Tiwi Islands – Northern Territory

GSL Ponzi Scheme – Who will pay for repair of 300 sq kms of weeds?

Posted by tiwiccbb on May 24, 2009


Once upon a time in the woods
Ruth Williams and Philip Hopkins
May 23, 2009
THIS week, the phrase “Ponzi scheme” was attached to collapsed managed investment spruiker Great Southern. It was merely the latest, but clearly the worst, label attached to the company in its 20-year history.
In its time, Great Southern was accused of destroying rural communities, of driving up the cost of prime agricultural land, of flogging tax write-offs and spruiking dud investments.
But, along with its peers in the plantation forestry business, it was also praised – by the one-time federal forestry minister, no less – as “vital” to a plan to treble Australia’s timber plantations, of having a “legitimate and important role to play” in the timber industry, and of yielding significant economic, environmental and social benefits.
By the time the company collapsed a week ago, 47,000 investors had ploughed money into tax-effective managed investment scheme (MIS) products – derived from timber and horticultural plantations – 300 accountants and financial planners had signed on to sell the products, 240,000 hectares of trees had been planted, and hundreds of farmers had sold land to Great Southern.
When Great Southern entered administration last Sunday, it was following the fate suffered just weeks before by its agribusiness rival Timbercorp. Great Southern has an estimated $600 million in debt; its main bankers, ANZ, Commonwealth, BankWest and the Japanese bank Mizuho, are owed $376 million. They called in receivers on Tuesday.
It is an ignominious fate for a company that once boasted a $5 share price, market capitalisation of more than $700 million and that was one of the top-performing stocks on the S&P/ASX 200 in the early 2000s. Its shares are now frozen at 12, its market cap at $77 million.
Great Southern’s expansion capitalised on the Howard government’s Plantation 2020 policy, released in 1997, that aimed to treble plantations in Australia by 2020.
Great Southern Limited derived its name from WA’s Great Southern region – it was here that Great Southern’s first blue gums were planted in 1994 and where, when the company listed in 1999, the vast majority of its plantations were located.
Virtually all the Great Southern region falls within the federal electorate of O’Connor – a seat held by maverick Liberal MP Wilson Tuckey since 1980.
Tuckey, as minister for forestry for three years from 1998, was a prominent advocate of the industry and of Plantations 2020 – to the point that a letter from Tuckey denying a MIS-negative newspaper article was reprinted in Great Southern’s 2000 annual report. The letter underscored the government’s commitment to forestry tax breaks – a 100 per cent deduction for investors in the year they bought the products.
This was important because although Great Southern grew trees, this was not how it made most of its money. Its main business was agribusiness-based, tax-effective managed investment schemes – a business that was about to boom on the back of favourable tax treatment.
From 2003 to 2008, Great Southern raised $1.8 billion from investors, almost two-thirds of which was in sales of blue gum MIS. Each year, Great Southern packaged and released new schemes – initially in forestry, but expanding to olives, vineyards, cattle and more. Its MIS sales grew from $56 million in 1999 to $314 million in 2008.
What exactly was it selling? Great Southern’s prospectus for its 2002 and 2003 blue gum MIS showed investors paid $3300 to Great Southern, or $3000 before GST, to lease one or more woodlots of a third of a hectare.
If ready money was a problem for a potential “grower”, Great Southern could arrange finance (with loans that would later be securitised and sold).
Great Southern selected, bought and prepared the land, planted the trees, monitored them and harvested them in “approximately” 10 years. In return, the grower got a handy tax deduction of $2900 in the year the grower bought the investment.
The tax write-off was the main inducement, but there was also the promise of a return when the trees were harvested in 10 or so years – at which point Great Southern would take a portion of the yield in management fees.
How much of a return was coming? The prospectus makes clear that Great Southern could not make a “definitive” statement on the size of the return growers could expect. But it was happy to give a “reasonable” estimate of net returns of between $1923 and $4569 per woodlot for its 2002 project – after an investor’s initial outlay of $3000 was recouped. The company was banking on yields of 250 tonnes per hectare.
The trees planted for the 2002 scheme are not yet mature, so investors will not receive their returns for some years. What is certain is that their returns will not be subsidised by company money, as earlier distributions were.
Great Southern Plantations 1996 was one of the company’s earliest projects. Based on company documents, the 783 investors in GSP 1996 paid $3000 each for the almost 4000 woodlots they collectively owned.
After investors paid their upfront fees, GSP 1996 sat dormant as the trees grew. There was little to be done until the harvest began in 2007, at which time Great Southern would again earn money from the project, and investors could anticipate a return on that decade-old outlay.
In 2008 – 12 years after the scheme was launched – the project generated $16 million for investors to share, meaning each woodlot returned about $4100. This gave investors a net return of $1100 per woodlot, after recouping the $3000 paid in 1996.
But what was not immediately apparent was that a Great Southern subsidiary, Great Southern Export, bought all the timber from the 1996 project – and paid up to $10 million of the company’s money to improve returns.
In its 2007 half-year accounts for the scheme, the company explains in the account notes that GSE would set its price after taking into account factors like the “actual yields” and the “prevailing woodchip price”. While no “final decision” had been made by the Great Southern board, it was expected that GSE would pay investors a premium “over and above the return they would otherwise have achieved”.
The premium would be “up to” $9.6 million. This means that, of the $16 million returned to investors, as little as $6 million to $7 million may have been recouped from the sale of timber. If investors had only this money to share, they would have taken home between $1500 and $1750 per woodlot – nowhere near their original outlay. This document starkly illustrates two problems with Great Southern. Firstly, the lengthy gap in earnings from the sale of the MIS products to the harvest, forcing the company to survive in the meantime on sales of new MIS products.
The other problem was that the yields were much lower than expected.
TASMANIAN accountant John Lawrence, who lives near Burnie, has kept an eye on the MIS industry since the MIS forestry companies came searching for properties in his region and his clients approached him for advice.
Lawrence claims Great Southern’s yields were kept hidden for a long time. “The first crop was 1994, which they would have harvested in 2005,” he says. “The yield there was about 123 tonnes per hectare, whereas they were projecting 250 tonnes, and the next year was similarly bad, about 160 tonnes.”
Lawrence, and others, noticed a telling change in Great Southern’s accounting practices in the months before it folded.
Great Southern’s long-standing accounting policy was not to recognise the plantation management and property rental fees it would reap at harvest – “until the value of the project’s net harvest proceeds can be measured reliably”, as it stated in its 2007 accounts.
But four months later, a supplementary explanatory document showed a change in policy – a change repeated in its annual accounts.
Great Southern had now decided to “update” its valuation model on the basis that “reliable measurement” of the proceeds of a plantation harvest could be made after four years of timber growth.
This meant it was recognising $17 million in fees for management services performed on trees planted from 1998 to 2003 in its current accounts – even though it would not physically get this money until the trees were harvested in up to three or four years.
Lawrence argues that this proves the company knew it had been overstating projected yields for years. “That was such a damning admission,” he says. “It means that Great Southern have known all along how poor the yields have been because they can assess them at four years – and they never ever told the market.”
It was Great Southern’s continued reliance on drawing in money from new investors, coupled with its practice of beefing up investor returns, that has sparked the “Ponzi” accusations. A classic Ponzi scheme involves investors being paid “returns” out of funds drawn in from new investors. It relies on new money constantly coming in.
Lawrence, for one, is convinced that Great Southern was a Ponzi scheme. On his advice, Greens senator Christine Milne wrote to the Australian Securities and Investments Commission late last year.
Her letter points to what “appears” to be a pattern of misrepresentation, deceptive behaviour and misreporting by Great Southern Plantations, on the basis that its product disclosure statements consistently overstated the yields investors could expect.
ASIC responded that there was “insufficient evidence” to conclude that Great Southern was a Ponzi scheme. “A general indicator of such a scheme is a lack of assets,” ASIC said, pointing to Great Southern’s reported net assets of $329 million at September 30, and its audited accounts.
Although ASIC noted that yields had fallen short of projected outcomes, it was not “necessarily” misleading or deceptive if the company had disclosed potential risks to investors, ASIC said.
If the fundamental purpose of the company – to grow trees – was not going so well, lots of other problems were also creeping up on the company.
Its growing debt, for a start. Great Southern’s policy was to own the land on which the plantations grew, meaning that if it wanted to launch more MIS products, it had to buy more land. And along the way, it bought or established new businesses – rural funds management, cattle stations – in an attempt to diversify from blue gum-based products.
The acquisitions were funded by equity raisings and bank loans. Its debt facilities were extended in 2007, to $350 million from $245 million, at which point the company admitted it had “fully drawn down on the facility to its limit”.
Meanwhile, it was battling high costs – especially the cost of its distribution model. Great Southern spent almost $137 million on commissions, marketing and promotion in two years to 2008. To help convince accountants and planners to sell its MIS products, Great Southern paid commissions of up to 10 per cent.
Late last year, the company unveiled a radical restructure, dubbed “Project Transform”. It involved selling assets to reduce debt, reducing costs and, crucially, buying out tens of thousands of MIS investors – giving them Great Southern shares instead of the harvest proceeds. Continued…
The offer was between 3500 and 6000 Great Southern shares per woodlot – working out at a return of $700 to $1200, based on the 20 that Great Southern shares were wallowing at by the end of the year.
Investors who bought on the basis of that 2002 and 2003 prospectus – who were tempted with possible returns of up to $4569 per lot – were among those approached to convert their holdings into shares. To help them decide, they were given an independent expert report prepared by KPMG. That report included projected yields for the 2003 scheme, calculated by forestry assessor GHD.
In that 2002 and 2003 prospectus, Great Southern said it could “reasonably expect” its trees to yield 250 tonnes, or cubic metres, per hectare. But the GHD projections show that, although a small number of trees were expected to over-deliver at 311 cubic metres, most were falling drastically short, with yields of just 107 to 167 cubic metres.
Why? The trees were growing in a period of drought, for one thing. And Great Southern had, in the past, acknowledged problems with earlier plantings, such as lower-quality seeds and poor choice of sites.
Whatever the reason, the plantation investors overwhelmingly rejected Great Southern’s proposal to swap their trees for shares.
The company released an update to the market in April. The tone was upbeat, but the content was telling. Great Southern could not borrow more money. It was slashing costs, but “cash flows (remained) dependent on the sale of assets and continued reliance on MIS sales”.
Great Southern’s shares were frozen on May 7, and the board appointed administrators on May 16. Receivers are now picking over the company.
Meanwhile, thousands of hectares of blue gums keep growing, awaiting harvest. Just who will maintain the trees and harvest the timber is unclear.


2 Responses to “GSL Ponzi Scheme – Who will pay for repair of 300 sq kms of weeds?”

  1. zacd said

    Northern Territory News

    Great losses as Tiwi company goes south


    May 19th, 2009

    TIWI Island forestry company Great Southern has been put into administration, owing more than 40,000 investors up to $4 billion.

    Great Southern, which is Australia’s largest forestry investment scheme, owes up to four times as much as Timbercorp, the group’s biggest rival, which collapsed in late April.

    Tiwi Land Council chief executive John Hicks yesterday suggested the council could take over the plantation. Chief Minister Paul Henderson said he was concerned the closure of Great Southern would mean a loss of jobs on the Tiwi Islands.

    “We’ll offer any assistance we possibly can to make sure jobs are maintained on the Tiwi Islands,” he said.

    He was hopeful because the Tiwi people were “entrepreneurial … looking at different industries to bring different employment opportunities”.

    The NT Government offered to send a business analyst to help the Tiwi people look at opportunities to run the plantation as a joint venture.

    “Nobody is going to take those trees away,” Mr Henderson said. “I think the fundamentals of that business is sound. Like any business, it is commodity based. It depends on what is happening in the market.”

    Opposition Leader Terry Mills accused the Government of contributing to the business’s decline because of its “hands-off approach”.

    “Given the importance of such projects, it is essential that Government provides active oversight and engagement,” he said.

    Environment Centre NT co-ordinator Stuart Blanch said that the Great Southern plantation project had not created many jobs for “ordinary Tiwis”.

    “Where’s all the money gone?” he asked.

    Mr Blanch said the Tiwi Land Council had tried to manage several large developments “and they have all turned to dust”.

    Up to 43,000 people have invested in the stock exchange-listed group’s managed investment schemes.

    The collapse of Great Southern could lead to as much as 1.75 million hectares of agricultural and forestry land flooding the market.

  2. tiwiccbb said


    Managed investment schemes under scrutiny


    Australian Broadcasting Corporation

    Broadcast: 10/06/2009

    Reporter: Greg Hoy

    The recent collapse of Australia’s two largest managed investment schemes, Great Southern and Timbercorp, has not only cast a gloom over investment of some $3 billion by 61,000 grower investors, it also overshadows the future of this entire sector in Australia. Dozens of such schemes have already gone to the wall and industry analysts predict other major players will follow.
    KERRY O’BRIEN, PRESENTER: The recent collapse of Australia’s two largest managed investment schemes, Great Southern and Timbercorp, has not only cast a gloom over the investments of some $3 billion by 61,000 grower investors but also overshadows the future of this entire sector in Australia.

    Dozens of such schemes have already gone to the wall and industry analysts predict other major players will follow.

    In fact, some maintain the future of Australia’s 12-year old forestry strategy, the so-called 2020 vision, has been thrown into disarray.

    And while the Federal Government has already announced a parliamentary inquiry to explore the cause, cost and remedial challenge ahead, others are asking increasingly uncomfortable questions, like who should be held responsible?

    Business editor Greg Hoy reports.

    DAVID MARSHALL, AGRIBUSINESS ANALYST: And I got a series of quite unpleasant threats.

    GREG HOY, BUSINESS EDITOR: What kind of threats?

    DAVID MARSHALL: Um… I don’t want to go into too much detail.

    GREG HOY: Why not?

    DAVID MARSHALL: It’s pretty harrowing when people say you will get hurt and they know where your family is… And that’s, you know, it’s really, very, very – I’m a finance guy, I’m not a policeman or a standover man. I’m a finance guy.

    GREG HOY: Agribusiness analyst David Marshall was the first to question the dream, the dream dating back to 1997 and even before was to grow money on trees through managed investment schemes, to make great profits while reducing reliance on old growth forest for wood chipping through the Howard government’s Plantations for Australia 2020 vision; to establish 3 million hectares of plantation timber. Today that grand dream has become a national nightmare.

    SHANE MURPHY, FORMER LABOR & INDEPENDENT SENATOR: Given that Timbercorp, Great Southern and likely some others will fold, it is a very serious position for the plantation industry strategy that was developed back then. If we don’t get this right, our industry in terms of our forestry industry could be in serious trouble in the long-term.

    CHRISTINE MILNE, GREENS SENATOR: This was one of the greatest financial rorts that has ever been promoted by a government.

    GREG HOY: With approval of politicians, the ATO, ASIC and financial advisors paid high commissions, promoters lured tens of thousands of investors spruiking 100 per cent tax deductions upfront to grow trees for woodchip and other agricultural products. $6 billion tax deductible flooded into such schemes over 10 years. No question there were good schemes and bad. Some promoters lent the money to investors to be repaid from tax deductions. But once they floated their companies on the stock exchange, it was for the less scrupulous a money tree on steroids.

    DAVID MARSHALL: I can tell you four or five major groups where the promoters have pulled out between $10 million and $50 million. So it is significant gain and net worth and the wreckage they’ve left behind them in terms of the average person on the street who’ve been absolutely devastated, and the dichotomy between those two I find extraordinarily offensive.

    INVESTOR: Very upsetting. My wife’s very upset about it because, you know, I’ve been in the same job for 40 years and looking to retire in a couple of years to get out and maybe that won’t happen. So it is very upsetting.

    GREG HOY: Echoing what happened, the forestry giant Timbercorp just weeks before. Forlorn creditors gather in Melbourne following collapse of the largest MIS group, Great Southern, now a smouldering tangle of 35 fallen managed investment schemes with 43,000 startled investors.

    MARTIN JONES, ADMINISTRATOR, GREAT SOUTHERN: This is a meeting of creditors for Great Southern Managers Australia Ltd, Great Southern Landholdings Pty Ltd, Great Southern Vineyard Holdings Pty Ltd, Great Southern Olive Oil…

    GREG HOY: Meantime, far from the matting crowed, 3,000 kilometres away in fact, the founder, director and largest shareholder of Great Southern, John Young, who lives comfortably in this enormous mansion on Perth’s waterfront, collects the morning paper. Mr Young became the first MIS promoter to join the BRW rich list. He has his admirers but David Marshall is not one of them.

    DAVID MARSHALL: I think the numbers he put in his prospectuses – John Young is perhaps the personification of what is the problem here. And more fool me, he’s now worth tens of millions of dollars.

    GREG HOY: John Young would not be interviewed by the 7.30 Report sadly, but another disgruntled investor, that most colourful West Australian premier, Brian Burke, was happy to be.

    BRIAN BURKE, FORMER WA PREMIER: No-one went into these investments with their eyes closed. Everybody had the opportunity to make decisions. That doesn’t excuse maladministration, it doesn’t excuse people misleading others and it doesn’t excuse poor business practices.

    GREG HOY: David Marshall predicted heartburn right across this sector a long time ago as he analysed and questioned dozens of companies producing everything from timber, tea tree oil, to olives and grapes, advising his clients such as Westpac, AMP and NAB that up to 60 per cent of such companies did not pass investment scrutiny.

    DAVID MARSHALL: What can be described at the worst end is fraud, and at the lower end as incompetence and greed. The punter, who put the money into the ground through these big listed reputable companies, half is going into the back pocket of the promoter, the growth rates were ridiculously wrong, and the timber price was at best optimistic and in one case absolutely fraudulent. That’s why I get pretty upset.

    GREG HOY: So nine years ago he tried to ring the alarm bells, first warning the Australian public of impending disaster.

    DAVID MARSHALL (archival footage, June 16, 2000): The bulk of these projects do have what can be seen as misleading returns and misleading information.

    (archival footage, August 8, 2001): We estimate between 30 and 40 per cent are not viable in terms of getting a sensible or any return to the investors and I would say at least 30 per cent of the schemes on top of that will fall over, over the next two to five years.

    GREG HOY: Dozens of such schemes have now fallen over. But David Marshall’s public warnings went largely unheeded, though as his big clients began to listen, he roused the wrath of those he criticised, angry at his allegation, amongst them fraud.

    Fraud is the crime of gaining money by deceit or trickery. As pressure increased to silence David Marshall, others began to reach similar sobering conclusions. But Mr Marshall felt increasingly isolated, especially, he says, after he knocked back an offer supposedly too good to refuse.

    DAVID MARSHALL: It’s pretty disturbing. When you’re offered quite bluntly a $500,000 bribe to “Maybe you could work with us for two years on a contract and review our projects and obviously we’d be looking for…” You get a bribe like that, but perhaps more importantly you get the reputation as a trouble maker.

    SHANE MURPHY: The Taxation Office was asked many questions with regards to the types of projections that these companies were making. There was plenty of evidence around to suggest that many of the projections being bandied around were way out there and could not be supported by even the most optimistic data available at the time. And they seemed as though they were not interested in that. The same with ASIC.

    JOHN LAWRENCE, ACCOUNTANT: The aim of the exercise seemed to be shuffling paper and making money, not growing trees.

    GREG HOY: In the far north west of Tasmania, Wynyard accountant John Lawrence began to fear the largest of the scheme promoters, Great Southern – whose plantations had arrived like a king tide in his region – showed signs of an investment scam.

    JOHN LAWRENCE: Great Southern confessed to having to prop up the price that they paid to investors, and that suggested something seriously was going wrong. That suggested that they were inflating the price to investors in order to encourage new money in.

    GREG HOY: While David Marshall had claimed many years ago Great Southern was exaggerating its projected returns for timber, which it vehemently denied, only in recent years when combing through its lists of contingent liabilities and notes to financial accounts, accountant John Lawrence found a Great Southern subsidiary was purchasing the timber from the company’s investors, claiming this was primarily driven by various efficiencies this option provided. It paid a significant premium to the investors over and above the return they would otherwise have achieved.

    JOHN LAWRENCE: In fact their first three crops were propped up in this way because the yields were so disappointing. They needed to boost the returns to the investors, or else it might have been game over for Great Southern if it became widely understood throughout the market that the returns on these crops weren’t as good as they were saying they should have been.

    DAVID MARSHALL: It’s rather like a whole series of car accidents and you know they’re going to happen next year. So you see it’s all going to happen, these people are going to lose money and I’ve had people ring me in tears, you know, “The project has fallen over, what can you do?” and I say, “There’s nothing that I can do. So you go to the – you go to ASIC and you say how can you let this go through? Because in those days they were getting the prospectus. These are our comparative tables, how can you let this go through?

    GREG HOY: So what did they say?

    DAVID MARSHALL: “Very interesting, thank you, let’s have a look at that,” and just disappear. You go to the ATO and say, understand – and senior levels in the ATO. I’m not going to be specific, but at senior levels, and you say, “You are being taken for a ride, you are being used to give authenticity and legitimacy and credibility to these promoters and we all know they’re shonks.”

    GREG HOY: And what did they say?

    DAVID MARSHALL: They’d say, “Oh, that’s very interesting, we’ll have a look at that and make sure that underneath there this is not a commercial assessment,” and then the next year it would be out 20 or 30 prospectuses with product ruling, the big stamp, the big tick, ATO product ruling grant.

    CHRISTINE MILNE: When a company sets up a subsidiary company to go and buy the harvest and the company itself then inflates the return to investors to make it look as if it is a good product, how can you say that’s anything other than deliberate? It’s a Ponzi scheme, governments knew about it, regulatory authorities knew about it, I pointed it out to them myself by letter, and yet no action was taken. How can that be?

    GREG HOY: Damaging the reputation of the good guys – it’s long been alleged some major companies were Ponzi schemes or investment scams, surviving by paying returns to investors with money rolling in from new investors.

    Like the ATO, ASIC argued buyer beware, adding these were not Ponzi schemes but real commercial entities with real value. Critics said such values were not what they were purported to be, like the projected returns which attracted more naive investors to keep previous investors happy while debt levels rose merrily.

    Today ASIC is not investigating Ponzi schemes, but is investigating other possible offences. But its critics argue it’s ASIC who should be investigated.

    CHRISTINE MILNE: ASIC looked at it and said that it was legitimate in what they were doing. I think ASIC now needs to really be looked at itself.

    GREG HOY: The Government has announced a Senate inquiry into managed investment schemes. Supporters argue with greater vigilance from investors, the schemes must continue.

    RICHARD STANTON, AUSTRALIAN PLANTATION & PAPER COUNCIL: We will certainly be emphasising that the deductibility of investment in plantation forestry should continue and that there are significant opportunities for further investment in wood growing in plantations in Australia.

    GREG HOY: Others aren’t overly optimistic about another such inquiry. David Marshall gave evidence to a Senate inquiry in 2001 headed by former Tasmanian Senator Shane Murphy, who says this will be the fourth such government inquiry.

    SHANE MURPHY, FORMER TASMANIAN SENATOR: Unfortunately governments of the day felt that the market would determine the outcomes and they simply haven’t. This will require probably a large input on the part of the Government, both State and Federal Governments, to determine how they can keep those forest assets, those plantations, as part of the overall plan for the long-term viability of Australia’s forest industry.

    Otherwise we could end up in a situation where there will be no pulp and paper industry because the resources will just simply not be there and that would be detrimental to the long-term economic viability of this country.

    GREG HOY: David Marshall is equally sceptical of the prospects of another political inquiry, but this time with the indemnity from litigation it would offer him, he might even have more allegations to offer in return.

    So will you tell us who threatened you?

    DAVID MARSHALL: No, absolutely not.

    GREG HOY: Why not?

    DAVID MARSHALL: It was a pretty serious threat and I’m – these guys are still around and there’s no way in the world I’m getting back into that.

    GREG HOY: So would you give this evidence to a properly convened inquiry?

    DAVID MARSHALL: Probably. But I need indemnity, but again understand I’m still, I’ve got kids at school and so on and I’m still trying to make my way. And you get back into the trouble maker role again. The person who warns on these things is not revered in this society.

    KERRY O’BRIEN: Greg Hoy with that revealing report.

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