HARDIE'S JUST THE TIP OF THE ICEBERG

James Hardie is just the tip of the iceberg

Adam Schwab writes in Crikey 23.4.09:

A former derivatives trader and long-time sharemarket investor told this writer yesterday that he didn't bother with fundamental analysis anymore because he simply couldn't trust what companies said. Instead, the investor said he now preferred to predominantly rely on technical analysis (or trends) to determine his trades, especially with regard to "short selling".

A few hours later, it was reported that NSW Supreme Court Justice, Ian Gzell, ruled that seven James Hardie non-executive directors and three executives had committed misleading and deceptive conduct in relation to a February 2001 press release. The release had claimed that a fund setup to meet potential asbestos liabilities was "fully funded" (it ended up being $1.3 billion short).

While the actions of former chairperson, Meredith Hellicar, and the remaining directors are without excuse (Hellicar, a former CEO of law firm Corrs Chambers Westgarth, was dubbed an "inaccurate" and "most unsatisfactory" witness), their conduct has not occurred in a corporate vacuum. There are numerous other former high flying corporate directors who presided over corporate collapses in which shareholders were fed constant misinformation but who have so far escaped any sanction whatsoever.

The former executives and directors of ABC Learning Centres have so far, avoided any charge for their actions at the insolvent company. Over the past five years, ABC's financial reports, upon which equity investors and lenders have based their financial decisions, were highly misleading (the company had been reporting profits when in actual fact, it had been making losses of hundreds of millions of dollars, with a large number of its centres losing money).
Under the watchful eye of auditors Pitcher Partners, ABC had been booking up-front cash payments as "development revenue" in an Enron-esque accounting slight of hand. In a remarkable coincidence, the Pitcher Partners auditor who formerly signed off on ABC's accounts was a gentleman by the name of Russell Brown. Brown also happened to audit the books of ABC founder Eddy Groves’ private company. No charges have been laid against Eddy Groves, or any other ABC executive. Further, the man who chaired ABC’s audit committee for five years, David Ryan, was last year re-elected Chairman of toll-road company Transurban and a director of Lend Lease -- that was after ABC’s was forced to re-state its earnings and slide into insolvency.

Then there is the sad case of MFS -- the Gold Coast-based fund manager run by former lawyers, Michael King and Phil Adams. MFS' business plan appeared to revolve around paying too much for cyclical assets (generally in the tourism sector) and flipping those assets into satellites. Those satellites would also invest in each other in what resembled a demented Macquarie Bank.

MFS was able to stay afloat for as long as it did because gullible investors were willing to place their savings into MFS' satellites or managed funds. Many did so on the basis of advice from their financial planners. Two former MFS directors, Michael Hiscock and Paul Manka, also happened to be financial planners at Avenue Capital Management. Avenue clients were among the largest investors in MFS funds, including the maligned Premium Investment Fund.

Then there is a sordid tale of Allco Finance Group, which paid $330 million to acquire property and fund manager Rubicon in December 2007. Allco directors Gordon Fell and David Coe collected tens of millions in cash for the deal, which was approved by independent Allco directors Rod Eddington, Barbara Ward and Bob Mansfield. Those independent directors also approved of Allco lending $50 million to a trust which was controlled by Allco’s founder, Coe, and which invested in the Allco headstock and satellite funds. Allco was placed in administration less than a year later, while Rubicon chief Fell used the proceeds from the related party Rubicon transaction to acquire a $28 million Sydney harbourside property.

The corporate careers of former James Hardie directors, especially that of Meredith Hellicar, are now over. Hellicar resigned from the board of AMP shortly after the damning judgment was delivered. It is expected that she will also resign from the board of Amalgamated Holdings shortly. Other leading director, Peter Wilcox, is expected to resign from the Telstra board.

While justice appears to have belatedly been done at James Hardie, it appears to be very much the exception to the rule.