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To view our conclusive evidence that the Feltex IPO was instigated by the major political parties to rob investors to finance cheating of Olympic medals click here We have revised our presentation of this evidence mid October 2014

Mid October 2014 Edition

The Houghton v Saunders judgment refers to an Australian investment firm operating in Australia and Britain by name of Hunter Hall (think Hudson and Halls because something is being cooked up here). At paragraph 503 it is claimed by the plaintiffs and accepted by the judge that this firm made an unexpectedly large commitment “at some $39m” to the Feltex IPO. It was apparently achieved by some hard work by Forsyth Barr, a joint lead broker. We can not find any reference to them not going through with this commitment. However we can see no reference to this firm on the list of the 20 largest shareholders of Feltex as at 31 July 2004 as contained in Feltex’s annual report to 30 June 2004. The 20 largest companies contains many nominee type companies but none of them are near large enough to hold all the $39m (15% of total issue) on behalf of Hunter Hall. Perhaps Hunter Hall made this investment on behalf of many individual clients. Well the analysis as at the 31 July 2004 shows less than $0.5m of shares held by Australian shareholders, and by shareholders in the rest of the world other than New Zealand and Australia. Similarly Hunter Hall do not appear on the list of 20 largest shareholders as at 31 July 2005. Most of the nominee companies are gone from that list. The Australian shareholders have gone up somewhat to 7.05% or $17m worth at their issue value in the 2005 analysis, however 5.08% of the shares are here held by Godfrey Hirst Australia, who eventually purchased nearly all Feltex assets. Of course Hunter Hall could have sold by then. But regardless this must have been a very queer shareholding.

Mr Peter Hall, Executive Chairman of Hunter Hall was called as a witness by the plaintiffs, but he appears to have little of relevance to say. This shareholding of Hunter Hall, would seem to have been concocted by the Plaintiff management, who we say were working as a team with the defendants, to counter the claim that virtually no commercial institution type investors had subscribed to Feltex. .

The evidence is that this shareholding of Hunter Hall, was non-existent and has been concocted by the Plaintiff management, who we say was working as a team with the defendants, to try to dispute the claim that virtually no commercial institution type investors had subscribed to Feltex. The only (other) major Institutional investors in the IPO as can be seen from the largest 20 list were the ACC, who’s chairman of Investment committee Eion Edgar was also the chairman of the joint lead broker of the issue, Forsyth Barr and hardly impartial. And South Canterbury Finance who had had many of its directors charged with major fraud for events a few years after the IPO so could hardly be said to be diligent professional investors who had unfortunately lost money by investing in Feltex. Indeed South Canterbury Finance is the type of company who would be keen to curry favour with Government agencies so that it might get treated favourably in respect to any regulatory issues that might come along in the future, for instance getting a Government guarantee for lenders to it.

Genuine professional commercial investments in the Feltex IPO were non-existent so the defendants and the plaintiff management (one the same people) decided to invent a major one. Even if the investment has taken place Hunter Hall was and is by brand an “ethical” investor so people who invested in it were very tolerant as to the return they received. It gives 5% of its earnings to registered charities. There is an article on the internet that says that in 2003 Hunter Hall had a very bad year and Mr Hall voluntarily halved his salary. It is unlikely that he would be investing carelessly in 2004 given that was the case. Although Hunter Hall claims to be an international company it is very much Australia orientated. The article lists two 2003 addresses of Mr Hall which I believe are Australian. However it would seem that the plaintiff and defense management in Houghton v Saunders wished it to be seen as a UK company. There would be less suspicion of skullduggery if it was a UK rather than an Australian company they no doubt thought. The judge said it operated in Australia and UK. It was claimed Mr Hall agreed to subscribe after being visited by a Forsyth Barr road show in London. And it was claimed that Mr Hall has given evidence to the hearing via a TV link from London. The judge had a duty to check out the validity of this claimed subscription.

One of the five directors of Hunter and Hall (international ltd) is a New Zealander or ex New Zealander by name of Naomi Edwards. Ms Edwards has a first class honours degree in mathematics from the University of Canterbury(NZ). It is unlikely that Ms Edwards was a director of the firm when the alleged subscription to the Feltex IPO was made however she no doubt was in 2014 when the Executive Chairman of the firm appeared as a witness to the Houghton v Saunders hearing. We say this NZ connection would be of much interest to her and that she should have her maths degree taken off her for not espousing that the Australian Carpet Market size on page 37 of the Feltex prospectus was incorrectly analysed and the past sizes indicated that there would be a 3% fall from year 2003 to 2005 not a 2% rise. Ms Edward’s father, Brian Edwards, has been a close associate of former Prime Minister Helen Clark who has been involved in many of the Securities Commission and judiciary appointments which have dealt with the Feltex affair. He wrote a “portrait” book about Miss Clark. He practices as a political commentator and makes regular appearances on the Radio NZ 4pm ”panel”. We say he is not fit for this position. He has said that this daughter practices part time as a stand up comic, and that is the way she would seem to be treating the Feltex IPO victims. We say this Hunter Hall scenario is very much a scam.

Well the Houghton v Saunders judgment was nicely tucked into peak election drama so that the media don’t have to comment. No surprise from our perspective. It’s a corrupt judgment emanating from a corrupt plaintiff legal team which was employed by the defendants.

Let us start however with the Lynne Snowdon case which has also came into the news with a judge requiring her to pay $400,000 in costs. Ms Snowdon was Radio New Zealand’s head of news until early 2003. At that stage Helen Clark had won a second term in office and was gearing up to win a third. We believe she did not like Ms Snowdon’s impartial news philosophy so she had to go. Women were supposed to support one another and this independent attitude was not acceptable. Radio NZ were not going to have an argument over news objectivity however so we say they picked a fight over budgeting and the like. We would thank Ms Snowdon for her persistence and would say that there is hope for her case yet.

Now back to Houghton v Saunders. It should be found here. It’s a long judgment as one might expect and we will have to consider it a little bit at a time. The judge refers to an expectation of appeals but Tony Gavigan the instigator of action has officially closed his web site and seems to have nothing to say, exactly as we would have predicted. His case against associates of Southern Petroleum went exactly the same way. Little digs here and there but not too much of substance overall.

Lets consider the Feltex revenue issue. Greg Meredith the plaintiffs witness said he thought the 1% (p.a.) increase in revenue allowed for market size was reasonable and the judge was not prepared to challenge this consideration. Mr Meredith did challenge the 1% p.a. increase for increase in market share but we have no record of what figures he produced. The judge did not see the issue as a long term trend of falling share probably due to lowering tariffs which would be very hard to turn around but seem to consider the optimism of staff there and then, or actually a bit after there and then.

It has long been the attitude of the defendants that the prospectus could not have been misleading because things went quite well for six months or so after the IPO. Well we do not wear that. The corporate giant (too big to be allowed to fail) Credit Suisse negotiated the sale of the Melbourne carpet manufacturing complex from the Carpet Manufacturing giant Shaw Industries. As far as we are aware none of Shaw’s carpet brands were sold with the plant. A critical matter in the sales would be, we believe, Shaws undertaking to regulate its participation in the Australasian market to allow Credit Suisse to “offload” the plant to the unsuspecting without problems being incurred by the new owners for the first six months or so. Such an agreement might not be legal it would just be an understanding that these big firms have with each other. They honour their “understandings” to their mutual advantage. Credit Suisse and associated brokers have of course also been able to negotiate with the NZ Government (ie senior politicians) for the market regulators (eg Securities Commission and the judiciary) to close down or “see their point of view” over this issue by offering Olympic success as a reward.

But let us follow some of the judgment more closely. Let us start at paragraph 311. Here is set out some of what the prospectus says about assumed market size and assumed market share for the purposes of the projections of the 2005 financial year of Feltex. Nothing further is said about market size although the claim about the 1% p.a. adopted being less than the average growth rate of the past 10 years is criminally misleading and should have been picked up by the judge even although the plaintiff team, working for the defendants, have not pointed this out. The trend of market size of the last ten years predicts a market size for 2005 3% below the year 2003 size, not 2% above it as we have reiterated many times.

In paragraph 312 it is acknowledged that the plaintiff alleged that there was no basis to assume that Feltex would increase market share. The case is understated by expressing it this way and whether the judge or plaintiff has done it that way we do not know. Whether or not the one percent increase is justified might not be the greatest issue but feltex had been losing revenue because of lost market share at the rate of 5% in recent years so the difference is 6%. That can be added to a 5% overstatement for market size and we have an 11% market overstatement. An improvement in share was not feasible because of falling tariffs. The question was would the deterioration just continue or perhaps worsen.

Paragraph 313 mentions previous year’s variances but then focuses on the year 2004 for which total market sales information would not be available. It mentions what was said at a meeting on 2 June 2004. All the money was in by that stage.

Paragraph 314 is more objective but less logical and we would like to know more about how that bar graph was compiled. Anyway we say that when Feltex have been talking about 1% increases in market share or market size in the prospectus they have meant 1% increases in sales due to either market share or market size as the case may be. Its projected revenue for FY2005 was about 11% greater than the actual revenue for FY2003, or expressed another way, a little more than 5%p.a. compounding. This 5% would seem to be made up of 3% inflation, 1% for assumed increase in market size, and 1% for assumed increase in market share. If we assume market size to be constant and accept the bar graph figures quoted then Feltex has lost 4.2 percentage points of the market between 1999 and 2003. This “share loss” represents a 4.2 x 100/30.7 = 13.68% reduction in sales over that time over what would be the case if it could have retained its share or an average reduction of about 3.5% of sales per year. The 1% increase assumed for FY2005 has got to be seen in the light of 3.5% falls. The assumed turnaround is greater than there presented. Australasia has a relative disadvantage for the manufacture of non-wool carpet and as tariffs diminished one could expect to see less and less such manufacture take place, similar to the car assembly industry which seems to be about to close down entirely. Nothing much can be done about it. Reducing the tariffs was a deliberate decision to increase each country’s wealth by engaging in more trade. Resources have then got to shift from uncompetitive industries to competitive ones. The prospectus warned about this prospect but then ignored it when it assumed an increased market share for its FY2005 projections.

A feeling we get with this discussion of market share in the judgment is it is saying a 1% increase in market share is just above zero and zero is as low as you can go. Far from it, if your carpet is largely made from man made fibers then you are in a diminishing sector and market share changes can be expected to be negative as a matter of course.

We end in the meantime by discussing the judges conclusion on the market share assumption in his paragraph 323. It all centres around some address the Feltex CEO Mr Mcgill gave (effectively) to the board in early June 2004. The money was all in then and the allotments made. It was not the time when you would be expecting the directors to be carefully considering whether they were doing the right thing. It was “we have got to live with it now” time. What Mr Mcgill and others were saying a month earlier would be far more relevant. In particular we say that when all major NZ institutions (other than ACC whose investment committee was chaired by the chair of a feltex broker) indicated that they were not subscribing, the share offer should have been withdrawn. Anyway Mr Magill said that although sales were down it was compensated for by improved margins. We say that the improved margins were likely to be a temporary or temporally derived phenomenon unlike falling sales which was ongoing. Anyway apparently Mr Magill then said the company “was in the best shape it had ever been in”. Well this could have very little to do with the directors assuming an increase in market share for the next year or so, one month earlier. We say Mr Magill could justify that comment with reference to the $50m debenture which had just been repaid with equity funds. Company debt had fallen by about 33%. But he should have known the company had overstated projected market size and market share by 5% each and with dividends about to be paid on that basis trouble was on the way, even if Credit Suisse had “arranged” for competition to be reduced for a while.

We thought the defendants argument that it would take time for carpet importers to set up a structure to be erroneous. You just hire a warehouse, dispatch a shipment and away you go. Shaw Industries knew all the retailers and had the brands.

Paragraph 435 of the judgment was of interest to us. Certainly the carpet market as a whole is finite. Carpet is a consumer durable but rather a unique one in that it is costly to buy the latest fashion on a whim when ones existing carpet is still quite good. Unlike a refrigerator used carpet sells at a big discount because it is cut up or worn at inconvenient places. And there are carpet laying costs so the total cost is large. There are also convenience costs as personal furniture is moved around and tradesmen invade the home. This finite-ness is very evident considering the market as a whole. Thus there was a peak in year 2000 when the Sydney Olympics were on and people decided to spruce up earlier than normal because visitors were coming. Predictably less carpet was sold in the next few years. Having replaced the carpet early you don’t do it again when you normally would have. This principle was not heeded when there was a big year in 2003 for whatever reason. Feltex Greg Meredith said that if you draw a straight line through the market size of virtually any year prior to 2003 and the line also goes through the 2003 size then 2004 and 2005 will be bigger still and we go along with that. They did not say “people have got in early in 2003 so 2004 and 2005 will be down and least square analysis is the only way to find the trend and get a prediction for 2004 and 2005”. Anyway the judgment at 435 criticises Ms Mills for saying a sale brought forward from say July to June is a sale that could not be procured at a later time. We agree with the judge if that is exactly what she was saying. But there are some closely related matters here. The sale in June makes the sales that financial year look better at the expense of the next year. And if forward dating of invoices continues it will move normal August sales into July etc until the forward dating stops or people think it is always available. As the judgment previously said this effective discounting will win some sales which would otherwise go to other manufacturers. But its biggest effect is likely to be on people who are already pre-disposed to buying the Feltex product. If their attention is drawn to the buying of carpet by hearing the words “discount” or “free credit” then they might buy months and months ahead of their normal time. This is not particularly logical except having thought carpet one might as well get on with it and get it done. This can be quite a big component of sales generated by forward invoicing in a given month.

Other very real dangers that the Feltex prospectus did not warn prospective subscribers of were:

(1) Part of the negotiations between Credit Suisse and Shaw Industries over the sale of Shaw’s Melbourne plant in the year 2000 could or would be that Shaw would manipulate the market by refraining from importing into Australasia until Credit Suisse had offloaded the plant to someone else.

(2) That Australian purchasers of carpet would not like the idea that ordinary everyday New Zealanders owned Australian carpet factories and had a NZ registered company domiciled in Australia and were presumably making a profit out of them. Feltex’s Australian sales would therefore collapse. The Feltex float was 98% allocated to New Zealanders. Most of the remainder was probably subscribed by the Australian firm Hunter Hall ($39M) (see para 501 of judgment).

(3) That two Australian females had been appointed to the NZ securities commission and this was likely to be to protect the vendor and promoter from fraud charges. There was an understanding that the issue was only for New Zealanders because much of the funds were to be used to get Olympic medals for NZ athletes.

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