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August 2008 Edition ---- to page back through Previous Editions click here

Well there is so much happening in the events we have been monitoring we thought that we better get out a new edition pronto.

The most disgusting news is that one Elizabeth Hickey is back on the Securities Commission. This site exist primarily for the condemnation of the work of Ms Hickey and other work like it. As an example of work of this most wayward accountant we quote a note of hers from the 1990 Bank of New Zealand annual accounts audit work papers. "Because the interest rate is a floating one based on LIBOR it is not possible to calculate the reduction in perpetual capital notes on a yield to maturity basis. Accordingly the bank's adopted straight line basis is accepted." Well a variable interest rate could make such a calculation difficult but by estimating the likely average variable rate it would always be possible to arrive at and apply a fair reduction. Wrong on score one. But even if it was impossible that is no excuse for applying some other inaccurate method. Furthermore Ms Hickey would well know that it would be equally difficult to apply the straight line method if the interest rate was variable. She somehow does not expect any reader to think she would be interested to discover how the bank managed this feat. Anyway she had a duty to check out the bank's calculation since it had such a major bearing on profit. She well knew that the relevant interest rate to which the bank had applied the straight line method was not variable at all. The coupon interest rate was fixed firmly at zero. What was referred to as perpetual capital notes had two components, the actual notes (a liability) which had the variable interest rate the interest of which was payable regularly, and a zero coupon bond (an asset), which was designed to pay off the notes at maturity. Ms Hickey's partner advised the bank that they were "looking into" the notes so the possibility that they misunderstood the nature of the bonds (as claimed by the Securities Commission) was zero. They knew they had good reason to "look into" them and to qualify their audit report because of them. She would also be well aware that the bank had put two years of straight line interest into the profit, because it had "forgot" to put through the journal entry the previous year. She knew that this $16m claimed for the previous year should have gone on their Unders and Overs schedule (as did the Commission) as well as the overcalculation for the current (1990) year but she did not enter it there (nor did the commission in their version). We believe that she was told by the government that she would be "looked after" if she allowed the grossly overstated bank profit to have an unqualified audit report. And look after her they have with appointments the boards of various government SOEs and agencies and an MBE for services to scouts and netball. She had a record 11 years on the Securities Commission and now is being brought back again. The Minister of Commerce seems to think she "served a term' with the International Accounting Standards Board but the board said that she resigned. We believe that they were asked by the NZ Government to take her and now she again has fallen back on their hands. This reappointment is scandalous in the extreme but the media are ignoring it. Two other women have been reappointed for a further 5 year term. We say it is too close to the election to be doing this.

The current Securities Commission is of course caught up in the Feltex controversy where it has claimed that they could find nothing unrealistic about the 1% increase in market share which Feltex adopted as a basis for its profit projection for its year to 30 June 2005. Our calculations show that it had been losing market share at the rate of 5% per annum and there was no reason to think that there would be such a turn around and as it happens there was not as well. Australia and New Zealand have been reducing their tariffs so it was rather inevitable that market share of the resident manufacturers would fall especially for non wool carpets which was half Feltex's production. The Commission said that they had been shown Feltex's marketing plan but did not say what it was. We say the Commission is allowing thousands of small time investors to lose their funds to this swindle in order to protect Feltex's women director at the time, Joan Withers. The Commission Chairperson, Jane Diplock promotes the idea that company boards should have an equal number of members of each gender. Hence it seems women directors should not be got into trouble. Another reason is however that fellow Securities Commission member David Jackson was an audit partner of Feltex's auditors at the time of the IPO and for all we know might have been involved with the Feltex account. Mr Jackson seems to have left Ernst and Young at a similar time to when Ms Withers left Feltex. The Commission had "retained" the services of an ex Ernst and Young National Head of Accounting in Kevin Simpkins to do this Feltex work. We have no confidence in Mr Simpkin's impartiality.

Interestingly Mr Gavigan of ftxit.com is claiming that the audit work on Feltex following its profit downgrade was all properly done except that the audit partner "forgot" to look at the file prior to signing a positive declaration. We say this is typical of Ernst and Young. They know their stuff but whether they choose to apply it depends upon what they see as their vested interest and frequently the answer is no. The Institute of Chartered accountants is apparently still considering the complaint against Ernst and Young or Gordon Fulton but is making heavy work of it. Someone must be forcing it not to just forget about the complaint which is somewhat encouraging.

Another bombshell to us is news that the corporate giant Credit Suisse and the broking firm which had the Credit Suisse First Boston name, namely First New Zealand Capital have extracted a $6m defense "incentive" fee out of Auckland International Airport. The fee is in relation to the attempted takeover or attempted partial takeover of the airport by the Canadian pension fund which the Government has eventually rejected. The airport is claiming refund of this fee from the Canadians but the Canadians dug their heels in and it was heading for court.

Our interest is in the fact that the Fairfax group's Stuff website has reported the matter but made no mention of Credit Suisse. Stuff did not have the item current for very long either. We believe the reason is because Joan Withers is a senior executive at Fairfax and is also on the board of the airport company. As well she became a Feltex Carpets director a little time before that company made its 2004 Initial Public Offer of all its shares. At that time Feltex was owned by a consortium called Credit Suisse First Boston Asian Merchant Partners. We and many others believe that Eeltex was unfairly promoted and overvalued in the prospectus, mainly by use of corrupt accounting. Feltex is now in liquidation and insolvent. Click here for a fuller picture.

Well we suspect that Ms Wither's association with Credit Suisse through her Feltex job has somehow led to CS getting this nice fee from the airport. We think there would have been an assumption that fee would have avoided scrutiny but that is not how it has worked out. Hence we think she would rather the matter did not get into the public domain.

Credit Suisse gave up using its name on the New Zealand scene, we think because it saw the pickings are too good. We think it has somehow been able to buy off the Securities Commission and major auditors. All it has to do is think up a pretext for people to hand over money to it which appears to be somewhat legitimate. Then it just asks for the money to be handed over and seems to get its way. It seems like it has learned from Fay Richwhite as they both wile away the time sitting in offices in Zurich.

We deplore such censoring by Fairfax and question whether it is adequately responsible to hold monopoly positions in the news media. We have long been a critic of its Dominion Post November 2005 statement claiming New Zealand's exports per capita are far below that of Australia and the United states. It flatly refuses to correct the statement although in fact the exports situation is the other way around. It claims that initially they had no reason to think that the statement was wrong. You would think that its business staff would have a better appreciation of macroeconomics than that, but on learning the true situation one would think that it should be keen to share its surprise with its readers. The truth seems to be that Fairfax has its own agenda which has nothing to do with having an informed readership. Unfortunately this is despite being lead by the country's only rugby world cup winning captain.

The latest news is that the airport and the pension fund have settled the dispute but the terms of the settlement are confidential. We think it would be the airport who would be conceding and think the shareholders would be entitled to know what the effect was on profit.

We were interested to then see that Stuff choose to use analysts from First NZ Capital and Forsythe Barr, the Feltex IPO joint lead brokers, to forecast the Auckland airport profit announcement for 2008. We doubt if Ms Withers is separating her media duties from her commercial ones.

We are pleased that NZ Herald columnist Brian Gaynor has repeated our criticism of the composition of a ministerial task force on the country's capital markets by way of his open letter to the minister. We think people with Fay Richwhite connections should be banned from such a taskforce. Unfortunately we can not now show any enthusiasm for his suggestion that Shareholders Assn chairman Bruce Sheppard should be on the panel. Initially championing the cause of Feltex shareholders Mr Sheppard then apparently used his influence to get McDonald Vague appointed the liquidators and then expressed considerable skepticism at the action now being taken by these Feltex shareholders. McDonald Vague was given and spent a lot of precious investigation funds studying Feltex records but has never claimed to found anything apart from confirming the Securities Commission's findings which was that there was nothing wrong with Feltex reporting until after its profit downgrade announcement in early 2005 when its reporting of its debt situation was quite appalling. Mr Sheppard has had his fingers in quite a few pies and we think somewhere along the line something has gone wrong which has enabled an undesirable faction to get a hold on him. Mr Sheppard has claimed Feltex director John Hagen to be a desirable litigation accountant and since the shareholders have taken action against Mr Hagen, Mr Sheppard's support for Feltex shareholders has gone cold and his Shareholders Assn is looking lost. He continues to be a bold blogger but does not seem to stay on any issue for long.

Mr Hagen of course was not a Feltex director when the IPO was issued in 2004. The IPO is the prime target of the shareholder's action as we understand it. Although most deplorable, the bad reporting of debt in 2005 meant only that shareholders who sold just after then unfairly did better at the expense of those who bought shares. If the action is successful sometime shareholders will be compensated according to their losses so this 2005 incident would seem not to be all that important. Other later happenings might be seen as important however, in particular the board not seizing opportunities to sell the business and pay some final dividend. It is easier to be wise after the event but perhaps there is evidence that something improper stalled a sale. Certainly a lot of happenings seemed suspicious to us. So although Mr Hagen would seem to be at the heart of the 2005 debt reporting scandal the reason for him being cited in the shareholder action is not particularly clear. Exposing this 2005 scandal in general casts doubt on the fairness of the IPO but emphasizing Mr Hagan's part in this 2005 scandal reduces the argument that the management and accounting has been bad all along.

The civil action against certain people associated with the Feltex IPO has begun in Christchurch. The time delay has been minimal which is a credit to the plaintiffs. The judges first task would seem to be to decide whether just who Credit Suisse FBAMP are should be made public. The identities could be interesting especially if they have a history of slippery dealing. The rumour is that they are US residents. The problem we have with the action is that it is not directed against the auditors of Feltex at all.

The other interesting development has been an accusation from Mr Gavigan who is leading the shareholders action that certain Feltex sales which were delivered and paid for in February 2005 had the invoices dated 1 January 2005 and were included in sales figures to 31 December 2004. One would expect that Mr Gavigan had plenty of evidence for this accusation. Things seem to be going well for him so it would not be born out of desperation. As Mr Gavigan indicated, section 68 of the Securities Commission's 11 October 2007 comprises the following: "The reasonableness of the assumptions and the projection figures were supported by [Feltex's]actual performance for the six month period ended 31 December 2004." This is the second of seven conclusions that the commission arrived at with respect to the Feltex IPO.

We say that the Commission and the liquidators have an obligation to investigate and publicly confirm or reject Mr Gavigans allegations. If confirmed their attitude to the validity of the Feltex IPO needs to be publicly revised. The liquidators have a significant amount of creditors debts which seem not to be being addressed. They should be working in harmony with the shareholders action so that all can be reimbursed. The creditors would seem to have a prior right over the funds of many of the defendants.

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