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Further to our advice in our last edition, we now suggest that investors who lost out by subscribing to the 2004 Feltex fiasco take a Disputes Tribunal action against the auditors for the amount of the loss or $7,500 whichever is the lesser. This avoids the need for someone to put a group action together. A Tribunal decision is likely to be full and final against this party but we think it should not preclude a Feltex subscriber from participating in any action against any other parties considered to be liable, for any portion of the loss which remains unrecovered. We would like to see these auditors cop the full cost of their wayward actions but them having to fork out up to $7,500 to many subscribers is far better than them forking out nothing. The possibility of a group action turning out to be bogus is unfortunately very high so in many or all cases this should be the best way to go.
The application form for so pursuing the dispute is available from http://www.courts.govt.nz/pubs/courts/disputes_claim.pdf or the form, set up so it will automatically produce the required copies, can be obtained from one's District Court.
The applicant has to represent themselves in person at the disputes hearing but we believe that this should be no problem as it is a near watertight so there is not much to argue about. The applicant needs only to provide proof that the shares were subscribed for and allotted and were either subsequently sold at a loss or are still held. We believe that only one defence will be presented and we below also offer advice on demonstrating to the tribunal that this defence and other possible ones are not valid.
We herewith offer assistance in filling out the claims form.
Enter the name in which the Feltex shares were held and contact details which now apply.
Enter the following details:
ERNST & YOUNG LIMITED
41 Shortland Street
P O Box 2146 Auckland
Ph 09 377 4790
We suggest that this panel be left blank.
Tick the "no" box and leave blank.
We recommend the following text for which the applicant needs to gain an understanding and take ownership. Please include only the appropriate words inside square brackets and do not include such brackets.
I claim that [I [ jointly] /my company}] subscribed to an 2004 Initial Public Offer of shares in Feltex Carpets NZ Ltd. A signatory of the respondent company signed the audit report contained in the (enclosed) prospectus issued for this offer and I claim that a misleading paragraph in the report has [directly and] indirectly caused [me/us] to subscribe. I [read/am not sure whether I read/ did not personally read] the prospectus including the audit report [and/but] regardless of this I claim that I was influenced into subscribing privately and publicly by people, largely journalists and business professionals, who will have read the combined document and been influenced by the paragraph concerned into some degree of support for the issue.
As a result of this subscription [I [ jointly] /my company}] [have/has] incurred a loss of $ the calculation and evidence of which I attach. I thus claim recompense of [the loss/$7,500] from the respondent.
I will now elaborate on the matter further.
It has been brought to my attention subsequent to the demise of the Feltex company that readers have had due cause to question the validity of projections of revenue and profit presented in the prospectus, but have had these concerns unjustifiably dispelled by incorrect assertions carelessly or wilfully contained in the second to last paragraph of the audit report.
The reasons for the projections being questionable as I cite relate to the large increase in the projected revenue and profit measures for the year to June 2005 over that forecast for immediately previous year (an increase of 29%), as shown in the table presented on page 19 of the prospectus , and of the assumption of a one percentage point increase in the company's market share as given on page 91. The company has been operating in this particular market for about 80 years and there would seem to be no reason for such a take off in market share at that time. It would be true that they would be introducing new carpet designs and techniques but so would be competitors. They were facing increasing competition from carpets manufactured elsewhere and possibly stood to lose purchases from the company's exiting owners.
The text of the second to last paragraph of the audit report which improperly dispels these concerns reads as follows:
"Actual results are likely to be different from the
forecast and projected financial information since
anticipated events frequently do not occur as expected
and the variation could be material. Accordingly we
express no opinion as to whether the forecasts for the
year ending 30 June 2004 and projections for the year
ending 30 June 2005 will be achieved. "
It can be seen that the first of these two sentences outlines aspects of the risks associated with the ownership of company shares even assuming there is no specific misconduct or inappropriate action on the part of anyone. It is reflective of the inherent uncertainty of the future. The word "expected" can only be taken to refer to genuine sincere expectations and not extravagant or fraudulently excessive statements of expectation, which of course are not expectations at all. Readers including me would expect that auditors by virtue of their normal function would be naturally be interested in the possibility of unjustifiable forecasts or projections having been adopted, regardless of whether they have any obligation to look for such anomalies. So by excluding the possibility of unjustifiable forecasts or projections from the reason that they give for declining to express an opinion on whether these specific Feltex forecasts and projections will be achieved, the respondent has clearly implied that it has checked the matter out and found that there was no such possibility.
The respondent has elsewhere (see Document A appended) claimed that it expressed no opinion on the reasonableness of these forecasts and projections. It claims that the first of the sentences in the audit report which I quote is a "cautionary note of fact". That it might be but the caution warns of risks of no greater magnitude than that which all shareholders have to accept and live with in order to become a shareholder. The 'cautionary note of fact" in no way alluded to the possibility of any of the forecasts or projections being unreasonable even although this was a far greater reason for the respondent to not express an opinion.
While I have analysed the paragraph cited in some detail the message is quite clear and simple to those who read it and says the auditors are not saying whether they think the projections will be achieved only for the obvious reason that predictions of this nature are never certain to be right no matter how much care goes in to making them and some variation, perhaps significant, is inevitable. They are thus saying that the assumptions which underlie the forecasts and projects are in their opinion valid and reasonable for the purpose for which they were adopted.
I thus claim the obvious interpretation of the paragraph concerned is at serious odds with the true situation as the auditors have later stated it and has resulted in concerns over the validity of the projections being unjustifiably dispelled. This in turn has caused me to subscribe to the offer and incur a loss as I understand did everyone who subscribed.
In case it might be relevant I advise that the projections referred to were not achieved by some considerable margin as is evident from the company's 2005 annual report. The reason given as I understand it was a general falling away of sales by the company in the latter part of the 2005 year. There seems to be no evidence of a sudden loss of product reputation or of sales outlets which might trigger such a general fall in sales. I claim therefore that the eventuality largely bears out concerns which readers of the prospectus (apart from the erroneous audit report) would have. It is not a case of having concerns about one type of thing and the company failing for something completely different. Having said that I would like to also stress that investors with concerns about the prospectus, were they not reassured by this audit report, would tend not to subscribe to the offer not only because they think the projections might be an overstatement of the likely result, but also because they as a result have lost confidence in the company as a whole.
Panel 6 Probably it should be said that there has been no such contact because it is believed that the respondent will defend the claim and its attitude is known. However you might choose to first send the respondent a copy of the claim seeking a direct settlement. It is possible that they might agree but perhaps in conjunction with a confidentiality agreement so that others will not know to follow suit. If you have made direct contact, declare it here as of course is your obligation.
Sign and date. The claim is all yours. At the hearing be quite candid about having followed advice from this site should the matter come up. Do not try to hide the fact. Be open.
1 Document A if you have referred to it which you can load down from here
2 A copy of the prospectus. If you can not find one please contact us as above and we may be able to assist.
3 Evidence of your subscription for the shares and any sale of the shares or the last document you have that indicates that you still owned them.
4 . A calculation sheet showing your loss. Declare the dividend you received. You could claim some interest to date.
A little advice
1 The respondent will argue that they have a policy not to express that opinion in respect of forecasts and projections in any prospectus which they audit and the first sentence of the paragraph in question is the reason (applicable in all cases) that they have such a policy. That might be so but it is what that paragraph says that counts and the first sentence is given as the reason for them not expressing an opinion on the specific Feltex forecasts and projections contained in that Feltex prospectus. It might be "a" sufficient reason but it is not "the" fair overall reason if the auditors have not established (as best they are able) that the forecasts and projections are reasonable since it does not include the possibility of the projections being unreasonable. What they claim they meant to say is not relevant. Don't allow the tribunal to be convinced that it is, if you can help it.
2 Even if you concede that you did not read the prospectus don't be put off by the fact that the influence of journalists and other business professionals on your decision may have been quite nebulous. You most probably will have received such influence whether you realise it or not and you are unlikely to be challenged on that score. It is also a very weak argument that "nobody reads that guff" referring to the prospectus and audit report even if it is substantially true. Officialdom requires a prospectus to be attached to every application form or such shares to try and get across that the information therein is relevant and you should discriminate between offers and not assume that because the offer was allowed to be made a subscription is worthwhile.
Go for it! All the best! You deserve all you get!
We would like to digress now to consider information recently reported concerning the commissioner who in 2004 was appointed to report on certain police behaviour, which she has recently done, Dame Margaret Bazley, and her ex husband.
It has come to light that her ex husband has a wide range of serious criminal convictions to his name and was an associate of the Mr Asia drugs boss. But he appears not to have offended since the couple split in 1978 which in many ways is good news.
The regurgitated information seems to have come from the NZ Herald as an aside to a storey about people of interest in the inquiry into police conduct hiring a private detective to investigate aspects of Dame Margaret's life. Well anyone can hire an investigator to investigate anyone else so that does not mean much, but the Herald seemed to need an excuse to bring up the matter of Mr Bazley's past.
Then the Dominion Post follows up and reports the matter under a heading saying the Bazley's were haunted by their past. Well everyone with that sort of past should expect to be haunted by it because it is necessary for such people to discriminated against so that only honest reliable people with a good track record get the top employment positions. The suggestion that this haunting is unfortunate or peculiar, we find most hard to justify.
Dame Margaret of course will have no such convictions nor will there be cause to accuse her of anything like that. But the job she was appointed to should demand a track record of impeccable judgement and a high level of people perception skills. There are plenty of people with such credentials who are able to do such work. Landing a husband such as the one Dame Margaret had indicates that neither such credential is adequately present. It also seems peculiar that Mr Bazley seems to have gone straight from about the time that they split up. On wonders whether he has been unable to operate as before because he has lost his mentor.
Getting the right people to the top is important in the accounting area as well and something needs to be done to stop this overlooking of substandard past performance.
We now wish to refer to the latest development on the New Zealand Institute of Charered Accountants' web site whereby decisions of it Disciplinary Committee are being publicly reported. It is good that they are starting to tell the public what is going on but that which is going on makes rather disturbing news.
A provisional member the institute was recently suspended for working for and being a shareholder in a company which was offering accounting services to the public. The document declaring this decision was signed by one R J O Hoare as chairman of the disciplinary tribunal. The problem as set out in the decision is that because the suspended member was a provisional member of the institute "members of the public could think that he was a Chartered Accountant holding a Certificate of Public Practice". Well that is quite a long stretch if he was not displaying any logos or institute trademarks that litter or adorn (according to one's taste) the offices of members in public practice.
The situation is not much different to that which Mr Hoare would seem to have been in in the early 1990s. He was a member of what was then the Society and possibly had a practicing certificate. As an employee he seemed to be adding credibility to accounting services being provided by the firm Fay Richwhite, the principals (and for that matter the principles) of which did not comply with being members of the Society. "Do as I say not as I do" would seem to be the message which has come from on high.