Do not remain content with the surface of things.  Don't become a mere recorder of facts, but try to penetrate the mystery of their origin.

- Ivan Pavlov
 

One of the first tasks we undertook was to try to understand the origins and structure of the Trust.  This entailed a page-by-page compilation and analysis of the original Trust Deed, and all subsequent modifications.  Anomalies we found in the deed, and the numerous modifications associated with the deed, later led us to inquiries at the Companies Office.

According to documents available at the Companies Office, The Department of Justice approved the Wellington Regional Enterprise Trust on the 20^th of April 1989 as being in accordance with the Unit Trusts Act 1960.  [However, subsequent correspondence from the Manager's lawyer (see point 29) indicates that may, in fact, not have been the case.  The link given here is not to the beginning of the Manager's lawyer's letter, but to the paragraph wherein she defends "opting out" of certain Unit Trust Act clauses.  We'll come back to her letter in due course.]  The trust deed was dated 8 May 89 and a copy was filed at the Companies Office on 28 March 90, along with a letter from AMP Perpetual Trustee to the Justice Department certifying that the annexed copy of the deed was a true and correct copy.  According to the register filed 31 March 90, the unitholders were primarily from Hong Kong.

A deed of modification dated 19 May 92 was subsequently filed (date of filing undenoted) which changed the name of the trust to the New Zealand Development Trusts and allowed additional unit trusts to be established under, and governed by, the Trust Deed.  It also added this wise modification:

In clause 1.01, in the definition of ‘Authorised Investment’ add at the end of (m) the following words:

‘Provided that investment by one Trust Fund in another Trust Fund is not permitted.’

This clause was subsequently modified into one allowing “cross-investment.”  Unitholders were not notified.  There have been many unheralded changes to the trust deed, including two deeds of modification supposedly executed on the same day, 1 August 1995.  (The second document contained a clause — regarding “borrowing” — that appeared to contradict a clause in the first document.)

Also on 19 May 92, the Second Additional Trust Fund Deed was filed which established Flat Rock Forests Trust, the "qualified” fund in which we invested our money.  Additionally filed on that day were modifications establishing the Local Authority Financings Trust and the Unlisted Companies Trust.  Eight days later, a fourth trust fund, the Phoenix Communications Trust Fund, was purportedly established, though all trace of it seems to have disappeared from the Companies Office.  There was a single set of financial statements filed for Phoenix.  But no trust deed.

According to the documents filed at the Companies Office, sometime in 1993 the Wellington Regional Enterprise Trust (now NZDT, the “umbrella” trust which covers our trust, Flat Rock) invested $103,193 to buy a 16% share of the Rocky River Forest in Nelson.  This transaction is said to have been recorded at cost, but had, “subsequent to balance date [31 March 93] been realised for more than the original cost.”  According to Flat Rock Forests Trust accounts filed for the same year:

At 31 March 1993 the Trust has purchased 84% of the interest in the [Rocky River] forest and 16% was purchased by another party.  The Trust had secured the right to buy the 16% held by the other party and has exercised that right on 7 July 1993.

I computed that this 16% was valued by Wall Arlidge at roughly $61,500 because I was told that 84% was valued at $322,688 for forests and land as at 31 March 93.  Yet I was told this 16% was purchased for $120,000 — almost twice that value (and I’m not told it was purchased from the parent Trust, WRET).[1]  Did each trust pay a procurement fee?

According to Deloitte Ross Tohmatsu-audited financial statements in the FRFT prospectus, as of 31 December 1992, total forests and land at Rocky River (140 ha), had cost FRFT $652,540 (up to 70% over its value), and had value (but not until harvest) of $563,711.  At least that’s what it said on page 28.  On page 32, I learned that Arbor Forest Management Limited had been instructed to value the forest at Rocky River as at 31 December 92: they had felt present market value (assuming an 11% discount rate) was only $478,504 — and they had said the forest covered 90.1 ha.  Financials filed with the Companies Office for FRFT as of 31 March 93 showed the cost for Rocky River to have been $412,098 and the valuation only $322,688.  (Wall Arlidge had valued the land and was able to find 140 ha.  The Manager valued the forests.)

Figures sometimes appeared hard to quantify.  But, whatever set of figures is used, why did this transaction (and similar others) cost more than the valuation?  Could it be the fees?

A subsidiary of the New Zealand Enterprise Board[2] was paid 5% of the gross value of any forest purchased: additionally, New Zealand Forests Holdings Ltd received up to 3% of gross revenue from the sale of timber or timber products and a 3% brokerage fee on any units sold in the trust.  The umbrella trust prospectus said the selling fee “will not exceed 4% of the amount invested,” and added that the Manager “may” charge a fee of 1% of the net value of Units withdrawn.  The Manager was also “entitled to fees based on rebated commissions as may be negotiated.”  The Trustee received an annual fee of .125% of the net asset value of each Trust Fund and “can recover fees on a time and attendance basis for any non-routine matters it is required to attend to.”

The Flat Rock Forests Trust prospectus shows a marketing fee of 3% on the gross sale proceeds is payable to NZ Forests Limited (a subsidiary of the Promoter, New Zealand Enterprise Board)[3] upon sale of land and forests, timber, and by-products.  Of course, forest operating costs are deducted, including a car plus expenses.  Over and above ALL expenses and fees, the Manager is paid a management fee and an administration fee of 1.5% per year and .5% per year respectively of the value of the Trust Fund.  Other deductible expenses include all formation costs, all costs of acquiring and dealing with investments, interest payable on bridging advances, costs for keeping the register, all costs for certificates, accounts, statements, and cheques, fees and expenses of auditors, costs of convening and holding unitholder meetings, and “any other fees or expenses properly and reasonably incurred by the Trustee or Manager in connection with the Trusts.”  In other words, fees were generally net to the fee collector.  (I believe other fees were added as time went by.)  Rather than itemising fees on the financial statements, they were generally added to the cost of forests purchased.

The event that precipitated action on our part was the setting up of another trust, the New Zealand Forests Trust (NZFT).  Our trust, Flat Rock, using borrowed money, bought three forests, Medlicott, Turret, and Bideford, which it “on sold” to this new trust.  Payment consisted of $5.4 million in NZFT units, $3.4 million in short term loans to NZFT, and $.6 million in cash.  However, Countrywide wouldn’t release Flat Rock from the debenture on those properties and NZFT offered no collateral.  NZFT was unsuccessful in attracting sufficient investors to achieve solvency.  The Manager proposed to keep one of the forests (Medlicott) for fees they were owed, transfer the other two back to Flat Rock, and close the new trust.  However, Countrywide wouldn’t relinquish collateral hold on Medlicott, saying any money from a sale had to be applied to their outstanding notes.  This whole aborted manoeuvre cost Flat Rock millions in value.  Why was it done?

The 1993-94 financial year (we bought in quarter four) appears to have been an especially bad year for the Trust:

	P9: forest at cost value went up $8.3 million.
	P8: $8.7 million in cash came in.
	P10: A $5 million loan was negotiated and by 28/4/94 $2 million was owned on it.

This was also the year that a change in accounting policies began (as of 1 April 93) which allowed all fees to be deducted up front, rather than amortising them.  Unitholders weren’t notified of this change for well over a year.

And what is our mission?  Why, we're attempting to get some or all of our investment back.

[1]    As of March 1993, there was one unitholder in the WRET: Chung Lo Yung Lin in Hong Kong.  There were four unitholders in FRFT: New Zealand Enterprise Nominees Limited (a subsidiary of NZEB) owned the most shares, followed by Stephen and Margaret Reidy, a Hong Kong investor named W W Gregory Ng, and Monica Grealy, then the Reidy’s boarder.

[2]    It depends on the date of the transaction.  New Zealand Forest Holdings and New Zealand Forests Limited traded names (Now, why do you suppose they would do that?) on 9 March 93.  Until then, NZFL had been 99% owned by New Zealand Enterprise Nominees Limited, presumably for Flat Rock Forest Trust.

[3]    Only after 9 March 93; before that (from 25 November 92) it was called New Zealand Forests Holdings Limited and prior to 25 November 92 was called Timber Holdings Limited.  On 25 November 92, a company called Coringa Holdings assumed the name Timber Holdings.  Confusing?  Of course!

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, check out the News Table of Contents.  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...