Not far from the Murray River border town of Corowa is a 600-hectare property named Farleton where a farming family once struggled to earn a living from wheat and sheep now planted out with row after row of odd-looking saplings, stretching as far as the eye can see.
In 1999 the property changed hands for about $1 million, and the new owners announced ambitious plans approved by the local council to subdivide it into two-hectare lots, plant it out with a fast-growing tree called the paulownia, and sell it off to the investing public.
Local people were recruited to plant about 20,000 seedlings that autumn, and the buzz was that they would grow so fast up to five metres a year that a forest would be ready for felling in five or six years, and everyone would make a fortune.
That was then. Nearly two years later, most of those saplings are dead, black sticks, killed by frost and drought, and the stunted survivors are no more than a metre or two tall at the most. Weeds are the only things flourishing water and fertiliser have not been provided for six months, and prospects of salvaging anything from the scheme are remote.
Two weeks ago the tocsin tolled when Plantation Management Corporation Ltd and Timber Tec Holdings Pty Ltd, the companies which operated the Corowa plantation and two other properties, near Port Macquarie in northern NSW and Dalby, central Queensland were placed in receivership. Books and computers were seized in raids on their Gold Coast and Melbourne offices, and the properties were “frozen”.
And that is terrible news not just for a few dozen unlucky investors and creditors, but for the thousands of shareholders of St George Bank, which financed the paulownia plantations, and for the creditors of HIH, the collapsed insurance giant, which “insured” the get-rich-quick scheme.
No less than $25 million is missing in this disastrous transaction one of a number of highly questionable high-risk policies written by HIH which are likely to be the focus of legal action, and investigation by the upcoming royal commission.
A principal of the group, Richard Thomas Sheers, 54, who was bankrupt until three years ago but now lives in a $950,000 waterfront apartment at Surfers Paradise and owns an ocean-going powerboat, told the Herald that he was working on a rescue plan.
“The fat lady hasn’t sung yet,” he said. “There is still an enormous opportunity to trade out of this position.”
However, the receiver appointed by St George, the Sydney insolvency specialist Prentice Parbery and Barilla (PPB), is not as optimistic. A spokesman said it was moving to seize and sell four properties totalling 1,300 hectares, which appeared to be the most substantial assets of the group, and to take action against the directors over personal guarantees they had given.
Financing for the paulownia scheme, said Sheers, was actually the brainchild of Stephen Wilfred Romp, 51, a British-born insurance broker who lives in East Doncaster, an upper-crust outer suburb of Melbourne. The two were business partners until about a month ago, when they had a “major falling out” which resulted in Sheers being removed from the Plantation Management board.
Paulownia trees, according to Alex Jay, a graduate forester who propagated and sold the seedlings for Farleton, have been around in Australia since the late 1980s, mainly promoted for tax minimisation. One huge scheme in Queensland is advertising on the Internet that high-earning investors will be able to treble their money in a few years.
The tree originated in China and its advantage is that it grows fast and is adaptable to a wide range of climatic conditions. Its disadvantage is that there is little demand for it in Australia and its soft balsawood-type timber is used in specialist applications such as beehives, beer barrels and coffins for emperors as well as in traditional medicine (it is said to cure bronchitis and swollen feet, and to turn grey hair black).
If anyone has any better ideas, Andrew Smith at the receiver would like to hear them among the impossible-to-value assets of the collapsed group are tens of thousands of seedlings and thousands of cubic metres of paulownia wood at the Port Macquarie plantation for which PPB is eager to find a buyer.
Using a complex network of interlocking companies, Sheers, Romp and others purchased the three farms and a nursery/display centre at Bellingen in northern NSW on which to grow Jay’s seedlings. The problem was, said Jay, they did not appear to have much knowledge of how to grow the temperamental trees and planted the seedlings in winter, the wrong time of year. Paulownias “are not like a normal tree where you stick it in the ground and walk away … they are like a horticultural crop and they require very intensive management”, Jay said.
The original plan to issue a prospectus and persuade several hundred tax-shy investors to buy small plots of land was abandoned and about a dozen people, mainly businessmen and professionals, eventually bought into the scheme. But the real money $25million repayable in five years was provided by St George Bank.
The bank’s chief financial officer, Steven McKerihan, confirmed this to the Herald, and said that the bank had been comforted in lending the money by the fact that HIH (backed by three other insurance companies, GIO, Gerling Australia, and Employers’ Reinsurance) had guaranteed repayment. He said this type of “credit enhancement” was fairly new to St George: “We have not done a lot of this type of business, but it is not unique.”
In essence, what had happened was this: the bank lent some agricultural entrepreneurs several times the value of the land they put up as security, because HIH had guaranteed that their crop, for which there was no market, would not fail. This was an exciting new product known in the industry as “indemnity insurance”.
Plantation Management, the company which borrowed the money, began defaulting on its interest repayments of about $200,000 a month late last year hardly surprisingly, since it had no income and all the money had been spent on buying land, trees and equipment, as well as fat salaries and a $4.4million premium for the HIH insurance policy, of which $2million was paid in commission to an intermediary.
HIH paid the interest for a few months, and when the insurer imploded in March, it took some time for St George to realise the full extent of the financial disaster on its hands. Part of the $25million loan was written off under a $12million provision for “bad and doubtful debts” which slipped past without attention in its March results. Then, on May 24, the bank sent in the receiver.
Sheers was indignant that, in his absence, agents arrived at his Gold Coast office to seize the books. “They were dressed very shabbily,” he complained “One was in a pair of split boxer shorts, with a gut sticking out about four foot.”
Sheers said he was far from happy about the fate of the paulownia plantation, and he has made a formal complaint to the Australian Securities and Investments Commission, the corporate watchdog, about one aspect of the HIH insurance policy guaranteeing repayment of the loan.
ASIC also raided the offices, but found the receiver had got there first.
However, it should not have come as a surprise to Sheers that HIH had defaulted on its guarantee. It was the second time this had happened to a company of which he and Romp had been directors the first time it was the Commonwealth Bank which took the hit, albeit a much smaller one so far.
Sheers and Romp were directors of a company called Gold Ribbon (Accountants) Pty Ltd , whose business, said Sheers, was borrowing money from the bank, and on-lending it as an unsecured loan at a higher interest rate than the normal bank overdraft to professionals such as accountants.
Another director of Gold Ribbon, until a fortnight ago, was Garry Raymond Howes, 52, a struck-off solicitor and former bankrupt described by a Tasmanian judge four years ago as “dishonest and incompetent”, a man who lied on oath, and “a threat to the public and to the [legal] profession”. Sheers said Howes remained as an employee of Gold Ribbon, though “not in a position of influence that causes any sort of security risk to the company”.
Sheers said Gold Ribbon had made 160 loans over the past two years, of amounts averaging $140,000. The source of the money, which now totals $23million, was originally the Colonial Bank, taken over last year by the Commonwealth Bank. As with St George, Colonial drew comfort from the fact that the borrowing was “insured” by HIH until HIH collapsed.
Sheers refused to confirm how many of the loans made by Gold Ribbon had gone bad but he did acknowledge that the Commonwealth had claimed against one, to the tune of $400,000, and that HIH had refused to honour its guarantee.
That loan was made to one of the most infamous scoundrels in recent Victorian business history Frank De Stefano, 52, a poor boy from Calabria who migrated to Australia, started an investment advisory business, and became mayor of Geelong and one of its most trusted and respected citizens.
Last November that city was stunned to learn he had been arrested and charged with the theft of about $8million of investors’ money, most of it held in trust accounts. It emerged in subsequent litigation that he had gambled it all away in $2,000 bets, sipping champagne at the mahogany roulette tables under the crystal chandeliers of the high-rollers’ club at Melbourne’s Crown Casino. He has pleaded guilty on eight counts and will be sentenced shortly.
His most wicked theft was the $6million he stole from Tom Papic, a young architecture student, who was awarded the money in a damages claim after he went into hospital to have a growth removed from his nose, and was given an injection in the spine which left him paralysed. Papic is suing both Crown Casino, which he claims turned a blind eye to De Stefano’s gambling, and the ANZ Bank, which cashed his cheques.
The statement of affairs of the receiver, dated August last year, shows that as his gambling losses accelerated to $520,000 in just two months and his business spiralled into oblivion, DeStefano was given $400,000 of Colonial Bank shareholders’ money by way of unsecured loans from Gold Ribbon loans “insured” by the now-bankrupt HIH.
Sheers called De Stefano’s conduct “disgusting” but said Gold Ribbon’s credit checks failed to disclose that his business was going bad. He said the borrowing was insured, and recovery of the money was a matter between the Commonwealth and HIH.
The Commonwealth, however, seems blissfully unaware of any problem. Gold Ribbon had “always been operating within the terms of the arrangement”, said a spokesman. “We know of no reason why they should not continue to meet their obligations,” he added.
As for St George, it says it is taking “all the normal actions you would expect a bank to take” to recover its missing $25million including seizing assets, taking action over directors’ personal guarantees, and considering what legal recourse it may have against HIH and its reinsurers.
Asked whether the bank would be less likely to again risk its money on paulownia trees, Steven McKerihan said: “That may well be the case.”
Pub: Sydney Morning Herald
Pub date: Thursday 7 June 2001
Section: News And Features
Word count: 2043Classification:
Company/Hih Insurance Ltd
Geographic area: NSW
Photography: Wallace Bruce
1. Licensed to grow money … the Corowa paulownia plantation failed to produce anywhere near expectation. Weeds now flourish there.
2. On the scent … ASIC, and its chairman, David Knott, were too slow for the receivers.