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Dirty deeds: Ferraris and $10K LA phone bills

  1. Dirty deeds: Ferraris and $10K LA phone bills
    Jul 19
    Colleen Ryan

    Brad Cooper put a $65,000 insurance claim into HIH Insurance for a log-book stolen out of the glove box of his Ferrari.

    He complained bitterly when the claims department baulked.

    The log-book wasn't covered under the policy; the valuation was suspect. Cooper got the money anyway, just before HIH collapsed.

    In a single expenses claim in 2000, Cooper asked to be reimbursed for $10,000 in telephone calls from a Los Angeles hotel. This time Rodney Adler baulked: "Brad ... this is beyond a joke ... managing directors of large successful companies do not spend this sort of money."




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    It is small beer in a $5 billion collapse. But it is a business aficionado's dream.

    In black and white in emails, letters and faxes Wayne Martin, counsel assisting the HIH Royal Commission, has this week laid bare the human side of a financial debacle.

    In a flood of documents tendered at the beginning of a particularly intriguing phase of the inquiry, Martin has described in detail the equivalent of corporate looting and revealed the sheer effrontery of young men on the make.

    The millions that found their way to Collingwood Football Club is just one element of an extraordinary tale.

    A cluster of unwitting players have been drawn into the net via the exhaustive paper trail. From Collingwood Football Club to hotel doyen David Baffsky. From the Packers to News Corp - mentioned in memos as potential investors or business partners.

    Former HIH chief executive Ray Williams is beginning to look like a victim, if that is possible.

    For example, he received a letter from his co-director, Rodney Adler, which bluntly stated that the market was looking for blood: "There is little doubt it will be either yourself, the chairman or a combination of both," the letter said.

    The FBI's mafia stooge and star witness for the Mob in Wall Street trials - Jeffrey Pokross - is back. This time he is buying shares for HIH and picking up a $US104,000 ($189,000) spotter's fee along the way.

    Martin has said that the dominant theme of this section of the inquiry will be conflict of interest - between the interests of HIH on one side and those who owed it a fiduciary duty, such as Adler, Cooper and Williams on the other.

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    It is clear that much of the focus will be on the river of cash that flowed to Brad Cooper and the role played by Adler in soliciting investment funds from HIH into ventures in which he had a significant personal interest, most of which proved to be financially disastrous for HIH.

    But a central feature of this extraordinary tale is how Ray Williams, chief executive of HIH, was placed in a position over two years of believing that his whole insurance empire was under threat if he didn't pour tens of millions of dollars into an ailing home burglar alarm business listed on the American Stock Exchange - Home Security International - a company in which both Adler and Cooper had an interest.

    Williams was repeatedly warned of financial disaster if he didn't keep up a river of money pouring into this relatively small business.

    The nature of the correspondence could be described as threatening.

    Take, for example, a memo from Brad Cooper to Williams urging HIH to purchase the rights to the FAI name at a time when HSI was running out of money, which said: "The alternatives are potentially horrendous and would impact HIH in a most unpleasant way."

    And there is a letter from Adler to Ray Williams on HSI's business dealings: "Dear Ray, It is not an easy letter to write because I feel very awkward pushing you very hard to do something that is not palatable and yet the consequences of not doing it, I believe, are more unpalatable to HIH."

    HSI's very short history as a public company (it lasted just over three years before being delisted) is intriguing.

    It is one company that Arthur Andersen walked away from - Andersen voluntarily resigned as auditor, according to US Securities and Exchange Commission filings.

    The principal known beneficiary from its short existence was an investment banker from Monaco, Paul Brown, who went to school with Rodney Adler at Cranbrook in Sydney.

    Brown walked away with at least $12 million. (The whole debacle cost HIH more than $100 million.)

    During 1998 HSI's share price experienced four sharp spikes of up to 25 per cent in a day, matched by equal declines a few days later. Most of the price spikes coincided with the end of a quarter, one of them occurring on June 30. (Unfortunately, the HIH Royal Commission is unlikely to address these occurrences because they happened before the takeover, during the FAI reign. But some investors must have made a tidy sum from these price movements.)

    In another intriguing event, when HIH wanted to buy another 10 per cent of HSI in October 1999, the facilitator was Jeffrey Pokross, the Mafia associate who ran a pump-and-dump brokerage house on Wall Street and who spent four years operating as an FBI informant, culminating in the biggest-ever FBI sting on Wall Street.

    Pokross charged HIH a spotter's fee of $US104,000 for sourcing the 10 per cent stake, yet it came from a Milwaukee fund manager, Heartland Advisors, which had been a large shareholder in HSI almost from the beginning. It should not have been too hard to find.

    Pokross is described in correspondence as having "a most cordial relationship" with Heartland. Heartland now has its own problems. It is under investigation by the Securities and Exchange Commission after three of its bond funds were forced into liquidation by the regulator.

    According to the Milwaukee Sentinel, investors claim they lost $US87 million. They probably didn't do too well out of HSI, either.

    HSI was established by Brad Cooper in 1988. Adler and FAI began backing it in 1990. It was known as FAI Home Security in Australia and for a few years was quite a successful company distributing home burglar alarm systems.

    In 1997 (the year before HIH made its takeover bid for FAI) Cooper took his home security business to the US. He listed it on the American Stock Exchange and FAI became its major shareholder at about 45 per cent of the company.

    When HIH took over FAI, the HSI stake and a swag of loans to the company came along with it. Martin estimates that HIH's exposure to HSI was approximately $100 million in equity and loans at the time of the takeover. It grew from there.

    Interestingly, HSI managed to attract a number of large institutions to invest in its shares. According to filings with the SEC, the two largest shareholders among US institutions were Heartland Advisors, the fund manager from Milwaukee, and Robertson Stephens, a California-based fund manager associated with Bank of America.

    From the time HSI listed until Brad Cooper took it private again in early 2001, it was a highly unusual company.

    As noted, the major beneficiary of HSI's short life appears to have been Paul Brown. His company sold 75 per cent of a burglar alarm manufacturer, Ness Security, to HSI, in the process turning an estimated $780,000 investment into a $25 million profit (at least on paper) in four years.

    Interestingly, it was this transaction in mid-1998 that caused the split on the FAI board, and enormous rancour between Adler and his fellow directors.

    An earlier owner of Ness, which later sold out to Paul Brown, was a company associated with James Packer, Dorigad Investments. During 2000, Adler and Cooper went to extraordinary lengths to ensure that Brown got paid out, even when the company was in dire financial straits.

    To ensure that Brown got his payment, HSI sold an asset to HIH - 50 per cent of FAI Finance Corporation.

    As it turned out, the purchase of FAI Finance Corporation brought a lot of headaches with it, because under creditors' statutes in the US, if HSI went into liquidation HIH would be liable for consumer claims, as FAI Finance had been a linked credit provider for the sale of the burglar alarms.

    Over the ensuing months HIH poured $17 million more into HSI, by way of loan funds, according to evidence given to the royal commission.

    The situation at HSI got worse. A few months later it needed more money. So this time HIH paid $20 million to HSI to buy back the use of the FAI name. HSI had access to this name through its Australian home burglar alarm business, which was called FAI Home Security.

    Then HSI sold 50 per cent of Ness Security to HIH, but at a price almost double that which it had been prepared to take from an alternative buyer just weeks earlier.

    By this stage, patience with Brad Cooper had run out and Rodney Adler had been appointed chairman and chief executive of HSI.

    The point that Martin made again and again in his opening address for this section of the inquiry was the blatant conflicts of interest Rodney Adler faced as he sought funds for HSI, in which he had a personal interest, from HIH, of which he was a director.

    Martin also pointed to "a veritable flood of cash pouring out of HIH during the last six months before the appointment of the provisional liquidators". For the most part the board was not consulted; in some instances Ray Williams was approving transactions some months after he had stepped down as chief executive.

    According to Martin, a recurring theme of the transactions to be investigated "is the role played by Mr Adler in soliciting investment funds from HIH into ventures in which he had a significant personal interest".

    Martin pointed out that Adler had been paid about $5 million by HIH over 2 years, yet the major activity in which he was engaged "was the solicitation of HIH's funds for ventures in which he had a personal interest and which invariably proved to be disastrous for HIH".

    Ray Williams, it seems, didn't make much money at all. What motivated him? From Martin's explanation it was fear: fear of bringing his company down and fear of losing his job. The one question mark hanging over Williams in terms of personal gain was that he sold his house to Brad Cooper on the very day he also approved a number of transactions Cooper had been urging in relation to HSI. But as far as the royal commission can determine, the price paid for the Mosman house ($5.6 million) was within the market range for such a property at that time.

    Martin raises more questions than he answers, but he apparently hopes to receive some of those answers over the next few weeks as he calls witnesses such as Brad Cooper and Rodney Adler for explanation.

    The HSI saga ended for HIH in late 2000 when it negotiated the sale of its 47 per cent interest to Brad Cooper for a mere $1.25 million. In reaching this point, relationships deteriorated markedly.

    Martin tracked the deterioration through the correspondence he tabled at the royal commission this week.

    Take the relationship between Adler and Cooper, who had been friends for a decade. Adler's letter of resignation as chairman and chief executive of HSI in September 2000 said: "After having placed HSI in a position where liquidation/insolvency is no longer a threat, but having to argue several hours a day, every day, every week with Mr Cooper, I have decided to resign."

    And in a letter from Adler to Williams earlier the same month: "Dear Ray, I look forward to seeing you at 11am today, primarily to discuss HSI. I have advised Brad about the meeting and told him not to attend; he told me he would sit in the foyer!"

    But it is the relationship between Adler and Williams to which Martin pays most attention. In particular he points to a letter Adler wrote to Williams in October 2000:

    "Dear Ray, I have two problems that are unrelated (but both are important to me) that I would like to discuss with you.

    "I find myself in a very awkward position. I have been and continue to be inundated by institutions, and more particularly individuals, ringing me and suggesting to me that they all place their proxy at my discretion to vote at the HIH Annual General Meeting, the sole purpose of which is for me to assume either the Chairman or Chief Executive role."

    Adler goes on to point out if Williams hadn't been " fair, so open and so honourable" with him in relation to the takeover and the HSI matter "I probably would have moved a long time ago against you".

    In the second part of the letter Adler brings up a company which he and HIH have as a joint venture (Pacific Mentor), which in turn owned 55 per cent of Business Thinking Systems - the latter a company that had come up $2.5 million short in a fundraising.

    Martin commented in his opening address: "There's an interesting combination of sentiments in this letter. In the first portion of this letter he deals with moves to unseat Mr Williams. In the second, he's attempting to solicit Mr Williams' commitment to contribute $2 million to a company in which he has a significant personal interest.

    "One of the questions that will have to be pursued is whether or not there was any inferred nexus between the two subjects."

    As for Brad Cooper, his HSI deal may have imploded but he was with HIH until the end. The final transaction was a $1 million spotter's fee for allegedly introducing the Packer group, PBL, to property transaction which it declined to pursue.

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