The protagonists behind one of the Australian villains of the GFC, collapsed agribusiness company Great Southern Plantations, look set to finally have their day in court. Well, sort of.
Seven former directors of Great Southern Plantations, including founder John Young, are facing a civil claim from the company's liquidator, Ferrier Hodgson. In true form, the Australian Securities and Investments Commission is too busy spending $30 million losing other less damaging matters, like Fortescue's alleged dubious disclosure, to bother with multi-billion dollar bankruptcies.
Like fellow agribusiness failure Timbercorp, Great Southern collapsed in a screaming heap in 2009 after its Ponzi structures were finally exposed. The damage was significant. In addition to shareholders, Great Southern ran 43 schemes with almost $2 billion invested in them.
Ferrier Hodgson is alleging the company's directors failed to disclose the company had been subsidising returns for older schemes, with the directors allegedly breaching their statutory and fiduciary duties by overstating assets and understating liabilities and expenses. Directors subject to the action include Young, former managing director Cameron Rhodes, Phillip Butlin, Alice McCleary, Peter Mansell and Mervyn Peacock.
Great Southern's business in very basic terms involved raising funds from retail ("mum and dad") investors and using those monies to fund timber plantations (Timbercorp would later in its life invest mainly in horticulture schemes but Great Southern largely stuck with timber). In order to raise the funds, Great Southern tended to pay financial planners commissions of upwards of 10%. This made the economics of the venture virtually impossible. The situation was worsened by terrible management of the plantations and a general "bidding-up" of land prices. Great Southern itself was a listed company and had its own shareholders.
Great Southern's business was turbo-charged in the early 2000s as tax deductibility rules allowed investors in its schemes (known as owner-growers) to claim an upfront tax deduction for funds contributed, even though profits from the venture wouldn't flow for a decade or more (those investments were double leveraged with most owner-growers borrowing to fund their stake). In theory, everything sounded great. Investors would be able to get a tax deduction and then generate a return of around 10% annually when the plantations were eventually harvested. Great Southern and financial planners would collect fees and everyone would be happy.
As the billions of dollars flowed in, Great Southern's share price rocketed from $0.50 in 2002 to $3.25 by 2004 (Great Southern was the second-best performer on the ASX over 2003 and 2004). The share price rise would make John Young a wealthy man -- he appeared on the 2004 BRW
Rich List with an estimated wealth of $140 million.
But while all appeared rosy, underneath the surface a very inconvenient truth was bubbling away. That is, the schemes weren't on track to deliver the profits promised to investors. In fact, it appeared the schemes weren't making any money at all.
Perhaps conveniently, Young would in 2005 sell more than $30 million of his Great Southern scrip into an institutional placement. Young would reap $4.65 a share -- a price that other shareholders would only dream of years later.
Not long after, the first signs of trouble would emerge -- but shareholders would have needed to be eagle-eyed to realise anything was amiss.
Buried on page 86 of its annual report, in a section entitled "contingent liabilities", Great Southern quietly stated it had incorporated a company called Great Southern Export Company which had acquired timber from its 1994 scheme. The shelf company created by Great Southern had recorded a loss of $3 million during the year.
In short, what Great Southern did was use shareholder money to pay off investors in its early schemes when it realised that those schemes weren't generating returns. This was classic Ponzi -- using money from new investors to pay off old ones (Great Southern Export would spend a further $12 million subsidising other poor projects in the coming years).
At the time the scheme became apparent -- two Great Southern directors, Peter Patrikeos and Jeffrey Mews, would almost immediately tender their resignations from the board.
Eventually, the Ponzi scheme would come unstuck and Great Southern would slip into receivership in 2009, as owner-growers, bankers and creditors fought for their share of a rapidly diminishing carcass.
It appears the Great Southern directors will finally get their day in court. Albeit civil rather than criminal court, with a liquidator, rather than a corporate cop on the other bench. Fortunately for Young, he is able to fund his legal defence from the proceeds of $33 million in share sales and $10 million in remuneration he received from Great Southern before its collapse.
*Adam Schwab is the author of
Pigs at The Trough: Lessons from Australia’s Decade of Corporate Greed