THE DISTILLERY: Centro reckoning

 
A big win for ASIC in a high-profile court case involving the collapse of the Centro retail and property trust group back in 2007-08. The collapse has generated a lot of publicity, angst among the securityholders and huge losses – possibly as much as $10 billion. Now yesterday's 186-page judgement from the Federal Court seems to have not made new law, but reminded directors of their existing responsibilities. Naturally, the jottery loved the decision, just as they loved last week's big Foster's and Qantas stories. 
 
The Fairfax broadsheets' Leonie Wood explained the decision yesterday: "The Federal Court has today found that markets watchdog Australian Securities and Investments Commission has proved its case against Centro directors who failed to notice multi-billion dollar errors in the property group's 2006-07 accounts. In strong comments while delivering his decision in Melbourne, Justice John Middleton said the directors were "intelligent and experienced men in the corporate world" but he said the case was "not about a mere technical oversight." Today's finding is likely to add clarity to the hotly debated notion of directors' responsibilities, and be examined closely by companies, shareholders and other interested parties. The result is also a significant win for ASIC in the high-stakes case." This will no doubt be appealed because of its importance.
 
This morning Wood extended her analysis: "What directors have to do is, the judge says repeatedly, is ''read, understand and focus''. It is not too onerous. It's commonsense stuff. Each director has to take upon himself or herself – as an individual – a singular responsibility to do something in the chain of steps, and that something involves bringing their own mind, their own energies and capabilities into the boardroom, and applying all that to the decision-making process thoroughly."
 
The Herald Sun in Melbourne said this morning: "University of Melbourne corporate law expert Professor Ian Ramsay said the decision would be read "in every boardroom in the nation" and would prompt companies to closely scrutinise who sits on boards. The ruling is also seen as an important victory for the corporate regulator, the Australian Securities and Investments Commission, following a number of high-profile legal losses. In his judgment Justice John Middleton stressed that the eight directors did not act dishonestly but instead found that they "failed to take all reasonable steps required of them"."
 
Meanwhile, Fairfax's Ian Verrender wrote: "Where does the buck stop? The Federal Court judge John Middleton made it clear yesterday. In his ruling on the conduct of eight current and former directors of Centro Properties and Centro Retail, the judge left no room for ambiguity, forcefully arguing that company directors, even non-executive directors, are liable for their actions. Ignorance, so often considered bliss in other fields of human endeavour, was no excuse when it came to running a public company. If Centro's directors didn't know, or didn't understand, that the accounts they personally signed off on misrepresented the company's position, then they should have."
 
This morning, John Durie wrote in The Australian: "The Federal Court has served a timely warning to public company directors that they are ultimately responsible for the company's financial accounts and cannot hide behind the advice given by management or the auditors. Justice John Middleton's decision in the Centro case yesterday was a significant victory for ASIC and indeed for company auditors PricewaterhouseCoopers, given all the non-executive directors made much of the fact they relied on the auditors and management. The important point here is the principle that directors are ultimately responsible, and it would not be surprising if all the NEDs escaped bans when penalties are considered in hearings in August. The court made it clear that the directors acted honestly but negligently, which means the more likely penalty will be a fine, with just an outside change of a lengthy disqualification."
 
The Financial Review's Chanticleer columnist wrote this morning: "It was hard to keep a straight face when the lawyers for Centro argued that the board could not have known about the flaws in the 2007 annual report." In an editorial, the paper says: "The Federal Court Centro decision makes it clear that directors cannot hide from responsibility for understanding the accounts even if that is not their area of expertise and they act honestly." The headline, which said "Directors face more pressure", is wrong – the judgement says they should be living up to their existing responsibilities.
 
But The Australian had no qualms in reporting warnings the judgement could see boardrooms emptying: "There were warnings yesterday of an exodus of directors from public company boards after the corporate regulator won a landmark case against the board of beleaguered property group Centro. But Australian Institute of Company Directors chief executive John Colvin yesterday said directors were concerned as there was confusion about the roles of non-executive directors and management. Deakin University law professor Jean du Plessis said the decision would "not make competent and even diligent people enthusiastic to take up positions as non-executive directors in companies." But hang on, the judgement says they did their job, but didn't go far enough. 
 
As Fairfax's Elisabeth Sexton explained this morning: "The central message of Justice John Middleton's judgment is that directors have a core duty to read the accounts and ask questions about anything they don't understand before they pass a resolution approving them. If that is a hurdle too high for some directors, then shareholders should be glad to see the back of them. ASIC did not allege that the Centro directors failed to get the accounts right. The case was about their failure to notice an apparently significant error and to ask management, or the auditors, or a fellow director about it."
 
And Fairfax's Adele Ferguson wrote after the judgement was delivered yesterday: "It was a win the regulator and Medcraft desperately needed and if the new boss plays his cards right he should use this as an opportunity to send a message to corporate Australia that ASIC won't shy away from taking on big, complicated cases, and that it will come down hard on directors that don't fulfil their duties. The judgment should also give ASIC the courage to go in hard after auditors and lawyers who sign off on books and give companies and boards advice. ASIC took eight Centro directors and executives to court seeking orders to ban them over alleged breaches of their duties because they overlooked an error in the 2006-07 accounts, which resulted in a failure to disclose to investors and the ASX that it had billions of dollars of short-term debt."

Elsewhere, The Australian's John Durie wrote yesterday: "Forget Greece, the biggest problem facing world markets is the $1.5 trillion US budget deficit, says Morgan Stanley boss James Gorman. In Melbourne for a brief visit, Gorman didn't put it quite like that in an interview with The Australian, but he played down concerns about a Greek default and said the big thing Wall Street wants to see is a reduction in the deficit. Like JPMorgan boss Jamie Dimon, Gorman said the US financial system is in better shape, but he added that there is a lot of uncertainty which was slowing things down, which explains the need for some real action on the deficit."
 
There was a well-timed bid in the iron ore industry yesterday, as The Australian's Tim Boreham noted: "Just as Pilbara junior FerrAus looked to be softening its stance to engaging with unwanted suitor Wah Nam International, along comes WA chum Atlas Iron with a superior offer. But while Atlas's scrip offer is pitched at a 38 per cent premium, we won't declare it a knock-out just yet. Defying the "keep it simple” lore, Atlas plans to combine its South East Pilbara development assets, which involves Atlas buying FerrAus's South-east Pilbara development assets in return for 121.8 million FerrAus shares. Atlas also subscribes for 37.4 million FerrAus shares at 65 cents, which in turn delivers Atlas a quick 38 per cent FerrAus stake. Most handily, this dilutes WahNam's 18 per cent FerrAus stake to 11 per cent. Atlas then makes an off-market offer for the remainder of FerrAus on the basis of one Atlas share for every four FerrAus shares, valuing FerrAus shares at 82 cents a pop." Whew!
 
And The Australian's Bryan Frith wrote this morning: "The only curious aspect of Atlas Iron's iron ore consolidation play and takeover bid for FerrAus is the way it is going about it. Atlas and FerrAus have agreed a two-step process. First combine the southeast Pilbara iron ore resources of both companies by the sale of Atlas assets to FerrAus in exchange for shares which will give Atlas a significant, if not controlling, interest in FerrAus, then make a takeover bid for FerrAus. On the face of it, if Atlas were planning a takeover bid for FerrAus, the interim step of consolidating the southeast Pilbara assets of both companies would seem redundant, because that could be achieved after the takeover."
 
This morning Adele Ferguson moved away from directors and looked at retail brokers: "Bill Shorten and some key federal politicians are about to be lobbied hard and loud by Australia's retail brokers who are fighting for their lives against a backdrop of depressed trading volumes, falling commissions and tougher regulation. The latest body blow relates to a set of recommendations in the Future of Financial Advice reforms which came about following the collapse of some financial planning companies, notably Storm Financial. Industry submissions recently closed, but some blue-chip stockbrokers and their lobby group, the Stockbrokers' Association of Australia, will go direct to politicians to try to overturn a set of proposals before they are put to the parliament."
 
The AFR said this morning that: "Australian retailers and airlines are spearheading a drive to divide the country's consumers into two tribes – Coles shoppers who fly Virgin and Woolworths shoppers who travel with Qantas."
 
And Fairfax's Insider, Ian McIlwraith, wonders about Perpetual and its high profile fund manager, John Sevior: "John Sevior's name did not even appear in money manager Perpetual's annual report last year, so shareholders could be excused for wondering why his likely departure appears to be costing them so much. It cost Perpetual investors more than $1 a share yesterday, the stock dipping below $25 for the first time in more than two years. Perhaps all parties need to stand back a bit for perspective. And here is a tricky question for regulators – if institutional investors in Perpetual are selling because they know they will likely withdraw funds management mandates from the group if Sevior leaves, is that insider trading?"