‘I LIKE TO BE where the action is,’ crowed Malcolm Turnbull, I like to play first division.’1 He had just been made Australian managing director of legendary Wall Street firm Goldman Sachs. Turnbull, his old Bulletin editor Trevor Sykes wrote, was ‘in grave danger of becoming respectable’. Turnbull admitted he would feel a ‘pang’ at closing Turnbull & Partners, which had boxed above its weight, but the action was with the big global investment banks. Turnbull addressed his reputation directly, knowing he might be seen in some quarters as a bit of a risk:
I know what everyone’s going to say. They’re going to say Goldman Sachs is so straight and Malcolm’s so entrepreneurial. But let’s look at it. I’ve never seriously kicked over the traces here and we’ve only ever been sued once—by the ANZ over the [Fairfax] bondholders matter when everyone got sued anyway. Having a legal background, one tends to be careful.2
Shutting up shop had not been Plan A. Turnbull & Partners was purring along by 1997, so well that Malcolm and Neville Wran were considering a float, hoping to sell down their holding and raise $60 million to pursue even bigger deals. In the middle of that year, however, the Asian financial crisis and subsequent collapse and bailout of hedge fund Long-Term Capital Management put paid to their plans. The contagion spread quickly to Russia, and financial markets would remain turbulent through the following year. Goldman Sachs was looking for a high-profile door-opener who could hit the ground running in Australia, and approached a few locals, including Turnbull. At the end of July, Goldman Sachs chief Jon Corzine and Turnbull jointly announced that the Turnbull & Partners founder would close the operation to become managing director of Goldman Sachs Australia. It was often reported as a sale of Turnbull & Partners, but it was more like a signing: the corporate entity did not change hands. Wran would join Turnbull, as éminence grise, along with a few key former staff. Stakes in OzEmail, FTR and Ghana Gold would be distributed among the Turnbull and Wran families.
The venerable Goldman Sachs was still an old-fashioned partnership, the only big Wall Street bank not listed on the New York Stock Exchange. It would take another decade for it to swell into the global powerhouse that, after the global financial crisis and resulting US government bailouts, would be forever branded a ‘great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’.3 Dominant in the United States and big in Europe, it was underrepresented in emerging markets generally, and Asia specifically. In Australia, Goldman Sachs was a tiny office that had been set up in the late 1980s in Sydney. A wave of privatisations at the state and Commonwealth levels, however, had turned Australia into a honeypot for the world’s biggest investment banks, who jagged tens of millions of dollars in advisory fees whenever a major public asset was sold. In the first half of 1997, Australia was actually the worldwide leader in privatisations, home to deals worth almost $7 billion, about half of which came from Victoria’s power sell-off.4 Controversially, Credit Suisse First Boston snaffled up $48 million in fees out of Victorian premier Jeff Kennett’s power privatisation. Investment banks all round the world now expected that NSW would be the next cab off the rank.
The job was a coup for Turnbull. Although Goldman Sachs was small in Australia, the name had clout and the deal set tongues wagging. Finance scribes noted that Turnbull’s aggressive, litigious style had not won him friends among the blue-chip corporates, but his impeccable Labor connections would surely stand the bank in good stead with a NSW government led by Bob Carr, who had been elected premier in 1995 and was pushing for electricity privatisation in the state.5
Turnbull’s euphoria quickly faded. The reality was that Goldman Sachs Australia, for all the ring to it, counted for under a dozen people in a highly competitive market, and the old deal-sharing arrangement between Goldman and local powerhouse Macquarie Bank was now off. Turnbull dismissed the rumour-mongering about his political connections as rubbish, but if Goldman’s plan had been to tap into Turnbull and Wran’s solid-gold network of NSW Labor mates and pick up lucrative mandates from the state government, by the end of 1997 the wheels were already coming off.6
In October 1997, the NSW Labor Party conference handed Carr a humiliating defeat, unanimously backing a resolution of ‘overwhelming opposition to electricity privatisation across the party’.7 Rank-and-file opposition had not stopped Labor governments before, of course, and the government soft-pedalled, tendering out a three-month advisory gig to look at ‘further reform’ of the power industry. Goldman Sachs was one of twenty-nine banks that expressed interest, hoping for an inside run if or when a sale eventuated. It was not even shortlisted. When the winners were announced, the newspapers were already speculating that little would come of the advisory mandate given the ‘resounding rebuff’ to Carr.8 Power privatisation in NSW remains a work in progress in 2015.
It was a serious setback for Turnbull, who was keen to impress his new Wall Street bosses. He brought one of them out to Sydney for a meeting with the premier and Wran to plead the bank’s privatisation credentials. But Carr’s hands were tied. In a lift after the meeting, a trapped onlooker watched Turnbull turn absolutely white as he copped a bucketing from the Goldman bigwig. The pressure on Turnbull was mounting: he had to come up with a deal. One of Turnbull’s most trusted advisers, Russel Pillemer, who had come across with him to Goldman, had an idea.
Almost a decade after the death of Larry Adler in 1988, his company FAI Insurance was floundering. It was not the fault of his son Rodney, who had been dumped into the role of chief executive at the age of twenty-nine and grappled with an old-fashioned, non-computerised, highly indebted outfit that had been run as a fiefdom. Larry had been extremely entrepreneurial, a high-risk investor and a lender of last resort, but the legacy of the 1980s crash was a string of problem assets once owned by the failed Bond Corporation—a Perth development site, a Hunter Valley coal mine, the St Moritz Hotel in New York—and taken over by FAI as loans turned bad. They were unusual, illiquid assets for an insurance company to own, and they were held at book values that just about everybody knew were unrealistic. The market reflected this dim view: FAI shares had dropped from their 1980s heights of above $7, when the company was worth $2.5 billion, to a lowly 50 cents each for a collective value of $200 million.9 Nevertheless, FAI’s core general insurance business—selling car, home and workers’ compensation policies—was profitable. The key to the future of the company was Adler himself, whose family owned 30 per cent of it. FAI in turn owned 43 per cent of an offshoot company, FAI Life, which sold life insurance and financial advice. FAI Life shares were also flagging.
Turnbull had known Adler for years. FAI had been a founding investor in Whitlam Turnbull, and Rodney had attended board meetings with Larry, although the experience had been short-lived and not particularly happy. There had been little contact since, but in 1995 Lucy Turnbull and Lyndi Adler found themselves both heavily involved in fundraising for the Children’s Hospital at Randwick. The Turnbulls and Adlers became loose friends. At least once, they had dinner at the Adlers’ place.
On Christmas Eve 1997, Turnbull and Pillemer had an informal meeting with Adler at FAI’s offices in King Street. Adler told them his ‘first love’ was general insurance and he had hoped to pass control to his own son one day, but both FAI and FAI Life were undervalued and, given the industry was consolidating, it was unlikely he would still own either company in five years. Various options were canvassed, but Pillemer’s main idea was that Adler should privatise both companies by borrowing enough to buy out the minority shareholders, then sell off FAI Life to pay down the debt. According to Pillemer’s notes of the meeting, Adler was receptive:
He said he thought he could be a billionaire in a few years’ time if he was successful … his concern is that he would be taking on a very high level of gearing and possibly gambling with his net worth. [Turnbull] said that the strategy of selling FAI Life to finance the deal as well as getting in an equity partner could significantly reduce the risk of this strategy. He [Adler] agreed and said he would like to see our thoughts.10
Turnbull had an equity partner in mind: Goldman Sachs itself could take a stake in FAI using its own money, from what was known as the Principal Investment Area or PIA. It was enough for Pillemer to start crunching the numbers, and for Turnbull to report back to his immediate boss in Hong Kong that he was ‘in the process of being mandated for an advisory role’.11 They came up with some codenames: ‘Fire’ for FAI and ‘Light’ for FAI Life. The privatisation was dubbed Project Firelight. Turnbull was keenly aware that Sydney was out on the periphery—the high-powered PIA committee had never invested in Australia. But Turnbull’s job was to jump up and down a bit and try to attract some attention from New York.
What Turnbull didn’t yet know was that FAI had been desperately papering over a growing hole in its accounts, caused by a failure to set aside sufficient reserves of capital to meet future insurance claims—particularly from professional indemnity products. The effect was to overstate profits, and by the end of 1997 FAI was ‘actuary shopping’ to find consultants who would take a lenient approach to its reserves.12 Adler had his head in the sand but by 1998 the under-reserving was estimated at between $150 million and $250 million, and as the end of the 1997–98 financial year approached the company was looking at a $50 million pre-tax loss. In the lead-up to 30 June, FAI struck two reinsurance contracts in the United States, converting the feared loss into a small paper profit of $8 million by booking an up-front ‘recovery’ benefit but incurring liabilities over the next five years.13 One of the deals was accompanied by at least two side letters in which FAI promised not to claim against the reinsurance contract. Effectively it was a loan, borrowing the balance sheet of the reinsurer. Without these sham deals, FAI may well have become insolvent in 1998.
Also apparently unknown to Turnbull, Adler’s relationship with the board of FAI was fraying. FAI chairman John Landerer had been a second father to Rodney, but now they were not communicating as well. Adler had brought a home security consultant, Brad Cooper, into the business, establishing a new division, and would soon get entangled in a series of related-party deals. Independent director Geoff Hill was grilling Adler at meetings, which Rodney described as ‘mini–star chamber’ sessions.14
At first blush, Pillemer’s numbers on the FAI privatisation looked promising: Goldman could double or triple its money within three years. Yet Turnbull got resistance at the top, complaining in one email to Hong Kong that the PIA was ‘not prepared to allow us even to proceed to due diligence. If you don’t trust your local management that far, you barely trust them at all.’15 In June, Adler flew to New York to make a pitch to Goldman Sachs and opened with the self-effacing admission that his management of FAI, ever since his father’s death, had resulted in a ‘decade of unparalleled failure’.16 The rest of his speech might have been persuasive—he had inherited a troubled company and done everything he could to turn it around—but the lasting effect was to cast doubt on whether Adler was the kind of ‘killer’ chief executive Goldman Sachs would like to invest alongside. The impression was only reinforced in August when PIA representatives came out to Sydney to hear from FAI. Over several days, FAI’s top people trundled in and out of the sessions, explaining all aspects of the business—half of them didn’t even know why they were suddenly giving presentations to Goldman Sachs.
By now, Pillemer’s numbers were looking dire. FAI profit growth forecasts were heroic, and certainly not backed by historical data. Pillemer and his team reckoned that FAI’s stated net tangible assets of $220 million should be reduced by $104 million in provisioning for doubtful loans and writedowns of problem assets, and by another $80–100 million representing the cost of breaking the 1998 reinsurance contracts. A memo to the PIA from Turnbull and Pillemer dated 7 September recommended against proceeding with Project Firelight, and contained a fateful sentence: ‘We estimate that the “true” net assets of Fire (i.e. after writedowns and unwinding of reinsurance contracts) is $20 million, compared with a stated book value of $220 million.’ The memo had a sorry ending: ‘We appreciate you taking the time to come to Australia to have a closer look at this. Hopefully, next time we bring you out here, we will have more success.’17
Turnbull and Pillemer paid a visit to Adler at his home to tell him the privatisation deal was off, and Adler mused he would have to focus on an outright sale of FAI. For Goldman, months of work had come to nought—not a cent in fees had been paid. Then, two weeks later, on 22 September, Turnbull was with another client in Melbourne when he got an urgent fax from Adler: Could he drop everything and come to a meeting in Sydney the next morning? Without doing a scrap of due diligence, the country’s second-largest insurer, HIH Winterthur, had launched a takeover bid for FAI.
For Turnbull, the bid was out of the blue. He arrived at the meeting to find Adler, Landerer and longstanding HIH chief Ray Williams in the room, with a team including formidable lawyer John Atanaskovic, a partner at Atanaskovic and Hartnell—AKA ‘antagonistic and heartless’. As he later described it, Turnbull was there as ‘putative advisor’ to FAI, given Goldman had not been formally engaged. A price of 75 cents a share, more than 20 cents above the market, had already been agreed in principle, but HIH wanted to pay with a combination of cash and its own shares. Adler was characteristically blunt: he would only accept cash for his own stake; his family needed money, fast. Atanaskovic was having none of it. It was illegal: all shareholders have to be treated equally under the takeovers code. Turnbull rounded on Atanaskovic, insisting a form of pre-bid acceptance could be drawn up—it was a tenuous position, a sign of how far Turnbull would go for his client. As they were making headway, another snag: Williams wanted to be able to pull out of the bid unless HIH secured acceptance from at least 90 per cent of shareholders, meaning it could move to compulsory acquisition of the remaining shares—a normal condition in takeovers. Adler wanted a much lower minimum-acceptance threshold of 50 per cent, meaning HIH could be left arguing with a rump of minority shareholders. The meeting got rather heated. It was a rare spectacle: two lawyers renowned for their aggression, locked in confrontation, neither backing down. With no compromise in sight, Adler stormed out, threatening to put his shares on the market and sell to the highest bidder.
What happened next has gone down in Australian corporate folklore.18 In short, Adler was true to his word, dumping half his family’s stake in FAI on the market that afternoon—he offered 35 million shares at 75 cents each, followed by another 10 million two minutes later. At the other end of town, Ray Williams snapped up both lines of stock within seconds, forking out $34 million on behalf of HIH.
HIH had been sizing up a bid for FAI for years—internally, they called it Project Vitamin—and now Williams feared Adler was finally getting the company into the sort of shape that might lure a rival bidder. HIH wanted to be the market leader and over the past few years had bought first CIC and then Colonial Mutual, and gone on an offshore buying spree as well. A combination of HIH and FAI would finally vault the combined entity to the top of the ladder, beating NRMA to become the largest insurer in Australia. Statements were immediately sent to the ASX: Williams announced HIH had acquired a 14 per cent stake in FAI and would bid for the rest, subject to a 90 per cent minimum acceptance. Adler declared the family had agreed to sell to HIH with a ‘heavy heart’.19 And even heavier pockets, no doubt.
Goldman Sachs was quickly given a firm mandate to handle the takeover defence at a meeting of the FAI board on 28 September. For comforting reasons, this would be called Project Fireside. There was some dissent at board level about the Turnbull appointment: Goldman was such a small shop, was it the best party to attract a rival bid? But Adler insisted on Goldman, and in his written pitch to Landerer, Turnbull emphasised his bank was ‘well up the learning curve in respect of FAI’.20 The board duly signed off on the engagement and, finally—having earned nothing so far—Turnbull was guaranteed a minimum $1.5 million fee for his team’s effort on FAI, with a bit more on offer if Goldman could attract a higher bid. But there was a big difference between Goldman giving advice on a possible privatisation to Adler, as FAI’s major shareholder, and giving advice to Adler as CEO employed by the board representing all of FAI’s shareholders, on the company’s defence to a takeover bid. Arguably Goldman, having worked on the first, faced a conflict doing work on the second.
Turnbull quickly established that there were few, if any, rival bidders for FAI. HIH was in a strong position with a blocking stake. Turnbull and Pillemer gave two lengthy presentations to the board of FAI in October. The only real alternative to the HIH bid, they argued, was privatisation. This was along the lines of Project Firelight, except that in all the board-level discussions, neither Turnbull nor Pillemer ever mentioned Project Firelight, nor any of the previous work done by Goldman on the privatisation, nor that the bank had declined to invest in FAI because its true net assets were more like $20 million.
By 29 October, the die was cast: the FAI board had recommended shareholders accept the HIH bid. A fortnight later, the board issued its ten-page target’s statement—known then as a ‘Part B’ declaration (as against the ‘Part A’ bidder’s statement)—to guide shareholders regarding the pros and cons of accepting or rejecting the bid. Turnbull specifically recommended against the inclusion of an independent expert’s report, which offers an arm’s-length valuation of the target company in a merger. It was not required under the law, Turnbull correctly argued, and would only slow down the takeover in a situation where the lone bidder could yet withdraw—and choppy markets at the end of 1998 made this a very real possibility. Along with the directors’ recommendations, dealings of associates and so on, Part B declarations included at the end a catch-all section headed ‘Other material information’. Here, the FAI directors declared there was ‘no other information material to the making of a decision by FAI shareholders whether or not to accept the Offer, being information that is known to any of the directors and has not previously been disclosed to FAI shareholders’. This statement was, again, silent about the work done by Goldman in Project Firelight and the $20 million internal ‘valuation’. In the later Royal Commission, counsel assisting would describe this omission as misleading and deceptive conduct by silence.
The $295 million HIH takeover of FAI duly sailed through and was completed by February 1999. Those FAI shareholders who took cash and managed to sell their HIH shares got a pretty good deal. Certainly, Adler did well, collecting a $3 million severance package and accepting an open-ended $40 000 per month consultancy with HIH and a seat on its board. Adler’s ‘farewell’ statement to the stock exchange included some reflections on his tenure and homespun advice for anyone interested:
The invisible hand that regulates our delicately balanced economy is not the hand of politicians, journalists, bankers or even bureaucrats, etc—these are the servants as well as the arteries of the economy. The invisible hand is the notion of free enterprise and the purity of business and its endeavours, for without it the world as we have come to know it would disappear into a sea of mis-allocated resources.
That sea would soon drown HIH shareholders and what was left of FAI, but in the meantime there was hearty back-slapping. In Turnbull’s case, 1998 finished on a particularly high note: in late October he was appointed one of fifty-seven new partners in Goldman Sachs, joining only 246 of the bank’s 12 500-strong staff around the world.21 Announced every two years, a Goldman Sachs partnership was one of the most coveted prizes on Wall Street. On top of their exorbitant base salaries and deal-driven bonuses, partners shared in the bank’s profits, raking in an estimated $5 million each year.22 At the same time, Goldman Sachs had been inching towards a $30 billion-plus float on the New York exchange, generating a one-off windfall gain for the partners. The equity stakes of senior partners were valued at an average $76 million apiece, and up to $200 million. Turnbull almost missed the boat,23 but in September the markets had been so volatile that Goldman suspended the listing. The following month, with HIH among an impressive tally of deals under his belt, including a junior role in the looming Telstra sale,24 Turnbull was lucky enough as a country managing director to join the partners’ ranks after barely a year.25
When the Goldman float roared back into life in May 1999, it sparked a guessing game among business writers trying to work out how much Turnbull had made. The most junior partner reportedly got Goldman shares worth US$20 million, and on average partners got stock worth US$66 million. That value went straight up, as Goldman shares issued at US$53 each jumped by a third to close above US$70 on day one, meaning Turnbull’s stake was worth at least US$27 million, or roughly A$40 million at the then-prevailing exchange rate. In the wake of the Goldman float, the BRW rich list bumped its entry for Turnbull up from $65 million to $90 million in 2000. Goldman shares kept rising: by the time Turnbull retired from the bank in late 2001, they were trading round US$80 each, prompting one columnist to calculate Turnbull was sitting on a Goldman holding worth $70 million—more than his gain from OzEmail.26
Today, after plunging during the global financial crisis and subsequent bailout, Goldman shares have risen back above US$200 each. It is impossible to know how many shares he has left, but it’s a fair bet that wherever the vampire squid’s tentacles reach, they are reaching on Turnbull’s behalf too.
It is widely accepted that the collapse of HIH in March 2001 was a long time coming. Perhaps the most blame should lie with chief executive Ray Williams, who had a cult following after thirty years at the helm of the company he founded. Williams dominated his executives and the board, and black-banned broking analysts who dared to be critical. But behind the invincible facade and the never-ending management largesse, HIH had been in an extremely precarious financial position for years before the collapse. Just like FAI, the company had been sweeping its growing long-tail liabilities under the carpet. Just like FAI, HIH would later be found to have been insolvent since June 1998, if not earlier.
When the HIH provisional liquidator was appointed, the shortfall to creditors was estimated at $5.3 billion, making it the biggest corporate collapse Australia has seen, one that had an immediate impact on millions of people. Whole categories of insurance dominated by HIH—public liability, professional indemnity, builders’ warranty, directors’ and officers’ insurance—were no longer available for love nor money. Policyholders were left suddenly in the lurch, as Gillian Dodd, the wife of a country-town baker diagnosed with cancer, found when they claimed on their longstanding income protection insurance with HIH:
Because he was our one and only baker, we had to close our business down … in a small town like this, you haven’t got bakers standing around waiting to fill in … when I think of the amount of money that we’ve paid over twenty-seven years of self-employment, and then the one time that you need it … you lose just about everything because of it.27
It was a national disaster. Amid widespread calls for a shakeup of the new Australian Prudential Regulatory Authority that had allowed HIH to go bust on its watch, in May 2001 prime minister John Howard announced a royal commission into the collapse, appointing judge Neville Owen to the mammoth task. Ray Williams and Rodney Adler would both wind up in jail.
A month after the royal commission was announced, Turnbull retired from Goldman Sachs, effective in five months. Turnbull says the timing of his retirement had nothing to do with the commission: ‘Quite the contrary. Goldman Sachs wanted me to take over a global business and run it from New York and for a variety of family reasons I declined the move.’28 There were plenty of reasons for Turnbull to stay in Australia in 2001: Lucy was serving on the City of Sydney council and, while Alex had left to study at Harvard, Daisy was in her final years at high school. Turnbull himself had set his course on a political career in the wake of the republican campaign, becoming federal treasurer of the Liberal Party, and—although he denied it publicly—was preparing to run again for parliament.
Goldman’s global chairman Hank Paulson paid tribute to Turnbull’s four years at the helm: ‘When Malcolm joined us in 1997, we had a small operation in Sydney … under his leadership, our Australian business has grown to the point where virtually all of the principal activities of the firm are now operational there.’29 Ultra-wealthy Briton Jonathan Aisbitt, whose relationship as co-chair with Turnbull since the end of 1998 had not been easy, took over the whole show.
With its overstated profits and reserves shortfall, FAI was not the sole cause of the collapse of HIH, but in the words of the royal commission it was a substantial contributing cause. When counsel assisting the commission ‘Stormin’ Norman O’Bryan made his opening address in April 2002, he gave a memorable quote that was replayed over and over in the media:
FAI was HIH’s Trojan horse. It was willingly, indeed enthusiastically, hauled into the middle of HIH’s Troy, much like the Trojan horse in ancient times, by the directors and senior management of HIH who thought it a great prize, only to discover soon after to their horror, that it contained the seeds of their own destruction.30
At first, when the royal commission’s investigators had approached Turnbull, they had suggested to him that Goldman Sachs was ‘so peripheral to this inquiry’ that he ‘may not even be required as a witness’.31 Now he was right in the public spotlight and wanted as a witness for three days of gruelling examination. His future political career, his whole reputation, was on the line. Turnbull was outraged to find himself in the frame:
There are few things more painful than to be unjustly accused … and there are few unjust accusations more painful than one which has no reasonable basis … things that are said by royal commissioners have a very real impact on reputation. I have seen this film before. I remember nearly twenty years ago representing Kerry Packer in front of the Costigan royal commission where a whole edifice of falsehood was created on a number of false assumptions, some of them bizarrely false. I am not comparing the torture Kerry had over several years to what I have had to put up with, nor would I suggest the issues I have identified are as serious as those in Costigan, but there are some disturbing parallels.32
Turnbull went so far as to threaten to sue O’Bryan for defamation, but after an exchange of letters, did not follow through. In his evidence, Turnbull stuck to the Costigan playbook, castigating the commission over the leak of an issues paper it had prepared, and which became a front-page article in the Australian Financial Review. Turnbull believed the commission was chasing headlines and hired spin doctor Ian Kortlang to help him win the media battle. Turnbull was relentless, as one journalist wrote, ‘spending six hours telling journalists how thoroughly composed he was and offered private briefings on his position to anyone who would listen. By mid-afternoon a vote had been taken by members of the press to have him evicted from the media room.’33
Turnbull was a tetchy witness. Julie Dodds-Streeton, later a Federal Court judge, undertook the examination as O’Bryan knew Turnbull too well, both having been Rhodes scholars at Oxford. Turnbull was extremely condescending to Dodds-Streeton, challenging her for putting general propositions akin to a ‘law school tutorial’:
Turnbull: ‘You’re conducting cross-examination, but it would be a lot more helpful to everyone, I think, if you just go to the particular facts.’
Owen: ‘I think I’ll decide that.’
Turnbull: ‘I beg Your Honour’s pardon.’34
Asked about his legal practice, Turnbull couldn’t resist a highhanded reference to his Spycatcher victory:
I didn’t hold myself out as a specialist, but I spent quite a bit of time dealing with a royal commission and so I learnt a little bit about royal commissions. That was the Ship Painters and Dockers Royal Commission, you may recall … I also had some experience with the law on confidentiality and you may have in your researches … come across a couple of cases in the High Court and other jurisdictions where I appeared, so it was a … commercial practice with a bias towards media-related issues, given my client base.35
Asked about his comprehension of directors’ duties, Turnbull responded: ‘Ms Dodds-Streeton, I’m a qualified lawyer. I’m not entirely without experience in company matters. I think, without patronising me, you can assume that I have a nodding familiarity with the Corporations Law and duties of directors.’36
The cross-examination was theatre of a sort, but after three days of plodding and skirmishing, it was wearing all round. One QC present, also later a judge, regarded Turnbull as an unimpressive witness, and there certainly were occasions when he had to be pulled into line by the commissioner. When Dodds-Streeton finally came to the killer question, which went straight to Turnbull’s ethical position, there was no answer as his barrister’s objections were upheld by the commissioner:
Dodds-Streeton: ‘I really was wishing to ask whether you yourself believed that the [FAI] 30 June 1998 financial statements were accurate?’
Jucovic: ‘Your Honour, there are a number of assumptions of an accounting nature made in the 1998 financial statements, as in all financial statements. It’s an unfair question.’
Owen: ‘It is extremely broad.’
Dodds-Streeton: ‘Did you believe, as at the date of the Part B statement, that the net tangible asset book value in the published financial statements of FAI was an accurate figure?’
Jucovic: ‘Again I object. These things are done for certain purposes. We know that there was a particular strategy involved in the 7 September documentation.’
Owen: ‘It would have to be asked on an asset-by-asset basis. We have been down that track, I think. I don’t think the question can be asked in a broad sense like that.’
Throughout his testimony, Turnbull insisted that the 7 September memo, which had put a figure of $20 million on the ‘true net assets’, was not a Goldman Sachs’ valuation of FAI, as the counsel assisting had implied in his opening statement. On the face of it, Turnbull was right: the memo was a three-page internal document, very backof-the-envelope, which concluded further work was unnecessary. Turnbull explained in turgid detail that, first, a Goldman Sachs valuation was a formal opinion of the firm, not just a memo from any old member of the staff, and second, a net tangible assets figure did not include intangibles like goodwill, and so could not reflect a valuation of the whole of FAI (although, it has to be said, the book value of FAI’s goodwill was tiny). Looking back, Turnbull adds that when FAI’s assets were sold off, the prices showed how far out the 7 September estimates had been: ‘FAI’s assets were realised for more or less for book value (as opposed to the more gloomy assessments in the Goldman Sachs internal memo).’37
At the same time, there was no doubt that Pillemer and his colleagues, in that short little memo, had put their finger on a very real and pressing concern about FAI’s balance sheet, which would have been of great interest to HIH. Commissioner Owen himself described the memo as one of the key documents tendered to the inquiry, which ‘in ten years’ time I’m going to wake up screaming in the middle of the night about’.38 In a replay of the Spycatcher trial, it was now Turnbull’s turn to wriggle around the witness box with a definition of the truth, under questioning from the commissioner about the meaning of ‘true net assets’. Turnbull asserted that ‘“true” in this context, Your Honour, means readily realisable or, you know, realisable within a short compass of time’.39
If Turnbull could not be hung, drawn and quartered on the 7 September memo, which never left Goldman Sachs and pertained to a project that didn’t go ahead, he was on more treacherous ground when it came to the state of knowledge of the FAI board. Turnbull’s problem was that chairman Landerer, and all four non-executive directors of FAI, later claimed in sworn evidence that they were told nothing about Project Firelight until it came up before the commission, they were never told Goldman had decided against investing in the company, and if they had known they would not have retained the bank to advise on FAI’s takeover defence. In his witness statement, Landerer was blunt: ‘I am surprised that Mr Turnbull of Goldman Sachs Australia never advised the board of his previous roles and knowledge and I believe it was his obligation to do so.’ Geoff Hill said if he had known about Goldman’s change of role, he would have told the Australian Securities and Investments Commission, because he considered it ‘improper’.40
Boiled down, the conduct of Goldman Sachs Australia and its managing director raised three serious questions for the commission. First, did the non-executive directors of FAI know about the dealings between Goldman Sachs and Adler on Project Firelight? Second, did Goldman reveal to the board in its assessment of the takeover offer the full extent of its knowledge of the financial situation of FAI? Third, was the advice given to shareholders in the Part B statement sufficient?41
On the first question, Turnbull could reasonably claim to be, to some extent, a casualty of the communication breakdown between Adler and his board. On 5 February 1998, Adler had sent Turnbull a two-page letter purportedly confirming an intention to engage Goldman Sachs on the privatisation of FAI Life, with a glancing reference to a potential larger transaction, and copied in his chairman. Turnbull produced the letter to support his claim that he thought Landerer was ‘in the loop’. Despite the ‘cc’ indicated, Landerer insisted he never received it, but whether he did or not, blame could not be sheeted home to Turnbull. Turnbull recalled subsequent conversations with Adler, well before the HIH bid lobbed, which suggested Landerer was happy for the privatisation discussion to continue, and others with fellow FAI non-executive director Geoff Hill, in which Turnbull discussed the likelihood that his work with Adler was unlikely to come to anything, and a sale looked like the most likely outcome. Turnbull assumed they understood he was referring to the privatisation, but he was a bit hazy on whether he had actually used that word, and the recollections of others differed markedly. Turnbull also gave a convincing description of Goldman’s comings and goings at FAI headquarters: ‘This was the least covert exercise you could imagine.’42 The commission put it down to miscommunication, accepting both that Turnbull believed the board knew about Firelight, and that it actually didn’t.
On the second question, it is hard not to believe that when Turnbull and Pillemer attended extended meetings of the FAI board on 13 and 23 October and discussed at length a recapitalisation alternative to the HIH bid, which the commission found was ‘practically identical’ to Project Firelight, the two men deliberately refrained from mentioning their prior work on privatisation, and Goldman’s decision to abandon Firelight. This was the single area in which Goldman, and by implication Turnbull, came under criticism in Neville Owen’s final report:
It would have been of assistance to the directors of FAI to have known that GSA [Goldman Sachs Australia] had spent considerable time in the course of 1998 analysing a very similar proposal in which Goldman Sachs might invest its own money but had decided not to proceed with it … The fact that these matters were not revealed to the board of FAI is regrettable. This is particularly so in light of the evidence of some directors that it might have affected their attitude to the appointment of GSA.
Some of the non-executive directors gave evidence that had they known of the 7 September 1998 memorandum and the conclusions reached in it, they would have called on FAI’s auditors to clarify matters … [although] on the evidence it is too speculative to say what would have happened had disclosure been made.43
Asked today whether he regrets that neither he nor Pillemer disclosed anything to do with Project Firelight or the 7 September memo to the board of FAI, Turnbull responds, in effect, that he thought they knew:
I remain surprised that Project Firelight was not formally discussed with the full board in the context of the HIH takeover. Mr Adler, the CEO and largest shareholder, and Mr Tim Mainprize, the CFO, were both directors and were fully aware of Project Firelight. In addition we had been led to believe that Mr Landerer, the chairman and close adviser to Mr Adler, had been aware of Project Firelight. Any privatisation by Mr Adler would have required the support of Mr Landerer and the FAI board. Goldman Sachs was entitled reasonably to assume that the FAI non-executive directors had been briefed about the proposal by their FAI board colleagues, Messrs Adler, Mainprize and Landerer, and were fully aware of it. We were surprised that Mr Landerer asserted he was not aware of Project Firelight. That was inconsistent with what we knew, and with what we had been told by Mr Adler. Indeed the reason for our being hired to represent FAI on the HIH offer was that because of the work on Project Firelight we were already well up the learning curve.44
As to whether Goldman Sachs revealed to the board the full extent of its knowledge of FAI’s financial position, Turnbull was convincing enough, explaining that the writedown and recapitalisation figures that the directors were walked through, with great care, were both consistent with and far more rigorous than the numbers in the month-old September memo. More importantly, although Goldman was aware of the reinsurance deals, it had no idea of the extent of the growing reserve shortfall at FAI, and so could hardly be found guilty of holding anything back from the board. The blame there lay squarely with Adler and FAI’s management.
On the third and final question, whether Part B should have included more information on the true financial position of FAI, the commission’s final report made no mention of any obligation falling on Goldman Sachs, but it did refer to the absence of any information on under-reserving (which Goldman was not aware of) and on the adverse financial impacts of the two reinsurance deals (which they were). Author Andrew Main wrote that Goldman Sachs appeared to have reached an ethical fork in the road, forced to ‘choose between helping its client, FAI, and obeying corporate law by putting all its information into the takeover document. It chose the former.’45
Ray Williams and HIH later claimed that if they had known the true financial position of FAI, or of the work done by Goldman, they would have paid less, or even abandoned the takeover. Even so, would that have saved HIH? Unlikely. The royal commission’s own best estimates were that FAI’s reserves deteriorated by $532 million over the two years following the takeover, to the end of 2000. Over the same period, HIH’s reserve shortfall reached nearly $2 billion. The commission found FAI’s asset values were not materially misstated as at the end of 1998—it was swings and roundabouts, but going by subsequent sale prices, it broke even. The acquisition of FAI for $300 million was a disaster for HIH, causing a $600 million loss it could ill-afford. But the overwhelming cause of the loss was the reserves shortfall, and Goldman had nothing to do with that.
On the release of the commission’s final report, Turnbull claimed vindication and lauded Owen for rejecting the thrust of counsel assisting O’Bryan’s argument, that Goldman was to blame for the losses caused by the HIH takeover of FAI. The commission had wasted weeks on an investigation that took up only nine pages of a 1500-page report, Turnbull said, and chided commission staff for their incestuous relationship with the media. Turnbull took it very personally, concluding with a general swipe at the media focus on him:
It would be naive to imagine that any attention would have been paid to Goldman Sachs or myself if I had not been a well-known Australian businessman and the Honorary Treasurer of the Liberal Party. Wild allegations about Malcolm Turnbull sell more newspapers than the dull, but highly relevant, minutiae actuarial accounting, reinsurance losses … and the underpricing of insurance products.46
Turnbull kept to the warpath. Labor leader Mark Latham copped a writ after he questioned whether Turnbull’s conduct over the sale of FAI rendered him ‘unfit for public office or any public role such as Liberal Party federal treasurer in this country’.47 Latham withdrew the remark and apologised, but followed up in the House:
The litigious Mr Turnbull—he never changes his habits—sent me a lawyer’s letter about those comments. This is a fellow who is so litigious that if you tell him that his tie is crooked he will send you a lawyer’s letter. The truth is that some of his own colleagues in the Liberal Party are losing confidence in him. I noticed a report in the Financial Review on 15 January … ‘It will be very tough for him to raise money while all this is going on. Businesspeople will use this as an excuse not to give’, said a Liberal stalwart. ‘This is not going to be helpful to Malcolm or to the party. The Labor Party will have a field day.’ If businesspeople are not going to donate to the Liberal Party, it is a recognition that Malcolm Turnbull has done something seriously wrong in his role in the collapse of HIH.48
The HIH saga was not over for Turnbull, not by a long shot. Waiting on the royal commission report was HIH liquidator Tony McGrath, who in late 2004 filed a case against nine parties—Rodney Adler, his two top executives, three reinsurance companies, and the triumvirate of Goldman Sachs Australia, Malcolm Turnbull and Russel Pillemer.49 When writs were finally served on the defendants two years later, Turnbull, by now in federal parliament, lashed out at the liquidator, accusing him of ‘trying to squeeze a settlement out of a well-heeled defendant’ before asserting:
We know exactly what this is about. The claim against Goldman Sachs—and, of course, against me, because I was an employee at Goldman Sachs at the time—is completely baseless. A cynical observer might think I’m personally named in order to get a little bit more publicity for the claim and put a bit more pressure on Goldman Sachs. Politics doesn’t just occur in parliament.50
McGrath did not bother to respond—he had a job to do. The case was gargantuan: according to a summary of the pleadings provided in one procedural hearing, the damages claimed were $557 million, before interest. There were two main limbs to the liquidator’s claim against the nine defendants: the first was to do with FAI’s misleading 1997–98 financial statements, underprovisioning, and misleading the auditors; the second was to do with misleading conduct during the HIH takeover of FAI.
Action against Turnbull, Pillemer and Goldman Sachs was only taken under the second limb, of course, and there were three separate claims, for combined damages of $261 million (plus interest, which had accumulated to $207 million by 2007). The first claim was that Turnbull, Pillemer and Goldman had directly contravened the companies law, misleading or deceiving the non-executive directors of FAI by failing to mention the existence of Project Firelight or that they had formed the opinion that the true financial position and net assets of FAI were substantially less than those that were to be reported by the group for the year ending 30 June 1998. The second claim was that Goldman Sachs had impliedly represented to the board that it was appropriate to issue the misleading Part B statement without reference to Firelight or opinions it had reached on the true net worth of FAI. The third claim was that Turnbull, Pillemer and Goldman were accessories to the breach of misleading conduct provisions by Adler, FAI and co. in relation to Part B. Goldman Sachs tried to strike out the first two, arguing McGrath’s case was ‘obviously untenable’, but failed.51 In a joint statement, the bank, Turnbull and Pillemer repeated that the claim was ‘baseless, which seeks to revisit matters rejected by the royal commission’.52
With so much at stake, the case snowballed. As many as 150 witnesses were expected to be called, the liquidator was attacked for wasting time, the number of cross-claims spiralled from fifteen to thirty-nine, and the months rolled on.53 Towards the end of 2008, with Turnbull installed as leader of the Liberal Party, and the case casting a pall over his political career, the pressure to settle was intense. In September there were reports that preparations for the mammoth case were to be frozen, and by March 2009 a confidential deal had been reached. The settlement sum was never reported, but the expectation had been that Goldman Sachs would make some payment to the HIH liquidator without any admission of liability.54
In Canberra, communications minister senator Stephen Conroy could not resist a dig: ‘I have a question for Goldman Sachs—How much did Goldman Sachs pay to settle Malcolm Turnbull’s deceitful behaviour around HIH?’55 With so much baggage, Australia’s richest politician was an easy target.