Between a Flat Rock and a Hard Time


Trustees Caught Between a Rock and Debenture Holder

It is possible that the scrupulously honest man may not grow rich so fast as the unscrupulous and dishonest one;
but the success will be of a truer kind, earned without fraud or injustice.
And even though a man should for a time be unsuccessful, still he must be honest: better lose all and save character.  For character is itself a fortune...

- Samuel Smiles

by Chris Hutching

The recently failed Flat Rock Forests Trust highlights the role of trustees aught between a debenture holder and the investors they aim to protect.

The trustee, Perpetual Trust, was upstaged when Countrywide called in the receivers.

The Flat Rock failure was unfortunate for the new owners of Perpetual Trust who have inherited the problem.  Formerly known as AMP Perpetual, the trustee company was bought about 18 months ago by Christchurch-based Pyne Gould Corporation to complement its PGG Trust business.

According to an information memorandum circulating at the time, Perpetual Trust was in the red to the tune of $2 million in the 1995 year but income from the group investment funds, such as Nuhaka Farm Forestry and Opio Forestry Fund, had surged.

The Pyne-appointed corporate services manager at Perpetual, Rod Templeton, was disappointed when the bank pulled the plug and said his staff had been working through the issues with a view to giving a realistic picture to unitholders soon.

The structure of the trust may have been a factor in its demise.  Trustees Association spokesman and Trustees Executors managing director Jim Minto questioned whether the borrowing practices had been appropriate for a closed unit trust with high debt that would be offset in later years by asset sales — in Flat Rock’s case they never eventuated.

Mr Minto said trustees of such trusts had a duty to ensure the manager played by he rules but they weren’t liable for the quality of the management decisions, unlike with most listed unit trusts where trustee powers and obligations are more onerous.  Meanwhile, an analysis carried out in 1989 when the Flat Rock prospectus was issued warned of high fees, unspecified charges and potential conflicts of interest in the administration of the scheme.

The report, written by FPG Research, said that while the general concept of shorter-term, mid-rotation to mature forestry investment was sound, there were questions about Flat Rock.  In particular, a 2% management fee, made up of a 1.5% management fee and a 0.5% administration fee, for a scheme with a small number of investors and less-intensive management requirements was considered high.  Other charges were not specified, nor was it clear how valuers would be selected or audited, the FPG report said.  There was also the question of how commissions were structured for a subsidiary of the manager, which would become the selling agent for timber and land.

FPG said there did, “not appear to be enough incentives to protect the investors’ interests and maximise returns for the investors” and it concluded that projected returns were too lean to warrant the risks.  This was based on the projected return of 10.19%, which compared unfavourably with the risk-free returns available in 1989 on a 10-year government bond of 7.10%

Source: The National Business Review 13 February 1998

I wish I had known about the FPG Research report in 1989!

For news articles on the Flat Rock Forests Trust, forestry, the Serious Fraud Office, one immigrant family's experiences, immigration specialists, fraud, juries, logging, and more, pressing the "Up" key below will take you to the Table of Contents for this News section.  Or you may wish to visit the Forestry Trust Table of Contents to read how a unit trust went bust.  Or the Topics Table of Contents which offers a different approach to lots of topics - among them poisonous insects, eating dogs, what's addictive, training vs teaching, tornados, unusual flying machines, humour, wearable computers, IQ tests, health, Y chromosomes, share options, New Jersey's positive side, oddities, ageing, burial alternatives, capital punishment, affairs, poverty, McCarthyism, the most beautiful city in the world, neverending work and more...

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