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August 2010 Edition ----

Well it is second of August and the Auckland District court has spoken on the case against five former feltex directors. Well one judge has at least, but it was a prosecution so the decision cannot be appealed. The five were found not guilty in connection to being responsible for Feltex Carpet's half year accounts to 31 Dec 2005 and saying the company was not in breach of its banking covenants and that the bulk of its loan from ANZ was non-current. There was agreement that these two particulars shown in the accounts were wrong.

No-one is suggesting that these inaccuracies contributed in any way to the collapse of Feltex. Indeed we would argue that they kept the company going for longer and that is why they were allowed to happen. If a fairy godmother somehow came along in the meantime perhaps somehow the company could be saved. The injustice is that the inaccuracies gave the public a more optimistic view of the company than is justified and hence shares changed hand higher prices than was fair.

The successful defence seemed to be that the directors had hired a firm of chartered accountants to ensure that there obligations in this area were met, and as far as they were concerned that discharged their obligations. It was all so very simple, or so they would have you believe.

We don't believe a word of this because:

A For these 6 minth accounts the directors decided to be about the first NZ company to comply with International Financial Reporting Standards. Given this situation we think the directors should have gone through each of the figures in the accounts and got an understanding on how they were made up. They decided to be bold so they should have taken a bigger interest in the project.

B The review might have cost over a hundred thousand but given this change to IFRS the directors should have went for an examination by Ernst and Young that had the same rigour as an audit (as is required for the year end accounts) rather than just a review. With a review the reviewers are entitled to rely on statements made by the company and don't have to cite the best evidence.

C We say the directors should have engaged a firm other than the auditors to compile the accounts according to IFRS and at the same time train their staff on how it was done. External auditors should not be auditing there own work, especially with a $250m listed company. The six monthly accounts did not contain an audit report and were not required to but the full year accounts which in general the six monthly period forms part of, are required to be audited.

D We cannot lay our hands on a copy of the report pertainining to the (audit) review. We assume that it is a watered down version of an audit report. An audit report contains a statement to the effect that it is the directors responsibility to prepare an accurate set of accounts. The auditors job is to give a report on the reliability of those accounts to external parties. The audit report is not to assure the directors. They are expected to have already satisfied themselves that the accounts are accurate before the audit takes place. The impression we get is that the directors got the staff to set up some sort of mock accounts then called in Ernst and Young to turn them into accurate official accounts. We believe a review is to assure external parties and not to assure the directors. The directors have got to otherwise assure themselves that they have prepared an accurate set of accounts. The idea is that the accounts should have been worked on by two competent parties independent of one another. By deciding to commission an external audit or review the directors are giving extra assurance to external parties. It is not a process for the directors to assure themselves.

Ie If the accounts are prepared properly by the directors and there is an audit we have 1+1=2 assurance. If the accounts are prepared properly by the directors and there is a review there is 1+half = one and a half assurance. If the accounts are prepared by the directors with the assumption that inaccuracies will be picked up by the reviewer it is probably 0+half=half assurance. We easily get the situation where the compilers of the accounts are relying on the reviewers and the reviewers are relying on the compilers and the result is near complete failure.

E We don't think Ernst and Young are a particularly reliable firm to be given such work. They have a habbit of colluding with client companies in disregarding rules, presumably to keep work. This site gives lots of examples with conspiring to give the Bank of New Zealand an extra $100m reported profit in 1990 being the biggest we know of up until the Feltex IPO. Well the true situation is that E&Y are in the business of providing crooked reports at the request of governments and others where they assess the chances of getting away with it to be very good. They had an arrangement whereby they would allow the 2004 Feltex IPO to go through and rob the subscribers of their subscriptions so that funds would be available to improperly prepare NZ athletes to win gold and silver medals at the Athens Olympic games. We elaborate on this claim below. There was a similar arrangement with these 31 Dec 2005 Feltex accounts. The ANZ bank and the Feltex directors did not want the public to know that Feltex was in breach of its banking covenants and the bulk of the loan from the bank was effectively at call. Potentially the news could put Feltex out of business if suppliers withdrew credit facilities. E&Y were sort of locked in and have "agreed" (nod nod wink wink) to make the "mistake" providing that the company did the same.

But even if engaging a firm of chartered accounts discharges ones obligations in general we say this discharge is not absolute. Directors are required to keep their wits about them. In particulatr we say:

a The directors should be competent enough not to confuse statements from the bank such as "there will not be a receivership" as meaning there has been no breach of banking covenants. Breaching the covenants does not mean a receiver will be appointed and the directors clearly knew that although they pretended to believe otherwise. Indeed the opposite should have been seen to have applied because why would the bank say "there will not be a receivership" if it was not entitled to appoint a receiver. They are not that dumb. They knew there was a distinct difference between being in breach of banking covenants and a receiver being called in. They knew the absence of the latter did not mean the absence of the former. It might be possible to argue that the only use of knowing whether the loans were current was to assess whether the bank might appoint a receiver and it was best to say it was non-current because the bank did not intent to so act. But it is stretching it too far to claim that they thought that such a misrepresentation was allowable. The bank clearly had an interest in making it appear that it was business as usual at Feltex while it tried to find a buyer. It no doubt suited the bank for the breach of banking covenants not to be reported and the directors should have been aware that the bank could have a different agenda from what should be theirs. The only reasonable conclusion was that what was in the accounts suited the directors and that is why they went along with it.

b The directors renegotiated the terms of their loan with the bank in October 2005. It was reasonable for the to keep the terms of this agreement to themselves until the time come for them to report on the six months to 31 Dec when they should personally have seen to it that everyone who needed to know the information did know the information.

Good evidence was presented at that that the ANZ was worried about getting its money back from Feltex in 2002 and had commissioned McGragh Nichol to Investigate. If the bank cannot get all its money back then the shareholding is worthless. Four of these directors were on office when the company acquired $250m from the public in payment for this near worthless shareholding. That in itself must be very close to a sherick of evidence that the directors might have arranged to declare bank loans non-current as at 32 Dec 2005.

We now return to the hearing of the Institute of Chartered Accountants of Gordon Fulton, facing charges bought by the Institute's Professional Conduct committee. We told about that last month . Well the newspapers did not mention this hearing so we thought we would take the matter up with the Dominion Post. They did not reply after about 10 days so we took the matter up with the Press Council who followed up for us and we got this reply.

Dear [withheld],

Thank you for your email.

I have no record of your complaint being handled by my office but I will now address it. While the Dominion Post endeavours to be at as many court appearances, tribunals and other industry hearings as we can, on many days we simply do not have the resources to do so.

I'd like to address your complaint about the appearance of Gordon Fulton at the Disciplinary Tribunal of the Institute of Chartered Accountants of NZ. This newspaper was not informed of Mr Fulton's appearance, which my business staff tell me would appear to be a change of policy from the past, and there was also no notification of the hearing on the institute's website. We simply were not aware he was appearing.

Since checking we understand the decision was reserved and will be publically available in coming weeks. At that stage we can and will report its findings.

I would like to take issue with your comments that we were aware that the 2004 Feltex IPO was a scam and was not prepared to expose it. That is simply untrue.

Yours sincerely,

Bernadette Courtney

Bernadette Courtney Editor

Well the Dominion Post is wrong about the hearing not being notified on the Institute's web site. It was put there on 25 May according to our records and remained there until the hearing. The Dominion Post appears also to have not mentioned this hearing as part of its coverage of the acquittal of the five Feltex directors. The hearing date of 29 June was given in the early stages of the trial in Auckland of five feltex directors. The Dominion Post had a reporter there at that stage who would have picked up the date and realised its significance. We say it is failing in its obligations

We present now evidence for our ongoing assertion that the Feltex IPO is a conspiracy between politicians, commercial interests the news media and now probably the judiciary to acquire funds off innocent NZ investors and applying some of it to improper preparation to enable NZ athletes to win gold and silver medals at the Aug 2004 Athens Olympic Games. The Court of Appeal have to date expressedkeen interest in this IPO possibly being a fraudulent hoax however and we can only hope that this continues.

1 Feltex Carpets was in financial difficulties with its bank in the years 2001 and 2002. It got a $50m debenture loan from someone to relieve the condition. The debenture was repaid by the IPO raid and the indications are that it was agreed that this would happen when the loan was given. Evidence of Mr Fulton and Mr Nichol of McGrath Nichol supports this.

2 Eion Edgar was appointed to the board of the Accident Compensation Corporation and chairman of its Investment Committee in Nov 2002, apparently for a 3 year term. The ACC was virtually the only NZ institution to subscribe to the Feltex IPO and did so to the tune of $9m. Around the year 2000 the ACC bought National Mail shares about a week before that company went out of business losing ACC $0.5m . The vendor was a close associate of a director of National Mail. The broker for the both parties was Credit Suisse First Boston, using different names. This firm is associated with the vendor, promoter and a joint lead broker of the Feltex IPO.

3 Eion Edgar was elected chairman of the New Zealand Olympic Committee about 2003. He was managing director of the other Feltex joint lead broker, Forsyth Barr, at that time. There was public dismay that NZ had won only one gold (and three bronzes) at the Sydney Olympics despite perhaps having the largest team per capita. The Government had been funding prospective medal winners quite extensively. Presumably it believed it had a public mandate for this. There was a need to look for more cost effective ways of winning some medals. Appropriation of Public funds for cheating was not feasible. Some other source of funds had to be found to get the medal tally up.

4 Eion Edgar received a high NZ honour about 2003 which he converted into a knighthood more recently. He was recently named Senior New Zealander of the Year, a new award which may have been instigated to keep up his status and invincibility.

5 Joan Withers was appointed to the Feltex board just days before the IPO was released to become the only female director. It could be anticipated that a female director would appeal to "Mum and Dad" directors. Soon after Feltex's profit down- grade announcement in 2005 Ms Withers resigned from Feltex and the remainder of her considerable portfolio of directorates (except the Auckland Airport one) to take up an executive position at Fairfax. The person who appointed her, David Kirk subsequently was appointed to the board of Forsyth Barr. Ms Withers had previously held a top executive job at the Radio Network but for no obvious reason that job had come to an end. It is most unusual for a director of a good range of companies to want to become an executive again. She expressed little remorse for deserting the Feltex subscribers in their hour of need. The logical answer is that the Fairfax appointment was a jack-up to get her out of Feltex. When she eventually left Fairfax senior appointments to Government Boards, particularly as chair of Mighty River Power, were made available to her.

6 The Feltex IPO was unreasonable with respect to its handling of assumptions as to market size and market share. On page 37 of the prospectus it showed a graph of the size of Feltex's Australian market for the years 1993 to 2003 In a sentence above the graph it said the market had grown 1.7% p.a. compounding in that time. Feltex had used only the market sizes for the two years 1993 and 2003 in making this calculation. On page 91 they said that the 1% p.a. growth they had adopted for their income projections for 2005 was 1% p.a. "which was below the average growth rate of the past 10 years". It can reasonable be assumed that it was the page 37 data they were referring to. As well as ignoring the figures for 1994 to 2002 their 1.7% calculation included 1993 which was outside the "past 10 years". Using the forecast function on Microsoft Excel and the data for the past 10 years the trend prediction for 2005 is 3% less than the figure for 2003 not the 3.4% greater that Feltex have calculated. The 6.4% difference represents about $20m of revenue a large amount of which would be profit.

With respect to market share Feltex have not referred to this parameter in its recent past. It can be calculated that they were losing share at the rate of 5% p.a. This 1% increase assumption is quite unreasonable but the Government appointed Securities Commission has failed to recognise this or the deceptive "less that the average growth of the past 10 years" statement with respect to market size. In the Commission's one page statement of its unannounced investigation it said that it would be taking no further action concerning the IPO. It defied that about a year later when it devoted about 3 pages of another report to the IPO. And according to the Commission Feltex auditors and directors just happened to make bad errors of judgement after Ms Withers left the company but did nothing obviously wrong with the IPO.

7 NZ scored some "astounding " wins at the Athens Olympics, much of them centred around cycling, which is well recognised as having a drug cheating problem. Ms Ulmer won by 2 secs and there was the unusual sight of her being held on her bike while she agonisingly recovered her breathing.

8 During the Feltex collapse the Shareholders Assn under Bruce Sheppard made a big noise and took token action against the directors but Mr Sheppard then changed tack and was apparently instrumental in getting MacDonald Vague appointed as liquidators. These liquidator purported to spend a lot of public money investigating the IPO but found nothing wrong "out of respect for the Securities Commission". They are suing the directors for matters other than the faults the Commission found (as well as those faults) but strangely enough also only for things that happened after Ms Withers left. Mr Gavigan is leading a shareholders action against those responsible for the IPO but seems to be going no-where. He keeps changing witnesses and legal people. His action is consistent with channelling shareholder energies into a losing action, as an agent of the instigators of the IPO.

9 The worst part of the scandal is the appalling collapse of market confidence as regulators are appointed not to project firm consistent regulation but to ensure that the corrupt Feltex IPO dealings are covered up. Kevin Simpkins who was "retained" by the Securities Commission to "report" on Feltex has been made chairman of the Accounting Standards Revue Board which is about to take over accounting and audit regulation from the Institute of Chartered Accountants. He has come from South Africa in the early 1990s as has Feltex's Chief Financial Officer, Des Tolan, and Feltex'chairman Tim Saunders. The regime they come from was all about misleading the population to retain white power. The only two accountants on the board establishing the Financial Markets Authority, replacing the Securities Commission and a few other agencies, are Bruce Sheppard (referred to above) and Scott St John, managing director of First NZ Capital the other joint lead broker of the Feltex IPO and close associate of the vendor and promoter of that issue.

"...and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage." - John Steinbeck (The Grapes of Wrath)

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