GREED, stupidity, reckless indifference, dishonesty and deception are among the stunning allegations to emerge from what must obviously be the extraordinary final submission to last week's hearing of an inquiry into Australia’s biggest-ever corporate collapse.
No one who was involved one way or another in the A$5.3bil debacle is spared from the scathing criticisms. Even the national watchdog of the insurance industry has been caught napping and has been given a tongue-lashing.
Never in the history of Corporate Australia has there been such damning allegations of widespread malpractice as those put before the royal commission into the collapse of the giant HIH Insurance.
What the submission reveals, in fact, is that HIH was run down by men who seemed to think that they could do what they liked with the company’s money.
For example, its managing director Ray Williams was accused of “throwing good money after bad in an improper way” by committing more than A$36mil to his associate, the erratic motivational speaker Brad Cooper, and his company Home Security International.
“His approach was to resort to conferring various private benefits on Cooper to placate him and encourage him to accept deals that he (Williams) wanted,” said lawyer Robert Beech-Jones who is assisting the commission. “The evidence reveals inappropriate and, in some respects, dishonest conduct.”
After one year of inquiry sittings and a 16-month investigation, the submission, totalling 4,236 pages from the four counsel assisting the commission, contains a litany of allegations that took industry leaders, the government and HIH shareholders by surprise.
There has never been a comparable case in Australia’s finance sector, not even in the aftermath of the 1987 market crash when several “cowboy” entrepreneurs were jailed for various offences under the Corporation Laws.
The allegations in the HIH scandal, which shows contempt for shareholders and its customers, include dubious accounting practices, concealing vital information, deceptive conduct and dishonest dealing.
And the final submission accuses the Australian Prudential Regulation Authority (Apra) of failing to identify about 1,000 possible breaches of civil and criminal laws. It also alleges that Apra missed every opportunity to act on the HIH problems before it collapsed in March 2001.
Apra should have seen that HIH was in serious financial difficulty by no later than July 2000, the submission says. Instead, it fostered a culture that “lacked curiosity, was inward-looking, and failed to understand the commercial reality of corporate groups.”
The first warning on HIH problems came from various sources, including the company’s whistle-blower, Apra junior staff, media reports and the staff of the office of former federal financial services and regulation minister Joe Hockey.
“Since at least the middle of the year 2000, the dogs were barking loudly enough to arouse even the most inattentive and soporific guardian into action,” says chief counsel Wayne Martin QC.
But for all its influence and impact on the operations or activities of HIH, or the ultimate outcome of those activities, Apra might as well not have been there.
Martin points his fingers at the senior management, the board of directors, the auditors, and the professional advisers, such as actuaries, lawyers and financial experts, for what happened.
Yet he does not call for a reform of the regulatory authority or for charges to be laid against its employees. He wants Commissioner Justice Neville Owen to refer their conduct to the Director of Public Prosecutions and the Australian Securities and Investment Commission for possible civil or criminal action.
Opposition financial services spokesman Stephen Conroy calls on the entire Apra board to resign or be sacked. He describes Martin’s accusation of the Apra missing every opportunity to police HIH as “a damning result.”
The final submission to the commission in Sydney goes further than that. It contains numerous adverse findings, including allegedly undesirable corporate governance and inappropriate discharge of regulatory responsibilities and obligations.
It criticises Apra and its executives in 47 separate instances ranging from its regulatory approach to its acknowledgment of what went wrong after HIH collapsed.
Apra later acknowledged some of the criticisms, saying that some of the adverse findings have already been remedied, but rejects others that, it claims in a statement, are not supported by evidence.
One of HIH's biggest problems is its United Kingdom operations, which lost A$1.7bil. Big mistakes were also made in the US operations, which lost about A$650mil.
But one of the major factors that contributed to its collapse, according to the submission, is the A$300mil acquisition of FAI Insurance from entrepreneur Rodney Adler in 1999. It was an investment to merge with HIH that would not have gone through had the board known of the company’s true financial position.
Another is that the HIH board unknowingly set aside inadequate money to pay future claims on the recommendation of an actuary who “caved in to pressure from HIH’s dishonest management” to keep margins tight.
Similarly, HIH’s auditor Arthur Andersen and its partners have been criticised for failing to obtain proper evidence to back audit opinions for issues ranging from the solvency of HIH to the A$275mil valuation of FAI in the accounts after it was taken over.
Arthur Andersen was “misled and lied to” but yielded too easily to the HIH management.
The importance of HIH to Arthur Andersen as a client might have influenced the firm to adjust the way it carried out its work, the submission says.
Of the seven key players in the HIH collapse, Adler, in particular, appears to have been singled out for what Simon White, another counsel assisting the commission, alleges as “reckless” in his responsibility and “failing to act honestly in the exercise of his powers.”
Adler has already been charged with manipulating the market in HIH shares. A former HIH director, he is also accused of failing to act honestly and giving misleading information about FAI’s financial position to the HIH board.
White says that Adler’s 1988 purchase of about 1.6 million FAI shares may have breached insider-trading laws.
Williams, who has given evidence at an earlier hearing, insists he had not lied or deceived anyone. But he is likely to face a charge over his “dishonest” decision to prevent an audit committee from seeing a damning report on the company’s failing US operations.
He had also approved Alder’s request to subscribe A$2mil worth of shares in Business Thinking System without a valuation on the merits of the investment. To this, Martin comments: “It is hard to imagine a more stark example of the breakdown of corporate governance mechanism and dominance of management over board.”
HIH chairman Geoffrey Cohen was “utterly ineffective” and so were its non-executive directors and the committees on which they served. The board itself had “no real strategy.”
Martin alleges that preferential treatment had been given to those in the HIH inner sanctum on drawing money from the company on the day before it collapsed.
The A$40mil commission, which has so far lasted 202 days, has heard evidence from 122 witnesses and received about 25,000 documentary exhibits which contains a total of 1.6 million images.
But some corporate consultants believe that there is a broader issue at stake and warn that companies should take note of what has happened in the case of HIH.
o Jeffrey Francis is editorial consultant, Australasia-Pacific Media (e-mail: email@example.com )
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