of interest was overlooked then. We suggest there was undue haste to appoint Justice Goddard to protect her from criticism.

Her replacement at the PCA has a Knighthood, another Sir David, Carruthers this time. The National Business Review has presented an interesting piece on both the old and new PCA bosses, taking them both down a peg or two.

We have had cause to contact the Police Conduct Authority after our complaint to the police concerning the 2011 deaths of young adults Paul Wilson and David Gaynor were ignored. We believe these young men have been abused as children in the cover-up of the wilful sale of the worthless Feltex Carpets, referred to in several places above. These young men both had a parent whose career obliged them to make the profitability of the company their business. We believe the NZ equivalent of the Gestapo or KGB had to "educate" a few people caught up in the Feltex saga including these two, and their families inevitably got tangled up with it also. Well the PCA would talk to us even if only to "assure" us that such a thing could not happen. The new chair has been much involved with youth, so we might try again. Both deaths are currently before the coroners but the Chief Coroner will have nothing to do with us and will not tell us when or where hearings are scheduled. Perhaps someone could provide us with this information. We think more young people will have copped it and probably more are dead. We say he has a duty to formally hear all viewpoints.

Promotion as a reward for doing a coverup is very wrong. We will work to expose such behaviour.

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