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HIH: The Cash Cow for Corporate Crooks

When Australia’s largest insurance company, HIH, went broke in 2001 for billions of dollars, there were tens of thousands of penniless customers who hoped that there was a special place in hell for the high flyers who had robbed them blind. And while they never got their money back, they achieved some personal satisfaction when crooked HIH directors Ray Williams, Brad Cooper and Rodney Adler found that special hell on Earth in prison, a long way from their lives of mansions, Rolls-Royces, Ferraris, first-class world travel and tipping food waitresses more than most people earn in a week.

When Williams fronted a royal commission into the collapse of HIH, ordered by then Prime Minister John Howard and presided over by Justice Neville John Owen in 2002, he maintained that he was a law-abiding citizen and pleaded ignorance. Williams maintained that his only crime had been that he hadn’t fully understood the trouble his company was in. And when it came time to present the facts to shareholders – the shareholders that in March the year before had found out that all the money they had invested in good faith was now worth nothing – Williams didn’t exactly tell the truth.

By April 2005, he had changed his tune – he was now complaining loudly and angrily to anyone who would listen that the minimum jail sentence of two years and nine months, with a maximum of four and a half years, that he had received as the result of his company imploding in spectacular fashion was far too harsh. The thousands of everyday Aussies who lost their homes and businesses didn’t feel the slightest compassion for him. Far from it; they believed that the sentence was far too lean – he should have been given life.

As if in complete denial of the obvious, Williams was indignant after having to plead guilty in court to making misleading statements in an annual report, which overstated HIH’s 1999 operating profit by $92.4 million to cover the company’s huge, mismanaged losses. On top of that, he had also pleaded guilty to signing off on a letter in 2000 telling investors that Rodney Adler’s newly acquired FAI Insurance had net assets of $200 million, when in fact it had just $35 million, making it worth considerably less than what the ailing HIH had paid for it. Williams was also found guilty of falsifying a prospectus to raise up to $155 million for HIH. When HIH went down the gurgler to the tune of $5.3 billion, it was far and away the biggest bankruptcy in Australia’s history – and, as is always sadly the way, it took tens of thousands of innocent Australians out with it.

First to go were the small businesses – primarily ones in the building trade that relied on payments from HIH for construction jobs they were employed to do for insurance claims. Next on the financial chopping block were the thousands of everyday Aussies waiting for payouts from the insurance company for their regular claims. By 1 March 2001 the bubble had burst and HIH could no longer make any payments to anyone.

HIH had gone from being one of the country’s leading insurance companies, with an alleged $7.8 billion in assets, to a barren financial husk. Provisional liquidator Anthony McGrath of accountancy firm McGrath & Riddell estimated that HIH had lost more than $800 million during the six months leading up to 31 December 2000, due to glaring mismanagement.

McGrath also quickly determined that the company had continued to trade even after they had become hopelessly insolvent, which, of course, was highly illegal. The company, it was said, eventually failed as a result of rapid expansion, unsupervised delegation of authority, underpricing, false reports, reckless management, incompetence, fraud and basic greed.

HIH was founded in 1968, as a small underwriting company, by Ray Williams and Michael Payne. It was originally named MW Payne Underwriting Agency Pty Ltd, and it went through a number of takeovers along the way – with Williams always staying on as CEO. It became CE Heath International Holdings in May 1996 and continued to acquire several companies under its wings both in Australia and overseas. One of those was local insurance company FAI Insurance, which it took on in 1998 and whose chief executive Rodney Adler became a director of HIH the following year, at which time the company also changed its name to HIH Insurance Ltd.

A year later the wild ride was reaching its messy end, with HIH going from a giant with net assets of $940 million to being down the tubes to the tune of $5.3 billion.

But how did no one in authority to monitor such matters notice what was going on at the time? If the Australian Prudential Regulation Authority (APRA) had been more alert to the situation, they may have been able to let shareholders know about the increasingly shaky situation, but the regulating body allowed HIH to keep on trading until early in 2001, even though it was looking like it would collapse by the end of 1999, finally becoming insolvent by September the following year. Those extra months allowed the crooked directors Williams, Adler and another especially greedy crook, Bradley David Cooper, plenty more time to keep their snouts in the trough and embezzle as much as they could from the failing company before it slipped into the ocean altogether.

Incredibly, the royal commission would later find that Williams, Adler and Cooper’s corporate fraud played no part in the downfall of HIH. But just the same, that didn’t stop the trio from going to jail. It turned out that their behind-the-scenes chicanery – offsetting HIH’s assets with its debts and potential insurance claims against the company – had left them with net assets of $133 million.

In 2000, due to bodgie financial statements concocted by Williams, the accountancy firm McGrath & Riddell described HIH’s solvency as ‘marginal’. The report into the company stated that ‘an extremely small movement of just 1.7 per cent in the value of assets, could move the balance sheet into net asset deficiency’. In the end, even the slightest setback to HIH would push the company into insolvency.

Of course, while his company fell apart, Ray Williams was still happily swanning around town in the latest Rolls-Royce, which he parked at his palatial mansion. He flashed the corporate credit card, even using HIH shareholders’ money to support several notable Australian charities. To anyone who didn’t know the trouble HIH was in, Williams appeared to be an unassuming Christian philanthropist. He was even awarded the Order of Australia and sat on numerous charity boards.

Four months into his prison sentence, Williams declared himself bankrupt. The circling creditors swooped – they obviously wanted to access whatever assets he had left, but they were too late. By that time, Williams had transferred all he had left into his wife’s name.

For his part, Adler was fined $5.4 million and banned from sitting on a board of directors after being found guilty of inappropriately purchasing $10 million worth of HIH shares with HIH money through another of his companies. The move was highly illegal and a ploy to prop up HIH’s share price, making his HIH shares worth considerably more. The court also determined that Adler, Williams and HIH Chief Financial Officer Dominic Fodera had breached corporate law statutes more than 200 times.

In February 2005, Rodney Adler was back in the Supreme Court and pleaded guilty to making false and misleading statements to encourage investors to buy HIH shares and misusing his position as a director of HIH to intentionally be dishonest, and failing to act in the best interests of the board. Adler was sent to prison for a minimum of two and a half years.

Like Adler, the chubby Ferrari-driving entrepreneur Brad Cooper – who had trouble squeezing into a Testarossa – had come across to HIH from FAI, which in turn was responsible for Cooper’s debt-ridden company HSI (Home Security International). HSI wasn’t just losing money – it was haemorrhaging it out an alarming rate. Ray Williams was worried that this would make HIH look bad, so, to protect his own name, he began pouring funds from his financially troubled company into his employee’s cash-strapped company. It was a situation that was never going to end well.

Williams ended up injecting $85 million of HIH cash into HSI – of which more than $13 million in turn found its way into Cooper’s greedy pockets, under the guise of fees and services rendered. Not bad money, if you can live with the guilty conscience. Cooper could, not a worry in the world.

With two waterfront mansions, a love of first-class travel and several luxury cars already to his name, it wasn’t as if Cooper really needed to embezzle from HIH. But Cooper was just plain greedy. He saw a cash cow and went for it. He bribed HIH Chief Investment Officer Bill Howard with $124,000 to facilitate the payment of $4.9 million to him, while getting the bean counter to turn a blind eye to a $1.79 million debt Cooper owed HIH.

Cooper had no trouble pulling his scam. He just made up a bunch of fake invoices and Howard paid them. These dodgy invoices were for such dubious purposes as $1.2 million on nonexistent seminars, more than $500,000 for random ‘expenses’ and almost $2 million billed for an ‘introduction fee’ involving a property deal with media mogul Kerry Packer that never saw the light of day.

When Cooper’s crimes were discovered, he found himself in court in October 2005 on 13 charges of bribery and fraud. Proving there’s no honour among thieves – especially the white-collar variety – Bill Howard gave him up. Cooper was sentenced to a minimum five years in jail, while Howard – in return for giving evidence against his former cohort – was given a three-year suspended sentence after being convicted on two counts of criminal misconduct.

And good riddance to them, all the investors and customers of HIH said. But it was little consolation to the thousands of decent Aussie workers and small businesses who are still suffering from their greed to this day.

The most recent news of Rodney Adler was that he was lecturing on honesty in business and how he had benefited from his mistakes. What a joke!