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Late September 2006 Edition ---- to page back through Previous Editions click here

We will stick with the Feltex saga for a bit. Accounting failure is at the heart of it we reckon.

The interim results for the 2006 year show a EBIDTA before one-offs of $20m which doesn't seem too bad. The Dominion Post has for some time seeing a likelihood of a general close down with the staff laid off. It could be right but we rather think the assets of the company are worth more in continuing operation.

The Dominion Post's backgrounder of 21 Sept (pC3) is quite interesting. Feltex we suggest is different from the other Tasman expansions mentioned in that it was not really a NZ owned or controlled company when it bought the Shaw Industries plant. It seems that ANZ bank got in deep at that time. It would not have realised that the company was going to be sacrificed in a sell and run operation. The other interesting thing in the article is the reductions in Australian carpet tariffs averaging 1.5 percentage points per year since 1990. This makes an assumed 1% increase in market for the 2005 year all the more unrealistic. ANZ should be fostering a shareholder's undertaking to recover from those involved with the prospectus.

We understand that Jane Diplock, chairperson of the NZ Securities Commission went on television on the morning of 4 September and stressed that the Feltex results had gone according to the projection for the first half of the projection period, ie the second half of 2004. We suspect that some mechanism was in place, such as borrowing from hoped for future profits as done by the Bank of NZ in 1990 with the assistance of its auditors, or independent subsidisation or other promotion of Feltex sales by the vendors with such costs not declared by Feltex, nor perhaps known about by Feltex. We suspect that the Securities Commission has put little or no effort into detecting such mechanisms. We suspect that they have taken the word of one of their privileged number, David Jackson, the audit of the Feltex prospectus having been done by him or one of his close colleagues at the time, that there had been nothing untoward going on.

We think a table might help with links between somewhat exposed scams and suspected scams to show how they fit together. Here goes:

The perceived Scams are in the columns to the right and the various entities who have links to them are in the rows below. The known links are stated in the appropriate other cells. The near total collapse in the reported profitability of Feltex Carpets Ltd in 2005 following its sale in entirety by way of formal public offer in 2004. The halving in the price of Tranz Rail shares in time of rising market price indices, following the sale of major controlling shareholdings, predominantly to managed funds, by book-builds in early 2002. The purchase from public funds of a significant holding in the fledgling company National Mail just several days before the company announced cessation of its core business prompting a large share price fall in the year 2000. The reporting of relatively healthy profits by the Bank of New Zealand in the years to March 1988 and 1990, in each case just months ahead of announcements of major losses.
New Zealand Securities Commission Produced a one page final report of an investigation without ever announcing that it was conducting the investigation. Report gave clean bill of health except perhaps with respect to Feltex's reporting of the ongoing saga. One Commission member at time of reporting was an audit partner of the audit firm at the time the prospectus was audited and may have done the audit. This was not declared by the Commission. Insider Trading action taken against many of the vendors with some funds funds recovered and presumably paid to Tranz Rail. No known criticism by the Commission of the auditors or over-eager buyers despite tell tale signs of improper annual accounts and poor company operating standards prior to these sales. No known involvement. Produced a 379 page report covering certain arrangements involved. Was most critical of the arrangements and of many professional people who had gone along with their deployment including the auditors, but conversely found no "evidence of" improper conduct on the part of anyone. Did not declare that one of their number when the report was issued in 1993 was an audit partner who audited the bank in 1990 and allowed a significant profit overstatement.
Ernst & Young Audited a prospectus finishing their audit report with an unrequired paragraph saying that they could not comment on whether the projections in the prospectus would be met because they related to future events and hence uncertainty. This could be interpreted as meaning they thought the projections would be met given reasonably predictable future events. There seemed to be little justification for the 1% increase in market size and 1% increase in market share assumed for the projections. Also issued unqualified audit reports for the company's annual accounts prior to and following issue of the prospectus. No known involvement No known involvement Issued unqualified audited reports for these years, 1988 as Ernst and Whinney. Little heed was paid to the plight of borrowers from the bank as a result of the October 1987 sharemarket crash as at March 1988. They were aware that the non-use of the Yield to Maturity method to allocate income from large parcels of long term zero coupon bonds had inflated the bank's profits in 1990 but chose to do nothing about it, making their work papers look as if they had taken action, to a casual peruser.
Credit Suisse First Boston Offshoots of this firm were the vendors and promoters of this May 2004 initial Public Offering. The 1% increase in market size and 1% increase in market share assumed for the projections of sales and profit in the propectus appear not to have been realistic as claimed in the propectus. No known involvement Acted for both the buyer and vendor as sharebrokers. They might claim that different branches of the firm were involved with chinese walls in operation. They should have been aware that Mr Peter Fitzsimmonds was a director of National Mail and a close associate of the vendor and hence the vendor was likely to hold effective inside information. No known involvement
Accident Compensation Corporation Subscribed for some 3.7% of the company despite claiming to be highly competent investors and despite its past experience with the CSFB group. No known involvement Purchased a 5% stake in the company. Knew that Mr Peter Fitzsimmonds was a director of National Mail and should have known that he was a close associate of the vendor and that inside knowledge was likely to be highly relevant. No known involvement
Fay Richwhite No known involvement David Richwhite in particular was a major shareholder vendor and director in the company prior to the sale and for some time afterward. No known involvement Shareholders in the Bank from late 1988 with two directors on the Board. Promoted the concept of zero coupon bonds being dressed as an insurance policy as an "income smoothing" arrangement which increased the Bank's 1990 reported profit. Sold some shares in the Bank to the National Provident Fund after this "profit" was reported.
National Nominees Ltd Subscribed for 10% of the companies shares on behalf of unknown parties. Along with Citibank Nominees Ltd held most or all of the shares sold in the book build, largely on behalf of managed funds which presumably were not happy with it been known that they had bought shares at such a price. No known involvement No known involvement
Cliff Cook Reported to be part of consortium offering to refinance Feltex. No known involvement Vendor of the shares despite having a close associate on the board who would have been aware of the probable demise of the operation. No known involvement

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