OPINION | Wednesday, 25 July 2007

George M. Mangion

The silence is deafening

Lord Conrad Black and three others are accused of fraudulently diverting almost $84m from Hollinger International, the newspaper group he used to lead. He was cleared of one count of racketeering but was found guilty of four of the 13 charges against him.
The 62-year-old Canadian-born member of Britain’s House of Lords could face up to 35 years in prison and millions of dollars in fines and forfeitures. As a newspaper tycoon Conrad often he locked horns with powerful adversaries including Australian media mogul Rupert Murdoch and former Canadian Prime Minister Jean Chretien.
The news of alleged corporate fraud send down shivers down the spine of regulators and credit analysts who hoped that the murky days of Enron are over.
The jury decision comes as a surprise to many although rumours about its outcome have been circulating for some time.
At one time, Hollinger International acquired major newspaper holdings included such prominent names as the Daily Telegraph of London, the Jerusalem Post and Canada’s National Post.
This was all credited to Conrad ‘s sharp business acumen. With hindsight we recall how he rose to stardom mingling in elite business circles while his flamboyant and lavish lifestyle is legendary. Reflecting on the size of the alleged fraud one wonders if national and international financial regulation has kept pace with today’s opportunities for fraud and deception perpetrated by company leaders. The jury heard how the misappropriations mostly came from the sale of hundreds of regional US and Canadian newspapers.
Since 2003, the company has since sued Conrad and he was fired as a board member. The more serious allegations about Black and his associates concern maneuvers to dispose of newspapers and misappropriation of $84m in fees that should have gone as dividends to shareholders.
This fraud teaches us a lesson to be extra diligent in cases involving massive pension funds and otherwise undeclared dividends owed to unwary shareholders. Should this be a turning point to tighten up on the Sarbanes Oxley act to be more careful when on recruiting independent directors to sit on mandatory audit committees. If these rules lose their effectiveness, do we run the risk of fanning the fire for more daring fraud and accounting scandals. In the hearing held in Chicago, Black and his co-defendants have denied responsibility for their misdeeds. Their defense lawyer categorically rebutted the charges stating that the transactions were sanctioned by the audit committee and authorised by independent directors. It will be interesting to hear what influence will this fact bear on the judge’s final sentencing, which is expected later on this year. With a relative calm in reported frauds after the dotcom-era collapse many sorely hit investors tried hard to lick their wounds and write off losses suffered from Enron, WorldCom, Tyco and Parmalat scandals.
Now with the re-emergence of this shocking revelation on Hollinger’s losses are we justified to question the effectiveness of the Sarbanes-Oxley Act, which purported to impose strict controls against abuse on boards, directors and external auditors. Some even lamented that the pendulum swung too far and the rigorous prosecutions of and stiff jail sentences for the perpetrators of the Enron and WorldCom frauds were enough to deter future scams. They cited that Sarbanes was an over reaction and in practice is too expensive to administer. On the other hand, reality shows how prosecutors continue in their daily ordeal to unearth cases of those who break capitalism’s rules and are mired in multi-million euro fraud.
Back home, we hardly ever read about that part of the Companies Act, which empowers the court to disqualify directors who are proven to have conducted fraud or seriously abused of their powers. Indeed prosecutions in this element are rarer than a downpour in Santa Maria mid-August holiday.
Paradoxically, two appeal judges were arraigned on charges of alleged bribery by a convicted drug baron who paid them to lighten his jail sentence, which was under appeal. One of the judges was none other than the chief justice himself. This year, two more bribery scandals erupted at the Transport and the health ministries.
Do we conveniently overlook Malta’ s homegrown accounting scandals, alias the Priceclub saga. Does the scale of alleged mismanagement and possible fraud mimic the reported tactics of Conrad Black? The impact of the collapse of the Priceclub on Malta’s domestic trade is probably equal to or could even be in excess of that of the possible impacts of the Lord Black scandal. In 2003 MaltaToday reported that the accounts of Priceclub were audited for the periods ending December 1998 and 1999 by Deliotte who gave a clean bill of health in their audit opinion. Deloitte never finished auditing the accounts of 2000, because of “audit differences related to debtors and stocks.”
They also audit one of the creditor banks and some of the unpaid creditors.
Much journalistic fervour was demonstrated by the late Julian Manduca, (a MaltaToday journalist ) yet following his demise this story has not been adequately covered. Julian had raised a number of questions about the role of auditors in Malta and the effectiveness of company law to protect the interests of third parties. The Priceclub turmoil has come to the fore following revelations of the evidence of shortcomings given in court by an in depth report compiled by PricewaterhouseCoopers.
PWC were paid by the major creditors to examine the books of account of Priceclub and report inter alia in relation to allegations of mismanagement by its directors. They reported shortcomings on stock controls.
With hindsight we note how the Lm13 million Priceclub debts work out at 0.7 percent of the GDP in 2002. Five years down the line since its sudden collapse and we are no wiser based on reportage of the liquidator’s acts and dealings.
It is difficult to tell which way the tale is unfolding as there has been a trickle of reportage on the case. Party apologists remind us that the country had made a big comeback considering most of these workers have found alternative work in other retail outlets and emerging large-scale shopping malls. They spite the Jeremiahs who persist to remind us of the Priceclub debacle labeling them as a vengeful lot of bad losers. Such Jeremiahs picture the liquidator resembling a Colossus towering amid the motley crowd of unpaid bakers, retail suppliers and starry –eyed poultry farmers who allegorically walk like insignificant paupers under his brawny legs.
After all it is common knowledge that the privileged creditors typically the banks have re-possessed the retail premises and recouped their losses. One of creditor banks even found the premises so meritorious that they converted them into a savvy international call centre.
Facts have it that the chairman of the same bank, also happens to be involved in a major importer of foodstuff and chief supplier to Priceclub although no eyebrows were lifted as this does not constitute a conflict of interest.
The rest of the unsecured suppliers who based their credit on the perception of business standing of the directors and audited accounts cry in the corner.
Surely one cannot blame the government given that Priceclub as a private company appointed external auditors specifically to monitor and report to shareholders on any suspected or proven mismanagement.
One may have to revisit this chapter as more details on the way the cash rich retail operation was run is revealed by the liquidator in his annual report on his acts and dealings.
Can we learn from this mishap and will we have better protection from other potential Conrad Black‘s nefarious schemes. Let us hope that a later day Julian Holland will emerge as a combative journalist who can continue to follow up the Priceclub saga.
Leaning from past mistakes the public pleads for better corporate governance in companies with audit committees having the power to weed out any hint of sleaze and corruption as the roots of such evil corrodes the business psyche
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