great southern probe on slow boil, page-9

Just to add to the previous thread this is a senate inquiry statement.I believe some readers would be aware of the author

1
Report for Senate Select Committee-Managed Investment Schemes
Schemes Chairman-Mr Bill Heffernan
Short Paper on the Specific Impact on the Availability and Efficient Use of
Capital-MIS Projects
The Great Southern Plantations (Scheme Promoter Company) experience incorporating
responsibility issues, a remedial action proposal and a suggested better way of
planning and implementing future MIS government supported proposals.
History
1. We have seen successive Federal Governments actively support tree planting
in Australia. My earliest recollection is the Hawke Governments proposal to
plant 1million trees back in the 80's.
2. There has been much talk about the need to encourage pine and other
plantations as part of an international imperative to replace the massive
reduction in forests and natural habitats contributing to increases in Co2
emissions including the deforestation of the Amazon. The UN reported in
1997 that almost half of the planet's original forests had been destroyed,
mostly during the previous three decades and that during the 90's although
the world gained 1.8 % of its natural forests through reforestation with
plantations, afforestation and the natural expansion of forests, it lost 4.2% of
its forests through deforestation- a net loss of 2.4%.
3. It was in this 'climate' of public awareness and concern that governments and
individuals formed the view that governments have to intercede and encourage
the establishment of new plantations.
4. The expected lowering of demand for paper products and consequently
woodchips did not emerge with the computer revolution. Rather, the
widespread business and consumer demand for software products and the
relatively low cost of printers and photocopy paper led to an increasing
demand for paper with the growth in print capability.
5. The federal government supported the MIS industry through the tax
deductible write-off in year one of the investment. It had no other direct
involvement.
6. The role of the Australian Taxation Office was to issue Product Rulings which
generally stated that if the terms and conditions in the proposal were carried
out, the investment in the project would be fully tax deductible in the year of
investment.
2
7. Given the profile and government support for tree plantations, investors
including lots of mums and dads invested in these MIS products with
accountants bombarded by financial planners to get their clients to sign up
with the attraction of fully funded finance by a related entity of the Scheme
Promoter Company. The financial planners were contracted by the Scheme
Promoter companies with the attraction of large commissions. This cost was
additional to the cost of employed sales and marketing people coupled with
visits by marketers and investors to the relevant MIS location to promote the
products and support the financial planners .I personally received an all
expenses flight paid for by Great Southern to visit the plantation in Albany,
W.A. to visit the tree plantation forest (I remember it well as it was the day that
Kathy Freemen won the Gold medal in the 400 meters at the Sydney Olympic Games)
as well as (in a different year) a separate all expenses flight to King Island to visit
the cattle farms.
8. The Chairman of ASIC Mr. Tony D'Aloisio on the 4th June 2009 explained that an
estimated $350 billion worth of investor's funds in MIS products involved a
"high level of self regulation" and that while MIS products must be registered
with ASIC and the responsible entity must be licensed, there was no
assessment of the "merit" of the offer. Moreover, he declared that the 'the
basic philosophy behind (MIS regulation), similar to a number of areas was to
leave it to the market with oversight and market conduct supervision from
ASIC. He further declared that ASIC's role is that they have functions of
licensing RE's (responsible entities) and register the schemes and that they
don't actually vet or approve them."We are monitoring on-going disclosure
but there's no requirement that product disclosure statements be filed
with ASIC" (The Age, June 8, 2009).
9. A Responsible Entity, Great Southern Managers Australia Limited (GSMAL)
was supposed to with its (board majority) �independent Directors� represent
and protect the investors by managing the scheme on behalf of the investors
and be arms-length from the Scheme Promoter Company, Great Southern
Plantations Ltd. It is the Scheme Promoter Company that appoints the RE-not
an independent body and the RE‟s Directors included several of the same
Directors in the Scheme Promoter Company.
The Players
There are a number of participants that impacted on the events that has led to the
debacle and failure of these MIS companies like Great Southern and Timbercorp.
10. The following individuals/entities/groups are involved:-
a. The Scheme Promoter company
b. The Scheme Promoter company's Directors
3
c. The Scheme Promoter company's Shareholders
d. The Accountants and Auditors of the Scheme Promoters Company
e. The finance company associated with the Scheme Promoter Company
providing the funding for the Investors
f. The Bankers who made loans to the Scheme Promoter Company
g. The Responsible Entity (RE) allegedly representing investors
h. The Directors of the RE
i. The Accountants and Auditors of the RE
j. The Financial Planners promoting the investments
k. The Government and Parliament of the day
l. The Australian Taxation Office
m. The Australian Securities and Investment Commission
The Primary Responsibility for Capital Wastage
11. The primary responsibility for this debacle is in my submission a shared
responsibility. However, I would hold as principals-the Government and
Parliament of the Day and ASIC (followed closely by the Directors of the Scheme
Promoter Company and RE and their respective Auditors).
12. It is important to recognize that Australians are broadly interested and
connected to a greener Australia.
13. National Australian governments of various persuasions have been in unison
over the last 25 years in publicly promoting and supporting tree planting as
an important capital investment to fulfill this nation‟s desire for land
preservation and ecology protection.
14. The easiest method of support by the Parliament for any MIS proposal is to
provide a tax deduction. This method with respect is an inefficient and
unsatisfactory method of spending our nation‟s capital and is in effect, an
abrogation of Governments‟ responsibility to planned goals and achievable
outcomes for this sector. In this regard, the method is painless as it is
uncollected tax revenue that is foregone and in this sense, is an invisible
�capital investment‟. The reality is however that Government is by definition,
the biggest investor in all these MIS schemes.
15. A set and forget mentality would not be condoned in the business world as
best practice for such a massive capital investment.
16. Worse still, the Commissioner of Taxation is then put in an impossible
position to validate these MIS schemes arising from an obligation to issue
product rulings that were inevitably used to ply the schemes by MIS
marketing agents to true believers to substantiate the righteousness and
commerciality of the investment. The Commissioner while not having any
role in determining the commercial viability of the MIS is seen by the
4
investors as giving commercial efficacy by approving the MIS for tax
purposes. In this regard, one of the criteria for the investor to obtain a tax
deduction is that the MIS itself is indeed a commercial arrangement. This is
vastly different to a determination that the MIS is a commercially viable
undertaking. One can have a commercial operation that by its underlying
assumptions for anticipated future revenue for example, is always going to
make a loss, even though it is a �commercial operation‟. The problem is that
the public cannot distinguish between a commercial operation and a
commercially viable operation.
17. The public also do not appreciate that the Commissioner will ultimately
determine the deductibility of the investment in respect of each taxpayer
investor. Quite separate from a favourable product ruling, in accordance with
Part IVA of the Income Tax Assessment Act 1936, as amended, the
Commissioner can determine for each taxpayer on a case by case basis that the
dominant purpose of the MIS was to receive a tax benefit and as a result, the
claim may receive a ruling that the particular investment is not tax deductible.
18. As we can see from the Chairman‟s report above, ASIC (also) do not
determine the merit of an MIS proposal nor vet or approve them. The public
have no idea that ASIC is not a regulator at all and that at best, masquerades
as a post office box.
19. In the case of ASIC and the Commissioner of Taxation, it must be Government
that defines their respective roles and determine the scope and relevance of
their involvement when it is seeking to propose and implement large scale
managed investments. Currently, the phrase �managed investments‟ is
anything but a managed strategic investment in this nation‟s future. I believe
that Government has a positive duty of care to the public and the investment
community to ensure proper enforceable guidelines exist with an
independent approval and monitoring process where, in particular, there is a
desire to encourage specific capital investment in the environment through
MIS schemes.
20. Specifically in relation to ASIC, if the Chairman is correct about the statutory
responsibility of ASIC, then one must conclude that this lack of empowerment
is a fundamental flaw in Parliament‟s prescription for the statutory role of
ASIC.
21. One cannot help but observe that ASIC does not appear to have any
operational or statutory impediment to exercise its powers after the event,
including putting a freeze on assets of Directors and Third Parties or
instituting proceedings for defrocking Directors and seeking court orders for
penalties (see for example James Hardie). Why, one may well ask, does the
Chairman view that the prime directive of ASIC is to exercise its powers to
strongly intervene after a corporate catastrophe that is, as a sort of cure, rather
5
than establish protocols and a charter for intervention to ensure its prevention
and mitigate losses by investors?
22. On the 13th November 2008, I attended an investor and shareholder
meeting/gathering in melbourne where about 1000 people attended to hear
the roadshow spiel of the Directors of Great Southern Plantations (the Scheme
Promoter company) and GSMAL (the RE) to sell the proposal to investors and
shareholders to swap their trees or/and cattle for shares in great southern.
23. Prior to that meeting, I wrote to ASIC asking them to intervene and prevent
this fraudulent misrepresentation by the RE directors and KPMG. A copy of
my complaint dated the 3rd November 2008 is attached as Appendix A. I
stated among other things that �I am very concerned that Great Southern is
insolvent�.
24. ASIC issued on the 7th of November,2008 an unsigned letter from their
Misconduct and Breach Reporting ,Stakeholder Services Branch said that the
issues raised will receive careful consideration and put questions to a Nicholas
Roper. On the 25th November 2008, Mr. Roper said that the issues I raised have
been referred to another of ASIC and that ASIC is �unable to comment
further� and that if ASIC had any requirement for further information from
me, they would contact me directly. In effect, ASIC was saying don‟t call us
we‟ll call you. No further contact has been forthcoming from ASIC to date. A
copy of their response is attached as Appendix B.
25. In my respectful submission, Mr. D‟Aloisio should be requested to provide an
explanation for this response and ASIC‟s failure to prevent this fraudulent
proposal as against the investors when ASIC was warned about the fraudulent
activity prior to its purputration.
The Secondary Responsibility for Capital Wastage and Profiteering
26. Prior to the meeting, I and Mr. Leon Sholl, solicitor and investor met with Mr
Steven Cole Chairman of Directors of GSMAL (the RE) and Mr Duncan
Calder, Partner Corporate Finance of KPMG. A copy of their business cards
that were given to me are attached as Appendix C. Please note that Steven
Cole gave me a private company card. I told them that the proposal was
fundamentally flawed as:-
a. The investors would be taxed on the value of the shares as it was
assessable income.
b. The investors would be required to repay loans as the underlying asset
(trees and cattle) and therefore security for the loans would be converted
to shares.
6
c. That as a result of a and b, the investors would have to sell the shares to
obtain cash and there was nothing that would underpin the share
value.
d. That as a result in massive losses of share value, there would be
diminishing returns to shareholders on the sale of their shares
assuming there was a market for them and they were at all sellable.
e. The company would not be able to raise share capital with a falling
share price.
f. Arising from the massive fall in share value, covenants that I suspected
were linked to bank loans would be triggered and lenders of Great
Southern would pull the plug on the company or/and by definition
would make Great Southern insolvent.
g. That as a result, the valuation by Duncan ( KPMG ) of the shares which
had already been devalued after the first attempt at this asset
acquisition for shares in September 2008 is unequivocally flawed and
unjustifiable on any truly independent valuation.
h. That if according to KPMG, the underlying asset value (i.e enterprise
value) of Great Southern far exceeds the current share value, why not
liquidate the land assets and pay out everyone at a profit?
i. The clear evidence was that the RE directors (GSMAL) should not be
recommending anything that puts the investors in a worse position
than they are or would be with their investment intact i.e. improperly
recommending shares for real assets.
j. That the proposal was unsound and unsafe by their own admission as
the recommendation by Mr.Cole for the RE to investors to accept the
proposal was that it was the best proposal �in the absence of a superior
proposal�. The recommendation was not one that was formed on a
view that it intrinsically represented real value to the investors. These
words of �in the absence of a superior proposal‟ were I said a phrase to
confuse mum and dad investors. Moreover, I said that there was no
evidence that he, as Chairman of Directors of the RE had sought
another proposal from the investment community.
k. That all of this proves that the RE directors are not really arms-length
from Great Southern.
27. These men were not able to respond to these significant points of irregularity
and it was clear to me that they were going to proceed in the face of any
opposition.
7
28. Mr Sholl and I attended the meeting and I spoke publicly stating the reasons
why the assets for shares proposal was financially flawed. I also added that
they could have asked a committee of investors to be formed and they could
still do so and that I for one would be happy to serve at no charge to the
investors.
29. It is my respectful submission that Mr Cole, Mr. Calder Mr Cameron Rhodes,
Mr Young and all directors of the Scheme Promoter and RE entities should
have their assets frozen and seized and that they should also be prosecuted
for fraudulent conduct. In this regard, not only did they promote and
participate in a scheme to trick investors to swap their assets for shares, they
were warned not to do so by many investors and proceeded to do so in the
face of those warnings.
Recommendations �Salvaging the MIS Schemes
30. The current fix-it regime is for the MIS Scheme companies to be placed in
liquidation so that they may be further raped and pillaged by liquidators and
lawyers while the courts are tied up for years with the liquidator seeking
court approvals and class actions by enterprising law firms.
31. It is my submission that Parliament introduces retrospective and prospective
laws �much as it did for the bottom of the harbour tax schemes to ensure that
all monies are recoverable by investors and that shareholders get some return.
32. These measures could include the following:-
a. The Government take over the schemes and see them out including
conversion of the pine forests to woodchip for sale and an orderly sale
of landholdings.
b. The government to appoint an expert panel of businessmen who will
form a board of management in an honorary capacity to direct an
efficient operation for the government to implement appropriate
measures until their completion in accordance with an effective
business plan supported by legislation.
c. Legislate to make the investors preferential secured creditors before the
banks/ secured land lenders (who were also culpable as they gave loans to
the Scheme company that put at risk the security of the investors) followed
by the shareholders and then the banks. Please note that the
government receives tax revenue from the proceeds recovered by the
investors as they are all tax.
8
d. Make KPMG culpable for its fraudulent advice and recover the balance
of the losses.
e. Seize the cash held by the finance company that improperly sold the
loans of investors to the Bendigo bank and others and refund the
Bendigo bank and others reversing the transactions (Debt ledger sales).
f. Legislate for a moratorium on loans owed by investors until the
investors recoup their capital investment. No further interest is to be
payable on the loans.
The Future
33. If we are serious in this country about promoting privately owned agri
business that underpins or exists side by side with an eco/environment
policy, Parliament should delegate the function of designing a planned role
out to the business community.
34. A tender process could be established with an honorary committee of eminent
persons charged with the responsibility of evaluation and selection.
35. I would see these proposals being partly funded by government and partly by
investors through a not for profit Responsible entity overseen by an
organization like ASIC with clearly defined accountable responsibilities and
powers.
36. Government can recover its investment through taxes on distributions to
investors.
37. In the end, Australia will benefit from an investment that will produce an
efficient use of private and public capital supporting valuable Agri businesses.
38. It is vital that we rebuild confidence in the investment community into such
projects as well as gain a sense of satisfaction that we are doing some good for
future generations.
_________________
David Mond