Maxwell. The name by itself is a byword in the European pensions industry for the dangers inherent in opaque, unprofessionally managed pension funds.
So the recent report by the UK Department of Trade and Industry (DTI) – after a staggering 10 years of investigation – comes as something of a lesson to us all.
One of the main focuses of the DTI report, in a somewhat oxymoronic sense, was to discover what the ‘due diligence’ procedures carried out at the time “did not reveal” – particularly with regard to the pension funds and why their abuse was not discovered earlier.
The heart of the Maxwell affairs lies in Robert Maxwell’s domination of the management of the companies he owned – including the pension funds – taking tacit control of a substantial part of their investments, although significantly not those governed by tighter US legislation.
Much of his overall business empire was kept out of the public eye, run through a Liechtenstein entity – the Maxwell foundation – and controlled by a Swiss lawyer, with disclosure, the DTI report notes, made on a “need to know” basis.
However, Maxwell’s fitness to run a publicly quoted company had been severely criticised in a DTI report of 1971/73 concerning his ownership of publishing firm Pergamon Press. This stated: “Notwithstanding Mr Maxwell’s acknowledged abilities and energy, he is not in our opinion a person who can be relied upon to exercise proper stewardship of a publicly quoted company.”
Such ‘ability’ and ‘energy’ put Maxwell back on the corporate map a few years later, repurchasing Pergamon Press and turning it into a highly profitable company.
Nevertheless, the latest DTI report questions whether investment banks and advisers that subsequently dealt with Maxwell took sufficient heed of his history, or the ‘know your customer’ rule laid down in the UK Financial Services Act.
Maxwell ran his companies and pension funds as one – moving assets between them as best suited his interests.
In 1984, Maxwell Communication Corporation (MCC) bought Mirror Group Newspapers (MGN), owner of the Daily Mirror newspaper, and as soon as 1985 the pension fund began lending money to the private side of MGN.
The DTI report notes that pension fund money was used on a regular basis by the company, assisting both in its corporate strategy and providing cash in exchange for investments that MCC needed to sell.
The funds also made significant investments in MCC shares.
Significantly, the presentation of the financial position of Maxwell’s companies and pension funds was carefully managed, with minimum disclosure made on a sporadic basis.
The web was further spun with establishment by Maxwell of an in-house nominee company, Bishopsgate Investment Trust, as well as a number of subsidiaries, which would hold some of the assets of the public and private companies, as well as assets of the pension funds.
The DTI reports there were often delays in recording the beneficial ownership of assets, which meant those dealing with Maxwell did not necessarily know who owned the shares they dealt in.
By November 1998 Maxwell was using blue-chip shares held by the pension funds as collateral for borrowing – a process described at the time as “stocklending”.
Notably though, a significant part of these assets used as collateral by Maxwell were held by an independent custodian.
By the summer of 1990 Maxwell and MGN were in financial hot water, faced with a repayment bill for part of £3bn (e4.8bn) in loans.
At this time the decision was made to float 49% of the MGN.
However, by the time MCC came to float Mirror Group Newspapers in April 1991, Maxwell had been buying shares in his own group through various third parties to boost the share price.
In his dealings Maxwell used investment managers and advisers of the highest reputation, including Goldman Sachs, Samuel Montagu & Co, Coopers & Lybrand Deloitte, Clifford Chance, Salomon Brothers International and Linklaters & Paines.
At the time of the flotation cash loans from the pension fund amounted to £100m, while a further £270m in shares was being used as collateral for bank borrowings.
Sales of companies that should have arrived to pay back the pension fund never found their way back into the coffers.
Furthermore, reviews by the auditors Coopers & Lybrand Deloitte did not take into account the borrowing of cash from the pension funds.
The result was that Mirror Group Newspapers’ fortunes were inextricably linked to those of the private side of the company whose bank borrowings amounted to about £1bn.
The DTI report concludes that MGN was not suitable for listing and that the flotation prospectus was “materially inaccurate and misleading”.
The rot did not stop there though.
None of the £235m made from the flotation was paid into the pension funds. Instead, the funds remained at the financial call of Maxwell for loans and foreign exchange transactions, which provided short-term liquidity.
Post flotation, Maxwell continued secretly buying shares in MGN through Goldman Sachs and using them as collateral to secure loans to the private side of the company, says the DTI report.
By the end of October 1991, the private company held no substantial assets other then shares in MGN, MCC and in property.
At this time pressure became severe on Maxwell to repay several outstanding loans, which he could not do without disclosing the use he had made of pension fund assets. The collapse of the empire was imminent.
Following Maxwell’s death on November 5, 1991 the clear nature of the pension fund abuse became clear, with many pensioners suffering enormous losses both financially and emotionally.
Maxwell’s sons were put on trail for their part in the proceedings but eventually acquitted.
While the DTI made it clear that they would not be re-examining the acquittals, it was damning in its criticism of Maxwell and the organisations he dealt with, noting that: “Conduct can be blameworthy without being criminal.”
The report says the practices in the pension fund were known to Coopers & Lybrand Deloitte and the other professional advisers and investment houses.
Goldman Sachs, it says, bears “substantial responsibility” in respect of the manipulation that occurred in the market.
One particular failure flagged up in the report is the role of regulation in the protection of the pensioners.
Work, it says, should also be done to build on the role of the Occupational Pensions Regulatory Authority (OPRA) in providing more assistance and training for trustees, which it notes perform the ‘vital’ role of the stewardship and investment of pension schemes.
Various measures such as a statement of guidance on the role and duties of advisers on a flotation, as well as the imposition of severe sanctions against companies who do not report fraud, are also put forward.
The issue of market regulation across border is also highlighted, with a need outlined for more effective control over firms that operate on a trans-national basis.
But the DTI acknowledges that regulation is not a panacea and warns that the public should be made aware that regulation cannot entirely eliminate fraud, malpractice or manipulation of the markets.
Its conclusion demands the highest professionalism, although some have asked whether its lack of legal bite stops short of making this a requisite: “The most important lesson from all the events is that high ethical and professional standards must always be put before commercial advantage. The reputation of the financial markets depends on it.”