The recent financial and banking crash which started in 2007-2008 (and hasn't really gone away), at least made the average person on the street more financially astute.
Many people became aware of the rather obscure and sometimes exotic terms conjured up by the financial and banking institutions: credit default swaps (CDS), collateralized debt obligations (CDO) and a whole host of other terms - like investor derivatives marketing (IDM).
However, few people knew what they meant, and even fewer knew how they worked. Financial journalist Gillian Tett in her book Fool's Gold describes how these terms were invented (principally by J.P. Morgan) by over-ambition university graduates with maths degrees looking to impress the world and its wife and to make names for themselves.
The problem with all these products was that it made people forget (or not even ask) who really owned what, or owed what to whom. In some ways it wasn't too much different from what Enron and its accountants (the much-missed Arthur Anderson) tried to do with its myriad of companies and complex accounting systems. It was just another attempt to make people forget or not notice the reality. No doubt people looked at the figures and happily mumbled, “It's OK!” - much as former Freeport director Robert Hodges must have done when he looked at, and then signed off, Freeport's last accounts.
People are still saying that lessons should have been learnt and such practices which led to the financial crash must never happen again. But they still are. The recently reported case of Parkalgar demonstrates that financial institutions still want to use complex and calculated procedures to try and fool people – and then claim that they are not doing so.
It's also clearly the same with Freeport. The more I look at their last published accounts (year ended 30 June 2012) the more I am amazed how bad they are, and how both the directors and the accountants seemed to be trying to hoodwink the public.
Further information recently received shows that the accounts fail to give a breakdown of the short-term (due within one year) creditors. While the notes to the accounts do give a breakdown of the £22 million debtors figure in the balance sheet, they completely ignore the £9.5 million short-term creditors. This is amazing because this information is more important than the debtors figure. Virtually all the debtors figure is owed by companies associated with Freeport. However the creditors figure are amounts that are owed to outside parties.
On the Companies House website it states that Freeport has seven outstanding mortgages. These are:
1. Finance acquisition No.1 S.A.R.L.: a Luxembourg law governed receivable pledge agreement – outstanding on 27 September 2011.
2. Finance acquisition No.1 S.A.R.L.: security agreement - outstanding 27 September 2011.
3. Finance acquisition No.1 S.A.R.L.: security agreement - outstanding 24 September 2011.
4. Bank of America Securities Limited: confirmatory security agreement - outstanding on 12 October 2009.
5. Bank of America Securities Limited (The Facility Agent): security agreement – outstanding on 14 November 2007.
6. Barclays Bank Plc; deed of charge over credit balances – outstanding on 24 November 2004
7. Barclays Bank Plc: security agreement – outstanding on 15 July 2004.
None of this information is to be found on the accounts. Why?
In November 2011 Robert Hodges, the then managing director, was upbeat about Freeport's new refinancing schedule. Through Carlyle, Freeport was gaining access to some €94,000.000 worth of capital. Though according to some press releases and reports, much of this money was coming from a sovereign wealth fund based “in the Middle East” (IP Real Estate, 2 November 2011). But like all these press releases, they are so vague that they border on meaningless.
If the several articles in the financial press are to be believed then these reports must have been referring to the above-mentioned €94,000.000 loan agreement which was signed on 20 September 2011. While the document does state some inter-company rights, principally with Freeport Leisure (Netherlands) BV, none of the money seems to have ended up in Freeport's accounts – either as any added assets, or material increases in liabilities.
Looking at Freeport's accounts (30 June 2012) after the mortgage agreement was signed, there is little material change in the creditors figure. In 2010 it was just over £10 million, while in 2011 and 20112 the amount was approximately £9.5 million (with a very small increase of just under £2,000 in the latest figure).
So here is the question: Where has the money gone?
Again, if we look at the notes (4) to Freeport's 2012 accounts we see that the inter-company amount between Freeport and Freeport Leisure (Netherlands) BV, one of the companies mentioned on the mortgage agreement with inter-company rights, has remained the same: £4,000,000. So the money doesn't seem to have gone there. It would be recorded as an inter-company transaction.
Further, and at least on the evidence, none of the money has gone to CEREP UK Investment D GP Ltd, Freeport's only shareholder and its biggest debtor owing it approximately £14.9 million. And as I have already mentioned in previous articles, this company has no material assets.
We can imagine CEREP UK Investment D GP Ltd being like a spoilt brat who does not work (generate income or capital) of a very rich father (Carlyle) and walking around with a sandwich board declaring, “I owe £14.9 million (and have no real means to pay off this debt).” But this is not quite true. CEREP UK's can pay off this debt, on the back of Carlyle's good grace and ability to back up this liability. But what if Carlyle refuses (or cannot) pay this debt? CEREP UK goes bust and Freeport has to write off the amount. Hence the reason Freeport is carrying a provisional liability of £17.3 million on its balance sheet. Does this reassure anyone?
I contacted Companies House to ask why Freeport's accounts did not show a breakdown of the creditors, or give any disclosure of its mortgage agreements. They couldn't get back to me immediately; apparently it need yet another accountant to answer the question. Further, the Institute of Chartered Accountants of England and Wales (IACEW) have replied to my other complaint: that the three totals that make up the debtors figure in the notes do not agree with total on the balance sheet; they exceed it (by just under £168.000) and this cannot be. While the Institute has not contradicted my observations, it has also stated that no disciplinary action will be taken against both John Bennett (the audit senior responsible for preparing the accounts) and RSM Tenon/Baker Tilly, the accountants who prepared the documents.
Clearly this esteemed organisation (ICAEW) is quite happy having an accountant that cannot reconcile four simple figures continue to represent it. Again, does this this fact reassure anyone?
Helen Howard, the person who mainly has been dealing with this issues at the ICAEW, has also written to Freeport, to ask about the “recoverability” of the debtors figure, especially the £14.9 million from CEREP UK Investment D GP Ltd. But don't hold your breath. Interestingly, if you look at CEREP' UK's accounts, you will notice that the £14.9 million loan which Freeport (supposedly) lent CEREP UK is shown as a long-term creditor (amounts falling after more than one year).
However, when we have a look at Freeport's accounts, which was prepared by the same audit senior, John Bennett, we find that the corresponding amount is shown in the short-term debtors, along with the other two loans to associated companies. While there is some disclosure in the notes (3) to the accounts that these amounts are due within the long-term, this policy is not consistent.
One of the golden rules of accountancy is that any policy should be applied on a consistent basis. How can the same amount be shown as a long-term creditor in CEREP UK's accounts and then end up as short-term debtor on Freeport's? Not only is John Bennett incompetent, he is also completely inconsistent. Or is he just corrupt?
The main point of this article is: should the proverbial cow dung ever hit the financial fan, who will own or control what? Like Parkalgar, we could have incompetent directors filing for bankruptcy (while possibly still sitting on fat bank balances), and then setting up another business with someone else (their cronies) owning the assets. I am sure that the Barclays and Bank of America didn't sign these mortgages or credit agreements with Freeport just for fun. Should Freeport go under (Or Carlyle pull the plug), who will get what? And why isn't at least some of this information on the accounts?
Preparing and filing abbreviated accounts, as Freeport and CERERP UK have done, shouldn't be used as an opportunity to try and deceive people. I haven't yet managed to secure an email for Robert Hodges, but he was working for Generation Estates Limited as director until 18 September 2013:
Further, his last known address according to CEREP UK's annual return is, 36 Perrymead Street, London, SW6 3SP. Send him a card. Ask him, “What's the deal with Freeport, Bob?”
Interestingly, the man who replaced Robert Hodges at Generation Estates Limited is Matthew Lo Russo, Freeport's new director (the American who once managed the Washington Redskins). On the Check-Business website both companies (Generation and Freeport) are stated as having a high hidden risk, while Freeport is described as insolvent. But that was what I was saying at the start!
Something else that is missing from Freeport's accounts: the directors have not stated that they prepared the accounts in line with section 393 of the Company Acts 2006. Here's why. The Act states :(1) The directors of the company must not approve accounts for the purposes of this Chapter unless they are satisfied that they [the accounts] give a true and fair view of the assets, liabilities, financial position, and profit and loss... of the company.” The omission of the the statement “true and fair” says it all. There is nothing true and fair about Freeport's accounts.
American author William Cooper (as far back as 1991) stated: “[The] bookkeeper can be made king if the public can be kept ignorant of the methodology of the bookkeeping,” The bankers (and their cronies) using worthless companies (Freeport and CEREP UK Investment S GP Ltd, for example, and of course Parkalgar, which was declared bankrupt) to suck out whatever is valuable from a country.