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September 2007 Edition ---- to page back through Previous Editions click here

Calling all people who have owned shares in to company previously called Feltex Carpets Ltd since May 2004 and have lost money on them or face such a loss. The company's auditors, Ernst and Young, have let you down regardless of whether you have read their report in the company's 2004 prospectus. Do not enter into costly schemes in an attempt to recover from other parties until you have attempted a more simple recovery from these auditors. Even if you have entered such a this way should be faster and more certain.

Let us explain how Ernst and Young have done this. The second to last paragraph of their audit report in the prospectus states "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. ". We claim that this paragraph will have been fairly interpreted by many or all readers with investment expertise (and we say 99%+ of reader will have some expertise) to be in line with the following paraphrase. "We have evaluated the assumptions upon which the forecasts for the year ending 30 June 2004 and projections for the year ending 30 June 2005 are based. As a result we believe that these particular forecasts and projections will be achieved, subject of course to there being no future events which have a significant adverse affect on the results and which are not reasonably predictable at this time. However we do not wish to say this directly because of our fear of there being such adverse events and some people claim them to be reasonably predictable, since having said so directly would we think be more likely to unfairly tarnish our reputation or involve us in legal action.." Ernst and Young absolutely deny that this is a fair paraphrase and say that they have said nothing about the reasonableness of the forecasts and projections concerned and say that both sentences of their paragraph represent a note of caution to investors. We again refer you to their letter to be found here '. We say that the latter point is nonsense and that investors realise the fact that no parcel of shares are guaranteed to retain their value, recognise this as a natural fact of life and are hardened to anyone stating this natural fact. We also claim that our paraphrase is a fair restatement of what they said and what they said has misled readers into thinking that the auditors had fully investigated the situation and believed that these forecasts and projections were realistic. We offer the following arguments in support of our claim. 1 The construct of the paragraph is such that the first sentence (of the paragraph in the Auditors Report which we quote above) is not necessary a message in its own right. The authors are saying it is true but they are saying it because it is the reason for the disclaimer which they make in the second sentence. This is consistent with the first sentence in its own right being all to obvious and referring to shares in general and not the Feltex ones about to be offered which were the subject of the prospectus. The readers should be taken to know about shares. Explaining about shares in general would take pages and they should not start and they have not. What they are eager to find out about is the relative quality of the shares being offered. 2 The auditors give only one reason for their disclaimer and it is one which can automatically be applied to all forecasts and projections provided with share offers. It is that the future is uncertain and the commercial arena particularly so. All forecast and projections into the future are on the basis of what can be reasonably expected unless it is stated otherwise. Other reasons such as the the probability of the vendors discontinuing to buy Feltex carpets or promote there sales and this not being provided for in the projections, presumably have been checked out by the auditors and do not exist, we are led to believe. There is only one problem, things that cannot be predicted. Other things. like the example given, would be of far more relevance to the reader and would be mentioned were it the case, one would think.

We are back on deck and continue with our assistance to Feltex Carpets shareholders. We would like the opportunity to contact them but we are sorry to say that we have been frustrated in this exercise by the liquidators of the company, which is now named Exftx Ltd (in receivership and liquidation).

The legal rights of these liquidators to deny the public access to the register of shareholders appears to be nil.

Our initial contact has been with Peri Finnigan who cited various difficulties in giving access but never refused absolutely. On visiting the liquidators office we were confronted with John Whittfield who said that the register was closed for inspections. He declined to give any legal authority for their right to do so. He said it was to help the liquidators to carry out their functions with minimal confusion from other operations.

The companies office advised that that its legal team were of the opinion that the public had the right to inspect the shareholders register of a company regardless of whether it is in liquidation, and that sec 248 of the Companies Act, (which Ms Finnigan said they were relying on), does not appear to affect the situation.

We would like the assistance of a legal practitioner to get this refusal corrected.

The liquidators have recently reported. The report said Mr Vague had investigated IPO issues but appeared to have found nothing of relevance. No mentioned was made of any possible auditor liability. Most prospects for action seemed to centre on the directors' not selling the assets at an earlier stage after the reported profitability collapse.

Let us again bring the misleading paragraph the the 2004 IPO audit report to the attention of subscribers and to some extent later shareholders. It is worded thus.

"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. "

This paragraph is misleading in both theoretical and practical terms. It gives the impression that the particular forecasts and projections had been checked out and found to be reasonable as far as is possible but nevertheless the auditors were not prepared to endorse them because invariably no absolute guarantees can be given concerning the future. In fact no checking out as to the reasonableness of these forecasts and projections seems to have been completed. Such work had not been contracted for and it is perfectly reasonable that it not be done except that the paragraph we highlight implies otherwise. The fact that this work has not been done is a far more relevant reason for not expressing an opinion than that given by the highlighted paragraph. The forecasts and projection were generally expressed a far more favourable position than recent finalised results as shown in the prospectus which justifies considerable concern, and this paragraph has had a strong but completely unjustified comforting effect on prospective investors. The auditors acknowledge that it was intended that their report should express no opinion as to the reasonableness of the forecasts and projections but we say that this paragraph conveys a contrary opinion.

They are required to clearly delineate the scope of their audit. There is no obligation to give any reason as to why the particular scope has been chosen. They clearly imply that there is only one reason. The reason seems to be that if they say that the in their opinion the forecasts and projections will or will not be achieved without qualification then unanticipated future events could affect Feltex's results and prove them to be wrong. Well everybody would realise that. They can qualify their opinion to say that it applies only if relevant events unfold in a reasonably predictable manner. Even if they do not do so qualify their opinion all reasonable people and the courts will accept that that there is such an implied qualification. There is of course a reasonable margin of debate as to what future events are reasonably predictable so presumably to avoid getting caught up in any such controversy they have chosen not to.

The auditors explain that they have a policy of not expressing an opinion on whether any forecasts or projections will be achieved, for the reason as given in the first sentence of the paragraph. Well that may be so but that is not what the paragraph says. It gives the reason for not expressing an opinion on the specific forecasts and projections in the Feltex prospectus. The assumption is that it is the only reason and it is not because they have not considered or come to a conclusion as to the reasonableness of the assumptions that underlie the projections such as a one percent increase in market share. We say this is deceit, the victims of which were most if not all subscribers to this share issue.

There is no excuse for such a misleading statement. Very similar or identical wording has been used in other IPO prospectus audit reports of the time by both these and other auditors. . There is no reason to believe that it was wording which was endorsed by the institute however. The second sentence of the paragraph without the opening word "accordingly" would seem to be a very well advised disclaimer. The first sentence on its own might also serve as some sort of warning but we say that it is stating the obvious. There are no absolute guarantees of the future or what will happen in it and virtually everyone knows that. It is hard to track down recent IPOs but we found one last month for Xero Live Limited the audit report of which contained a sentence the same or very similar to the first sentence which we highlight above but no sentence of any similarity to the second one. It merely said that the assumption underlying the forecasts and projections were a Director's responsibility. Well we think that is a little misleading because the whole prospectus except the auditors report would seem to be a Director's responsibility but at least there is nothing to suggest that the assumptions have been fully considered by the auditors and found to be reasonable.

The Gavigan camp has now come to light with an expensive proposal to sue the directors in office at the time of the Feltex IPO and the lead brokers. Why it thinks the vendors and auditors should get off the hook amazes us. They need to release a lot more to warrant the expense.

The other big news of recent times is the settlement of the Securities Commission's Tranz Rail case. The parliamentary debate on the matter is to be found here. There is not much evidence to say that they bought Trans Rail cheap from the Government. Toll Rail seem to have a better deal now with the Government doing much of the line upkeep. Some other speech of the Commerce Minister praised the bravery of the Securities Commission chairwoman in pursuing the case. There certainly has been a huge history of leaving alone or failing to get on top of any irregularities which Fay Richwhite are in anyway connected with. As long as there is some connection with them crime seems to be free. There was a whole host of irregularities in the 2003

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