Crikey goes inside a $32 billion law suit against our biggest bank. Has the National told shareholders “the whole story”? Does this issue have the potential to cause Australia’s biggest bank much grief this year. You be the judge.

National chief executive Frank Cicutto and his chairman Mark Rayner have been putting on a brave face about the $32 billion law suit against Australia’s biggest and most successful bank. The case comes to trial in June. It involves an e-commerce joint venture the National hatched in 1996 with a Sydney company Idoport Pty Ltd (known as JMG after its colorful founder John M Maconochie of Sydney).

Can such an extraordinary claim be serious? Who is Mr Maconochie? Can his company JMG seriously take on the mighty National and win? Have CEO Cicutto and Chairman Rayner told their shareholders the “whole story”? Is there really “no material exposure” to the National as they say?

In our debut issue we look at what Cicutto’s predecessor, Australia’s “BANKER of the Decade” (Australian Banking & Finance magazine, November 1999), Don Argus, and National’s Board, let the National’s shareholders in for with this deal. As readers may know, Argus is now safely ensconced as Chairman of BHP. He’s also about $20 million in front on his NAB options even after the stock price has tumbled from $30 to damn near $20 since he left. Don’s departure hasn’t stopped JMG also suing Argus personally. The case against Argus is being heard with the case against the others.

What have the judge’s had to say so far?

Here’s what Mr Justice Einstein of the New South Wales Supreme Court said in a pre-hearing judgement last August.

“JMG has proved that it has a serious and not a speculative case, which has a real possibility of ultimate success and that it has contractual interest, which may be presently being substantially eroded by the conduct of NMG and the Bank.”

And in the New South Wales Court of Appeal last Wednesday, 9 February 2000, in the prestigious Banco Court, as the National fought a last ditch stand against disclosing its e-commerce secrets to JMG, Mr Karkar, Q.C. for the National told appellate Justices Priestley, Mason and Fitzgerald that

“e-commerce is critical to the National’s future”.

We should hear their Honours’ judgement later this week. We’ll let you know. For now, we can surmise from the National’s esteemed senior counsel that the outcome of this case is probably critical to the National’s future.

Crikey! Can this be the same hymn sheet that Cicutto and Rayner have been singing from to shareholders?

Stripped of the soothing noises, it looks like Cicutto and Rayner may have “bet the bank” on this one. Still, there’s yet to be a trial. National’s big, they will of course win, won’t they? Well, maybe not. Betting’s like that. Nothing like a punt to quicken the pulse in the uncertain betting ring that are the courts. Anything can happen on the scrum line at the Bar table. And JMG seems to have as many, if not more, talented front row forwards as the National, with maybe better odds. Go figure.

Never mind. It’s only money, and it’s yours. Over to you shareholders and over to him.

And what of Mr Maconochie?

By all accounts, Maconochie is an experienced, determined and successful entrepreneur and well able to take care of business. He has assembled an impressive legal team lead by John Garnsey Q.C. to extract his due as he sees it from the National, the hard way.

After leaving Scotch College in Melbourne in 1964, the Lincoln-driving Mambo-shirt-wearing Maconochie, completed an honours degree in Mechanical Engineering at Melbourne University in 1968. He then spent about 9 years at Esso working on the development of the Bass Strait oil and gas fields, with several training assignments in the US with Exxon USA and Esso Production Research Co. Apparently a versatile fellow, he worked as a senior engineer in the not-too-genteel world of offshore oil and gas production, petroleum, drilling, reservoir and commercial engineering sections, being schooled in the world’s largest oil company. Development management of new directions followed with the entrepreneurial Lend Lease Corporation for more than 6 years, which led into financial services. In 1984 he teamed up with partners Laurence Freedman and Brian Sherman, reorganised the Equitlink Group and founded EquitiLink International and the now multi-billion US-listed First Australia Funds. One, the Prime Income Fund, in 1986 was the largest initial public offering in US history. Counsel for the National last year in court credited Maconochie with predicting the 1987 stock market crash, to which Justice Einstein of the New South Wales Supreme Court quipped “seems like a useful fellow to have on your team”. Since 1989, he has pioneered the development of on-line e-commerce services, establishing Market Holdings in 1991 and JMG in 1996.

The National obviously thought it was a good deal to pay JMG more than a reputed $1million per year service fee and JMG’s royalties which the National saw fit to wrap in a guarantee.

JMG contends that the greater part of the NAB’s worldwide e-commerce should be, but apparently on JMG’s case is not being, conducted under the auspices of NAB’s wholly-owned subsidiary National Markets Group Limited (NMG).

JMG’s huge claim, if successful, would rank ahead of holders of ordinary shares and unsecured income securities. Even on a low probability of success, say 10%, a solid chunk of NAB shareholder wealth could flow JMG’s way.

It is the largest commercial claim against any Australian company in Australian history.

Now Rayner and the rest of National’s Board might not think this risk in material, but it’s not their money on the line if they happen to be wrong. What were they thinking of when they put the National’s shareholders at such risk. How did this thing get so far off the rails?

Cicutto and Rayner envision for the National in their Annual Report

“to be the world’s leading financial services company”:

This case gives the National the dubious distinction of possible leadership in what may become the world’s biggest e-commerce legal battle. Shareholders have front row seats. They should find it an interesting but possibly an expensive day out.

A National champion indeed.

Well done Don, Frank, Mark and the rest of the National’s august Board. The shareholders’ fortunes are riding on it.

More details

Defendant line-up

Personal defendants are National’s Cicutto, Glenn Barnes, David Krasnostein, and two outside directors Kevin Courtney and stockbroker Russell McKimm. All are, or have been, directors of NMG.

Corporate defendants are the National and its subsidiaries National Australia Financial Management Limited, National Markets Group Limited and Australian Market Automated Quotation (AUSMAQ) System Limited.

So far, two other directors of NMG, senior National employees Roland Matrenza, and Peter Thomas, and NMG past directors Cliff Breeze (who retired from the National in 1997) and Rod Carr (who left the National in mid-1997 to become Deputy Governor of the Reserve Bank of New Zealand) have not been joined as defendants. It could interesting for all of these individuals if the shareholders go down on this one.

The deal

Back in September 1996, the National established a new unlisted public company called National Markets Group Limited (NMG). National and NMG then entered into a joint venture agreement with JMG under a curiously named agreement called the Consulting Agreement.

The joint venture is concerned with the National’s development, commercialisation and operation of e-commerce throughout the world using a service called the AUSMAQ Service. This includes any service with similar or equivalent functionality whatever the name. JMG contends that the greater part of the NAB’s worldwide e-commerce should be, but apparently on JMG’s case is not being, conducted through NAB’s wholly-owned subsidiary National Markets Group Limited (NMG).

As part of the deal, Maconochie’s Market Holdings transferred the e-commerce intellectual property to NMG. NMG agreed to pay a substantial annual service fee to JMG for some years and a royalty of up to 12.5% (13.5% in Australia and New Zealand) of the gross operating revenue of the National’s e-commerce operations throughout the world as defined in the agreement, forever, no cap.

JMG sought, and obtained from National, an extraordinary unlimited, unconditional and irrevocable guarantee. This guarantee covers payment of the royalty, apparently including any damages in connection with the royalty. This guarantee means that JMG ranks ahead of shareholders, the National’s creditors and last but not least, holders of National Income Securities.

The case and damages

JMG and Market Holdings (the plaintiffs) have sued NAB and others. The plaintiffs allege breach of contract and breach of fiduciary duty by NAB and certain of its subsidiaries and executives including the personal defendants Cicutto, Glenn Barnes and Cicutto’s predecessor Argus.

A damages claim of $US271 million per year as at 2003 and continuing indefinitely or $A32 billion ($US21 billion) or more has been lodged by the plaintiff. JMG has used the services of a number of experts in the United States, the UK and Australia on which to base its claim.

Hearing date

A hearing (trial) date has been set down for 14 June 2000.

Attitude of the Court so far

In a judgement dated 19 August 1999, Einstein J said:

“JMG has proved that it has a serious and not a speculative case, which has a real possibility of ultimate success and that it has contractual interest, which may be presently being substantially eroded by the conduct of NMG and the Bank.”

In a judgement dated 28 October 1999, Einstein J ordered the National to discover and hand over to the plaintiffs all of the National’s high level e-commerce documents in connection with financial services. His Honour quoted from an earlier case:

“A document relates to a matter in question between the parties if it is reasonable to suppose that the document contains information which may – not which must – either directly or indirectly enable the party requiring [the production of the document] either to advance his own case or to damage the case of his adversary.”

The National’s e-commerce in relation to financial services is obviously an issue in contention.

Importance of this case to the National’s future

The National admitted in the NSW Court of Appeal on 9 February 2000 that e-commerce is of critical importance to its future.

The NSW Supreme Court’s direction to the National to produce all high level e-commerce documents in relation to financial services (which is being challenged in the New South Wales Court of Appeal) and provide them to the JMG seems to put it beyond doubt that the National’s global activities in e-commerce are in contention in this case.

An indication of the lengths the National is going to can be gained from Mr Justice Einstein judgement dated 10 December 1999, which quoted from an affidavit lodged by the National’s solicitors.

“The defendants recognised at an early stage the magnitude of the proceedings and have devoted and are devoting very significant resources to their preparation.”

“The defendants currently have 19 solicitors, 6 barristers and a large team of paralegals working on preparation (Lovell affidavit para4).”

“The trial may take considerably longer than 6 months.”

It would appear that the National is being forced to take this matter very seriously, and at very great cost. One can only imagine what the 19 Freehills solicitors, the National’ s in-house solicitors, and 6 barristers must be costing shareholders. This much legal horsepower seems extraordinary on a case which Rayner has stated at the AGM will have no material effect on the bank. How does he know?

Disclosure by the National

The 1998 Annual report (page 133) made a 2 line disclosure.

The 1999 Annual Report (page 139) made an 18 line disclosure.

Business Sunday report on November 7, 1999. Michael Pascoe interview with National’s Frank Cicutto

Non disclosure by the National

National Income Securities Prospectus

In mid 1999, the National raised $2 billion through the issue of National Income Securities to 52,856 holders (Ref Annual report page 168). The New York branch of the National Australia Bank was the issuer. The prospectus was lodged with ASIC and circulated in Australia.

The information in the 1999 Annual Report (page 139) about the JMG action under contingent liabilities did not appear in the prospectus.


The unlimited and unconditional guarantee given by the National to JMG is not mentioned in the Annual Report under paragraph 38(c) Contingent Liabilities.

The nature of the guarantee appears to rank JMG equally (or even perhaps more than equally) with depositors and ahead of shareholders, trade creditors and importantly, holders of the unsecured National Income Securities.

Risk Management

In the Annual Report (page 63, Risk Management), it says

“Management of risk is fundamental to the business of being a full financial services provider and is an essential element of the Consolidated Entity’s strategy”

The Annual Report goes on to cover areas of market risk (trading risk, balance sheet risk), credit risk, country risk.

Nowhere does the Annual Report cover the risk, if any, that the JMG action poses to the National and how it can be controlled, apart from fielding many lawyers.

Court highlights

Interlocutory hearing 26 July 1999 – 5 August 1999. Result: Judgement 19 August 1999 ( Foundation Law: Judgements. Orders to the National to account for profits, trial date set for May 2000. A summary of the judgement given on a pre-trial basis is given below (Appendix A).

Notice of Motion 23/09/99 Proceedings 3451 of 1999 Result: Orders restraining Mr Maconochie and JMG from divulging legal advice given by Freehills to the National and others.

Notice of Motion 25/10/99 Result: Judgement 28 October 1999 Foundation Law: Judgements. Orders to the National to discover and hand over all high level e-commerce documents to plaintiff.

Notice of Motion 2 December 1999 Result: Judgement 10 December 1999: Orders on Discovery timing and statements, hearing date moved to mid June 2000

Appeal NSW Court of Appeal 09/02/00 – ecommerce orders of 28/10/99 Result: Judgement: Pending

Further threatened legal proceedings by JMG

JMG has apparently taken exception to remarks made by Cicutto on the Channel Nine Business Sunday program on 7 November 1999. JMG has sought a retraction and correction, alleging that Cicutto misrepresented the legal proceedings and JMG was defamed.

So far, it is believed that the National has refused to alter its position.

JMG has threatened legal proceedings against Cicutto in the absence of the National making a retraction and a correction.

Reaction of the National’s Board

The National’s public statements appear designed to downplay the situation. They have intimated that the JMG action has no prospect of success, the allegations are untrue, the basis on which JMG’s claim is based is “fraud” or “flawed”, will cause no material exposure to the Bank and the Bank is confident about its position.

What is the true situation?

Well, we’ve got some answers and a lot of questions.

The court proceedings promise to be an increasingly revealing medium for shareholders to learn what is really going on inside the National.

Here are some of the gems and the questions.

1) On 4 February 2000, the National’s Mr Liley, under cross examination by JMG’s counsel Mr Whittle in the New South Wales Supreme Court, admitted that the National is putting its e-commerce and internet businesses into a separate business and he will be heading it. We haven’t heard about this before from Cicutto and Rayner. A new major e-commerce/internet dotcom business for National?

2) E-commerce, or at least some parts of it, which the National admits (to the New South Wales Appeals Court, 9/2/00) is critical to its future, is in fact the subject of a joint venture (with JMG) which is being contested. Will the National’s proposed new “dotcom” business in e-commerce fall into the court net and become caught up in the legal proceedings.

3) The order of magnitude of the damages being sought by JMG from the National (more than $32 billion) are twice or more the value of shareholders’ funds in National. In fact, this is about the entire current market capitalisation of the National.

4) These damages are covered by an unlimited, unconditional and irrevocable guarantee given by the National, never before disclosed to shareholders until disclosed in the court proceedings and Mr Justice Einstein’s judgement last August. National has still not publicly acknowledged the existence and nature of the guarantee to shareholders. What happened to risk management and disclosure at the National?

5) After a two week hearing in July and August 1999, in which the basis of the case was canvassed by the court in some detail, the court concluded that JMG has a real possibility of prevailing over the National:

“JMG has proved that it has a serious and not a speculative case, which has a real possibility of ultimate success”

6) The court also concluded that the National and its executives may well have, and were continuing, presumably knowingly, to breach the contract:

“JMG has proved that … it has contractual interest, which may be presently being substantially eroded by the conduct of NMG and the Bank.”

How does this sit with the National’s proclaimed “values”?

“Our values – Professionalism and ethics in all our actions” (1999 Annual Report – Our Values)?

7) The New South Wales Supreme Court (Hunter J, 3/2/99), in admitting JMG’s Statement of Claim against opposition by the National, commented that although the damages claim is large, the case is essentially a simple one of breach of contract and the issues before the court that will need to be decided are commonly decided by the court. No big deal there it would seem. If the case on liability is seen by the court as being comparatively simple and the Statement of Claim, which included claims against individuals, was readily finalised and admitted within three court months of its original filing against concerted opposition by the National, aren’t some alarm bells going off somewhere at the National?

8) In mid 1999, the National raised $2 billion on the back of a public prospectus when it had the same knowledge about the claim as it did when it prepared the Annual Report. However, it made no similar disclosure in the prospectus. Didn’t it occur to the National’s directors that this might have been of more than passing interest to the 52,856 successful subscribers to offer (1999 Annual report page 168)? And where were the auditors KPMG when this was happening?

9) In September 1999, in a separate ex parte injunction, the National rushed off to court and obtained orders restraining Maconochie and JMG from divulging certain legal advice provided by the National’s solicitors to the National. What’s going on there? Is there something there the shareholders maybe should be told?

10) JMG is threatening to sue Cicutto, who is himself already a personal defendant, claiming Cicutto misrepresented the case on 7 November 1999 on Channel Nine’s Business Sunday program.

11) The comments to shareholders at the National’s AGM in December 1999 were puzzling. In answering questions about the case from Crikey, chairman Rayner intimated there was nothing to worry about, the National had no material exposure and would fight to the end. But at about the same time, the National had told the New South Wales Supreme Court that it had not yet prepared its statements on damages in reply to JMG’s claims and these would not be available for another 2-3 months. Chairman Rayner must have been futuristically clairvoyant that day. His intimation to shareholders was also that the National was being unjustly attacked and was compelled therefore to defend itself to the end. He made no mention made of the court’s adverse pre-hearing judgement earlier in August or why it had been necessary to obtain ex parte and interlocutory orders in September suppressing Freehill’s legal advice. Rayner’s comment that legal combatants often try to publicly embarrass the bank into a settlement is probably not far from the truth on this one.

12) On Monday 7 February 2000 in London, Frank Cicutto, in response to a question from an analyst, was quoted as expecting a 6 month hearing time (and repeating what the National’s counsel had told the court prior to the AGM in December 1999). Six months! This doesn’t sound like something that one could be confident about the outcome, does it?. Given Justice Hunter’s comments intimating this case is a simple breach of contract case, the liability side of the case is surmised to be relatively straightforward and quick to resolve. Presumably therefore much of the forecast lengthy hearing is likely to be spent on how much the National might be liable to pay in damages. Given a projected 6 month hearing time and National’s 25 lawyers and an unnamed number of para-legals on the field, it seems difficult to see how in December 1999 Chairman Rayner and CEO Cicutto could be so certain about the prospects for an outcome in the National’s favour as to dismiss at the AGM any possible damages as “not material”. If a realistically risk adjusted $32 billion is not material one wonders what is? Seems like there are some unanswered questions here also?

Share price?

What’s happening here? The National’s share price is below $22, down from $30.28 last April, a loss in market capitalisation of about $12 billion (there are about 1.5 billion ordinary shares on issue). National Income Securities trade at 7-10% discount to the issue price. Some of National’s biggest foreign shareholders have apparently been well briefed on the nature of the litigation. The US is a far more litigious environment and this particular e-commerce court battle is likely to attract world attention if it ever gets to trial.

National’s strategy?

The market has been dismissive of Cicutto and the National’s strategy, which does not appear to have been well articulated. They may have one, but no-one seems able to say what it is. This hiatus may in part be due to a large part of the National’s strategy “going forward” being bound up in e-commerce. If, as it seems, the National’s e-commerce is up for grabs in Philip Street Sydney before their Honours, not Bourke Street Melbourne before the National’s Board, it doesn’t appear that Cicutto and Rayner can really say too much about the National’s e-commerce strategy at this juncture. They made a solid attempt at enunciating a strategy at the AGM and there was certainly plenty of chest-beating about the various e-commerce strategies being developed. However, such a large legal battle over e-commerce would presumably make it more difficult to deal with other potential e-commerce partners.

What’s the bottom line?

The bottom line take seems to be:

1) The critical future, e-commerce of the National, is the subject of a joint venture in dispute and before the court. Mr Justice Einstein has ruled that there is a real possibility of ultimate success for JMG.

2) Damages awarded to JMG will be covered by the unlimited, unconditional and irrevocable guarantee given by the National to JMG. This guarantee ranks JMG ahead of shareholders, trade creditors and holders of National Income Securities. The guarantee may even rank the National’s obligation to JMG ahead of the National’s obligations to depositors.

3) In the critical area of risk management, arguably over a significant part if not all of the shareholders’ funds, the National’s Board and its management have no control. That control is now in the hands of four men. None of these men are Bank executives or directors. They are a judge of the New South Wales Supreme Court, and three judges of the New South Wales Appeals Court. In effect, control of the National is now being determined by the New South Wales courts. The damages claim is based on a loss of opportunity that JMG claims should have been taken through the creation of a powerful stand-alone e-commerce “dotcom” business. National is only now belatedly starting to create one, and not within NMG. This should be interesting. Market systems and valuations are becoming more certain by the day. Values and therefore potential damages are accelerating away from the National. The market is putting stratospheric valuations on such businesses with even meagre revenues. In effect, the National has an open derivatives position that it is powerless to unilaterally close. Publicly it appears confident that the court will close it. But will it.

4) If the court decides that the joint venture agreement between JMG and NAB covers most of the Bank’s global e-commerce, then holders of National Income Securities and holders of ordinary shares could potentially suffer a further diminution of value in their holdings. Then again, the court could throw it out and NAB would only have to bear the cost of its legal fees which are estimated at more than $10 million so far.

5) Thanks to the National’s ex parte and interlocutory injunction, it is now public knowledge that the National has received certain legal advice which JMG and certain of its lawyers have apparently seen. The National has gone to extraordinary lengths to obtain orders that suppress this advice from becoming public.

7) The bottom line take appears to be that Cicutto, Rayner and the National’s Board have effectively, consciously or unconsciously, left the bank exposed to significant damages payout. Their statements to the effect that “there is no material exposure”, or “we are confident in our position” appear curious. Surely that is for the court, or in the intervening time, the market to decide given the information.

8) Is the National heading for the bricks with this $32 billion law suit? Could damages eat into shareholders’ funds? National is so big and generally well managed that it is difficult to imagine that it would go the way of Barings in the UK, Continental Illinois and Bankers Trust in the US, Trico and BankSA in Australia. However, the group got into strife mismanaging their risks. The answer to these questions lie in the hands of the court and now appear largely beyond the control of the Bank itself. That’s risk management, National-style. Maconochie is known as a tough street fighter and a lively businessmen better known during the heady 1980s. What is his price? How deep are his pockets? Can he slay our banking Goliath? People familiar with him note that he is confident in the extreme and waging a geurilla war against the National at many levels. Some of the directors are apparently getting court documents sent to their farms. Where will this end?

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Peter Fray
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