PGC displays run of poor judgment

04:28, Jul 05 2012

Incredibly, after all the damage done by finance companies with related party loans, a major institution has been at it again.

With the release of court judgments today involving Pyne Gould Corporation subsidiary Perpetual Trust, this time we know regulators have acted promptly.

Specifically, we know the Financial Markets Authority has demanded the lending be unwound and the courts have ruled the public can be told about it.

One of the most compelling details in the High Court ruling is an email from George Kerr, managing director of PGC and its majority owner since completing a takeover bid in February.

On Sunday February 19, five days after the takeover went unconditional, Kerr sent an email requesting a loan from a $50 million cash fund run by Perpetual - an asset manager as well as a trustee company.

The loan was for a limited partnership fund called Torchlight.

The email said: "As the chairman of Torchlight I am requesting that the following is put in place for tomorrow - Monday 20th."

The email requested a loan facility of $7.5m, but preferably $15m, and asked for arrangements to be made that night so A$5.5m could be sent to Sydney the following day.

An $18m loan was approved by PGC's board, without Kerr who declared himself conflicted, the following afternoon.

Amazingly, although the loan was to be secured on property in the Queenstown/Wanaka area, Perpetual gave Torchlight three months to provide valuations. If they weren't up to scratch, the deal allowed Torchlight simply to pay back some of the money or provide more security.

The speed of the transaction is apparent from the fact that the security was registered on property records just a day later on February 21.

At this point credit is due to Matt Lancaster, Perpetual's head of corporate trust and the cash fund's trustee.

On February 23 he flagged concerns about the related party loan to the cash fund's managers, saying "the proposed loan is not permissible".

Whether the concerns were considered by the relevant people is not clear, but by April 4 the loan had reached $28.2m, apparently without further formal approval.

The whistle was eventually blown by Trustees Executors, the cash fund's statutory superviser, and the FMA came down on Perpetual like a ton of bricks.

No doubt Perpetual and Torchlight would argue the loans were a great deal for investors in the cash fund.

Indeed, Kerr indicated to me in an email this afternoon he thought the proceedings were "Orwellian" and the transaction would have been highly rewarding for the Perpetual fund had it been allowed to proceed.

However, the FMA thought otherwise. Justice Paul Heath said: "the lack of judgment and understanding of the role of a trustee for funds of this nature, evidenced by the circumstances the loans came to be made, is striking."

It's hard to disagree with that comment.

No doubt disclosure of these shenanigans will do Perpetual and PGC no good at all, but they should have thought of that before rushing into multimillion dollar related party lending.

Their efforts to suppress details from the public is further evidence of poor judgment, in my view.