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April 2016 Edition

To peruse our extensive evidence that the Feltex IPO was a Government sanctioned robbery of hard working but modestly educated New Zealanders to raise funds to enable the country’s athletes to cheat Olympic gold medals click here. The latest robbery to finance Olympic cheating has obviously been from the New Zealand Superannuation Fund where with the aid of Goldman Sachs the Fund has purportedly made a rare and unfortunate decision to make a huge $200m deposit in a Portuguese Bank which just happened to go bust a few weeks later with the “deposit” being lost. Obviously it was already known that the Bank was bust before the deposit was purportedly made and a portion of the “lost” funds are buying us gold at Rio.

We attended on Monday 11 April the first three hours of the hearing of the appeal in the case of Houghton v Saunders concerning the so-called Feltex IPO which took place fourteen years ago.

We were not impressed by the performance of the counsel for the appellants Colin Carruthers QC. He seemed to be inadequately familiar with his subject matter and could seldom answer questions forthwith.

We agree entirely however with Mr Carruthers main message that there was absolutely no justification for assuming that Feltex could increase its market share by one percent, which as Mr Carruthers emphasised equated to a 3.8% increase in revenue.

But the appellants have improperly taken a 0% change in market share to be a fair assessment of what would occur. The 2003 annual accounts of Feltex shows a 2% reduction of revenue from that for 2002, while the market size information shown on graphs on page 37 of the prospectus shows growth of about 6% for the same period so indicating that 2% ((2+6)/4) of market share had been lost. There was no reason to believe that that would not continue as lower tariffs resulted in carpet manufactured overseas became more popular. So by saying only that the 1% increase in market share was unjustified the appellants are seeking only to claim one third of what is due to the people they represent. 0% change is but one point on the continuum. Its only claim to significance is perhaps that it is the roundest figure. But roundness is irrelevant. In addition the market size could have been expected to fall in the 2004 year as per the pattern shown on page 37 since the 2003 size was large.

Mr Carruthers also focused on Feltex’s statement of prospective performance for the year to 30 June 2004 as contained in the prospectus. This showed a profit about $2m less than that which was declared as the actual profit for the first half of the year. Readers of the prospectus who observed this might well have deduced that the company was making a loss in the current half year and so decided to leave the issue alone.

Considerable costs associated with the IPO were included in this statement of prospective performance, but not in a proper manner. The statement should have derived a profit from operations first, then deducted these other costs from that. Just how this disadvantaged prospective subscribers is not too clear although certainly they were entitled to well presented information. But it was claimed that prior to actioning the IPO the directors found savings in the costs so that the profit as per the statement of prospective performance would be met even although the revenue as per this statement would not be met by some margin. We say this situation has arisen by way of a secret top up of profit by cash injection from the “IPO” proceeds. Although the reported 2004 actual sales were $10m or so less than forecast they were $10m greater than that for the previous year.

We see problems with the appointment of Dame Patsy Reddy as Governor General designate. The GG job might be largely ceremonial but it falls on the GG to smooth the way for a change of parliamentarians such as when all those involved in financing of Olympic cheating are obliged to resign. We need a Governor General who is prepared to recognise corruption and deal with it.

We have had considerable dealings with Reddy’s husband the knight David Gascoigne the former Judicial Conduct Commissioner. He won’t recognised the Feltex IPO scam or its aftermath.

We are wondering if we can get a accurate biography of the Dame provided on Wikipedia. We had some success in that we got it mentioned that she had had a husband before Sir David. Victoria University who seem to be monitoring the page helped us set up the entry.

But when we entered the following paragraph the luck ended.

About 3 years into her ten year tenure as a director of Telecom NZ, then NZ’s largest stock exchange listed company by far, Reddy as a director was responsible for the wilful overstatement of that company’s profit in what was described by responsible commentators as NZ’s Enron Telecom required its associate company Southern Cross Cables to pay it $246m in dividends which rendered that associate insolvent. A poorly considered or willfully misstated regulation said equity accounting must not be used if an associate is insolvent. There was no regulatory requirement to declare such dividends as income, nor any credible reason to have such dividends paid other than as some mask of unjustifiably inflating Telecom’s year 2001 profits so that no significant downfall was reported. This demonstrated preparedness to fiddle the books has seen Reddy being given many Government appointments and decorations.

Had that not been promptly deleted a follow-on paragraph may have gone something like this:

A year or so later the Telecom board sparked controversy by appointing as a Director Mr L R Pyne. Pyne was appointed CEO of the Bank of New Zealand following the Bank being bailed out by the Government for close to $1b as a consequence of the 1987 sharemarket crash. It was claimed that the bank would be able to survive on its own after that injection but a collapse in the Australian property market was slow to reveal itself. The bank used income deceit from zero coupon bonds to create a false $100m profit for its 1990 year but it had to concede losses and receive a further bail-out some months later. In 1993 the Securities Commission in a large report was highly critical of the use of two large parcels of zero coupon bonds in producing this 1990 BNZ profit. These large bond parcels had been purchased in late March 1988 when Sir Ron Brierley was chairman of the Bank. Patsy Reddy had joined Brierley Investments (founded by Sir Ron) as Group Legal Counsel in 1987. Brierley Investments, The Bank of New Zealand, and Capital Markets Ltd (a public company dominated by Fay and Richwhite) each held 28% of the equity in European Pacific S. A., a company incorporated in Luxembourg but nevertheless listed on the NZ stock exchange as at March 1988 (sec para see para 2.22( c ) of Certain Arrangements entered into by BNZ in March 1988 ) when this company was party to some so-called insurance arrangement supposedly underwriting the loans of the BNZ but also incorporating a large long term zero coupon investment bond held by the Bank. Essentially the scheme misapplied the revenue from the bonds between financial years to “smooth” profits possibly borrowing from anticipated profits of later years. But what if such profits don’t eventuate? And what about the right of shareholders to know what is going on? In the event there was no “need” to make use of any such arrangements as at 31 March 1988 since the Bank did not make provision for bad loans or write off loans held to any abnormal extent. It just assumed that those borrowers who had been hit by the crash would meet their obligations to service their loans in due course. When later in 1988 losses on loans could not be concealed any longer the problem was too big to bother trying to use the arrangements so, a Government bail-out by way of Capital markets buying about on third of the Bank and these proceeds going into BNZ coffers, was made, Sir Ron ceased to be on the BNZ board, and Brierley Investments sold its EP shares. Such arrangements were used as at 31 March 1990 though, when Mr Pyne was CEO to give the impression that the Bank was recovering from its woes when that was not the case.

The appointment of Mr Pyne to the board sparked considerable controversy at the 2001 AGM of Telecom which gave rise to some classic photos which now seem to have disappeared from the internet. We think Patsy Reddy appears in some of them. It seems likely that she had suggested Mr Pyne’s appointment. Mr Pyne resigned from the board about 6 months later probably as a result of this controversy.

The point we here make is that in forming this company European Pacific these 3 large parent companies would not have appointed a large independent staff to it, they would have pooled resources. Brierley Investment’s major staff contribution in 1988 is likely to have been its Group Legal Counsel, namely Patricia (Patsy) Reddy.

We do not claim to be experts in matrimonial relations but we nevertheless interested in a little bit of information supplied by a top lawyer during a 5 minute autobiography. He names 4 “luminaries” he worked with at Rudd Watts & Stone in Wellington at the start of his career. One of these was Patsy Reddy. Two of the others have married Patsy Reddy at some stage. We think this rather peculiar. We think there are adequate non-divorcees to choose from for the office of Governor General even although it might rule us out from ever taking office. Divorce was a big issue in the downfall of Edward 8. We have now established that Sir David was previously married and had 2 children from this earlier marriage in the early 1970s We are not certain whether this marriage ended by way of divorce or death of the wife.

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