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Shareholders' Battle
The many extracts on these pages are from
copyright material. They are owned by the reference
given or its owner. They are reproduced here for
educational purposes and to stimulate public debate
about the provision of health and aged care. I
consider this to be "fair use" in the common
interest. They should not be reproduced for
commercial purposes. The material is selective and
I have not included denials and explanations. I am
not claiming that all of the allegations are true.
The intention is to show the general thrust of
corporate practices as well as the nature and
extent of any allegations made.
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Shareholders
This page written in 2001 gives an account of
Alpha's shareholders battle to address their
perception that they had been unfairly treated. It
returns in 2005 and reviews possible misconceptions
and the ultimate failure of their efforts. It looks
for lessons in their experience.
(2001 to
2004)
I wrote this page in September 2001 soon after the takeover of Alpha Healthcare by Ramsay Health Care. In summary, Alpha had gone through a bad time but the worst seemed to be over and management was optimistic. Its major shareholder the US group Sun Healthcare.was in bankruptcy. Sun's receiver now controlled Alpha's debt and Sun's shares. Ramsay bought Sun's debt for a third of the amount owed by Alpha and also Sun's Alpha shares. It was now in a position to close Alpha down and acquire its assets to pay the debt. It mounted a takeover of Alpha and Alpha's shareholders had little choice but to accept what Ramsay offered. The takeover is described on the Alpha page.
A group of Alpha shareholders felt that there had been unfairly and unethically treated. There had, they felt been a conspiracy to defraud them and prevent them or others from buying the debt. The company was worth much more than Ramsay had paid. Corporations law had been breeched.
At the time objections had been lodged with the takeover panet (Corporations and Securities Panel - CSP) and with ASIC (Australian Securities and Investment Commission) but had not been upheld. Over the next three years the shareholders attempted to get someone to address the wrong they felt they had suffered. They did not succeed in this and ultimately the federal ombudsman ruled against them.
What heppened is interesting as it reveals the difficulties in actually securing the information you need to force regulators to act when the circumstances suggest to you that a fraud has occurred. It is also revealing of the way different parties often interpret the same information quite differently. Regulators and the courts may not see things the same way you do,
I wrote this page in 2001 soon after the takeover had been completed. I have copies of correspondence from the shareholders and from the Ombudsman and have now updated the page. I have decided not to rewrite the rather long winded page I wrote in 2001 to bring it up to date as it sets out the views of the shareholders at the time. Instead I have written a 2005 retrospective analysis as an update. This summarises what happened in 2001 and I suspect that most will want to go directly to that section. It explores the issues from a wider perspective.
Alpha's minority shareholders feel that they have been unfairly treated and seriously disadvantaged by the takeover of Alpha Healthcare by Ramsay Healthcare. They believe that those who owed them a fiduciary duty failed to fulfill that duty. Some have taken to the courts and others have asked the minister to set up a process to investigate the way their complaint was dealt with by ASIC.
The 2001 account on this page is based on information given to me by one of these shareholders. I am unable to verify its accuracy and the views given are those of the shareholders. It supplies additional information about these events.
My concern is that market based activities and conflicts like this should be so much a part of the health care system. They have nothing to do with caring for sick people and everything to do with the money made from their payments. It is simply another illustration of the way human and financial resources intended for the care of citizens are squandered in activities which address only the activities of the marketplace.
Shareholders have formally requested that under Section 14 of the Australian Securities and Investment Commission Act 2001 the Minister for Financial Services and Regulation direct the Australian Securities and Investment Commission, (ASIC) to investigate the matters brought to its attention. They believe that there have been alleged or suspected contraventions in areas referred to in Section 14 (2) (a) and (b) of teh corporations law.
The essence of the formal complaint concerned Mr Warren Schelling, (a director of Alpha and the Sun Healthcare Group Australia Pty Limited). Mr Schelling had endorsed decisions, in conjunction with Mr John Gibbons, (the Ernst and Young Partner appointed as Receiver and Manager to Sun Healthcare Group Australia Pty Limited) which were against the interests of Alpha. The "DEAL", which Mr Schelling told Mr Gibbons was acceptable to him, enabled Ramsay to take control of Alpha. This was by virtue of the acquisition of some $31 million of Alpha debt for $11 million and the purchase by Ramsay of the 38 percent of Alpha’s shares held by Sun for 40 cents. The net tangible asset backing of the shares was 82 cents.
The offer of 40 cents was accepted, under duress, by most shareholders, because it was very clear the degree of control of Alpha that had been handed to Ramsay by Gibbons and Schelling. Ramsay had the capacity to make Alpha insolvent and force the sale of the Westmead Private Hospital to Ramsay to satisfy the debt acquired at very substantial discount.
In responding to the formal complaint ASIC advised that Alpha had taken the matter of the takeover up with the CSP (Corporations and Securities Panel). ASIC said that this complaint would be dealt with in conjunction with the CSP hearing.
To the surprise of shareholders, who complained to ASIC, the Panel, presided over by Mrs Maxine Rich, who at the time was having her own dealings with ASIC, had determined that the takeover should be allowed to proceed. The issues which had been raised with ASIC had largely been copied to the CSP Executive and Acting President, Ms Nerolie Withnall. The shareholders determined to try to find out how their complaint had been dealt with.
What they found was that the CSP essentially only addressed what went on after a Pre-Bid Agreement was entered into between Ramsay, RHC and Sun, on 9 April 2001. (James Hardie {RHC} was owed $7 million by Alpha and held 9.4% of Alpha shares).
These shareholders formal complaint was about what had preceded the Pre-Bid Agreement.
On 26 March 2001 Ramsay announced that it had raised $31 million through the placement of shares with Australian and Institutional institutions through Salomon Smith Barney.
Ramsay stated to the ASX that the proceeds would be used to pay debt. Two weeks later Ramsay made an ASX announcement that it had acquired 19.9% of Alpha shares and was making a takeover offer at 40 cents a share. What it did not say to the ASX was that it was also acquiring substantial Alpha debt at a very substantial discount.
Alpha, Salomon Smith Barney or any of many other financial institution could have raised the same $31 million from Alpha shareholders and Alpha’s bankers. Advice from the Alpha’s former Chief Executive Officer, Mr Mark Compton was that the Alpha Board did not know that the Receiver and Manager was willing to accept such a deal. This is the very same deal that was said to be acceptable to Alpha director Mr Warren Schelling.
The terms of the deal, which was acceptable to Mr Schelling, would have been much more acceptable to the 2,600 Alpha shareholders whose interest he was supposed to represent.
Mr Patrick, one of the disgruntled shareholders discussed with Mr Mark Compton the activities of Mr Schelling. Mr Compton said that he had warned Mr Schelling of difficulties, which could arise, if he did not comply with his responsibilities as an Alpha Director. As far as the shareholders are aware Alpha did not raise the activities of Mr Schelling with the CSP. To do so would have reflected upon the competence of the Alpha board.
What the CSP and ASIC have refused to investigate is why the offer accepted from Ramsay was not offered to Alpha. The shareholders believe that as soon as Schelling became aware of the Receiver and Manager’s bottom line he should have called a meeting of the Alpha Board and proposed that Alpha make a similar offer.
Shareholders have asked the Secretary of the Alpha Healthcare Limited and Ramsay Health Care Limited, Mr Larry Ransley, the following:-
Mr Ransley responded saying "we do not have any knowledge of the matters referred to in your letter and cannot comment on them". The shareholders find it inexplicable that Mr Ransley could find no reference in the minutes of the Alpha Board to the actions taken by Mr Schelling.
Th shareholder believe that what they have uncovered is extremely disturbing. In their view it was clear that ASIC ignored the substance of their formal complaint. In fact, in an ASIC submission to the CSP, dated 8 May, there were no mentions of their complaint let alone any mention of the activities of Alpha director, Mr Schelling. The shareholders did not find this out until 26 June.
They believe that because ASIC did not investigate their complaint it has been unable and/or unwilling to answer the most basic questions put to it about the handling of this complaint. The shareholders wrote to the ASIC officer who took the initial decision to ignore their formal complaint. There has been no response.
Thhis officer, Ms Cuneo had asked Mr Patrick if he would be prepared to go to Melbourne to appear before the CSP. It later became clear why that would not have been welcome. Both the CSP and ASIC had decided to not investigate the crucial issues put to them by shareholders.
The shareholders allege that
The Panel took an inordinate length of time to give its reasons for allowing the takeover to proceed. The shareholders prepared a table which illustrated how they believe 2,600 Alpha shareholders were deprived of a fair and legitimate price for their share holding.
It is noteworthy that in the Panel’s findings there was no reference to the activities of Mr Warren Schelling. It was as if he did not exist despite the fact that Ernst and Young’s Mr David Walker stated on 3 May that the "DEAL" was done because it was acceptable to Mr Schelling. This had never been denied by Gibbons or Ramsay. (Gibbons was the Ernst and Young receiver for Sun's bankruptcy.)
The shareholders believe that the table they prepared demonstrates very clearly why the 2,600 Alpha shareholders have been unreasonably treated.
They claim that there were numerous responses Messrs Schelling and Gibbons could have given to the offer made by Ramsay. One was that it could have insisted on all Alpha shareholders being paid 82 cents per share before agreeing to sell the debt. In this way Alpha shareholders would have received the NTA of their shares and creditors of Sun another $7 million. Ramsay would still have come out well ahead.
Had Ramsay refused the above proposition both Alpha shareholders and Sun would have been even better off after an arrangement had been completed between Alpha, RHC and Sun.
The shareholder claim that since 4 May Mr Gibbons has steadfastly refused to provide an explanation of this and various other issues put to him. Given that Mr Gibbons refused to answer questions repeatedly put to him they ultimately sought his submissions to the CSP through the Freedom of Information Act 1982. That process is continuing.
Mr Gibbons has they claim opposed the release of documents, including one concerning the main Alpha asset, Westmead Private Hospital. This is the property, which could have been sold by the Ramsay controlled board of Alpha, to satisfy the debt Ramsay had acquired.
The shareholders have also put questions to Mr Brian Long, the Managing Partner of Ernst and Young, particularly about the relationship between Ernst and Young and its audit client Ramsay Health Care Limited. Like Mr Gibbons, Mr Long has refused to provide answers.
The shareholders hand delivered their table to ASIC’s Director, (Corporate Finance), Mr Richard Cockburn on 2 July. They believe that Mr Cockburn effectively ignored the table. On 13 August they put the following questions to Mr Cockburn:-
The shareholders believe that these are legitimate questions expected by the 2,600 shareholders caught out by the "DEAL". Mr Cockburn would not answer the questions.
The table was also handed to the CSP’s Director, Mr Nigel Morris. Mr Morris gave copies of it to Panel members but did not provide Panel members with comments on what was revealed in the table. That would have required the CSP Executive to actually investigate the issues the table raises.
What the shareholders feel they have revealed is that neither ASIC nor the CSP investigated the formal complaint concerning the "DEAL". Unlike HIH and One-Tel the assets involved remain and can be returned to the Alpha shareholders who suffered as a consequence of the deal.
What 2, 600 shareholders are looking for is for ASIC to thoroughly investigate the Schelling, Ramsay and Gibbons "DEAL". They claim that it is what went on long before the Pre-Bid Agreement was entered into which is the crucial issue
The shareholders have asked the minister for Financial Services and Regulations to exercise the power given to him under the Australian Securities and Investment Commission Act 2001 and direct that an investigation be conducted by ASIC. They are confident that a thorough investigation would reveal that there is a very substantial case for the takeover to be reviewed by another Panel.
They claim that Ramsay, the Receiver and Manager and Mr Schelling ought to welcome the opportunity to clear the air by willingly submitting the matter for review. To object would raise the grave doubts Alpha shareholders have about the propriety of the "DEAL".
While the takeover cannot be undone, the property given up, under duress, by Alpha shareholders, remains. In the shareholder's view a fair and reasonable proposition to be put to a new Panel is for Alpha shareholders to be paid an additional 42 cents in the form of Ramsay shares. That should be on the basis of the price of Ramsay Health Care shares as at 8 April; the date of the takeover offer.
The shareholders claim that the matter reflects poorly upon the state of administrative affairs within ASIC and the CSP. They realise that ASIC’s resources are stretched but do not accept that this is an acceptable reason for the corporate behaviour revealed by the "DEAL" to go unchallenged? Because of the deplorable administrative handling of their complaint by ASIC and the CSP they have previously brought the matter to the attention of the Commonwealth Ombudsman. The Ombudsman is awaiting the outcome of the shareholders representations to the minister before undertaking an investigation.
They believe that there are policy issues here for the Government and the Parliamentary Joint Statutory Committee on Corporations and Securities to address.
The shareholders indicate that another Alpha shareholder has taken the matter to the Supreme Court. They believe that it would be appropriate for ASIC to seek an appropriate Court order under section 232 of the Corporations Law 2001 pending the outcome of its investigations
Background:- The hostile takeover of Alpha Health Care by Ramsay Health Care should be seen within the prevailing market and political philosophy of the time. Health and hospital care was perceived as being fragmented and inefficient with too many small groups competing. The buzz word was consolidation. The prevailing ethos was therefore away from the introduction of new small players and towards takeovers or mergers with larger market listed entities. They were seen as desirable and the future for health care. Large companies were excpected to be winners and smaller companies to be losers which would be acquired.
Regulatory bodies had been politicised by government appointees of marketplace figures. They too would have been sympathetic to consolidation and perhaps less to fairness and due process. At least one of the parties involved was a pillar of the marketplace and political establishment, liberal party donor and friend of government officers. The issues relating to Sun Healthcare and Ernst and Young were not openly discussed. These were all still credible figures in the establishment. Regulators might have been inherently reluctant to challenge their actions when the complainants lacked credibility.
The shareholders position:- The Alpha shareholders clearly felt very strongly about what had happened to them. They believed that they had been defrauded by Ramsay, Schelling and Gibbons, individuals acting for Ramsay Healthcare, Sun Healthcare and bankrupt Sun's creditors respectively. They felt that Gibbons was acting in the interests of his company Ernst and Young and their profitable client Ramsay Healthcare and not Sun's creditors.
AS the Takeovers Panel mulls over whether Ramsay Health Care's bidder's document for Alpha Healthcare breaches Corporations Law, the deal has become the subject of a formal complaint to the Australian Securities and Investments Commission.
May 2001 The takeover objections
ASIC declined to say whether or not it was investigating the complaint but a spokeswoman said the commission had made a submission to the Takeovers Panel on the Ramsay/Alpha deal.
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Alpha Healthcare alleges that Ramsay's bidder's statement breached Corporations law because it contained inadequate disclosure.However, the Takeovers Panel is believed to be reviewing the wider issues involved in the deal, including whether Ernst & Young, the receiver of Sun Healthcare's 38 per cent stake in Alpha, obtained the highest possible bid for Sun's stake and for its debt holding in Alpha.
Complaint over Ramsay's bid The Australian May 16, 2001
Shareholders struggle for justice:- Over a three year period the shareholders mounted a concerted and sustained effort to blow the whistle on this. They tried repeatedly and unsuccessfully to obtain disclosure of information and explanations from Gibbons, Schelling, Ramsay and later ASIC about what had happened, and to force an investigation. Among civilised people there is a reasonable expectation that citizens are willing to explain and justify actions which impact on others - but not in the marketplace. Shareholders had limited success in securing documents under FOI regulations, partly because of objections by Sun's receiver.
They wrote repeatedly to vast numbers of regulatory bodies, the stock exchange, ombudsmen, ministers, other parliamentarians and the media. They repeatedly accused and challenged the parties to provide explanations and documents to show that they had not connived to defraud them. They came to believe that the regulators were part of the system and themselves flawed or corrupt. They were warned of possible legal action by Ramsay's lawyers.
The federal Ombudsman agreed to investigate but delayed his investigation because of other more pressing complaints, providing a report of some issues in December 2003 and a final report in October 2004. While sympathetic to their position he ruled against the share holders. He criticised them for not using the courts to obtain redress.
One shareholder adopted a different approach and used the courts to address the issues and seek compensation. He also lost his case.
Concerns about regulatory authorities:- There was concern about the operations of ASIC. This was expressed very publicly in the press after a senate inquiry in 2004.
Peter Kell, ASIC's respected consumer protection head, quit earlier this year. As did Pauline Vamos, who had implemented the financial services reform legislation. As did Peter Wood, the successful head of enforcement. They followed Sean Hughes, head of regulatory operations, who made for the exit late last year.
2004 ASIC's failures
Others within ASIC's leadership are considering their futures. As some will tell you, ASIC no longer feels like a rewarding place to work.
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But it is unfortunate that ASIC's insights into the property industry were never made public.Conroy alleged the report had been deliberately buried, presumably to avoid embarrassing the Government over its regulatory gap.
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As one former ASIC executive observed: "Never underestimate the importance of institutional incompetence in explaining conspiracies."
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The report should have blown the property spruiking industry wide open. Instead, it sat virtually untouched from May until it went to the three commissioners in September.-------------------------------------
More than a year after ASIC discovered that property spruiking was a $60 million-plus industry and that no one made money but the spruikers, the nation's number one corporate and investment regulator remains largely silent.
ASIC Bumbles As Spruikers Rake In The Dosh The Sydney Morning Herald June 5. 2004
The shareholders were concerned by the fact that the chairperson of the takeovers panel at the time was Mrs Maxine Rich, the wife or relative of Jodie Rich the founder of a failed telephone company being investigated by ASIC at the time and subsequently prosecuted through the courts. There was a long delay in publishing the reasons for the panel's decision. They felt that she may not have been an appropriate person and was perhaps distracted by her own problems.
Anyone who has examined the function of government departments and regulatory authorities in relation to corporate interests is well aware of their propensity to bumble, bungle, and fail in their duty to protect the citizens who ultimately pay them - then cover their tracks. This is readily apparent in health care where those responsible for protecting citizens are too often found wanting. In the Alpha case the shareholders suspicions were fanned by the failure of the regulatory bodies to openly respond to what they felt were reasonable requests for justification.
That regulation fails is hardly surprising when you realise that the members of regulatory bodies are all too frequently drawn from the corporations which they regulate. Their belief systems are consequently congruent with the offenders whom they know and to whom they are sympathetic. These bodies are sometimes heavily politicised by government appointments.
Concerns about the integrity of those involved in the deal:- In addition to this Ernst and Young the auditors for Ramsay Health Care were the receivers for Sun Healthcare and primarily responsible for the sale of Sun's debt and shares.
It would be interesting to know whether Ernst and Young did any other accounting work for Ramsay and the extent to which this happens in Australia. Auditing accounts is only a small part of the work of auditors. Most of the money comes from other work done for the client and this work will not be forthcoming if the auditing points to problems. This puts pressure on auditors to overlook problems in a company's books and to otherwise act on their behalf. Anderson's complicity in the Enron fraud is a good example.
Ernst and Young also have a worrying track record. They were the auditors for HealthSouth during the entire period of its $4 billion fraud and did much other work for the company. They were remarkably blind to the fraud performed by past Ernst & Young employees at HealthSouth - even when whistle blowers drew their attention to it. The shareholders were aware of this worrying track record.
The second participant Schelling was the Sun Healthcare representative in Australia and on the Alpha board. He represented Sun's founder Andrew Turner. Sun was a bankrupt company with a dreadful record of fraud and the misuse of citizens for profit. The once credible and widely admired Turner is now shunned by his former company.
This was not the first time that Paul Ramsay had been accused of forcing shareholders to sell their holding below its true value. Shareholders were unhappy about this when Ramsay bought them out after the 1989 crash.
The shareholders were aware of all this and understandably felt that they were dealing with a gang of thieves and I personally feel this was a perfectly reasonable suspicion. Past or related misconduct is not evidence of current misdeeds.
The failure of any of the parties to give explanations or supply documents only served to fuel shareholders' suspicions. Given the concerns above we can hardly blame them.
What Mr Gibbons has not said has only caused us to become more concerned about the real nature and purpose of the "DEAL" done between Schelling, Ramsay and your Mr Gibbons.
July 2001 Silence fuels suspicions
Ernst and Young's other associations with Ramsay Health Care Limited and the other business interests of Mr Paul Ramsay, (media), warrant comment from you.
Letter to Ernst and Young July 2001
The Ombudsman was sympathetic to the share holders position and clearly understood where they were coming from and why.
Whatever your reaction to my conclusions, please note that l have been focussed on the legality and reasonableness of ASIC's actions only, rather than the merits of the takeover process in general.
Oct 2004 Ombudsman's report
I would also like to thank you for your civility and forbearance during this complex process of inquiry.
Email from Ombudsman October 5, 2004
Before examining the Ombudsman's report we need to separate the facts from the presumptions and beliefs of the shareholders.
The undisputed facts can be summarised as follows. Ramsay entered into a confidential deal with Sun's receiver to buy Alpha's debt. This put Ramsay in a position to force shareholders to sell their Alpha holding at a price which Ramsay rather than the market dictated. A key question is whether this was acceptable conduct in the marketplace?
Alpha's value:- The shareholders claim that either another company or they themselves would have purchased Sun's debt at a better price had it been put to tender and that their shares were worth double what Ramsay offered. They owed $31 million and could have settled this by paying only $11 million. They felt they had been defrauded. The receiver of Sun Healthcare would have secured more for Sun's creditors had he put the debt up for sale. He did not act in their best interests either.
The ombudsman referred to the findings of the judge in the court action by another shareholder and accepted his comments. The judge considered that Sun had in fact been bankrupt for some time. The receiver had been trying to sell Sun's assets and debt without finding a buyer for the debt. Ramsay put its hand up and they sold. The debt had been on the market. He gave little credence to the alternate buyer Alpha had referred to. One might draw the implication from this that Alpha could have negotiated earlier to buy the debt at a reduced price and perhaps should have seen that a predator would seize the missed opportunity. This was a time of frequent takeovers.
The judge and Ombudsman considered that Alpha's past record indicated that it was a distressed company in serious trouble. He considered it unlikely that Alpha shareholders could have raised the funds to buy the debt. He gave little credence to their claim that the market and Alpha's fortunes were recovering and that their shares were worth double what Ramsay paid. In retrospect of course the market was recovering and those companies which succeeded in getting through the difficult 1990's without going under or being acquired prospered. The hospitals were very profitable for Ramsay.
A conspiracy to defraud:- The shareholders believed that Sun's creditors and their own interests would have been best served by offering the Sun debt to them. This sale was conducted with the cooperation or active participation of one of Sun's directors sitting on Alpha's board. He did so without informing Alpha's board and remaining shareholders. He owed a fiduciary duty to all Alpha shareholders. The shareholders saw this as a conspiracy between Gibbons, Ramsay, and Schelling.
The agreement between you and Ramsay and your decision to deny Alpha the opportunity to purchase the heavily discounted package of debt and shares is the pivotal issue before ASIC.
May 2001 Letter to Sun' receiver
Letter to Mr John Gibbons May 31, 2001
The ombudsman noted that the judge had given little time or credence to this or to the allegations about Schelling. The evidence that Schelling had known about, approved the sale of the debt, and not informed shareholders was hearsay. The assertion that Schelling had breeched his fiduciary duty depended on this. There had been communication between Alpha and the receiver in relation to Sun's debt for some time (but no mention is made as to whether this related to its sale to Ramsay). The debt had been on the market and Gibbons could not find a buyer.
ASIC had, the ombudsman claimed, considered some of these issues and decided not to investigate. Other issues were the responsibility of the takeover panel which had considered them. The concerns about the Ernst and Young receiver were dependant on assumptions which were dismssed.
Failures by ASIC:- The share holders alleged that ASIC had not adequately carried out their initial assessments and were duty bound to investigate their other assertions. A new investigation was required with a view to compensating them.
What we have uncovered is extremely disturbing. It is now clear that ASIC ignored the substance of our formal complaint. In fact, in an ASIC submission to the CSP, dated 8 May, there were no mentions of our complaint let alone any mention of the activities of Alpha director, Mr Schelling. We did not find this out until 26 June.
Sept 2001 Concerns about ASIC
Letter to The Hon. Joe Hockey Minister for Financial Services and Regulation September 25, 2001
The Ombudsman devoted most of his own investigation to whether ASIC was legally required to investigate and whether it was a reasonable decision to prioritise investigations and not investigate this complaint. He had access to documents from ASIC and the Takeover Panel which were not available to the shareholders and which he was unable to release to them. He found that contrary to their belief both bodies had dealt with some of the issues and properly considered them. He found that ASIC was not required under the law to investigate every complaint and that it was reasonable for them not to have done so in this case.
He found that the corporations law was not relevant to the facts supplied. Another shareholder had taken similar matters relating to Mr Ramsay to the courts and not succeeded (Mr Justice Barrett in Teh vs Ramsay)
This exposes another of the problems inherent in commercial in confidence considerations. Citizens cannot gain access to all of the information they require before deciding to act.
Criticisms:- The Ombudsman criticised the shareholders for not being prepared to use other channels.
It is also significant that neither you, nor most of your fellow former shareholders in Alpha, were prepared to seek an internal review of the Takeovers Panel decision, challenge that decision in the courts, challenge compulsory acquisition orders after the bid had concluded, or seek a review of the conduct of Sun's receiver by the courts. Suffice to say you cannot expect either ASIC or this office to achieve what you have not been prepared to seek for yourself by legal action.
Oct 2004 Ombudsman's criticisms
Ombudsman's letter October 4, 2004
In practice of course legal challenges are fraught with uncertainty and are liable to prove very costly. Although the overall sum allegedly defrauded was large, the loss to each of the many individual shareholders was not nearly as large. While they may have been affronted and disgusted by what had happened to them and what they saw as an abuse of process, they would be reluctant to risk losing more money. The potential reward from this for them individually would be small. If their primary objective was to expose an abuse of process and the law then it is not reasonable to expect them to carry the risks. This is where the Qui Tam laws of the USA are superior to ours. Those who seek to expose the misuse of the system are rewarded if they succeed.
What was missed? Regardless of whether the assumptions by the shareholders had any substance the question of whether a large corporation can legitimately place all of the smaller shareholders in a position where they had little choice but to sell at the price offered was not addressed. This is not the level playing field our leaders have promised us.
In addition to this the alleged conduct of the parties was not openly and publicly tested in a forum where all the material was assessed and the parties cross examined. Justice was not seen to be done. This would have required a court of law or a royal commission. It was established that a judge dealing with related matters understood the situation of the company, its valueand its prospects very differently to shareholders and the Ombudsman then took that position. As a consequence many of the grounds for the investigation fell away. He found that ASIC was not required to investigate and it was reasonable for them to refuse to do so.
Even in a court of law the judge can only make decisions based on the evidence available, however suggestive the circumstances. The law is a blunt instrument and even the very guilty may be exonerated when evidence of their misconduct is not produced. In this instance the evidence was circumstantial and partly based on the refusal of the parties to cooperate. No one can be convicted of not cooperating in their prosecution.
It is of course possible that all three regulatory bodies (including the Ombudsman) involved in the process were flawed but there are limits to what you can reasonably claim without losing all your credibility.
If we consider the lack of hard evidence and the disputed value of Alpha's shares then in retrospect the chance of the shareholders succeeding was probably small. The system is particularly unresponsive to issues like this and convincing evidence is required even when the concerns are valid.
It is always easy to point a finger in retrospect and it seems crass and unkind to criticise. That is not my intention. It is always worth examining what happened and considering whether alternative strategies might have had a better chance of success. It is easier for an outsider to do that. I make the following suggestions for consideration by others and not as a criticism.
There were two underlying issues - the issue of fairness, ethics and decent behaviour as a citizen on the one hand and the issue of legality on the other. The corporate sector can sometimes have a different view of fairness and ethics to the general population.
In the marketplace, particularly in corporate takeovers legality becomes the key issue, whereas in health care, issues of ethics and fairness are very relevant. There are avenues for pressing the probity of corporations and individuals.
Outside opinions:- Perhaps it would have been advantageous to have obtained a credible legal opinion and then used this to pressure politicians and ASIC. Shareholders left the field open to their targets who would have paid for and provided contrary opinion.
In addition shareholders failed to provide credible independent industry reviews and opinions to show that the assumptions about the effect of Alpha's debt, Alpha's prospects for the future and Alpha's share value were soundly based. Their entire argument depended on this. This was an adversarial situation and the accused parties would certainly have provided contrary opinion to justify their position.
Anticipating the behaviour of others:- The views of complainants, particularly those with a financial interest will always be challenged and hold little credibility in legal circles. This was not an open review at which the shareholders were represented. They were not in a position to challenge contrary outside opinion supplied by the parties to the deal. This needed to be anticipated and steps taken to neutralise it with strong and credible independent views supporting the shareholders.
Hard evidence:- The assertions of illegality were based on the failure of the opposing parties to respond and supply information not on actual information. Any legally advised corporate entity will behave like this even when innocent. The basis for the concerns was circumstantial and this was not direct evidence of wrongdoing. They were grounds for pressing for an investigation with appropriate powers but not for asserting so strongly that a fraud had occurred.
In legal circles this would be seen as lacking objectivity and so credibility. I experienced the same difficulty when pressing unsuccessfully for an investigation of Justice Yeldham's 1993 decision in 1996. The circumstances were highly suggestive and I expected the Independent Commission Against Corruption (ICAC) in NSW to investigate a suspicious situation and use their powers to look for evidence. They expected me to produce evidence to support my concerns and I did not have the powers to do so. They did..
A refusal to disclose is not guilt:- The shareholders repeatedly challenged the parties to explain their conduct and produce documents. When they failed to do so they took this as evidence and accused them bluntly of misconduct. Making unqualified accusations based on the absence of evidence serves only to destroy your credibility and undermine your position. It is wiser to express qualified concerns strongly. This is particularly wise if you already have real evidence of wrongdoing. When your concerns are denied you can show that the parties lied so destroying their credibility and enhancing yours. Credibility is a key issue in dealing with politicians and regulatory authorities. Large established corporations come with enhanced credibility and individuals have little. Reversing this situation can be the key to success.
Criminal and Civil issues:- The question of whether a fraud has occurred and should be prosecuted is a criminal matter for regulatory bodies and requires a penalty. Damages is a civil matter for a civil court. For most of us the two are intertwined and in practical situations they are,
In addressing fraud an emphasis on personal compensation leaves the complainant open to the accusation that their complaint is opportunistic and based on self- interest rather than the prosecution of a fraud in the common interest. In 1994 I was heavily criticised and my credibility attacked during a medical council inquiry into doctors conduct which I considered a threat to others. This was because I had also launched a civil action against the hospital where they worked. This counted against me.
Compensation is a civil matter and I wonder if it would have been better to have kept this as a less prominent component of the complaint and left it for later negotiation once fraud had been established.
Finding a lever:- If one can find a lever to force the disclosure of information or a statement which can be challenged this can be used as a lever to open up a can of worms if one exists. The shareholders did not have a good lever that they could use and the parties were careful not to provide them with one.
Culture and thought processes:- If we examine what happened within the framework of market thinking we can see it differently. The market values entrepreneuralism and opportunity for wealth creation. It is set up to foster these. David Malouf expressed this well when he enthused about entrepreneuralism and described it as "an eye for the main chance and the weakness of others" - attributes which he traced back to Australia's convict days.
The majority of appointees to regulatory bodies are drawn from entrepreneurs and other businessmen. To many of them what happened was probably simply a clever business strategy and they might not be sympathetic to wingers who were not smart enough to see this coming. This was the attitude taken by some Wall Street financiers when they were fined for deceiving investors and then ripping them off. This may be one reason why bodies set up to protect citizens do not operate as well as they should.
It is a good idea to carefully consider how the other parties involved an any situation are likely to see it.
Apologies:- I apologise to the shareholders and confess that I was in possession of all of the correspondence as it became available and did not advance these thoughts at the time. They are partly based on my own experience and mistakes. My only excuse is that I was caught up in the Tenet Healthcare, HealthSouth, and Affinity & Citigroup affairs at this time and only scanned through the material as I received it. I did not review the entire documentation together as I have now done. In the absence of some hard evidence to open up the blank wall I doubt that it would have made any difference.
The way the situation was understood by the shareholders created a suspicious situation. The regulatory bodies whether factually, culturally, wishfully or otherwise understood the situation differently and so did not do anything about it. The accused parties are consequently completely exonerated. Whether there was any way of making authorities see the situation differently is debatable.
These principles are based upon the creation of the 'level playing field', but more importantly on an approach which uses contestability as a key precept.
1996 A level playing field
The Hon Michael Wooldridge AMA Summit Proceedings :::: Competition in Health: "A Brave New World" A 1 Day National Information Briefing on The Trade Practices Act & Competition in Health Friday 10 May 1996
Market advocates including Australia's previous minister for health have promised us a level playing field based on contestability. What we have is a dense and confusing jungle inhabited by voracious predators. It is steeply slanted in favour of the large, the powerful, the influential, and the credible. The small, the weak and the gullible are prey. The avenues for contesting are complex, unpredictable and ruinously costly.
The battle is conducted ruthlessly and all too often the manipulations of the battle stretch legality and acceptability to the limits. There are winners who survive and losers who die or are consumed. Profits by the winners is at the expense of the losers who are smaller or weaker.
Ramsay is a hard headed businessman, and an experienced player on this field. He would consider the acquisition of Alpha as a legitimate business enterprise and the fact that Alpha's minority shareholder were vulnerable, readily outmanoeuvred and so losers is what he would capitalise on. This is how the market works.
This brings me back to my opening comments. How did the care of the sick, helpless and vulnerable become a football in this aggressive game? Why have vulnerable patients and sometimes their doctors been turned into the small and gullible players who are prayed on by the giants?
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This page created September 2001 by
Michael
Wynne
Updated November 2005
