Devious accounting surrounds Freeport - what's going on?

AJG

freeport2 It's shocking: at the time of writing Freeport still has failed to file its accounts with Companies House, even though they are overdue by over four months.

This also is the case with its only shareholder, CEREP UK Investment D GP Ltd. According to company law, because Freeport is an unlimited company, it does not legally have to file its accounts, but its shareholder does, as it is a limited company.

Furthermore, CEREP UK has the same year end as Freeport (30 June), so the accounts also are overdue by the same period. Even worse, CEREP UK Investment D GP Ltd also has not filed an annual return.

While Freeport does have a legal right to not file its accounts, we have to ask why the current directors have made this choice when, at least in the recent past, previous company officers willingly filed these documents. I know, as I have copies of the 2011 and 2012 accounts and annual returns.

Is it because there have been several articles in the Algarve Daily News, as well as some other sources, detailing the fact the Freeport's ‘finances’ are a joke, that the company is worthless and that some of the directors' actions and those of the company's accountants are extremely questionable.

Freeport's main and only shareholder does have to file its accounts, but has so far refused so to do. Again, we have to ask why. In the previous two years in which I have been following the fortunes of Freeport, the accounts were generally filed on time.

But not this year...

One problem that the company officers of CEREP UK Investment D GP Ltd have is that previous accounts have shown Freeport's profit and loss figure, usually a loss, in the notes to the accounts.

Even if Freeport continues to use its right not to file its accounts, CEREP UK Investment will still have to show at the very least Freeport's final profit or loss figure, as well as the final balance sheet total, both to satisfy the requirements of company law and to adhere to one of the basic tenets of accountancy: consistency.

As CEREP UK Investment DGP Ltd has published there figures in the last two years - at least according to the accounts I have for 2011 and 2012 - there would seem no good reason not to publish them in the next accounts (2013).

That is, unless the company's officers have something to hide.

Of course, it would be easy for CEREP UK Investment D GP Ltd's company officers, which are the virtually the same as Freeport's, simply to insert any figures into the accounts. After all, as Freeport's seems to be refusing to publish its accounts so that the public can see them then nobody would be able to verify them anyway.

There is just one problem with this solution. While Freeport does have a right not to file its accounts, it does still have to produce them. Also, if there were any legal proceedings or other serious matters that required them to show the accounts – and the figures didn't agree – oops! - there could be a problem.

Another matter is the question of working papers. These are the papers which accountants produce both to arrive at and back up (in the case of an audit) the final accounts. In accountancy terms they are the real gold as they reveal virtually everything about the accounts that the final filed accounts only allude to. This is even more important in cases like Freeport and CEREP UK Investment D GP Ltd because there are several other related companies.

While we certainly would not want to accuse Freeport's accountants Baker Tilly of being corrupt, we can say that they were at the very least financially persuaded to collude with the directors in producing accounts that were bordering on deceitful for anyone reading them - especially if the reader was not trained in how to understand financial documents. Even if the reader was an accountant or lawyer and trained to read such documents, unless they saw the accounts of CEREP UK Investment D GP Ltd alongside those of Freeport – and also analysed the notes to the accounts – then they probably wouldn't pick up on some of the discrepancies that can be found.

Discrepancies such as the amount under 'debtors' not agreeing with those in notes; and the loan from Freeport to CEREP UK Investment being shown as long-term creditor in CEREP UK Investment's accounts, and being passed off as short-term debtor, due within one year, in Freeport's.

But this is all ancient news as it all relates to the 2012 accounts. However, there is good reason for referring to this these figures. When Freeport (hopefully) and CEREP UK Investment D GP Ltd (a legal requirement) finally get around to filing their accounts for 2103, they will have to produce comparatives showing the previous year's figures. Given that the figures in Freeport's 2012 accounts were wrong, it will be interesting to see how the company's directors fudge, sorry, ‘correct’ the comparatives when they publish the 2013 accounts.

This could be one reason why the directors are refusing to publish the 2013 accounts for Freeport, nobody will be able fully to analyse the figures, all they will have is the final profit and loss figure and the aggregate capital and reserves figure in the notes to the accounts of CEREP UK Investment D GP Ltd - the company that owns 100% of Freeport's shares.

However, should Freeport then decide to file the 2014 accounts, it will then only have to show the 2013 figures as comparatives, figures that will not have been seen before as the 2013 accounts have not been filed. This will be a fantastic way to conceal any changes in the 2012 comparatives that the company does not want the public to see.

Clever - or should that be ‘criminal?’ There is little reason to doubt that this is the main reason that Baker Tilly took so long to reply to my original complaint to the Institute of Chartered Accountants of England and Wales (ICAEW) regarding clear inaccuracies in the 2012 accounts, and why Freeport's and CEREP UK Investment D GP Ltd's directors have taken so long to publish the 2013accounts. As yet, they have not done so.

But while we cannot currently take a look at the Freeport and the CEREP UK Investment D GP Ltd accounts, we can take a look at the accounts of other companies that are associated with Freeport and its ultimate owners, the Carlyle Group.

As stated in some of my previous articles about Freeport, this company is now owned by the American private equity group Carlyle, which is based in Washington, but incorporated in Delaware. Carlyle controls CEREP UK Investment D GP Ltd and several other companies with a similar name: CEREP stands for Carlyle European Retail Estate Partners. Essentially this is an investment portfolio where private investors and companies invest their capital to get a return. Carlyle's slogan is “Invest Wisely. Create Value”. I would add, “At Other People's Expense!”

Carlyle creates little if any value and makes at least some its profits from artificially inflated asset prices – usually property.

Two of Freeport's directors, before they resigned in September last year, were Robert Hodges and Eric Sasson. Up until then they were considered to be key men at the heart of Carlyle's European retail management operations. Their resignations sent minor shockwaves through some of Carlyle's investors.

Both, along with Robert Konigsberg, also were involved with CEREP UK Investment D GP Ltd. All three were also involved with another of Carlyle's companies: CEREP Poole GP Limited. This company has now gone bust so it gives us a great opportunity to have a look at the way Carlyle runs its property management operation in Europe.

Sasson and Konigsberg also resigned from the company as directors on the 29 April 2012 but Hodges still holds the position of director and company secretary. No doubt he is working with the liquidator to ensure that as many as the losses can be offset against CEREP Sarl II, another Luxembourg-based arm of Carlyle in Europe.

Interestingly, this is very similar to the way Freeport and CEREP UK Investment D GP Ltd is being run at the moment; many of the same directors now have resigned and an American from Carlyle, Mathew Lo Russo, is running the operations.

Remember, back in 2012 (the last accounts which Freeport published) there were three directors and one company secretary. Now there is just one. If this doesn't point to a potential imminent liquidation of both Freeport and CEREP UK Investment D GP Ltd, then one should at least ask why there has suddenly been a significant reduction in directors and other company officers on the board.

Certainly any liquidation wouldn't harm Carlyle's interests. Both companies are worthless with the combined overdraft of both companies close to £20 million, so any losses could be offset against CEREP Investment ISarl, the immediate parent company registered in Luxembourg. This will reduce or even eliminating any corporation tax liabilities. Further, Carlyle will still have all material assets in its possession, especially the land, which once belonged to the good people of Portugal before one corrupt minister of the environment gave it away. Lastly, for now at least: what has happened to the €94,000,000 mortgage which Freeport took out in 2011. It certainly wasn't in the 2012 accounts.

CEREP Poole GP Ltd (company registration number 5656372) is another of CEREP's worthless companies. According to its last published accounts (the 2012 ones are overdue), we are informed that the “principal activity of the company is to act as a General Partner of Limited Partnerships and as manager or operator of Limited Partnerships and other investment collective schemes.”

Sounds impressive. Unfortunately, the company is worthless. It produces no income let alone profits and the only entry on the profit and loss account is £5,135 worth of “administration expenses”, of which we know that £1,000 was for accountancy fees paid to the same incompetent firm RSMTenon – now Baker Tilly - which prepared both Freeport and CEREP UK Investment D GP Ltd's accounts. The only purpose for the profit and loss account, technically speaking it is a loss account, is to pile up losses on the balance sheet.

What's the point?

Looking at the balance sheet we see the same modus operandi of other CEREP companies that I have looked at: a negative balance sheet. In this case an overdraft of £24,911. Are these shareholders’ funds? There aren't any. Although the balance sheet shows an impressive £25,552 in the bank, up from £240 in 2010, this is all eaten up by the creditors all falling due within one year, of £50,464.

We now move on to the CEREP Poole Limited Partnership, the company which CEREP Poole GP Limited is supposed to ‘manage’ - another profit and loss account with another loss, £742,073.

What a surprise.

Although there is a ‘turnover’ of £807,841, this is all consumed by, among other things, ‘administrative expenses’ of £440,994 (directors' salaries?) and ‘interest payable and similar charges’ of £997,381. This last figure is the largest amount on the profit and loss account.

Moving on to the balance sheet, we encounter yet another overdrawn figure: £9,799,067 (nearly £10 million). Partners' funds? There aren't any. Another surprise.

A detailed analysis would take too long, but there are a couple of further interesting points to look at. The Limited Partnership owed £13,745,884 (at the time of the balance sheet) to Anglo Irish Bank. Yes, the same Anglo Irish Bank which virtually, thanks to its debt, was partly responsible for the collapse of the Irish economy. It's funny how the same corrupt faces pop up in the same corrupt places.

Anglo Irish Bank has a fixed charge over Dolphin Quays, the retail property worth £13,500,000, which is the main investment asset of the company, and more interestingly, ‘a fixed and floating charge over certain assets of the Limited Partnership (CEREP Poole Limited Partnership) and the rights of the Limited Partnership Agreement.’

Given that the Anglo Irish Bank was nationalised in 2009, and the mortgage was issued on 31 May 2006, some serious questions should be raised as to who now really owns what. The existing agreement was with a private institution (Anglo), which was subsequently ‘rescued’ with taxpayers' money.

Anglo was then merged with Irish Nationwide Building Society in 2011, forming a new company called Irish Bank Resolution Corporation. The new name, we were told by the Irish Minister for Finance, Michael Noonan, was necessary to remove the “negative international references associated with the appalling failings of both institutions (Anglo and Irish Nationwide) and their previous managements.”

Not very reassuring; I wonder if the sale of the proceeds from Dolphin Quays will go back to the Irish taxpayer?

Much of the above was simply a digression to demonstrate what could happen if, or most likely when Freeport finally hits the financial buffers.

Whatever happens we can be certain that those who currently control the assets (essentially Carlyle) will keep them, while passing on the liabilities to innocent creditors and taxpayers.

It is also clear that the Freeport's directors past and present have complete contempt for the people of Portugal by now refusing to publish any financial information about the company.

At the time of writing, the 2014 year end of 30 June already had passed. Essentially, there is no information about the financial state of Freeport and its main shareholder since 2012. Is there a politician in Portugal who has the guts to say, “Enough is enough!”? And then to do something about it, like kicking Freeport out and placing the land back into common ownership.

There is one major change: Freeport's auditors, Baker Tilly I assume, resigned on the 31 July. Maybe that's the reason the accounts are overdue: Freeport's incompetent and corrupt directors are struggling to get another firm of accountants.