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    Default Lessons of the past

    Lessons of the past

    By ROB STOCK - Sunday Star Times | Sunday, 28 December 2008

    LESSONS OF THE PAST: Allan Hawkins became the poster boy for 1980s excesses as columnist <b>Rob Stock </b> wonders whether we will ever learn from the 70s, 80s and 90s.
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    Delving through the dusty clippings files in the basement of the Sunday Star-Times building in Auckland, the lessons of lost fortunes echo through the years.
    In the yellowed newspaper clippings on the investment company collapses that scandalised New Zealand decades ago, the now-familiar hallmarks are evident the management penchant for risk-taking with other people's money, the tendency to obfuscation, the tangled webs of related companies, the investors willingly closing their eyes to danger.
    How little we seem to have learned from the past.
    The 1960s had just ended when mini-conglomerate JBL, with interests in property, fishing, building, cosmetics and mineral excavation, hit the skids. It had been funded largely by syndicates of small-time investors.
    "The media, investors and politicians were all baying for blood," recalls police investigator and later the first head of the Serious Fraud Office Charles Sturt in his memoir Dirty Collars.
    It took three years of sifting through the company's paper records to launch a criminal prosecution (a similar glacial pace seems to beset current investigations and cases), but it didn't take Sturt long to conclude: "The company was in dire straits and innocent investors were still being encouraged to pour in their hard-earned cash."
    Investors in some of the recently collapsed finance companies will recognise the situation.
    Also reminiscent of some present-day failed finance firms is the corporate complexity of JBL. Even in the 1960s and early 1970s, investors were being asked to put money into firms whose complex flows of money and related-party connections would flummox financial experts..
    In 1974, satisfied he had all the evidence, Sturt headed to Henley-on-Thames, on the fringes of London, to interview JBL's bosses, Jim and Vaughan Jeffs. The pair bugged the meeting room in Henley, Sturt claims, but it was he who would have the last laugh. In 1975 the Jeffs were extradited to New Zealand to face what was then the costliest trial in Kiwi legal history. Jim was sentenced to nine months in jail. Vaughan was fined.
    It was a watershed moment. No one could now deny New Zealand had a corporate fraud problem. "At the time no one really believed in white collar," Sturt said. " `Crime' was something committed by common criminals such as burglars, robbers and rapists."
    JBL lingered in receivership, and in the headlines, for many years. But its infamy has dimmed. The first of the great investment firm failures that still lives in the popular imagination came in 1977 Securitibank. It was a collapse that sent shock waves through the country and led to the foundation of the Securities Commission in a bid to reduce the chances of a repeat.
    Instead of there being hundreds of out-of-pocket investors, Securitibank left thousands. At the time it was the largest corporate collapse in New Zealand history with estimated losses of $30m-$50m, though in the end every cent was returned to investors.
    Once again, there were claims that the company had been accepting investments from the public despite having been insolvent for some time a previously unthinkable crime as it was part-owned by two government-owned insurance companies, State and Government Life.
    A common cry was that people had invested because of the government shareholding a claim that would be repeated in the later insolvencies of PSIS and Bank of New Zealand.
    But this time investor-power had arrived. A consortium of investors squared off against "most of the top legal talent in New Zealand", Sturt recalls, with a $50m claim for damages against the shareholders and directors. Eventually the liquidator took over the case (after the first had died of a heart attack) and it was eventually settled out of court. "Part of the deal was for the dollar value of the settlements would remain confidential," Sturt says. "Nevertheless it is safe to say that millions of dollars were received by the liquidator."
    As a result, investors got all their money back.
    But Securitibank was not alone. Property developers had also been borrowing money directly from the public using debentures, but as economic conditions worsened, they started to fall and an outcry arose.
    Bob Jones, writing in Truth in 1977, said: "All have the common characteristic of wiping out the savings of small gullible investors, the little man, or as sometimes referred to in money circles, the `old lady market'.
    "The money of larger, sophisticated investors, such as trading banks and other financial institutions, is usually well secured such as by mortgages over property, and they suffer only to the extent of a delay in being repaid."
    Others agreed.
    Businessman Charles Belton wrote at the time: "It's criminal that someone can arrive from, say, Timbuktu, form a developing company, get some well-respected names to work for him, then get people to invest thousands of dollars. The developer pays himself a huge salary, buys a new car, and a flash house, then leaves many lamenting New Zealanders after the firm has gone broke. It is high time laws were introduced to make it more difficult for huge losses of investors hard-earned money."
    It sounds too familiar. All that appears to have changed is that the thousands became tens of thousands and hundreds of millions, and instead of the development companies asking for the money from the old lady market (now dubbed `mum and dad investors'), it was asked for by finance companies, who lent it on to the developers.
    It was not until 1987 that New Zealand had its seminal corporate collapse experience, but before then another government-endorsed investment company flirted with insolvency, to a large extent because of two of the causes of the modern finance company failures - lending long and borrowing short, and a crippling loss of investor confidence.
    The Public Sector Investment Society, PSIS, was placed in statutory management on June 28, 1979. It had experienced a crippling stop-go run on funds over a period of 13 months as realisation grew of its parlous financial position (it had made a hash of running retail shops, bought real estate, went into developing, had virtually no capital base, and lent long on a base of on-call deposits). There was also a nasty and ill-judged battle for control of the business, which increased fears and stoked the run. Statutory management prevented a fire sale, which one estimate suggested would have returned as little as 25-28 cents to depositors. At the time PSIS had $131m of liabilities and its deposits were almost all short-term. In his history of PSIS, Over half a million careful owners, Gordon Boyce wrote: "The society had virtually no safety net to meet a sudden onslaught of withdrawals."
    The scale was immense. Out of every 100 New Zealanders (children and the old included), six would have been a member of PSIS. Statutory management lasted until October 1987.
    THE '87 CRASH
    On October 20 the sharemarket crashed, and a scar was cut into investors' memory. In their hundreds of thousands investors swore off shares for life.
    It was horribly overheated (the top 50 shares averaged 300% gains in 1986) and included the likes of listed investment companies Equiticorp, Euro-National, Judge Corp, Renouf Corp and Chase Corp. When the crash came it was like the collapse of a house of cards.
    Shares in Rod Petricevic's Euro-National piked from highs of over $8 in 1986 to 8c, dragged down by complex deals with other listed companies, including Judge Corp and Renouf, that also crashed and burned.
    Judge Corp went from being worth $900m at its peak to receivership in 1998. Shareholders in the company, whose major asset was shares in other listed companies, got nothing back despite directors' claims to having made "earnest and genuine efforts" to salvage value.
    Renouf reported a $401m loss in 1987/88 (then the second-largest ever announced). In a moment reminiscent of some recent finance company moratorium meetings, Sir Frank Renouf got a round of applause at the annual meeting in 1988. Shares were then trading at 15c, down from a peak of over $7 in 1986.
    But it was Equiticorp's Allan Hawkins, then New Zealand's second-richest man (on paper at least) who became the poster boy for what was wrong with 1980s corporate New Zealand.
    Sturt recalls, "Everyone with a dollar to spare wanted to be on his coat tails." There were tens of thousands of shareholders and debenture holders. Anything seemed possible, even a tilt at taking over BHP.
    But on October 20, 1987, the day the sharemarket crashed, it was the $327m deal to buy New Zealand Steel from the government that really lived in the memory. The payment was to be in Equiticorp shares, to be onsold at a guaranteed amount to an unnamed international finance group. The buyer turned out to be companies associated with Hawkins, with the purchase effectively funded by Equiticorp itself. The government never asked who the buyer was, and eventually had to fork over damages to the statutory managers (after the then second-longest running civil trial in Commonwealth history). Equiticorp ended up in statutory management. Hawkins eventually ended up in jail.
    Equiticorp took complexity to a new level. Sturt likened unravelling the Equiticorp deals to completing a 100,000-piece jigsaw from one million pieces. "The dilemma was to work out which 900,000 pieces did not form a part of the final picture."
    Energycorp had raised $12m in a public offer, but it soon turned out that the quality of its revolutionary wood-burning and "brushless electric motor" technology wasn't as good as it had been made out to be. Energycorp was basically the repackaging of the Heat Harness company which the directors had bought for $780,000 a year before Energycorp listed.
    Four elements from the cuttings sound familiar. The receiver confiscated and sold flash executive cars (Mercedes-Benz and BMWs, though there was also a leased Lear jet). It was one of the best examples of investors ignoring risks (receiver Paul Preston said of it: "Any newly floated company would have been well-received by the market.").
    Chief executive Gerald Henry, who had a slew of failed businesses already under his belt, blamed the media. And years later Gerard's brother Brian was to return as chief executive of Diligent, which listed last year at $1 but has since collapsed to 20 cents.
    The curious case of the missing gold of Goldcorp, which collapsed in 1988, also proved fascinating to the investing public. Listed in February 1986, chairman Ray Smith predicted people would soon be embracing gold as an investment. The company sold "unallocated gold certificates", holding the real gold in its vaults. But it turned out there was not enough gold to go around, and what was there was claimed by funder BNZ.
    About 1600 certificate holders fought back, but in the end the lawyers were the winners, pocketing an estimated $2m for a legal battle that went all the way to the Privy Council. BNZ got its gold.
    Fraud charges were laid against Smith, who was acquitted. He later wrote Where's the Gold? in which he claimed BNZ helped squeeze the company dry in the six months before the towel was thrown in.
    The litigation and investigations that followed the collapse of the 1980s corporates cast a shadow for years, and there is no reason to expect any different of the modern finance company collapses, where receiverships, civil and criminal cases and moratoriums guarantee headlines for years to come.
    1990 saw the country face up to the horror of finding the-then "People's Bank", BNZ, on the edge of collapse. Falls in commercial property prices led to a wave of loan impairment for the bank, much of it on Australian loans. To prop it up, the incoming National government chipped in $620m. It wasn't the first capital injection. Fay Richwhite had bought a shareholding in BNZ for $300m the previous year. Around 13% had been floated to the public in 1987. Ruth Richardson saw no need for the government to own it and perhaps wished Roger Douglas had been allowed to sell the whole thing. In the end National Australia Bank paid $1.48b for it. It was a bargain. In the past six years the company has made a net profit for shareholders of $3.61b.
    It is tempting to think corporate excesses and naked over-hyping of share placements are a top-of-the-market phenomenon. History shows that to be untrue.
    In 1983 Sovereign Gold Mines launched a share float, but was in receivership before it could present its maiden financial accounts. More recent examples in this ilk are the sound-a-likes Vertex, Fortex and Feltex.
    Meat company Fortex went into receivership in 1994, four years after it debuted on the stock exchange. Sadly, extensive accounting fraud had obscured the extent of foreign borrowings, hiding them as income. Managing director Graeme Thompson was convicted and served a stiff sentence. In a warning sign for auditors of failed finance companies, receivers KPMG pursued Price Waterhouse and are understood to have received an out-of-court settlement.
    Plastics manufacturer Vertex was listed in 2002 by a private equity firm at $2.05 a share, but just two months after listing it issued a profit warning, which had a devastating impact on its share price.
    Feltex listed in 2004 at $1.70 a share, which appeared to suggest it was worth over $250m, but within two years a series of profit warnings (the first nine months after listing) had led to the price falling 90%, much to the acute embarrassment of promoters Forsyth Barr and First NZ Capital, now facing an investor lawsuit along with Feltex directors. Feltex went into receivership in 2006.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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