When businesses collapse, especially large businesses, it is usually due to a combination of incompetence, fraud and a little bad luck. It should come as no surprise therefore that KordaMentha, the liquidator of failed agribusiness company Timbercorp, has discovered that the company allegedly paid secret commissions to financial planners and operated secret plantations to falsely boost yields to investors.
Like fellow agribusiness twin Great Southern Plantations, Timbercorp collapsed in 2009 after it was unable to meet its debt obligations, which exceeded $900 million. Timbercorp ran what was effectively a giant tax minimisation scheme — that is, wealthy investors who were seeking to reduce their immediate tax bill would invest money in a timber of horticulture project. The initial costs of the project would be able to be used as a tax deduction, and a decade later (in the case of forestry) or a few years later (for horticulture) the investor would expect to receive a return (of about 5%-10%) on their initial outlay. The gains (and risks) were usually magnified because many “owner growers” used debt to fund their initial investment.
This all sounds good in theory, but there were myriad problems with the model. For a start, the agribusiness twins were generally very poor operators and the schemes used lower quality land. Also, the growth in MIS led to a “bidding up” of the price of land, further compressing returns. Another serious problem was that financial planners (and other advisers) would skim 10% of the investment as a fee, making reasonable returns even more difficult to achieve.
Of the two revelations outlined by KordaMentha, the presence of “buffer plantations” would be most concerning for Timbercorp directors. KordaMentha noted:
The purpose of these buffer plantations was to provide a safety net of harvestable trees should the trees planted in accordance with the forestry schemes not generate sufficient yields to comply with the expected yields stipulated in the relevant [product disclosure statement].
If these allegations are true, then Timbercorp would have been operating a classical Ponzi scheme. (Great Southern operated a similar Ponzi type scheme and even reported as much to shareholders deep in its annual reports).
What appears to have been alleged is that Timbercorp management realised that the yields on its crops were far below what it had promised to investors. In many cases, the schemes were actually loss-making. It wouldn’t look good if Timbercorp was forced to tell owner-growers that their $10,000 investment was now with $6000 10 years later (investors were expecting that their stake would have been worth about $20,000 after a decade). To overcome this problem, KordaMentha is alleging that Timbercorp used the “buffer” plantations to artificially inflate the yields to investors — this would allow Timbercorp to continue to sell other dud MIS projects to new investors.
The Ponzi element comes from the fact that the “buffer” plantations were being paid for by shareholders and new MIS investors. Taking a step back, what appears to have been occurring is that new investors in Timbercorp’s schemes (and feasibly Timbercorp shareholders) were paying money to the company, which would use that money to grow these secret “buffer” plantations. The “buffer” plantations would be harvested and the profits be diverted to old investors to create falsely inflated yields to ensure that returns resembled what investors were told in product disclosure statements.
After collapsing, it was revealed that owner-growers in many of Timbercorp’s forestry schemes would lose upwards of 80% of their initial investment. Many would also be left with a massive personal debt, which would also need to be re-paid.
While all this was occurring, Timbercorp founder Robert Hance was cashing in his chips. In 2004, Hance sold more than $20 million worth of Timbercorp shares. Hance’s private company, Timbercorp WA, collected $6.2 million in fees from the collapsed company and he also received $4 million in remuneration.
Fairfax reported this morning that ASIC “has served 10 official notices as part of 16 requests for the production of documents and information”. To date, however, ASIC has not yet brought any civil or criminal charges against any executive or director of Timbercorp or Great Southern Plantations.
Adam Schwab (www.adamschwab.com) is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, which features the collapse of Timbercorp and Great Southern Plantations.