TRANSCRIPT OF PROCEEDINGS

National Judicial Staff ServicesSupreme CourtP O Box 7018BOROKO. NCDPAPUA NEW GUINEA

Telephone: (675) 324 5792Facsimile : (675) 325 7732

COMMISSION OF INQUIRY INTO THE DEFENCE FORCE RETIREMENT BENEFITS FUND

Mr Sao Gabi, ChairmanMr Tos Barnett, Commissioner Mr Donald Manoa, Commissioner(In absentia)

AT WAIGANI, WEDNESDAY 5 JUNE 2002 AT 10.17 AM.

(Continued from 4 June 2002)

[10.17 am] THE CHAIRMAN: The commission of inquiry into the Defence Force Retirement BenefitsFund is now resumed. Mr Reeve.

MR REEVE: Thank you chairman, the sole business I have for the commission this morning is thepresentation of the third part of the opening on the Sandaun Motel which as I indicated brings theopening up, in fact past the evidence that we already have and which indicates the future direction andmatters that remain to be addressed.

So in the usual manner I would seek to make some opening remarks which cover part 3 of theopening and I will seek to do that by handing those opening remarks to the commission and a copy tothe transcription service and requesting that they be incorporated in the transcript.

THE CHAIRMAN: I direct that the opening remarks on part 3 of the Sandaun Motel be incorporated inthe transcript.

SANDAUN MOTEL – OPENING PART 3

OPENING REMARKS

These brief remarks introduce the again, longer than expected Part 3 of the Opening which addressesthose parts of the Commission's Terms of Reference on the purchase by the DFRBF Board of sharesin Banora Trading Limited.

As with the first two parts of this opening justice cannot be done to the 273 pages of this Part in a shortprécis and the Part must be read in full to appreciate what is said.

Part 3 continues where Part 2 ended namely with events after 30th June 1999.

It examines in Chapter 21, events to and including the Special DFRB Board meeting held on 7th July1999 when it appeared that Colonel Renagi, with latter day support from Colonel Playah, stalled theSandaun Motel purchase until a business valuation was obtained.

Chapter 22 details events between that meeting and a Board meeting held 5th August 1999 after Mr.Kila had been reinstated as the DFRB General Manager. It shows in detail how Mr. Kelly Naru and his

legal firm, Carter Newell, advanced the Sandaun Motel transaction towards completion with Mr.Marcus Cullinan in Port Moresby awaiting settlement and the return to Papua New Guinea of hisfather, brother and nephew from Australia.

Mr. Naru overcame the efforts at resistance from the DFRB Board by advising the Board at a meetingof 22nd July 1999 that if it reneged on the deal it faced the prospect of losing the K530,000 depositwhich had been paid to his legal firm (on behalf of the Vendors for whom he, Mr. Naru, was personallyacting) and being sued by the Vendors for breach of contract.

We deal with Mr. Kila's return to work and a further plan clearly initiated by Mr. Naru for Mr. Kila toobtain a Toyota Landcruiser as his official vehicle and trade­in the Mitsubishi Pajero which had earlierbeen purchased for his use and which Mr. Naru purchased at what seems to be a plain undervalue forhimself.

With the DFRB Board and Mr. Kila thus dealt with, Mr. Naru then struck what was clearly anunanticipated obstacle with the DFRBF contracted fund managers and investments advisors KSL, whodespite Mr. Naru's belligerence, would not release the K4.77 million balance purchase moneys for theSandaun Motel without a Deed of Indemnity which protected them from liability in respect of theSandaun Motel transaction.

With this impasse and it being clear that a Share Sale & Purchase Agreement had been signedChapter 23 of the Opening evaluates that Agreement in considerable detail.

The conclusion we come to is that the Agreement even as signed was very much a "Vendors draft"and failed in the many, many respects which are detailed to adequately and properly address andprotect the proper legal interests of the DFRB Board.

The analysis illustrates the untenable conflict of interest, which Carter Newell had in acting for bothVendors and Purchaser in this transaction and the yet further conflict, which Mr. Kelly Naru hadbetween his interest as a lawyer acting for the Vendors and his duty as the Chairman of the DFRBBoard.

Having analysed the Agreement, we turn in Chapter 24 to deal in detail with how Mr. Naru turned thewell­meaning resistance of KSL into a disgraceful questioning of KSL's integrity (and believe it or notsuggestion KSL had a concealed conflict of interest) and by "hoodwinking" the DFRB Board on thatmatter and a question of delegation and in an extra­legal "Tele­conferencing" meeting to agree to theDeed of Indemnity which KSL were so sensibly seeking. We also deal in detail with the concurrentarrangements to settle the Sandaun Motel transaction as soon as KSL made the cheque available.What should have and what in fact happened on Completion in Vanimo is dealt with in detail disclosingthat four days before actual settlement and at the outset of yet another trip to Jayapura, Mr. Naru (whowas acting for the Vendors) gave Mr. Marcus Cullinan the cheque for K4.77 million.

This action left the Carter Newell lawyers, who were acting for the DFRB Board in a disgracefulsituation where they were in effect obliged to complete receiving few of the documents and records,they should have received and with no regard to multiple other matters that should properly have beenchecked before and at settlement. In the result the proper legal and commercial interests of the DFRBBoard were disgracefully neglected.

This Chapter concludes with Mr. Naru's report to the DFRB Board – where there was severe criticism– on 26th August 1999, the approval of a further K60,000.00 in working capital for Sandaun Motel(which was not adequately questioned) and Mr. Naru completing his purchase of the Ex DFRBFPajero.

With the deal "consummated" in this disgracefully neglectful manner, Chapter 25 deals with events inSeptember 1999.

The first parts of this Chapter deal with the "after the fact" attempts by Carter Newell to attend to someof the matters, which should have been attended to prior to and at Completion and pursuit by Mr. Naruof his campaign against KSL.

We also deal with how Mr. Kila and Mr. Uware planned an initiative to send Mr. Uware back to Vanimoto put in place some order and controls at Sandaun Motel. Mr. Kila, somewhat naively, telegraphed Mr.Uware's arrival to Mr. Marcus Cullinan and the DFRBF management initiative was thwarted by Mr.Naru joining Mr. Uware on this trip and after what now seems to be a further mandatory trip toJayapura shepherding Mr. Uware away from the Sandaun Motel records and frustrating Mr. Uware's

efforts to achieve his objects for the trip by stating those matters would be attended to by hisassociates Marcus Cullinan and Michael Tulake who had been put in place by Mr. Naru as the GeneralManager and Financial Controller respectively of Sandaun Motel.

The only tasks which Mr. Uware was able to accomplish, involved budget preparations and the initialsteps – at Mr. Naru's direction – for a proposal to acquire new vehicles for the Sandaun Motel at anestimated further cost of K395,000. This was necessitated by the facts that of the four vehiclesdisclosed in the 1998 accounts for Sandaun Motel, only one had been included in the Asset Registerin the Agreement, the other three having been taken by the Cullinan family and in the result, the Motelwas without a courtesy bus or any vehicles available for hire.

The Chapter concludes with two new vehicles being purchased (and the only one in the AssetRegister being traded­in) and how that occurred and was financed.

Chapter 26 deals with events in October 1999 with questions asked in the National Parliament,activities at Carter Newell, the DFRB Board meeting of 6th October 1999 where the tide began to turnagainst Mr. Naru and a trip to Vanimo by Messrs Kila and Uware – this time without Mr. Naru. TheChapter continues in detail though legal charge entries and documents as does this whole openingwith events at Carter Newell, the purchase of three further hire vehicles for Sandaun Motel and howthat was financed and concludes with DFRB Board meeting on 29th October 1999.

The chronology into November 1999 continues in Chapter 27 with financial reporting – inaccurate as itwas, progress in the stamping of documents and financing the vehicles, the final report and closing ofthe Carter Newell file and KSL approaching Deloittes to examine the reporting and control systems atSandaun Motel.

As we proceed into December 1999 the outstanding issues and problems became clearer and inChapter 28 the financial performance and reporting to December 1999, Board meetings of BanoraHoldings Limited and DFRB Board and emerging problems over the financing of the K364,000.00 invehicle purchases for Sandaun Motel are detailed.

In the four months of trading, Sandaun Motel produced a return of just over 7% on funds invested tothe DFRB Board.

With the Commission's Terms of Reference focussed on the period up to 31st December 1999 we dealin Chapter 29 with relevant subsequent events.

With DFRBF management obtaining legal advice and further questions asked in the NationalParliament the DFRB Board was changed and only Colonel Renagi retained from the former Board.

The new Board, under the Chairmanship of Mr. Chris Alu, addressed some of the problems withSandaun Motel. After a short brief from KSL, changes sought to the Board of Banora Trading Limitedand without the presence of Mr. Naru a property valuation was obtained from the Professionals and anon­statutory audit and business evaluation from Deloitte Touche Tohmatsu. The business evaluationin particular is dealt with in some detail.

With this evidence we encapsulate in something of summary at Chapter 29.11, the following:­

(a) The land and buildings valuation of The Professionals tells us that those assets had a value ofK1,241,000.00.

(b) The report of Deloittes tells us that the business conducted by Sandaun Motel evaluated on afuture maintainable earnings basis had an indicative value of K700,000 to K1.2 million.

(c) It is plain, as we have already shown, that the valuations carried out by Messrs Iori Veraga andRupa Siba were worthless and overstated the value of what they were valuing by a factor of at leastfour.

(d) It is plain, as we have already again shown, that the balance sheets prepared by Mr. MichaelTulake contained massive overstatements of the value of assets and understatements as well as non­disclosures of material liabilities (such as income tax and sales tax) to the result that the value of theshareholders funds was overstated by at least a factor of five.

(e) It is also plain as we have already again indicated that a fraudulent Auditor's Report was obtainedin relation to the 1998 accounts because a proper audit would have disclosed the falsity of thoseaccounts.

(f) It is plain, as we have seen, that Mr. Kelly Naru went to great lengths to avoid the obtaining ofbusiness evaluation of Sandaun Motel despite the advice of Mr. Ruimb, Mr. Kila, the Department ofFinance and KSL as such an evaluation would have disclosed the true value on the only properlyrelevant basis of what the DFRB Board was purchasing – future maintainable earnings.

(g) It is plain, as we have seen, that Mr. Naru went to great lengths to avoid any of the DFRBmanagement and in particular Mr. Ruimb and Mr. Kila before Completion and Mr. George Uware afterCompletion having access to the financial records of Sandaun Motel.

(h) It is plain that the interests of the DFRB Board were not protected:­(i) in the terms of the Agreement which was signed

(ii) in what little due diligence was undertaken even under the Agreement(iii) in the shortfalls of Carter Newell and Mr. Naru providing appropriate legal advice to theDFRB Board

(iv) in Carter Newell failing to carry it out prior to and at Completion what was properly required ofthem (largely because Mr. Naru had given the cheque for the K4.77 million balance purchase moneysto the Vendors four days before Completion).

(v) in what was done or failed to be done by Carter Newell even after Completion.

When all these things are put together the only logical conclusion, which can be reached isthat the DFRB Board paid for the Sandaun Motel in the order of four to five times what itwas in fact worth, that at least Mr. Naru, Mr. Brian Cullinan, Mr. Marcus Cullinan and Mr.Michael Tulake knew that and that all of them cooperated to produce and present to theDFRB Board and the Minister for Finance (to obtain Section 61 approvals) knowingly falsefinancial statements for the 1996, 1997 and 1998 financial years and a knowingly falseAuditors Report to induce the Board and its advisors to believe that they were obtainingproper value for the K5.3 million which they were being asked to pay. It is further clear thataccess to records, which would have exposed this clear fraud was denied to avoiddetection; that primary financial records prior to 1999 were also removed to avoid thatdetection and that Messrs Marcus Cullinan and Michael Tulake were engaged as GeneralManager and Financial Controller at Sandaun Motel to further avoid that detection.

It was only after Mr. Naru's appointment to the DFRB Board as its Chairman wasterminated that steps were taken to obtain proper evaluations which exposed what wouldseem clearly to have been a transaction designed to cheat and defraud the DFRB Board ofin the order of K4.0 million.

The financial effect for the DFRB Board is in fact greater than these figures indicated, foras we have seen the company of which it had acquired the issued capital – Banora TradingLimited – did in fact have contingent liabilities for State Lease rent and Provincial Sales Taxwhich were not disclosed to and taken account of by Deloittes and had a far greater liabilityfor income tax than the K436.000.00 for which Deloittes had made provision.

We then conclude this chapter by examining litigation, which was on foot or produced by Fleet Limitedagainst Banora Trading Limited, by the DFRB Board against the Vendors and further possible litigationbetween the DFRB Board and the Vendors, Mr. Naru and Carter Newell to define areas where theCommission must take care; events at the DFRB Board where it was finally accepted that theSandaun Motel investment was really only worth K1.1 million and the aggravating consequence, forwhich KSL bears no responsibility, of the fees paid to KSL on the basis of this investment having acost greater than its true value.

The opening then turns to examine the role of the Auditor General in his examination of the SandaunMotel transaction and his long unanswered management letter to the DFRB Board, which was in effectthe basis for the Terms of Reference of this Commission.

The Part concludes with outlining the areas which remain to be addressed.

As the commission pleases. With the second step chairman, I seek to hand to the commission the fullopening, part 3 of the opening on the Sandaun Motel and for a direction that that full opening beincorporated in the transcript.

[10:19 am] THE CHAIRMAN: I further direct that the part 3 of the opening address on Sandaun Motelbe incorporated in the transcript.

CONTENTS:­

21. EVENTS TO AND INCLUDING SPECIAL BOARD MEETING 9/99 – 7 JULY 1999 4749

21.1 Taking Stock at 30th June 1999 4749

21.2 Thursday 1st July 1999 4750

21.3 Friday 2nd July 1999 4751

21.4 Monday 5th July 1999 4755

21.5 Tuesday 6th July 1999 4757

21.6 Special Board Meeting 9/99 – Wednesday 7th July 1999 4758

22. EVENTS TO AND INCLUDING SPECIAL BOARD MEETING 11/99 – 5 AUGUST 1999 4764

22.1 Friday 9th July 1999 4764

22.2 The return of the Cullinan's – 10th July 1999 4765

22.3 Monday 12th July 1999 4765

22.4 Tuesday 13th July 1999 4766

22.5 Thursday 15th July & Friday 16th July 1999 4767

22.6 Tuesday 20th July, 1999 4768

22.7 Thursday 22nd July, 1999 4772

22.8 Special Board Meeting 10/99 – 22nd July, 1999 4776

22.9 Location of the DFRB Board Seal 4785

22.10 Mr. Kila returns to work and faces a new car 4787

22.11 Mr. Naru addresses the KSL problem 4789

22.12 Special Board Meeting 11/99 – 5th August, 1999 4797

22.13 Future Direction of Opening 4800

23. EVALUATION OF SHARE SALE AND PURCHASE AGREEMENT 4800

23.1 The Agreement 4800

23.2 Parties Execution and Date 4800

23.3 The Company and the Share Sale 4802

23.4 The Contract and Completion 4805

23.5 Share Transfers 4806

23.6 The Directors and officers of the Company 4807

23.7 Usual other provisions 4809

23.8 The Accounts 4809

23.9 The business assets and conduct of the business 4812

23.10 Conditions precedent 4816

23.11 Conduct pending completion. 4818

23.12 Records to be handed over on Completion 4819

23.13 Tax and impository obligations 4820

23.14 Property 4823

23.15 Motor vehicles and hire car income 4826

23.16 Inventory and Stock 4826

23.17 Poker machines 4827

23.18 Liquid funds, Directors fees, Distributions 4828

23.19 Warranties 4829

23.20 Restraint of Trade 4836

23.21 Conclusions 4837

24. COMPLETION OF THE PURCHASE 4839

24.1 Taking Stock 4839

24.2 Mr. Naru addresses the KSL problem 4839

24.3 More action at Carter Newell 4845

24.4 KSL gets its Deed of Indemnity 4847

24.5 Mr. Michael Tulake put in place 4854

24.6 Settlement arrangements at DFRBF 4854

24.7 Settlement arrangements at Carter Newell 4861

24.8 What happened in Vanimo – 21st to 24th August 1999 4863

24.9 Special DFRB Board meeting 12/99 – 26 August 1999 4879

24.10 What happened to the K4.77 million 4887

24.11 Mr. Naru buys the Ex DFRBF Mitsubishi Pajero 4891

24.12 Events to 31st August 1999 4893

24.13 Why working Capital was required 4898

25. SEPTEMBER 1999 4912

25.1 Action at Carter Newell – 1st to 6th September 1999 4912

25.2 Revoking the Delegation to KSL – 8th to 13th September 1999 4915

25.3 Mr. Kila sends Mr. Uware to Vanimo 4917

25.4 Hon. Peter Waieng goes to Vanimo 4931

25.5 More cash drawn from Fleet Limited 4931

25.6 More activity at Carter Newell 4932

25.7 Marcus Cullinan purchases two new vehicles 4944

26. OCTOBER 1999 4945

26.1 Questions raised in the National Parliament 4945

26.2 Some activity at Carter Newell 4948

26.3 Some activity at DFRBF – the tide turns 4949

26.4 DFRB Board meeting 3/99 – 6th October 1999 4953

26.5 Messrs Kila and Uware Travel to Vanimo 4954

26.6 Mid October activity at Carter Newell 4954

26.7 Mid October activity at Sandaun Motel 4955

26.8 Further activity at DFRB and three further vehicles 4962

26.9 DFRB Board meeting 3/99 continues – 29th October 1999 4966

27. NOVEMBER 1999 4967

27.1 Reporting on Sandaun Motel 4967

27.2 Progress on Stamp Duty and Vehicles 4969

27.3 Board meetings in Vanimo – 15th November 1999 4971

27.4 Final activity at Carter Newell 4976

27.5 The vehicle loan unresolved 4977

27.6 KSL Approach Deloittes 4978

28. DECEMBER 1999 AND BEYOND 4978

28.1 Deloittes respond to KSL 4978

28.2 Report on Sandaun Motel to December 1999 4978

28.3 Banora Trading Limited Board Meeting – 15 January 2000 4980

28.4 DFRBF Board Meeting 4/99 – 14 January 2000 4981

28.5 Excessive Interim Dividend paid 4981

28.6 Board Decisions conveyed to Mr. Cullinan 4982

28.7 Demands made by Fleet Limited 4982

29. RELEVANT SUBSEQUENT EVENTS 4982

29.1 DFRBF Management obtains legal advice 4982

29.2 Further Questions raised in the National Parliament 4984

29.3 Alterations to the DFRB Board 4984

29.4 Chairman Alu seeks a brief from KSL 4984

29.5 Banora Trading Limited Board meeting – 28th August 2000 4984

29.6 DFRBF Special Board meeting 2/2000 – 27th September 2000 4985

29.7 Business Valuation sought from Deloittes 4986

29.8 Banora Trading Board meetings 4986

29.9 Property Valuation obtained from The Professionals 4987

29.10 Deloittes Complete the Business Valuation 4988

29.11 What do these valuations tell us 4991

29.12 What happened to the litigation 4992

29.13 Final DFRB Board Action 4994

29.14 An aggravating consequence – KSL Fees 4995

30. THE ROLE OF THE AUDITOR GENERAL 4996

31. FUTURE DIRECTION OF OPENING 5002

21. EVENTS TO AND INCLUDING SPECIAL BOARD MEETING 9/99 – 7 JULY 1999

21.2 Taking Stock at 30th June 1999

Part 2 of this opening we had dealt with events to 30th June 1999 and seen:­

(a) The political climate where a challenge to the Government was imminent – the Prime Minister Hon.William Skate had resigned, was acting as Prime Minister pending an election by the NationalParliament at its July 1999 sitting and the usual political lobbying for members and "camps" and "lock­ups" were apparent.

(b) Nothing concerning the Sandaun Motel purchase had been reported to or dealt with in any DFRBBoard meeting between 29th March and 30th June 1999.

(c) Mr. Darby Kila had been terminated as General Manager of DFRBF by the unilateral actions, inexcess of power by Mr. Kelly Naru, such termination being subsequently converted by the DFRBFBoard to a suspension and Mr. John Ruimb's resignation as the Executive Manager – Investment ofDFRBF had, at Mr. Naru's direction, been brought forward. Voices of prudence over the SandaunMotel proposal within DFRBF management had thus been eliminated.

(d) Mr. Naru had assumed complete control of the Sandaun Motel purchase to the exclusion of DFRBFmanagement and the DFRB Board, had obtained Ministerial approval and was pressing on not onlywith signing the contract (if that had not already been done) but with arranging settlement of thetransaction.

(e) The false and misleading financial statements of Sandaun Motel for 1996, 1997 and 1998 hadbeen arranged between Mr. Naru, Mr. Marcus Cullinan and their author Mr. Michael Tulake and usedby Mr. Naru both to obtain Ministerial approval of the Sandaun Motel purchase and to attempt to

appease the concerns of the DFRBF fund managers and investment consultants Kina Securities(KSL).

(f) Mr. Naru had successfully prevented efforts by DFRBF management to implement the DFRB Boarddecision of 1st March 1999 to conduct a business evaluation of the Sandaun Motel and had by politicalpressure and a political directive obviated the like efforts by the Department of Finance and Planningto have a business evaluation carried out.

(g) Mr. Marcus Cullinan was in Port Moresby and had been staying since 20th June 1999 at theAirways Hotel and as at 30th June 1999, Carter Newell were making arrangements (at the cost as tolegal fees of DFRBF) to extend Mr. Cullinan's accommodation in Port Moresby.

It seems clear Mr. Cullinan was in Port Moresby, among other reasons, for the settlement of theSandaun Motel transaction.

(h) Whilst the deposit moneys of K530,000 on the Sandaun Motel purchase had been deposited intoCarter Newell Trust Account on 18th June 1999, and Mr. Naru had also sought to have a cheque forthe balance purchase moneys made available on or before 30th June 1999 (and arranged for eitherK2.0 million or K3.0 million of those moneys to be paid to the Cullinan company Fleet Limited), he had,despite his belligerence and threats, met an unexpected obstacle with KSL who had asserted theirrights under the management and investment consultancy agreements with the DFRB Board;expressed their concerns at the Sandaun Motel proposal; stated the financial statements would haveto be audited and indicated that if the transaction was to proceed they may require a Deed ofIndemnity from DFRB relieving KSL of its contractual obligations to the DFRB Board in respect of thattransaction.

(i) At the same time, and we will endeavour to specify when shortly, Mr. Naru had decided that theDFRB Board should have an audit report on the 1998 financial statements, made Mr. Marcus Cullinan,who was already in Port Moresby, aware of that need and Mr. Tulake had been delegated to obtainthat Audit Report.

This he did by typing up a fraudulent Audit Report without any actual audit being conducted,entertaining his colleague Mr. Joseph Paraka, telling him lies about the reason for which the AuditReport was required and prevailing on Mr. Paraka to sign the Audit Report which represented falselythat he – Mr. Paraka – was a Registered Public Auditor.

This fraudulent document was thus created and signed by Mr. Paraka and according to Mr. MarcusCullinan three (3) copies were made and he received one whilst in Port Moresby.

(j) Mr. Naru's demand for KSL to produce a cheque for the balance purchase price was at a stalemateas at 30th June 1999 due to the stance taken by KSL and the desire of KSL to take steps to protect itsown position as the fund manager of and investment consultant to the DFRB Board if the SandaunMotel transaction was to proceed.

21.2 Thursday 1st July 1999

(a) As we have earlier seen the letter from Mr. Yates of KSL to Mr. Naru of 30th June 1999 was copiedto the Acting DFRBF General Manager Mr. Richard Sinamoi on 1st July 1999 though not noted by Mr.Sinamoi until 6th July 1999 (see Tendered Documents SM426­428).

(b) We had earlier failed to mention that on 30th June 1999 it would seem that after Mr. Naru hadreceived Mr. Yates letter of that date he contacted Mr. Yates and requested Mr. Yates provide him byfax a copy of the Thirwall Aisi and Koiri letter to Mr. Kila of 2nd June 1999.

We say this as on the Carter Newell file 990166 is a nine page facsimile dated 30th June 1999transmitted at 17.13 hours to 17.15 hours consisting as to the first page the facsimile cover from Mr.Yates to Mr. Naru reading, "Please find enclosed documents as per your request" and as to the othereight pages a copy of the Thirwall Aisi and Koiri letter.

A copy of the facsimile cover taken from that Carter Newell file (Commission Document DCD76) willbe Tendered Document SM478.

(c) Carter Newell thus clearly had this copy letter by 1st July 1999 having not seen it earlier.

(d) There was also activity on 1st July 1999 in the form of ongoing communications between KSL and

Blake Dawson Waldron with a number of faxes on the KSL file (Commission Document DCD13).This activity produced documents on 2nd July 1999, which we will deal with shortly.

21.3 Friday 2nd July 1999

(a) The Carter Newell invoice 17360 (Tendered Document SM337) contains only one entry:­

"2 Jul 99 Letter to Marcus Cullinan re payment of K3,000,000.00".

The entry is a clear reference to the unsigned letter from Mr. Paul Toua to Mr. Cullinan which isTendered Document SM433.

(b) As we have seen, Carter Newell had obtained a copy of the letter of Thirwall Aisi and Koiri to Mr.Kila dated 2nd June 1999 (Tendered Documents SM370 to SM377) and which had been used as thebasis of Mr. Kila's letter to Mr. McEniery of 3rd June 1999 (Tendered Document SM378 and SM379).Carter Newell clearly learned of the existence of this letter from the letter of Mr. Yates of KSL to Mr.Naru of 30th June 1999 (Tendered Documents SM427 and SM428) where the letter is mentioned insome three (3) places.

On 2nd July 1999 Mr. Paul Toua of Carter Newell wrote to the General Manager of DFRBFa letter "FOR COLLECTION" in the following terms:­

"Re: PURCHASE OF ALLOTMENT 11 SECTION 6, VANIMO – SANDAUN MOTEL

We refer to the above matter to the letter from Thirwall Aisi Koiri Lawyers to Mr. Darby Kila,the General Manager of DFRB dated 2nd June 1999 which has recently been referred tous. We also refer to the letter from Mr. Darby Kila to Carter Newell Lawyers dated 3rd June1999. We confirm we are fully aware of the issues raised in these two (2) letters.

We confirm whilst some of the concerns raised by these letters have been addressed wereiterate and advise that your Board request and insist on a properly audited financialreport of Banora Trading Ltd to enable your Board to be satisfied on the financial viability ofthe company before concluding the purchase.

Apart from that we confirm the deposit of K530,000.00 has been paid by your fundmanagers to our Trust Account pending settlement".

A copy of this letter taken from Commission Document DCD23 will be TenderedDocument SM479.

It seems plain, from the evidence that Mr. Toua was, in Mr. Kila's absence, being less thancareful with the truth because:­

(i) comments in Mr. Kila's letter of 3rd June 1999 (which was a plagiarisation of the ThirwallAisi and Koiri letter of 2nd June 1999) had not been addressed at all – Mr. Naru had, asnoted by Mr. McEniery, given instructions on 9th June 1999 (see Tendered DocumentSM394) that the comments made by Mr. Kila were to be ignored.

(ii) "confirm" and the "reiterate and advise" falsely suggest Carter Newell had previouslygiven advice, that an audited financial report on Banora Trading Limited should be insistedupon.

(c) There is, in our submission, a clear inference available that it was Mr. Yates letter of 30th June1999 coupled with the copy of the Thirwall Aisi Koiri letter of 2nd June 1999 being received by CarterNewell that triggered the steps earlier dealt with being taken to obtain the fraudulent Audit Report ofthe 1998 financial statements for Banora Trading Limited and that the Audit Report was backdated to23rd June 1999 to make it appear such Audit Report had been obtained earlier.

It is clear the Carter Newell letter of 2nd July 1999 to Mr. Sinamoi was a transparently falseattempt to make it appear both that Mr. Kila's comments (as adopted from the Thirwall AisiKoiri letter) had been considered and that Carter Newell had earlier advised auditedaccounts should be required. In the latter respect Mr. Sinamoi would not have knownotherwise in the absence of Mr. Kila.

(d) It is clear from the KSL file (Commission Document DCD13) that whilst the events of 1st and 2ndJuly 1999 were occurring, Mr. Yates of KSL was also briefing Mr. Peter Coumbis of Blake DawsonWaldron on the situation and obtaining advice from Mr. Coumbis.

On 2nd July Mr. Coumbis clearly had discussions with Mr. Naru and wrote to him enclosinga draft Deed of Indemnity, which had not been seen by KSL requesting his comments.

A copy of this letter taken from Commission Document DCD13 will be TenderedDocument SM480.

The original letter and attachment is on the Carter Newell file (Commission Document3B).

(e) These occurrences are also confirmed in a further fax from Mr. Coumbis to Mr. Yates of 2nd July1999 and the draft letter to Mr. Naru and revised Deed of Indemnity therein referred to. A copy of thefax cover attaching these documents will be Tendered Document SM481. We will come to the letterand Deed shortly.

What occurred is further clarified by a further handwritten fax from Mr. Coumbis to Mr.Yates also dated 2nd July 1999 which reads:­

"Syd,

Herewith copy letter to Kelly Naru as settled by us and agreed to by you over the phone.Richard Flynn has checked it and agrees with it. Also enclosed is the Deed of Indemnitywithout annexures. Richard approves it as well.

As discussed and agreed it was delivered to Kelly Naru's office at approx 5.20pm today.

Regards Peter".

A copy of this further fax taken from Commission Document DCD13 will be TenderedDocument SM482.

The letter and Deed earlier forwarded by Mr. Coumbis to Mr. Yates were received anddiscussed and the final versions were agreed. The letter to Mr. Naru reads:­

"We have instructions from Mr. Yates in relation to the draft Deed of Indemnity provided toyou earlier today in accordance with which he requires the following:

1. Copies of the key letters to be attached to the Deed. We have redrafted the Deed withthe same attached.

2. A duly executed and certified copy of the Board's resolution pursuant to which it hasagreed to enter into the Deed of Indemnity and the contract referred to in the nextparagraph.

3. A copy of the executed contract for the purchase of the shares in the company BanoraTrading Ltd.

4. An explanation of why the balance of purchase monies are being drawn in favour ofFleet Ltd and not the vendors named in the contract.

5. A copy of the title searches for the companies Fleet Ltd and Banora Trading Ltd.

6. A letter from Carter Newell addressed to the Board and Kina Securities Ltd signed by apartner certifying the following:­

(a) that all necessary title, company and other searches and investigations havebeen carried out by or on behalf of the firm in relation to the matter.

(b) the firm has copies and is fully aware of the issues raised in the letters dated2 June 1999 from Thirlwall Aisi and Koiri Lawyers, Mr. Darby Kila, the former

general manager of the DFRBF Board and from Mr. Kila to Carter Newell dated3rd June 1999;

(c) Carter Newell has duly advised the Board in respect of such matters and issatisfied that the Board is not legally exposed in any way;

(d) Carter Newell has written directions duly signed by the vendors directing thepayment of the balance of settlement monies to Fleet Ltd; and

(e) Carter Newell is satisfied that the payment of the balance of settlementfunds will lawfully discharge the Board's obligations under the contract.

We await your earlier written reply to the above and receipt of your comments in relation tothe enclosed Deed of Indemnity.

The original of this letter is on the Carter Newell file (Commission Document 3B).

Copies of the letter and draft Deed taken from Commission Document DCD15 will beTendered Documents SM483 to SM488.

(f) It is in our view important to note at this stage that whilst the need for audited accounts and toregard the comments of Thirlwall Aisi and Koiri and Mr. Kila as suggested by Mr. Yates in his letter of30th June 1999 had purportedly been taken cognizance of no cognizance appears to have been takenof Mr. Yates advice.

(i) THAT NO BUSINESS VALUATION HAS BEEN PROVIDED AND THAT IT IS NORMALBUSINESS PRACTICE FOR A BUSINESS VALUATION TO BE CARRIED OUT (seeTendered Document SM427).

(ii) THAT THE CASHFLOWS PROVIDED ARE UNSATISFACTORY AND NEED TO BEREVISED TO REFLECT SEASONAL FORECASTS (see Tendered Document SM427).

(iii) THAT AUDITED ACCOUNTS WERE REQUIRED UP TO THE COMPLETION DATE(see Tendered Documents SM427 and SM428).

(iv) THAT THERE WAS CONCERN ABOUT A CONFLICT OF INTEREST IN CARTERNEWELL ACTING FOR BOTH THE VENDOR AND PURCHASER (see TenderedDocument SM428).

These are important matters and they having been raised expressly both Mr. Naru asChairman of the DFRB Board and a Lawyer and Carter Newell as a legal firm each, in ourview, had a duty of care which obliged them to address those matters which they wouldaccordingly only ignore at their respective perils.

This will need to be borne in mind as we examine how these matters were dealt with andwhat, if any, attention was given to them.

21.4 Monday 5th July 1999

(a) On 5th July 1999 Mr. Coumbis wrote to Mr. Yates confirming his advice of delivering the Deed ofIndemnity to Mr. Naru on 2nd July 1999 advising he would contact Mr. Yates when he received aresponse from Mr. Naru and attaching a typed copy of his handwritten fax of 2nd July 1999 (in theterms quoted in 21.3(e) above).

Copies of this letter and typed fax taken from Commission Document DCD13 will be TenderedDocuments SM489 and SM490.

(b) The Carter Newell Invoice 17357 which was cancelled (Tendered Documents SM238­239)contains the following entries:­

"5 Jul 99 Letter to Blake Dawson Waldron by Chairman of DFRBF – K. Naru5 Jul 99 Letter to Peter Coumbis enclosing duly executed Deed of Indemnity5 Jul 99 Letter to Mr. Richard Sinamoi re: DFRB purchase of Sandaun Motel

5 Jul 99 Drafting Authority to pay".

This invoice was raised on the Carter Newell file 990166 (Commission DocumentDCD76).

There is an original letter and facsimile confirmation on this file which appears to explainthe first of these entries being on DFRB "Office of the Chairman" letterhead signed by Mr.Naru and addressed to Blake Dawson Waldron and which reads:­

"RE: PNG DEFENCE FORCE RETIREMENT BENEFITS FUND BOARD AND KINASECURITIES LIMITED

Thank you for your letter of 2nd July 1999 and the redrafted Deed of Indemnity, thecontents of which we have noted.

We agree with the contents of the Deed of Indemnity and are prepared to execute that.

The other queries raised in your letter are being attended to and we will respond to you assoon as possible.

A copy of the letter and facsimile confirmation of 09.34 on this day will be TenderedDocuments SM491 and SM492.

The only other document on this file of this date is a full company search of the Cullinancompany Fleet Limited obtained by Mr. Paul Toua from AC Fox and Associates.

A copy of this search and its cover page will be Tendered Document SM493 to SM496.

There is no document on this file, which substantiates the other entries.

It may be that the third entry relates to the letter to Mr. Sinamoi of 2nd July 1999 (asreferred to in 21.3 (b) above) as there was no fee entry recorded on that date for that letter.The other entries appear to be fictitious.

(c) The Carter Newell Invoice 17360 (Tendered Document SM337) contains the following entries:­

"5 Jul 99 Telephone out Airways Motel – accommodation for M. Cullinan5 Jul 99 Writing new purchase order and faxing same to Airways for M. Cullinan'sextension of stay".

This invoice was raised on the Carter Newell file 990218 (Commission Document 3A&B), which was the Sandaun Motel file.

There are no documents on that file that substantiate these entries or the other entriesreferred to in 21.4(b) above and explanations are clearly required.

It seems clear that the matters raised by KSL had required Mr. Cullinan to further extendhis stay in Port Moresby and that Carter Newell were attending to his accommodationneeds by issuing their purchase orders for his accommodation and charging DFRBF legalfees for so doing.

Again an explanation as to why these items were billed to DFRBF is required.

There could now be little doubt that at this time steps were being taken to have thefraudulent Audit Certificate obtained.

(d) We are still in the process of endeavouring to obtain records from both Carter Newell and AirwaysMotel as to what occurred and will advise the Commission further when those enquiries arecompleted.

(e) On 5th July 1999 Mr. Naru also spoke to Mr. Yates who made a file note of such conversation asfollows:­

"Spoke to Chairman he advised he is happy with contents of letter from our lawyer. He willendeavour to have everything requested in the next day or so.

He has recommended we re­invest money for a further two days".

Mr. Yates also received from Mr. Coumbis by fax, a copy of Mr. Naru's letter to BlakeDawson Waldron as quoted in 21.4(b) above.

Copies of the file note and fax cover both taken from Commission Document 13 will beTendered Documents SM499 and SM500.

21.5 Tuesday 6th July 1999

(a) The Carter Newell Invoice 17357 which was cancelled, (Tendered Document SM239) containsone entry on this day which does not related to the Sandaun Motel purchase.

The Carter Newell Invoice 17360 (Tendered Document SM337) contains two entries:­

"6 Jul 99 Letter to Mr. R. Sinamoi, DFRB6 Jul 99 Letter to Mr. Marcus Cullinan by Richard Sinamoi of DFRB".

We are not able to locate any letter of this date to Mr. Richard Sinamoi from Carter Newelland that entry requires explanation.

We are able to locate a letter from Mr. Sinamoi to Mr. Cullinan, which the entry indicateswas drawn by Carter Newell, which is addressed to Mr. Cullinan by address and faxnumber to the Sandaun Motel in Vanimo and which reads:­

"RE: SALE OF SANDAUN MOTEL

We refer to the above matter and note one of the conditions of the sale agreement is foryou to deliver to us your company accounts.

We would be grateful if you can forward to us Banora Trading Limited's audited's accountsfor the year ending 31st December 1998 as required by the agreement".

A copy of this letter taken from Commission Document DCD13 will be TenderedDocument SM501.

(b) Again it is clear that this letter was a further part of the "cover up" intended to reinforce theimpression that Carter Newell had been part of the move to obtain audited financial statements forBanora Trading Limited for the 1998 year.

It is also noteable that Carter Newell well knew that Mr. Marcus Cullinan was not at theSandaun Motel in Vanimo, where this letter was addressed, but had extended his stay atthe Airways Hotel in Port Moresby for which extension Carter Newell had provided thepurchase order.

Mr. Richard Sinamoi was uncertain whether he prepared this letter or whether it wasprepared for him (Transcript pp. 4297­4298) but it is clear, in our view, the letter wasprepared for him by Carter Newell.

(c) This letter ties in with the evidence of Mr. Marcus Cullinan as referred to in 20.6 of this opening andquoted at Transcript p. 4194 where, when being asked about DFRBF wanting the 1998 financialstatements audited he said, "Yes, there was a letter sent from I think Darby or Richard, something likethat".

This letter and that evidence tend to make it clearer that the fraudulent audit report was obtained atthis time and backdated to make it appear it was obtained prior to that matter being raised by Mr.Yates' letter of 30th June 1999.

The dishonesty is apparent as is the role of Mr. Marcus Cullinan and Mr. Kelly Naru in that dishonesty.

21.6 Special Board Meeting 9/99 – Wednesday 7th July 1999

(a) How this Board meeting came to be called is something of a mystery.

In our earlier opening on "Board Fees, Allowances and Expenses" we dealt in detail with a trip taken inJune/July 1999 to Wellington and Canberra by Mr. Richard Sinamoi, Colonel Playah and Mr. Porikalifor the purposes of finding suitable accommodation for Defence Advisors. That touring party left PortMoresby on 28th June 1999 and returned from Brisbane to Port Moresby on 5th July 1999. Mr.Sinamoi had accordingly only just arrived back in the country and had time to sign the letter to Mr.Cullinan on 6th July 1999 before this Special Board meeting was called. It also indicates why he firstsaw and noted Mr. Yates's letter to Mr. Naru of 30th June 1999 on 6th July 1999.

As Board Secretary and Acting General Manager Mr. Sinamoi had minimal time to prepare for andarrange this Board meeting and this reflects in the documents produced by DFRBF (CommissionDocument DCD96) which contains no written notice of, agenda for or copy Board papers for thismeeting.

Mr. Richard Sinamoi said he only come back to the DFRBF office on 6th July 1999 after the trip toAustralia and that notice of this meeting would only have been given at some time on that day. He saidit was probably later on that day and "I would not say that they were given at least 24 hours notice"(Transcript pp. 4298­4299).

(b) According to the minutes of the meeting it was held on Wednesday 7th July 1999, Mr. Naru andColonel's Playah and Renagi were present, Mr. Vali Asi was absent and Mr. Richard Sinamoi was inattendance.

The meeting was opened at 1.00pm, closed at 2.40 pm and the agenda items were:­

"1.1 Sandaun Motel Acquisition1.2 Land Purchase MHA Scheme1.3 Rebo Media Consultant Contract1.3 Defence Attaches Houses2.1 Liquidity of the Fund2.2 Mr. Darby Kila's letter3.0 Next Board meeting

A copy of the minutes taken from Commission Document DCD24 will be TenderedDocuments SM502 to SM505.

The minutes suggest that there was an agenda in existence but the inclusion of two items1.3 suggest it was confused.

(c) When the meeting was opened, according to the minutes the Chairman Mr. Naru is recorded asrequesting that agenda item 1.3 dealing with the study trip for Defence Attaches houses "be broughtforward for discussion whilst the General Manager for Kina Securities Limited Mr. Yates was here, sothat he may provide advise (sic) on the investment".

Colonel Playah and Mr. Sinamoi are then shown as providing a verbal brief on their trips to Wellingtonand Canberra and despite concerns expressed by Colonel Renagi about having a lease agreementwith the Department of Defence and fixing the rent with that Department the Board resolved subject tomanagement assessment and negotiation of price based on a valuation report to purchase House 2,"Yarrabi Shores, Barrington Crescent Namoroo Street 31".

As the Defence Advisor designate to Canberra Colonel Playah, who had not declared his interest,would doubtless have been pleased with this decision and Mr. Naru would doubtless have thoughtColonel Playah was content before the Sandaun Motel proposal was dealt with.

When this item was dealt with the minutes record "Col. Renagi asked that Mr. Yates advise the Boardas to the status of the fund and its liquidity, this is recorded in item 2.1 Other Business. The Chairmanthanked Mr. Yates and asked him to leave, so that the Board may discuss other items".

The very next item discussed, according to the minutes was the "Sandaun Motel Acquisition" which wewill come to shortly.

On item 1.2 – the land purchase the minutes record a resolution, "that in light of the absence of aMinister all Land matters are to be placed on hold until a Minister is appointed or the Board decides totake up the offer, at a later date". The political involvement in this issue, which had earlier beenpressed by Mr. Naru, was plain.

The Rebo Media Consultant matter has been dealt with in our earlier opening on "TendersProcedures" and Mr. Kila's letter was deferred to the next meeting.

(d) In respect of the Sandaun Motel acquisition the minutes of this meeting (Tendered DocumentSM503 and SM504) read:­

"1.1 Sandaun Motel Acquisition

Chairman briefed the Board of the status of this particular proposal. He advised the Boardof KSL's request for an indemnity to be signed if they where to settle this matter with outthe proper analysis by them.

Thus he asked weather the Board was willing to sign an indemnity. Col. Renagi expressedhis concern over the proposal and that certain members of the fund where askingquestions about this particular investment. He stated further that the Board should not signan indemnity form to allow KSL to settle this mater without through analysis. He wanted thematter to be referred back to Management for them to review and advise the Boardaccordingly.Col. Playah agreed with Col. Renagi sentiments especially with regard to all the concernsraised by our members on this particular matter and certain other Board dealings. As forthe indemnity form he did not want the Board to sign it.

Resolution:

Moved Col. Playah seconded Col. Renagi and unanimously resolved that the Board;

1. Take note of the advise (sic) provided by K.S.L, and to await the Audited FinancialStatements to be supplied to Management.2. Upon receiving the Audited Financial Statement, Management should proceedimmediately to finalising the Business Evaluation and table the report for the Boardsconsideration".

It is quite plain that it was Mr. Naru who brought forward the items with which Mr. Yateswas concerned and who asked Mr. Yates to leave this Special Board meeting before theSandaun Motel proposal was discussed thus ensuring that Mr. Yates and KSL wereexcluded from the discussion.

Clearly the resolution over the house in Canberra had not been sufficient to placateColonel Playah's concerns and on this occasion he supported Colonel Renagi's expressedconcerns about a thorough analysis being required and the matter being referred back toDFRBF management for further review and advice to the Board.

The Board resolutions could not have been clearer.

The KSL advice was noted, the audited financial statements were to be provided to DFRBFmanagement and DFRBF management was to finalise a business evaluation and table itfor the Board's consideration.

Plainly, the Board had affirmed its earlier condition of 1st March 1999 that a businessevaluation was needed and the transaction was not to proceed until that was done andconsidered by the Board.

The Board failed to address the conflict of interest position with Carter Newell acting forDFRBF as well as the vendors of the Sandaun Motel or to confront Mr. Naru on that issue.

It did however note the other advice given by KSL – presumably as contained in Mr. Yates'letter of 30th June 1999, which was copied to other DFRB Board members.

In our view, it is plain that with these resolutions passed the Sandaun Motel proposal could

not proceed further without a further DFRB Board decision, which was based on abusiness evaluation being tabled for the Board's consideration.

It is also worthy of note that in the political area the events we have earlier reviewed weretaking place and the Board was awaiting the appointment of a new Minister for Defence toreplace Hon. Peter Waieng.

(e) Mr. Richard Sinamoi gave evidence of this Board meeting and the events surrounding it on 21stMarch 2002.

He said that though his involvement in the Sandaun Motel transaction to this point hadbeen minimal and "Most of those were facilitated outside my level anyway", Colonel Renagihad enquired about the status of the transaction and what due diligence had been carriedout (Transcript p. 3196). He said he did not make any complaint to Colonel Renagi prior tothis meeting. He said he also had learned from Mr. Yates of KSL that "They did not want tohave anything to do with it … with the share sale and purchase agreement of the motel"(Transcript p. 3197). He said Mr. Yates told him that and " – he said it was not a viableinvestment. That was a general discussion".

Mr. Sinamoi said he was not involved in the discussion or negotiations regarding the Deedof Indemnity sought by KSL and "As far as I was aware in relation to the Deed of Indemnitywas when Kina Securities were discussing and I think they were discussing directly withthe chairman in relation to indemnifying themselves". Mr. Sinamoi said he understood theeffect of the Deed of Indemnity (Transcript p. 3198) and that it concerned him as ActingGeneral Manager. Asked what he did, he said:­

"Well, I recall having discussions with both contributor representatives in relation to thatdeed of indemnity and I remember speaking to Colonel Renagi and advising that, well, thiswas an ideal opportunity. If we were to exit from this deal that we use the Kina Securitiescontract in this instance and push against not investing because Kina Securities did have acontract and they could hold that against the board. And the board decided to pursue it andit would entirely be up to the board and Kina Securities because then it even got to a stagewhere they were considering the fact of terminating the agreement between the board andKina Securities. So it was not ­ because they could not come to an arrangement with that,Kina Securities saw this as an option for them to relieve themselves of that by taking out anindemnity". (Transcript p.3199)

Mr. Sinamoi said his discussions with Colonel's Renagi and Playah were informal and notwritten; that he thought those discussions may have led to the two Colonel's action at theBoard meeting of 7th July 1999 and that he had no discussions with Mr. Naru about theDeed of Indemnity (Transcript pp. 3199­3200).

Mr. Sinamoi who took the minute of this meeting said Mr. Naru stressed at the meeting howimportant it was to have the indemnity signed and they had considered the option of endingthe contract with KSL. He said Mr. Naru advised the Board that it was a "necessity" toexecute the indemnity so we could progress the acquisition of the motel" (Transcript p.3200).

Mr. Sinamoi said that there was no mention of a signed contract at this meeting and hisbelief was "There was no contract. We were still carrying out due diligence … We were toprogress those business valuations and the other necessities" (Transcript p.3201).

In fact Mr. Sinamoi was doing nothing in these respects as he said, "It was all above my –out of my level anyway" and he clearly thought the involvement of KSL derived from anearlier request by Mr. Kila for KSL to provide advice on this proposal (see Transcript pp.3201­3202) which was adverse. "And when the matter was pursued quite diligently fromour board; that was I think when Kina Securities and their management realised that therewas really nothing more they could do to stop this deal, so they had to seek indemnity fromthe whole transaction".

Mr. Sinamoi said the determination for the transaction to proceed came from Mr. Naru andthat the two Colonel did not agree with it and "They were of the opinion that we shouldprogress with carrying out the necessary business valuation and what have you, the furtherdue diligence and table it at the board meeting to determine whether it was a viable

investment. They did not want to go and indemnify Kina Securities, because then if KinaSecurities were indemnified then the whole process of raising a cheque and all that wouldhave been an awkward process" (Transcript p. 3203).

Mr. Sinamoi said the resolutions as recorded in the minutes were passed and agreed thesteps those resolutions entailed were:­

(i) Await the supply of the audited financial statements to Management.

(ii) On receipt of those financial statements Management should proceed to finalise thebusiness evaluation.

(iii) The evaluation should be tabled for the Board to consider (Transcript pp. 3203­3204).

(f) Colonel Renagi gave evidence of this Board meeting and the events surrounding it on 25th March2002.

Asked of his recollection of this meeting without access to the minutes the Colonel said:­

"I think the chairman put it to the board something to the effect that the Kina Securitymanagement may have a conflict of interest in ­ I think, the question arose prior to thatmeeting, a concern being expressed by Colonel Playah and I that all this time, KSL has notcome into the party as part of the due diligence checks by the management was also toengage the fund managers, in this case, it was Kina Securities.

Even if we were to get an independent valuation, it was part of the process to get a secondopinion from our own fund managers and do some comparisons later on.

But it became obvious to Colonel Playah and I that it was already middle of the year andKina Security had not come in and we raised it informally with the chairman, I am not toosure whether it came up formally during board meetings or not. The chairman's responseat that time was – I also again in the absence of a formal, anything on paper. I have hadthese impressions for sometime but I cannot recollect whether the management hasformally put it to the board or whether it came formally again from the chairman. Again,these are all verbal that the Kina Security management may have a conflict of interestbecause there was an opinion prevailing at that time within the board again advanced bythe chairman or the GM himself that we cannot allow the KSL management to carry on duediligence check because they have a conflict of interest and I asked why, and they said,there was a connection between some KSL board members, may be from Malaysia originor whatever ,they have a connection to some of the timber logging companies there whosupposedly own the Vanimo Beach Hotel. And I later on got some sort of opinion from KSL.

When I asked the GM well what does KSL think and they said they did not recommendagainst it and that is something that we expected because of the Asian connections andthe timber, logging companies, they own the Vanimo Beach Motel and they are the oneswho do not want us to by the Sandaun Motel because they are probably interested inbuying that one too. So there was an opinion. Like I said there was a body of opinion butthe again it had been advanced, those opinions were advanced by both the GM and thechairman that we cannot use KSL because they are already compromised, they have aconflict of interest. They will obviously tell us not to buy so that was the opinion why theyhad to go through somebody else, another national company of valuers. It subsequentlyresulted in Mr. Yates writing something to the board chairman saying that we areconcerned that you have not included us in the valuation as part of your due diligencechecks and we would like to absolve ourselves from any legal liabilities in future so I thinkthere was a deed of indemnity sent by them to the chairman or the management to sign sothat in the case that it came before some investigation then there would be ­ they washedtheir hands off, something like that. That is the best of my recollection –". (Transcript pp.3287­3288)

Asked whether he was aware at the time Kina Securities advised audited financialstatements should be obtained and that they were totally opposed to the investment inSandaun Motel, Colonel Renagi said he thought Mr. Kila later showed he and ColonelPlayah a copy of a letter from Mr. Yates but he repeated that earlier on Mr. Naru and Mr.Kila were saying KSL had this conflict of interest and could not be trusted, that this was the

opinion formed within the Board and thus that a negative opinion from KSL was in factanticipated on that basis (Transcript pp. 3288­3289).

Asked if he appreciated the seriousness of KSL seeking a Deed of Indemnity ColonelRenagi said the legal position should have been explained to the Board and that whilst heand Colonel Playah understood the consequences "with the chairman being a lawyer byprofession we trusted his instinct as well as the management who spend all their timesdoing all this follow up work" (Transcript p. 3289).

When shown the minutes of this meeting Colonel Renagi did not wish to add anything butsaid that his view prevailed, "For a brief while" (Transcript p. 3290).

(g) Given the resolutions passed at this meeting it is not necessary to reflect on Colonel Renagi'sremarks as to a perceived bias or conflict of interests on the part of KSL or the role of Mr. Naru as alawyer.

It does bear repeating that though Mr. Yates letter of 30th June 1999 gave the perfectopportunity to question Mr. Naru's roles and conflicts the Board did not take thatopportunity to confront him.

22. EVENTS TO AND INCLUDING SPECIAL BOARD MEETING 11/99 – 5 AUGUST 1999

22.1 Friday 9th July 1999

(h) The Carter Newell Invoice 17360 (Tendered Document SM337) contains one entry:­

"9 Jul 99 Printing letter from DFRB to M. Cullinan".

We are not able to locate in the Carter Newell file (Commission Documents 3A & B and67) any document, which substantiates this entry. The charge entry in consequencerequires explanation.

The only document we can locate bearing this date is a note in the Sandaun Motel file(Commission Document 3B) headed "Copies of Consents" which reads:­

"Kelly,

These forms need to be sealed with the common seal of DFRB and signed by twodirectors.

Paul".

A copy of this note will be Tendered Document SM506.

We are not able to ascertain from this file what "consent" documents would have requiredexecution under the DFRB Board seal at this time and again an explanation is required.

(i) Though it seems clear there was activity in other quarters at this time particularly on the fraudulentAudit Report we are not able to point to any specific documented other events on this day.

22.2 The return of the Cullinan's – 10th July 1999

(a) The Department of Foreign Affairs Movement Records show that all of Mr. Brian Cullinan, his sonMr. Kevin Apita Cullinan and his grandson Dillon Tyren Cullinan, arrived back in Papua New Guineaon Saturday 10th July 1999 on flight PX004 and remained in Papua New Guinea until 26th October1999.

(b) As mentioned earlier, we are still in the process of endeavouring to obtain records which willexplain the movements of the Cullinan family in this period and will advise the Commission whenthose enquiries are complete.

It would seem from records of Westpac Bank as dealt with in 24.10(d) below that Mr

Marcus Cullinan at least remained in Port Moresby until Friday 16th July 1999.

22.3 Monday 12th July 1999

(a) The Carter Newell Invoice 17360 (Tendered Document SM337) contains an entry:­

"12 Jul 99 Telephone out Airways Motel extending stay at the Hotel until Tuesday 13th July1999".

There are no documents in or notations on the Sandaun Motel file (CommissionDocuments 3A & B), which substantiate this charge entry.

(b) There is a letter from Mr. Marcus Cullinan to Mr. Richard Sinamoi dated 12th July 1999 (which maybe backdated) on Sandaun Motel letterhead which reads as follows:­

"RE: FINANCIAL STATEMENTS FOR BANORA LTD (SANDAUN MOTEL)

Reference is made to your letter of July 6, 1999 in relation to the above.

Our Accountants and Auditors have completed their Audit of the company's accounts asper attached.

As requested we are pleased to enclose a copy of Sandaun Motel's Financial Statementsfor the year ended December 31st 1998.

You would note that this transaction has been dragging on for quiet sometime and wewould be grateful if the transaction can be completed by the end of the week or possibleearly next week".

A copy of this letter taken from Commission Document DCD13 will be TenderedDocument SM507.

The Commission will observe that the letter is noted by Mr. Richard Sinamoi some eight (8)days later on 20th July 1999.

Mr. Sinamoi said this notation indicated this was the date on which he first saw this letter(Transcript p. 4299).

Though we will deal with this receipt later it is important to note that on 12th July 1999 Mr.Marcus Cullinan was at the Airways Hotel in Port Moresby and as we will see later Mr.Sinamoi said he received these financial statements from Mr. Naru.

The available inferences are either that the fraudulent audit report was still being obtainedand the letter was backdated or that the fraudulent audit report had been completed andthat there was a deliberate delay in handing the documents to Mr. Sinamoi.

22.4 Tuesday 13th July 1999

There is a single entry in the Carter Newell Invoice 17360 (Tendered Document SM337) whichreads:­

"13 Jul 99 Document preparation reviewing file – memo to KN".

The only document we are able to find on the related Carter Newell file (Commission DocumentDCD3B) of this date is a handwritten note which reads:­

"Memo: 13/7/99

Kelly, Could we please meet to discuss what needs to be done on this file".

A copy of this note will be Tendered Document SM508.

It could in our view, not be clearer that it was Mr. Kelly Naru who was controlling the progress of this

transaction and that whoever reviewed the file needed instructions from Mr. Naru as to what was to bedone.

22.5 Thursday 15th July & Friday 16th July 1999

(a) It seems that Mr. Naru did not respond to this note for at least a day (he was obviously engaged onsomething else) but on 15th July 1999, carrying into 16th July 1999 there was clearly a spate ofactivity.

The Carter Newell Invoice 17360 contains the following entries for those days:­

"15 Jul 99 prep minutes, change of director/secretary of Banora Trading Ltd15 Jul 99 revise change docs15 Jul 99 Meeting with Chairman of DFRB and taking further instructions to prepareresignations of Directors – appointments of new directors – check agreement – draftingresignation forms – drafting appointment forms – memo to clerk – drafting settlementschedule – telephone in Chairman – telephone out to Richard DFRB15 Jul 99 Review of agreement in preparation for settlement – telephone in Richardrequesting information of Directors – Residential addresses – reviewing company search –reviewing title search – conference with clerk – revising documentation15 Jul 99 Document preparation attendance – conference with Chairman – furtherinstructions – further telephone conference with Richard – attending to changes toagreement.15 Jul 99 Telephone in Kelly – documents finalised and ready to be picked up.15 Jul 99 Conference with P. Toua – attendance on file.16 Jul 99 Document preparation attendance on file".

(b) To anyone familiar with company takeovers this flurry of activity points clearly to preparation forsettlement with the preparation of resignation forms for the existing directors and secretaryascertaining details of the new directors and secretary from Mr. Richard Sinamoi to prepare theirconsents to act and preparing those consents, drafting the minutes of the Board meeting at which thechanges of Directors and Secretary would take place, reviewing the Agreement and the company andproperty title searches in preparation for settlement and drafting the settlement schedule.

Two aspects of these entries are noteable. First that all the instructions were being givenby Mr. Naru and secondly that a number of the contacts were made by Mr. Naru (who wasclearly located somewhere else).

There are numerous copies of directors and secretary's consent and resignation forms anddraft Minutes of Meetings in the related Carter Newell file (Commission Document 3B)and which are dated and signed in August 1999. It is quite possible these documents wereprepared at this time.

There is also a hand written page with notes of the names and full address of ColonelRenagi, Colonel Playah, Mr. Richard Sinamoi and Mr. Darby Kila, which would appear toexplain the contacts with Mr. Richard Sinamoi –to obtain these details.

A copy of this hand written page will be Tendered Document SM509.

Finally there is a typed e­mail memo from Rohia Vani to Paul Toua "Sent: Thursday, 15 July1999 at 9.52am" on the "Subject: Kelly called and left a message" which reads:­

"URGENT!!

Please prepare Sandaun Motel documentation as soon as possible in order for thedirectors to sign today".

The message could not be clearer.

A copy of this e­mail memo will be Tendered Document SM510.

(c) It is quite plain that despite what was resolved at the DFRB Board meeting on 7th July, 1999 andindeed in defiance of what was so resolved Mr. Naru was arranging completion of the documents for

the Sandaun Motel transaction so that they could be signed on 15th July, 1999 and that steps weretaken towards preparing not only to sign the share sale and Purchase Agreement but also otherdocuments in preparation to complete the purchase.

The legal charge entries shows that these documents were being prepared with Mr. Naruout of the Carter Newell Office and with Mr. Naru being advised that the documents wereavailable to be picked up. There is every reason to believe that Mr. Marcus Cullinan wasprobably still in Port Moresby at this time; that the urgency was associated both with hisplans to return to Vanimo and the recent arrival of his father, brother and nephew and thatMr. Naru was probably with or within easy contact of Mr. Marcus Cullinan and Mr. MichaelTulake.

22.6 Tuesday 20th July, 1999

(a) Whilst there was presumably activity between Friday 16th July and Tuesday 20th July 1999 there isno documented evidence of it.

(b) On Tuesday 20th July 1999 Mr. Richard Sinamoi noted as received the letter of Mr. MarcusCullinan dated 12th July 1999 attaching the 1998 financial statements of Banora Trading Limited withthe fraudulent Audit Certificate as dealt with in 22.3(b) above (Tendered Document SM507).

Mr. Sinamoi on the same day – 20th July, 1999 wrote an inter office memo to Mr. Yates ofKSL in the following terms:­

"SUBJECT: FINANCIAL STATEMENTS FOR BANORA LTD(SANDAUN MOTEL).

Further to your letter dated 30 June 1999 regarding the Purchase of Sandaun Motel, couldyou please find the Audited Financial Statements of the above mentioned company asrequested for.

Please advise as urgently of your opinion and weather this information is sufficient tocomplete the Business evaluation".

A copy of this memo taken from Commission Document DCD 23 will be Tendered DocumentSM511.

(c) With the audited financial statements received Mr. Sinamoi was in a position to implement theBoard decision of 7th July 1999 which required DFRBF Management to complete the businessevaluation of the Sandaun Motel proposal and he had clearly sought Mr. Yates advice and opinion onthat aspect.

Asked about this aspect Mr. Sinamoi said:­

"… And as stated there and as I said earlier, I mean our involvement in it was quite limited,basically because all those, the business valuation upon – and the financial statements andall that, although it was to be facilitated by management, I mean records already have itthat the chairman facilitated all that. So you can see that our roles were already limited".(Transcript p. 3204)

Mr. Sinamoi said (although we have seen his letter of 6th July, 1999 which was preparedby Carter Newell) that he did nothing to obtain the audited financial statements – "It wasprovided for me and also provided to the Board" (Transcript p. 3204) and "It was only afterit was requested and then the Chairman provided us information" (Transcript p. 3205) andfinally "the Financial statements were provided and it was then that I knew – well thechairman provided them to me. So obviously the chairman was facilitating it" (Transcript p.3206).

Plainly Mr. Naru was involved to the exclusion of DFRBF Management in dealing with thispart of the Board resolutions of 7th July 1999.

When asked what steps he took to implement the Board resolution requiring DFRBFManagement to complete a business evaluation Mr. Sinamoi said "Because as soon as thebusiness evaluation or well, as soon as the audited financial statements were received,they were tabled. I recall they were given or tabled during a meeting and basically it wasstated that this was the business valuation".

After repeating that he knew they were tabled at a meeting he said "But the chairmanclaimed that this was a business evaluation as well" (see Transcript p. 3206) and that hesaid nothing to contradict it.

The fact that he had signed the letter to Mr. Cullinan of 6th July, 1999 and written to Mr.Yates on 20th July, 1998 does not appear to have registered with Mr. Sinamoi and thoughhe recalled a discussion with Mr. George Uware (Transcript p. 3205) the fact Mr. Uwarewrote him a memo on this subject, which we will deal with shortly, also appears not to haveregistered with him.

In his later evidence and when shown these documents, Mr. Sinamoi said the letter withthe financial statements was hand delivered to his office. He said this was at a time whenMr. Marcus Cullinan was "coming into town, meeting up with certain members of the Boardand then going back up". He said he knew this as Mr. Cullinan would call from the AirwaysMotel and dropped into the DFRBF office a couple of times when he, Mr. Sinamoi, wasActing General Manager of DFRBF.

He said Mr. Cullinan would call him up saying he was in town for the weekend and that hewas having trouble contacting Mr. Naru.

The evidence then proceeded:­

"Q: So his main contact you thought was with Mr. Naru and then he only contacted you ifhe was having problems?

A: Yes, Mr. Naru, Chris Vihruri because Chris Vihruri was travelling as well to and fromMoresby. He dropped into my office and he was claiming that he was following up oncertain matters when he was with the secretary, I think he had some outstanding,payments to follow up on.

Q: Was Mr. Vihruri here also around this time when you were acting general manager orwas that much earlier on?

A: Well, he travelled down to and from and I believe while I was acting general manager hewas in town.

Q: Did you know where he was staying?

A: No.

Q: You do not know whether he was at the Airways motel or not?

A: He may have been because he ­ you know, the would convene there to have dinnersand all that.

Q: Who would?

A: Well, Chris Vihruri and Marcus and maybe even the chairman.

Q: How did you know that?

A: Well, that is why he would call me up to see if he could convene a meeting with thechairman for dinner.

Q: During the time that you were acting general manager?

A: Yes, and even when I was still the executive assistant.

Q: No, I am more interested in when you were acting general manager and I am very

interested ' who were at these dinners, you see.

A: Yes.

Q: So we have got Mr. Vihruri and Mr. Cullinan and Mr. Naru?

A: Yes.

Q: Anyone else that you know who were at any of these dinners?

A: No, Mr. ­ well, Marcus would call me up in relation to getting in touch with the chairmanso I was of the opinion that the chairman was attending. I am not too sure about any of theother directors.

Q: Who would call you up?

A: Marcus Cullinan.

Q: Did you have any contact with Michael Tulaki at this time as well?

A: Around that time I do not think I had any contact with Michael Tulaki.

Q: See, this is the reason I am asking you this is, what you have told us previously is thatyou received the financial statements from the chairman and that is incredibly significant.That is why I am asking you whether that letter causes you to change that evidence abouthow received the financial statements. Do you remember the question I asked you?

A: Yes, yes. Well, I said that I had received the statements from the chairman, because thechairman was, as I said, following up on the matter with the statements and it was the firsttime when he brought it to my attention. It was my discussion of the financial statementswith the chairman.

Q: All right, but what I am concerned about is it would seem that you first received thosefinancial statements on 20 July and you received them with that letter from Mr. Cullinan?

A: Yes.

Q: So, it is important that we know, if you are aware, how that letter or who that letter camefrom. Who actually put it into your hands?

A: Well, I would not change my evidence. I would still say that it was probably the chairmanthat handled this.

Q: That you derived that from?

A: Yes. I had also derived that because usually when we receive correspondence and if itcame through the procedures, I mean the normal procedures where it is received at thefront desk and all that, it is usually registered and there would be a received stamp on it.So, assuming that there is no received stamp on it I would have delivered or ­­­

Q: Hand delivered to you.

A: Handed straight without being received, yes.

Q: Yes, because you usually stamp, your received stamp on it if it comes through theoffice.

A: Yes.

Q: Now, do you recall that at the board meeting on 7 July 1999 the board had resolved thatwhen the financial statements were obtained the business evaluation was to becompleted?

A: Yes.

Q: Did it strike you as significant when you received this letter that the letter was dated 12July but hand delivered to you and that you only received it eight days later on 20 July?

A: Well, it did strike me as funny. But, as I said, it was passed on and it never occurred tome any further to question it. I thought maybe through the normal mailing procedures fromVanimo or whatever". (Transcript pp. 4301­4303)

We have quoted this evidence in full as it gives insight as to who was present andcommunicating with whom at the time the fraudulent Audit Report first materialised.

Mr. Sinamoi also recalled that he sent the financial statements to KSL and gave a copy ofthe financial statements to Mr. George Uware to obtain his opinion on them (Transcript pp.4704­4706).

We will come back to Mr. Sinamoi's role shortly.

22.7 Thursday 22nd July, 1999

(a) The Carter Newell Invoice 17360 (Tendered Document SM337) contains one entry for this day:­

"22 Jul 99 Attendance at Dept of Lands"

We are not able to locate in the related Carter Newell file (Commission Document 3B)any notation or document which substantiates this charge entry but such an attendance isconsistent with preparations for settlement of a transaction involving land.

(b) Though there is in evidence on a number of files (including Commission Documents DCD 3B,DCD 13 and DCD 23) of a letter of Carter Newell Lawyers dated 22nd July, 1999 signed by Mr. JimmyMaladina that letter was either back dated or not liberated until 27th and 28th July, 1999 and we willdeal with it when we come to these dates.

(c) At some time on or before Thursday 22nd July, 1999 Mr. Richard Sinamoi, as Board Secretary hadbeen asked to arrange a Special Board Meeting 10/99 and had prepared an agenda for that meetingscheduled for 12.00 noon on 22nd July, 1999.

A copy of that agenda taken from Commission Document DCD 96 will be TenderedDocument SM512.

This meeting was thus scheduled two days after Mr. Richard Sinamoi had received thepurportedly audited financial statements and had provided them to Mr. Yates of KSL andallowed no adequate time for any business evaluation (which Mr. Naru had constantly beenavoiding) to be undertaken.

We will come back to this meeting shortly.

(d) Between 20th and 22nd July, 1999 Mr. Naru and Mr. Richard Sinamoi had both spoken to the onlyremaining senior manager at DFRBF Mr. George Uware (Mr. Kila being suspended and Mr. Ruimbhaving his resignation brought forward at Mr. Naru's direction) seeking to obtain something from Mr.Uware – who is a qualified accountant – in the nature of an appraisal of Sandaun Motel. Mr. Uwareprovided his views in a memo to Mr. Sinamoi dated 22nd July 1999 which reads as follows:­

"As requested by both the Chairman and yourself, the following are my views on theproposed purchase by DFRBF of Sandaun Motel.

I wish to from the outset qualify my views as merely representing my personal opinion andprincipally based on information provided to me. The information thus provided being anaudited set of financial statements for the financial year ended 31 December 1998.

I have not sighted nor have been privy to any official documentation providing details of theprice being offered by the vendor for the purchase by DFRBF of the abovementionedmotel, however it suffices to say that the proposed investment will be substantial (ie. inexcess of K1.0 million) judging by the figures shown on the 1998 financials.

Since this represents a substantial investment of contributor funds, it is a fundamentalresponsibility of management and ultimately the Board of Trustees to evaluate thisinvestment proposal diligently and prudently to ensure its viability for the ultimate benefit ofthe contributors.

1. Financials

The figures appearing on the financial statement for 1998 are very impressive and theowners must be congratulated. However as the intending purchaser of the motel (and for asubstantial sum of money I must say) the Board of Trustees of DFRBF has a duty toconduct a thorough evaluation not only of the financial statements but of the business as anecessary part of its due diligence process prior to acquisition.

This means to conduct a detailed investment appraisal and the requirement for anindependent audit on the financial affairs of the motel by a "reputable" accounting firm.These Procedures are essential and necessary and should be undertaken by DFRBFwithin a reasonable period of time without undue pressure from the vendor or its agents.Although the 1998 financial statement may have been "audited" I do not feel comfortablerelying on the opinion expressed as the gospel truth upon which to commit a substantialamount of money for the purchase of this motel.

Furthermore, it is necessary as part of the investment appraisal to carry out a trendanalysis of the motel's financial statement covering a period of say five years prior to 1998.It is not possible to do this since the only "audited" financial statement given relates to1998. It is therefore not possible to analyze whether the business has grown, remainedstatic or has declined over a period of time. This information is one of many required todetermine future growth potential of a business since any investment made must inevitablybe recouped from future profits, NOT past results.

In addition, I have noticed minor errors but ones having significant implications on theprofessional ability of the auditor such as on page 2, Statement by Directors whichmake references to the 'Institute" where such reference should have been in respectof Sandaun Motel. If minor errors such as these go unnoticed, then one wondersabout material problems concerning Sundaun (sic) Motel and ultimately the "truth andfairness" of the audit opinion expressed.

I have not had the time to analyse the financials to determine viability due to other pressingduties and therefore I am unable to advise accordingly prior to your meeting today.

2. Others

Investment proposals involving substantial amounts of contributor funds should not berushed. Directors ought to be aware of their fiduciary obligation to the contributors onwhose behalf they hold office as Directors in "trust". Contributors have placed their trust inthe Directors that any investment decision taken will be in their best interest.

3. General

My advise (sic), considering that a substantial amount of contributor funds will becommitted is to instruct Kina Securities who are contracted to provide investment advise toevaluate and provide a report as to the viability of the investment proposal.

I am sure that Kina Securities as a matter of procedure will engage the services of areputable audit firm to provide an alternative opinion which will be critical in deciding on theproject one way or the other.

Due to time constraints I am unable to provide detailed advise, however trust that theabove will suffice for the moment".

A copy of this memo taken from Commission Document DCD 23 will be TenderedDocuments SM513 and SM514.

Plainly this was a new matter to Mr. Uware who was provided only with the purportedlyaudited 1998 financial statements and nothing else.

Mr. Uware clearly pointed out his suspicions about the veracity of the document he hadbeen given and like Mr. Kila and Mr. Ruimb before him clearly stated the Board's obligationto evaluate the proposal "diligently and prudently to ensure its viability for the ultimatebenefit of the contributors"; the Boards "duty to conduct a thorough evaluation ….. of thebusiness as a necessary part of its due diligence process prior to acquisition" ; theimportance of evaluating future cash flows rather than past profits; the fiduciary duty owedby the DFRB Board members; the need for a professional evaluation and his inability toprovide advice on the limited material available to him.

(e) Mr. Uware said in evidence before the Commission on 3rd July, 2001 that this document wasprepared as a consequence of a verbal request from Mr. Richard Sinamoi (in the absence of Mr. Kilawho was on suspension) "To review whether it was a viable investment to get into by the DefenceRetirement Benefits Fund" (Transcript p.415).

Asked whether he was asked to do an assessment of the proposal Mr. Uware said "Thetime given was not sufficient to do a thorough assessment of the investment. I was given –I was told the day before. Where I recommended that at that time Kina Securities wereengaged to provide investment advice and therefore the matter be referred to them to givea proper assessment of the investment" (Transcript pp. 415­6).

Mr. Uware confirmed the only document available to him was the audited report for theyear ended 31st December 1998, that he had no information on price offers, no copy of thecontract, did not know what the price was and generally had no other information at all(Transcript pp. 416­7).

Mr. Uware finally confirmed that he had reservations as to the veracity of the documentsgiven to him and the integrity of the audit report and that he expressed these and othermatters through the memo we have quoted (Transcript pp. 414­5). Mr. Uware said he hadno further involvement with the Sandaun Motel until September 1999.

(f) Though it seems quite clear that the purportedly audited 1998 financial statements not coming intoMr. Sinamoi's hands until 20th July, 1999 and the calling of Special Board Meeting 10/99 on 22nd July1999 was by Mr. Naru's design and not by accident to allow an inadequate time to finalise thebusiness evaluation of Sandaun Motel which Mr. Naru had been studiously avoiding Mr. Uware hadmanaged to create a document which pointed up substantial issues and which could only be ignoredwith the most serious consequences.

22.8 Special Board Meeting 10/99 – 22nd July, 1999

(a) We have dealt with the background against which this yet further Special Board Meeting was calledand the agenda for it (Tendered Document SM512).

Mr. Richard Sinamoi said that after he received the financial statements he had adiscussion with Mr. Naru who "wanted those documents presented to the board,independent opinion in accordance with the Board resolution …" (Transcript p. 4305). Hethought this discussion was on 21st July 1999 and went on to say:­

"At the time it was a special board meeting so he did not indicate what agenda was goingon.

He just said he wants to convene a special board meeting and that is usually what he did.He said, we need a special board meeting. He would never indicate any agendas of thatsort".(Transcript p. 4306)

Mr. Sinamoi said he believed Mr. Uware's memo "may have been passed onto thechairman because it was his request as well. But to the other board directors, no, I do notthink it was passed on to them" (Transcript p. 4307).

He said Mr. Uware's memo was received prior to this Board meeting.

(b) The only Board Paper provided for this meeting was a copy of Mr. Kila's letter dated 25th June,1999. A copy of this letter taken from Commission Document DCD 96 will be Tendered DocumentsSM515 to SM518.

This letter was more extensive than Mr. Kila's rushed letter of June 1999 (TenderedDocuments SM385 and SM386) and was expressly forwarded in anticipation of thecharges threatened by Mr. Naru but which did not eventuate.

In relation to the six substantive matters specified in Mr. Naru's "notice to show cause" of4th June 1999 (Tendered Document SM382) we quote Mr. Kila's response in full as it isboth revelatory of the problems he experienced and in respect of the Sandaun Motel andother matters that a political agenda or political interference was involved. That part of theresponse reads:­

"1. FUND NEWSLETTER

This activity commenced in 1998 and two issues were dispatched to all units in the country.The second issue incorporated and covered the second and third quarters of the year. Thefourth quarter issue was delayed because of a few factors;

a) A change of Board Membership and all efforts were concentrated on organising theSwearing­in Ceremony early in the year;b) Preparation for the first Special Board Meeting as an acquaintance and get together forthe new members;c) Preparation for the trip to Taiwan, Mt. Hagen and first Board Meeting in Vanimo;d) Difficulty in recruiting a Public Relations Officer as I was receiving differing directionsfrom the Board despite the advice to contact the Public Relations and media services of theNational Newspapers firm. The Board required professionalism for the Funds advertisingand promotion medium and the people recommended for me to contact were actuallycontacted on numerous occasion. Disappointingly, they were extremely slow in responding.I attempted as best I could to accommodate your request but with much disappointment.

However, the person I have introduced to undertake the Public Relation & Media servicesfor the ­Fund is hopefully carrying out these services you specifically require of him at a feewhich the Board is agreeable with.

2. MEMBERS HOUSING ASSISTANCE SCHEME ­ Land Acquisition

This is the most confusing project despite the fact that a Tender was called for interestedlandlords to offer their land for sale to the Fund. It is so confusing that I really did not knowwhat the Board Member expected inspite of the Board standing resolutions.

Infact, both you and the Deputy Chairman were giving me contradicting advise on thismatter and both of you again claiming the advise to be as the Minister required. A quorumcould not be achieved for the Supply and Tenders Committee to sit and deliberate on aproposed piece of block to purchase. On numerous occasions Committee meetings wereattempted but as a quorum could not be achieved no meeting were held.

This confusion was earlier created when a Director (individually) advised me not toseriously consider the suggestion by the Minister to build houses, but to continue toimplement the result of the survey that was initially conducted. This was not the first timeindividual directors have give me verbal direction contrary to some Board resolutions. It hasoccurred on numerous occasions and under such circumstances you will appreciate muchapprehension and confusion when one is frequently given contrary and individual directionrelative to Board resolutions.

I just found it extremely difficult to implement this resolution under differing directions fromindividual Board Members inspite of standing Board resolutions.

3. SANDAUN MOTEL PURCHASE

Apart from my earlier explanations, I wanted this investment to be done properly that isfrom negotiations to purchase. What happens after purchase is out of any jurisdiction. Thedelay to accommodate a properly executed deal was for a good intention.

I was actually under pressure from external sources in regards to this deal. Without anyadvice to the Board, I took it upon myself to do things procedurally, so that in the long run,

the fund and its Directors are properly covered and protected from any adverseimplications. In effect, I was contacted by an associate of a politician in the oppositionregarding this deal. I was surprised but was informed that an inquiry into this and otherrelated deal processed by the Fund and its Directors will be conducted when there wasgoing to a change of government in July 1999.

Part of my responsibility as a General Manager is to protect the Government of the day. If Idid not, then I will be seen to be negligent in the execution of one of my responsibility.

You will acknowledge my initial interest in this purchase and I still feel that it is a goodinvestment. However, as for as Management is concerned, I have a responsibility to protectthe Directors by ensuring a due diligent is conducted. This is so as to properly cover anymisconceptions and for loop holes that may arise during an inquiry. This is how I feltconvicted to protect the Board and the Government of the day. It is the long­term impactupon which the inquiry could have on the individuals appointed to guide the Fund, includingmyself that was my concern. Ministerial approval is one thing, but a long term impact anenquiry could make on an individual is enormous.

As this purchase is in millions of Kina every precaution is to be taken. That is where I amplaying my role. However, the delay is the non­involvement of Management for quitesometime. I was directed by you to not involve Management in this project, hence, yourdirection was accommodated faithfully. Furthermore, it is only fair that management shouldhave been involved as I knew exactly what to do and specific instructions were given to themanagement prior to being told not to continue.

4. HIGH YIELD INVESTMENTS

This matter was resolved to be placed on hold and a proposed trip to Cairns was cancelledafter the Minister intervened.

Personally further investigation to be carried out from the Board office was sufficient andwhich could determine whether it is worthwhile to be actively involved. My advice then wasto the contrary.

The proposed trip to Cairns for this purpose was a bit too much for the Fund in light of ourrecent trips to Taiwan, Mt. Hagen, Vanimo (a few times), the Solomon Islands, and now theCairns trip. It is not long after the return from Honiara that the Cairns trip was proposed.How the Minister received information on this proposed trip, I must admit I do not have aclue. To date, I still don't know how he knew unless you briefed him early.

The insistent on the travel was my greatest worry because I had already received criticsfrom within the Defence Force and the Department on our frequent travels. In this instance,the High Yield Program was not worth the expense to travel but I have to oblige due to theBoard resolution to attempt arranging the trip. Unfortunately the Minister intervened andprevented the travel.

5. LIST OF NAME AND ADDRESS OF DIRECTORS OF COMPANIES WHICH DFRBHAS SHARES

In my earlier explanation, I understand that Mr. Yates was advised. to provide theinformation as he was in the Board Meeting in Vanimo to present the reports. Allinvestment information had always been with KSL. I only provided you a verbal informationon who is who of the Fund on which Board of Directors of our investee companies.

Whilst awaiting for the information from KSL, I thought my verbal advise was sufficient.However, I shall provide these information if I am reinstated. Otherwise I have everyconfidence in Richard to provide these information with Mr. Yates assistance.

6. DIRECTORS MOBIL PHONE

This was basically an administration matter. Often it was beyond the Management control,because Richard has to collect quotes from various suppliers recommended by Cellnet, dovisits to the Suppliers to view the equipment and when they are not available another timehas to be organised, getting a number from the Cellnet, credit checks to be done byCellnet, which takes several days, processing and collection of cheques from KSL, and

finally paying, then getting the supplier to programme the new number to the equipment. Iacknowledge that the request was made early in the year however, a lot of very urgentrequest from the Board had taken precedence hence, the delay. Richard was tasked thisjob which he finally recommended for my approval the equipment you are now using".

Clearly the Commission will wish to ask Mr. Kila about what he has said on the SandaunMotel issue at least.

(c) The Minutes show that this Meeting was attended by all Board members – Mr. Naru, Mr. Vali Asiand Colonels Playah and Renagi and that Mr. Richard Sinamoi was in attendance; that the meetingwas opened at 2.20pm (almost 2½ hours later than scheduled) and that it was closed at 4.40pm.

A copy of the Minutes taken from Commission Document DCD 24 will be TenderedDocuments SM518 to SM523.

(d) The Minutes show that at this meeting and after some initial debate Mr. Kila's letter was dealt withand it was resolved that he be reinstated with a severe reprimand, subject to instructions and subjectto a performance review at 31st December, 1999.

The second topic dealt with involved the establishment of the separate "AdministrationAccount" for DFRBF, which we have earlier severely criticised.

The third topic considered was the DFRBF structure and salaries, which was deferred to aCommittee with a freeze on new recruitments but the position of Board Secretary wascreated and filled.

There is included under the Minutes for this item an out of place paragraph which reads:­

"The request from Kina Securities to the Board for the Board to give indemnity to KinaSecurities on this transaction was also put to the Board and discussed. All members raisedthe point that there was no need to give indemnity to Kina Securities as Kina Securitieswas not a party to this agreement and any liability arising from the transactions will be theresponsibility of the Board and not Kina Securities".

We will come back to this paragraph shortly.

The following item 1.4 concerned the Sandaun Motel, which we will again come to shortly.

The fifth item dealt with Rebo Media Consultants (considered in our opening on "TendersProcedures"), the sixth an attempt to secure a Defence Advisor's residence in Canberraand the last with a critical letter from Colonel Renagi which was noted and ignored save forit having the result of bringing the Waigani City Centre proposal to an end.

(e) In respect of the Sandaun Motel the Minutes read as follows:­

"1.4 Sandaun Motel

Col. Renagi noted his concern over the investment, especially in light of the recent politicaldevelopments. He asked the Board to review the decision to purchase the Sandaun Motelfor K5.3 million. As he believes that later on this matter might come under a lot ofcontroversy, as it was against the fund Managers advise.

Both the Chairman and Mr. Richard Sinamoi briefed the Board on the current status of theproposal. The Chairman went further to advise that the Motel was booked out for the nextsix months. He advised that if the Board renege on its earlier decision to purchase, then wewere likely to loose the 10% deposit of K530,000 paid into the Lawyers trust account andfurther more the Board would most likely be sued by the owners of Sandaun Motel.

Mr. Vali Asi agreed with the Chairman's concerns and stated that he didn't want to loosethe K530,000 deposit as it was a substantial amount. Further more if the contracts aresigned then he sees no way out of this deal but to settle it, through paying the outstandingbalance.

Chairman reiterated further that all­necessary endorsements from all bodies including theBoard and Minister of Finance and Planning was acquired. Thus if all the formalprocedures are followed he can not see why this matter should be delayed any longer. Headded further that K.S.L had requested for the Audited Financial Statements from SandaunMotel they now have this information therefore settlement should proceed immediately.

Col. Playah expressed his concerns by stating that he agrees with Col. Renagi, howeverhe also believes the concerns raised by both the Chairman and Mr. Vali Asi, especially thepoint regarding the forfeiting of K530,000 to the properties of Sandaun Motel. Havingconsidered the matter he advised that he would rather see the matter settled, as it wouldbe a large amount to loose if the Board reneged on the sale.

RESOLUTION:

It was unanimously resolved to proceed as per previous resolution to acquire SandaunMotel".

(f) The earlier quoted "out of place" paragraph, if accurate, shows that this Board, as led by Mr. Naruwho was a practising professional lawyer, simply did not understand or was led to misunderstand whatthe KSL requirement for a Deed of Indemnity was about and that Mr. Naru did nothing to correct theposition.

To state the obvious KSL was seeking an indemnity in respect of any claims which mightbe made against it for negligence under its agreements with the DFRB Board in failing asthe DFRB Board's contracted investment advisor to advise against and to prevent theSandaun Motel acquisition coming to fruition. The fact it was not a party to the SandaunMotel Share Sale and Purchase Agreement was totally irrelevant to the issue as would beplain to any law student let­alone a practising professional lawyer.

Mr. Naru would doubtless need to be asked why he did not correct this clearmisapprehension.

The main part of the minutes on the Sandaun Motel almost defy credulity.

After Colonel Renagi raised well founded concerns including the advice of KSL and Mr.Naru and Mr. Richard Sinamoi supposedly gave briefs on the current status Mr. Naru,without expressly saying so – at least according to the Minutes – gave advice to the Boardwhich was consistent only with a signed and enforceable contract being in existence i.e. ifthe Board "renege on its earlier decision to purchase" then it would lose the K530,000 (paidat his direction into his firms Trust Account) and be liable to be sued by the Vendors.

With this "fear" raised and the immediate support of Mr. Vali Asi (who rarely attended BoardMeetings) stating and not being corrected by Mr. Naru "if the contracts are signed then hesees no way out of this deal but to settle it" and followed by some further clear pressurefrom Mr. Naru Colonel Playah's resistance and agreement with Colonel Renagi was clearlyovercome and in the end Colonel Renagi was outnumbered.

In the result the Board agreed to proceed with the Sandaun Motel purchase.

The minutes show with the clarity of crystal what occurred and where the pressure camefrom.

Mr. Richard Sinamoi was questioned as to his role at this meeting and whether hespecifically advised the Board of the content of Mr. Uware's memo and as to the dates onwhich he received the financial statements and passed them on to KSL at Transcript pp.4309­4311 and it would seem that he did not.

He was also asked what he had to say as to the criticism that follows.

The amazing things, in our view and though Colonel Renagi was clearly outnumbered,were these:­

(i) Mr. Richard Sinamoi did not clearly and expressly advise the Board that he only receivedand forwarded the purportedly audited financial statements to KSL two days earlier on 20th

July, 1999 and that there was insufficient time to assess them. He was in our view remisesin his duty in this regard.

(ii) Mr. Richard Sinamoi did not clearly and expressly inform the Board of the memo he hadreceived from Mr. George Uware and which made so many relevant and pertinent points.He was also in our view remiss in his duty in this regard.

(iii) No one asked about or drew attention to the fact that the Board Meeting of 7th July1999 had made a further specific resolution requiring that a business evaluation beobtained and presented to the Board for consideration before this transaction proceededfurther. All of the Board members (save perhaps Mr. Asi who was absent from thatmeeting) and Mr. Sinamoi were in our view remiss in their duties in that regard.

(iv) No one questioned or drew attention to the fact that the Board had not resolved to paya deposit of K530,000.00 or to execute a contract which would have caused the DFRBBoard to risk forfeit of that deposit or to be at risk of a claim for damages for breach ofcontract. Again, in our view, all Board members and Mr. Richard Sinamoi were remiss intheir duties in that regard.

(v) No one questioned Mr. Naru as to when and by whom any contract had been signed onbehalf of DFRB Board and using the Board's seal and with what authority. Again in ourview all Board Members and Mr. Richard Sinamoi were in our view further remiss in thisregard.

We do not know with certainty whether the contract had in fact been signed at this time –Mr. Naru would know that – and accordingly we do not know whether this was a "bluff" onMr. Naru's part following which a contract could be signed with impunity or whether he hadin fact already had the contract signed and was seeking to share the legal exposure whichwould in consequence have confronted him.

It is in our view clear that Mr. Naru as a practicing lawyer and Chairman of the DFRB Boardfailed in his duty to fairly and frankly advise his fellow directors as to the facts of which heclearly had knowledge and the law which he either knew or should have known.

(g) Mr. Richard Sinamoi gave evidence as to this meeting on 21st March 2002 (Transcript pp. 3207­3213).

He said that between the earlier meeting of 7th July 1999 and this meeting he haddiscussions with Colonel Renagi "with regards to the indemnity and maybe he would raisehis concerns about of course the acquisition price and again the involvement of thechairman at the time in pursuing this matter".

Mr. Sinamoi said of the deposit cheque "Again as I said, the Chairman was liaising ortalking direct with Kina Securities and it was done outside or without my knowledge or I hadno direct involvement in the raising of that cheque".

Mr. Sinamoi said he learned of that cheque being raised after the fact and from Mr. Yates.He agreed there was no Board resolution authorising that payment.

Mr. Sinamoi also said he had no knowledge about the existence of a signed contract beforethis meeting and said that to the best of his knowledge the contract was not presented to orapproved by the Board, and no authority was given by the Board to affix the common sealto it.

He agreed that the Board meeting of 7th July 1999 required the production of auditedfinancial statements, the finalisation of the business evaluations and the tabling ofdocuments for the Board's consideration. He said (falsely) that he had not seen thefinancial statements prior to this meeting.

After confirming the minutes and being asked whether anyone questioned how a contracthad been signed and deposit paid he said, "No. Colonel Renagi may have raisedsomething but no one questioned the Chairman".

He agreed no one questioned the fact a contract was entered without Board authority orapproval and the Board placed in a position where it may lose its deposit and be sued fordamages for breach of a contract someone had without authority entered into.

He said the minutes recorded what Mr. Asi said, and what Mr. Naru said and that no oneasked about approval to enter the contract. He also confirmed that no business evaluationhad been carried out.

After confirming the minutes recorded what Colonel Playah said and asked what hisreaction, as Acting General Manager of DFRBF was to what had occurred at this meetingMr. Sinamoi said:­

"Well, I was confused at the time. I thought if the contract was signed, maybe 'we shouldfacilitate it when Mr. Kila was still the general manager. But as far as I was aware, I hadnever sighted the contract and the contract had never been signed. So again it was asurprise – I mean including the ministerial approval and all that was facilitated pretty muchoutside of the involvement of the management. So I mean there was always a feelingduring ­ as far as management was concerned that this matter was out of our hands andwe pretty much had no control over who was handling it". (Transcript p.3212)

When asked who was controlling it Mr. Sinamoi said "The Chairman" (Transcript p. 3213).

Mr. Sinamoi gave subsequent evidence as detailed earlier regarding the meeting.

(h) Colonel Renagi had no independent recollection of this Special Board meeting 10/99 withoutrecourse to the minutes (Transcript p. 3290).

The Colonels recollection was assisted by the minutes and he said:­

"Well, I felt that ­ looking at some things so that ­ I felt that despite my earlier concerns andreservations on the manner that we were approaching the acquisition and also even talkingto the GM in the sense that the agenda was already pre­orchestrated, it was set and Ifound myself as the odd man out. And it was not a matter of giving in because I wasoutnumbered or whatever but I think they have some commitment done, commitment bythe GM upon the insistence of the chairman to pay the 10 per cent up front to the trustfund, the Carter Newell trust found; I think it was half a million. And even subsequently Iexpressed some strong reservations that could result in the forfeiture and then we maylose that amount so I felt that despite the earlier reservations or concerns I raised, it wasnot going to be taken seriously by the other three members of the board and one was thedeputy chairman who was also defence secretary at the time. So I felt that maybe on thataccount I lost our by a sheer­weight of numbers".(Transcript p.3290­3291)

Colonel Renagi said that it was only after the meeting he became aware that "themanagement" had already committed the deposit moneys to Carter Newell Trust Account(Transcript p. 3291).

Asked whether anyone asked Mr. Naru how the deposit had been paid and a contractsigned having regard to the resolutions passed at the meeting of 7th July 1999, ColonelRenagi said:­

"I said something to that effect but I am not too sure whether I said it at the board meetingor outside the board meeting. Like I said in answer to several of your questions, counselthat behind the scenes after each board meeting or especially with regard to the SandaunMotel, the chairman was personally involved with the GM and I think he must havepressured the GM to make that commitment, commitment meaning getting cheque toCarter Newell without the knowledge, supposedly without the knowledge because I amsaying this because I cannot speak on behalf of both Colonel Playah and Mr. Vali Asi. Buton my part I was not aware of it and it was probably done in that manner by the chairmanmaybe, exerting pressure on the GM so that ­ ­ ­" (Transcript p. 3291)

When reminded Mr. Kila was suspended at this time, Colonel Renagi continued:­

"Right. Or maybe it was done in that manner so that later on the board can be committed ingoing ahead with the decision. It will make it very difficult to renege knowing that we haveall ready made the commitment of some substantial amount. What I am saying is it mayhave been purposely done by the chairman" (Transcript p.3292)

(i) In our view, the minutes and evidence are clear as is the role of Mr. Naru.

22.9 Location of the DFRB Board Seal

(a) Earlier in this opening we dealt with the evidence of Mr. Kila that after the DFRB Special Boardmeeting of 11th May 1999 (where the extension of the Kina Securities contracts was "pushed through"in Colonel Renagi's absence) and before he was purportedly terminated on 4th June 1999, the DFRBBoard common seal was taken from his – Mr. Kila's office by Colonel Playah and returned to him byMr. Naru after he resumed work from his suspension (see 12.10(k) at Transcript p. 4022).

(b) Mr. Richard Sinamoi said that prior to Mr. Kila's purported termination on 4th June 1999, Mr. Kila"was minus the seal" and "the seal was – and at that time he (Mr. Kila) said that it was either withColonel Playah or the Chairman" (Transcript p. 3213).

Mr. Sinamoi said he had no personal knowledge of these occurrences but that this is whatMr. Kila told him (Transcript p. 3213).

He said that prior to Mr. Kila's purported termination he (Mr. Sinamoi) had the responsibilityof keeping a seal register and the register could not be kept when one of the Boardmembers had the seal.

Mr. Sinamoi said that he had not been made aware – as Board Secretary and ActingGeneral Manager – prior to 22nd July 1999 that the Board seal had been used to sign acontract to purchase the Sandaun Motel, that no one had requested him to make any entryin the seal register regarding such signing and that he was not aware the seal had beenused to sign such a contract.

(c) Colonel Renagi said:­

"When we were still at the old location in Gordons, I can recollect at one stage that Mr. Kilatold me that the chairman came in and got the seal because he could not find the companyseal. And I said, well, it is supposed to be under lock and key in a combination safe orwhatever. I did not think had a combination safe., It was just an ordinary drawer orwhatever and I think Mr. Kelly must have come in and asked or demanded the key from thestaff. I do not know, maybe it was the board chairman or whatever when he asked for thekey for the seal and they gave it to him. I learned this informally from Mr. Kila and I said, doyou realise that that is very serious and because I was not aware of what document theywere going to use the seal on" (Transcript p.3292)

When told that Mr. Kila had given evidence that it was Colonel Playah and not Mr. Naruthat had taken the seal the Colonel's evidence continued:­

"Not the chairman. Well, Mr. Kila told me it was – again, like I said it was an informaldiscussion. Because Mr. Kila and I come from the same area, he confides a lot of stuff tome so I advised him the do's and don'ts. He told me it was the chairman or somebody elsecame in, maybe Colonel Playah, I do not know.

If it was Colonel Playah, then he had a hand in the Sandaun Motel purchase along with thechairman. Again, some information, I do not fully disclose to the other board membersbecause I became aware that there may be some element of collusion which I am notaware of, because from time to time, Mr. Kila and I would be discussing and he would saysomething to the effect that you better check the other board members, that is what hesays. You better check the other board member. What he was trying to do was, probably,sow the seeds of suspicion and also curiosity about the other members and I becameaware that what I disclosed formally at the board meetings, I had to be very careful abouteven carrying on a private conversation with some of the board members in case what Isay to them might be relayed back to the chairman. And it was towards the end of the yearthat I started to have suspicions of the other contributors rep because of his association

with Mr. Vihruri and the chairman. And again, that curiosity was sparked by Mr. Kila'sopening remarks like, you have to watch the other board members". (Transcript pp. 3292­3293)

Colonel Renagi said he first learned of what had happened with the seal a few days afterMr. Kila was purportedly terminated. He recalled that he was at the DFRBF office inGordons when Mr. Kila who was living above the office came downstairs to the office –even though he was terminated and not on official duty – and made this disclosure. Herecalled saying, "Well that does not sound right. He is up to something" – speaking of theChairman Mr. Naru – and the Colonel said he left it to Mr. Richard Sinamoi – "to sort out"(Transcript pp. 3293­3294).

(d) Plainly the Share Sale and Purchase Agreement when signed would need to be executed underthe DFRB Board seal and it is important to know that seal had earlier been taken from the custody ofDFRBF management by Colonel Playah and was later returned after Mr. Kila was reinstated by Mr.Naru.

22.10 Mr. Kila returns to work and faces a new car

(a) The DFRB Board meeting of 22nd July 1999 had resolved that Mr. Kila be reinstated.

By a letter dated 26th July 1999, Mr. Naru wrote to Mr. Kila in the following terms:­

"RE: RE­INSTATEMENT TO THE GENERAL MANAGER'S POSITION

I wish to bring to your attention the above matter and advise that the Board resolved duringSpecial Board Meeting 10/99 to reinstate you with a severe warning that you diligentlyattend to the performance of your duties, particularly in implementing Board resolutions.

Your reinstatement will be subject to review by the Board based on your performance on31st December 1999. I trust your performance will improve to the Board's expectation.

I wish to welcome you back and look forward to working with you.

A copy of this letter taken from Commission Document DCD23 will be TenderedDocument SM524.

It will be noted the letter is date­stamped as received on 28th July 1999.

(b) Mr. Kila said that during the time of his suspension he had nothing to do with the Sandaun Moteltransactions (Transcript pp. 3238 & 3240). He said that he returned to the DFRB office on a Monday,which he thought was either 27th or 29th July 1999 (Transcript p. 3240).

We would interpose that it seems probable that Mr. Kila returned to work on Monday 26thJuly 1999.

Mr. Kila said that at the time he returned he was told that the K530,000 deposit on theSandaun Motel was paid and that he learned what had occurred though reading the Boardminutes of meetings held in his absence including those of 7th July 1999 and 22nd July1999. He said it did not occur to him whether a contract had been signed or not(Transcript pp. 3238­3239).

Mr. Kila said he had nothing to do with the Sandaun Motel acquisition and did not discussthat subject with any DFRB Board members between the time he returned to the DFRBFoffice and the next DFRB Board meeting held on 5th August 1999.

(c) Mr. Richard Sinamoi said that between the return to work of Mr. Kila and the next DFRB Boardmeeting held on 5th August 1999 he had no involvement in advancing the Sandaun Motel transaction.

He said he may have had discussions with Mr. Yates about the balance purchase moneysbut that KSL was not doing anything on behalf of the DFRBF, none of his staff were doinganything on his instructions and that generally DFRBF management was left out of whatwas occurring.

Mr. Sinamoi said that on Mr. Kila's return he had general discussions with Mr. Kila aboutmatters which were outstanding and which needed to be progressed but that there was noformal briefing on matters including the Sandaun Motel transaction.

He agreed that Mr. Kila would have had the minutes available to him and would, of coursehave had access to Mr. Naru (Transcript pp. 3215­3216).

(d) As we have seen in our opening on the topic "Tenders Procedures" Mr. Kila had only returned tothe DFRBF office for a metaphorical "five minutes" when Mr. Naru had him go to Freeway Motors oneither 29th or 30th July 1999 to obtain a quote to trade in the Mitsubishi Pajero motor vehicle of whichMr. Kila had the use since November 1998 in exchange for a Toyota Landcruiser VX at a changeovercost to DFRBF of K59,500.00.

The quotation obtained was dated 30th July 1999 (see Transcript pp. 3011­3012 andTendered Document TP19) and Mr. Naru's letter in response, which referred todiscussions on 29th July 1999 was also dated 30th July 1999 (see Transcript p. 3012 andTendered Document TP19).

It will be recalled that Mr. Naru's letter stated that as DFRB Board chairman he approvedthis transaction and sought to have the transaction expedited "as a Special Board meetingis scheduled next week to endorse this purchase".

(e) Though this matter is dealt with in detail in the earlier topic "Tenders Procedure" and Mr. Kila theresaid that the Sandaun Motel was not mentioned in the context of this transaction and that he – Mr. Kila– thought this was a "sori" gesture for Mr. Naru's termination of his employment we say that its relationto the Sandaun Motel transaction is important even if unspoken.

The Commission has already seen and will shortly again see how Mr. Naru contrived"sweeteners" to obtain support for his agendas.

We say Mr. Kila's termination – which was clearly a result of his uninvited initiatives on theSandaun Motel transaction – coupled with his contemporaneous return to employment areindicative that this concurrent "generosity" with DFRBF money was contrived by Mr. Naruas a "sweetener" to persuade Mr. Kila not to provide further problems on the SandaunMotel transaction.

22.11 Mr. Naru addresses the KSL problem

(a) As we have shown at 21.3(e) above the latest exchange of documents on the position taken byKSL was the letter of Messrs. Blake Dawson Waldron to Mr. Naru dated 2nd July 1999, which attachedthe amended Deed of Indemnity and stated KSL's requirements (Tendered Documents SM483­484;Mr. Yates' note of 5th July 1999 that Mr. Naru said he was happy with the Blake Dawson Waldronletter and would endeavour to have what was requested in the next day or say (Tendered DocumentSM499) and Mr. Naru's letter of 5th July 1999 to Blake Dawson Waldron confirming he agreed withand was prepared to execute the Deed of Indemnity and would respond as soon as possible to theother queries (Tendered Document SM491).

(b) As we have shown at 22.8(f) above the DFRB Board had apparently not understood what wasrequired and had determined at its Special Board meeting on 22nd July 1999 that there was no needto give KSL an indemnity and Mr. Naru had told the meeting that KSL had the audited financialstatements they had requested and "therefore settlement should proceed immediately" (see TenderedDocuments SM520 & SM521 respectively).

(c) As we have said at 22.7(b) above though there was a letter signed by Mr. Jimmy Maladina thatletter was not released until 27th and 28th July 1999 and we would deal with it at that time which wenow do.

(d) One of the requirements of KSL which was sought by Messrs Blake Dawson Waldron in their letterof 2nd July 1999 (Tendered Documents SM483­484) was a Carter Newell letter addressed to theDFRB Board and KSL and signed by a partner certifying five specified matters (a) to (e).

The Carter Newell file (Commission Document 3B) contains a letter and facsimile

confirmation showing that letter was sent by facsimile at 09.49 on 27th July 1999.

Copies of the letter and confirmation taken from Commission Document 3B will beTendered Documents SM525 and SM526.

The letter is on Carter Newell letterhead, dated 22nd July 1999, addressed to the ActingGeneral Manager of DFRB attention Mr. Richard Sinamoi, shown on its face as copied toMr. Syd Yates of KSL signed by Mr. Jimmy Maladina and reads:­

"RE: PNG DEFENCE FORCE RETIREMENT BENEFITS FUND – PURCHASE OFSUNDAUN MOTEL

We refer to the above matter and certify the following:­

a) All necessary title, company and other searches and investigations have been carriedout by or on behalf of the firm in relation to the matter,

b) The firm has copies and is fully aware of the issues raised in the letters dated 2nd June1999 form Thirlwall Aisi & Koiri Lawyers and from Mr. Darby Kila to Carter Newell Lawyersdated 3rd June 1999,

c) Carter Newell has duly advised the Board in respect of such matters and is satisfied thatthe Board is not legally exposed in any way,

d) Carter Newell has written directions duly signed by the Vendors directing the payment ofthe balance of settlement monies to Fleet Limited, and

e) Carter Newell is satisfied that the payment of the balance of settlement funds willlawfully discharge the Board's obligations under the contract".

The letter which in our view will assume great significance particularly in relation to duediligence was in the exact terms sought by Blake Dawson Waldron.

The original letter as received by DFRBF is date stamped and noted as received by Mr.Sinamoi on 28th July 1999.

A copy of the original so stamped and noted taken from Commission Document DCD23will be Tendered Document SM526A.

(e) The Carter Newell Invoice 17351 which was cancelled (Tendered Document SM239) contains twoentries:­

"27 Jul 99 Letter to new Minister for Defence Hon. Alfred Pogo27 Jul 99 Reviewing and reprinting letter to Messrs Blake Dawson Waldron (editing andreprinting)"

Whilst we are not able to locate on the related Carter Newell (Commission DocumentDCD76) any copy of the letter to the new Minister there are copies on that and other files(including Commission Documents DCD3B & DCD13), of a "HAND DELIVERY" letterdated 27th July 1999 from Mr. Naru to Blake Dawson Waldron for the attention of Mr. PeterCoumbis which reads as follows:­

"Further to our letter to you of 5th July 1999 in the above matter, we note and enclose thefollowing:­

1. We note and confirm the matters attached to the re­drafted Deed of Indemnity,

2. We enclose a duly executed and certified copy of Board's resolution agreeing to enterinto the contract,

3 Copy of the executed contract for the purchase of the shares in Banora Trading Ltd,

4. The balance of the purchase monies are being drawn in favour of Fleet Limited on theinstructions of the Vendors named in the contract,

5. Copies of title searches for the companies Fleet Limited and Banora Trading Ltd,

6. A letter from Carter Newell addressed to the Board and Kina Securities Limited signedby a Partner certifying the items mentioned under point six (6) of your letter of 2nd July1999.

We advise that our Board met and resolved at its meeting on 22nd July 1999 that there isno need for us to enter into a Deed of Indemnity with Kina Securities Limited as the latter isnot party to this agreement and will not be liable from any action arising from thisagreement.

Your client is required to process the balance of the settlement payment immediately as wehave gone past the settlement date".

A copy of this letter taken from Commission Document DCD3B will be TenderedDocument SM527 and SM528.

Mr. Naru clearly thought that as with the DFRB Board he could bluff his way though BlakeDawson Waldron and KSL by supplying what was requested and then seeking to use theinane DFRB Board determination to renege on his earlier agreement to sign the Deed ofIndemnity and demand that KSL produce the balance purchase moneys.

(f) There are copies of the documents said to be enclosed with this letter on the KSL file (CommissionDocument DCD13) and these include a copy of the executed contract referred to in item 3 of Mr.Naru's letter.

A copy of that contract taken from this file will be Tendered Documents SM529 to SM551and a copy of the attached Power of Attorney, which relates to its execution will beTendered Document SM552.

This provides the first documented evidence that the Share Sale and Purchase Agreementhad by this time in fact been signed.

We will come back to this document in detail shortly.

(g) As would clearly have been anticipated by all but Mr. Naru his letter and attached documents,which were received by Blake Dawson Waldron on 28th July 1999 were not simply passively receivedbut as we will see shortly were the subject of detailed analysis and advice from Blake DawsonWaldron to KSL.

(h) Apparently buoyed by what he thought was his success and with the balance of the week spent inMr. Naru attempting to engineer Mr. Kila's car changeover, it was not until the following Monday 2ndAugust 1999 that Mr. Naru resumed his efforts to have the cheque for the balance purchase moneysproduced by KSL.

(i) The Carter Newell Invoice 17357, which was cancelled (Tendered Document SM239), contains thefollowing entries.

"2 Aug 99 Letter to Board members of DFRB by the Chairman2 Aug 99 Letter to Mr. Syd Yates by the Chairman3 Aug 99 Letter to DFRB (Invoice No B16885)".

The final entry clearly relates to the Carter Newell Invoice 16885 which we have dealt within detail earlier in this opening which was for K57,932.67, had been sent to DFRBF andwhich remained unpaid.

The second entry relates to a letter of 2nd August 1999 to Mr. Yates which reads asfollows:­

"RE: OUTSTANDING DFRB FUND INVESTMENT

It has become apparent that you are deliberately delaying settlement of a couple of

investments as approved by the Board. They being:­

1. Sandaun Motel acquisition payment of the remaining K4.770 million; and2. Pacific Capital Resource Management equity investment of K500,000.00.

As the Board would like to finalise these investments expediently, the delay at your end iscausing some great degree of concern. Could you shed some light on the status of thesematters. Otherwise, settlement of these outstanding Board resolutions must be effectedimmediately.

Furthermore, it seems obvious that the delays reflect a conflict of interest situation as I amreceiving unsatisfactory advise as to the status of the Fund's liquidity position. I would liketo place on record and notice that the Board intends to review the managementarrangement with Kina Securities Limited".

A copy of the original of this letter taken from the KSL file (Commission DocumentDCD13) will be Tendered Document SM553.

The veiled threat and "bully boy" tactics, which had succeeded for Mr. Naru to this pointwere again clearly being employed against KSL.

We are not able to locate in the related KSL file (Commission Document DCD76) or inthe Sandaun Motel file (Commission Documents DCD3A & B) any copy of a letter fromMr. Naru to the members of the DFRB Board dated on or about 2nd August 1999.

(j) On 3rd August 1999 Mr. Coumbis wrote to Mr. Yates of KSL enclosing copies of Mr. Naru's letter of27th July 1999 and the documents referred to in it advising those documents were received on 28thJuly 1999 and offering four pages of advice in relation to them.

A copy of this letter taken from Commission Document DCD13 will be TenderedDocuments SM554 to SM557.

Drafts of a letter to Mr. Naru from Blake Dawson Waldron responding to Mr. Naru's lettersof both 27th July and 2nd August 1999 were also faxed between KSL and Blake DawsonWaldron.

(k) On 5th August 1999 Blake Dawson Waldron delivered a hard copy final version of their letter to Mr.Naru (after a faxed version had been sent on 4th August 1999). The final version, a copy of whichtaken from the Carter Newell file (Commission Document 3B), will be Tendered Documents SM558to SM562 reads:­

"Kina Securities Limited ("Kina") and the DFRBF Board ("Board")

We acknowledge receipt on 28 July 1999 of your letter dated 27 July 1999 together withthe enclosures referred to in points 2, 3, 5 and 6. We advise that we have now referredthem under cover of a detailed written advice to our client's General Manager, Mr. SydYates, who returned to the office from leave on 2 August 1999. We have also reviewedyour letter to Kina dated 2 August 1999.

We have instructions to reply to your letters as follows:

1. Deed of Indemnity

1.1 The reason for the Deed of Indemnity was to protect Kina in relation to possiblebreaches of its Management and Administration Agreements with the Board and not inrelation to any breach by it of the Sandaun Motel agreement to which as is acknowledgedin your letter of 27 July 1999 Kina is not a party.

1.2 In more specific terms its object is to protect Kina in the event of a breach of theprovisions in such agreements which in effect require it to recommend and authorise anyinvestments by the Board. Since the proposed Sandaun Motel purchase in Kina's view, asan expert and experienced fund investment manager, has not been independently valuedas a business and has a number of due diligence deficiencies such as an inadequate

property valuation on the one hand and has not been proved to Kina's reasonablesatisfaction to be a good investment on the other it is our view that unless Kina can besatisfied in these respects it cannot recommend the purchase and may be in breach inallowing it to proceed.

1.3 It is pointed out that the Board by its letter to us of 2 July 1999 advised that it hadapproved and agreed to execute the Deed of Indemnity and cannot now withdraw itsapproval. On these facts Kina could obtain court orders compelling the Board to executethe Deed of Indemnity if the Board refuses to do so voluntarily.

1.4 We again request on Kina's behalf that the Board in the absence of satisfying Kina'soutstanding requirements for the Sandaun Motel purchase which are listed in section 3below, execute the Deed of Indemnity for the reasons set out above as relevantlysupported by the issues addressed in the balance of this letter.

2. The Board Minutes of 21 March 1999

2.1 It is acknowledged that the Board resolution as contained in paragraph 1.1(1) of theabove minutes formally approved the purchase of the Sandaun Motel. However in therecord of the discussions prior to the resolution being passed Col. Renagi is noted asstressing the need for proper due diligence and there also is a reference there to abusiness valuation being conducted to support the property valuation. Due to purportedurgency at the time and the illness of "the owner" the obtaining of the business valuationwas bypassed.

2.2 Our responses in relation to these events are as follows:

(a) Kina should be provided with copies of the Board minutes in meeting no. 1 / 99 (seefoot of page 1 of the minutes of the meeting held on 25 March 1999), the submission ofmanagement (Mr. Darby Kila) at that meeting and the revised submission by managementto the meeting of 29 March 1999.

(b) As the transaction is still not settled would you advise what is there to prevent abusiness and for that matter a full and proper property valuation being obtained now?Since it only takes 2 to 4 weeks for the former (see the comment in this regard in the 29March 1999 minutes) and the latter has been commenced we cannot see why they areunable to be commissioned now.

3. Agreement for Purchase of Sandaun Motel

3.1 We note the following anomalies in relation to the above:

(a) It has not been dated (see page 1).

(b) There is no notation that stamp duty has been paid even though according to theminutes it was executed on or about 29 March 1999 or early April 1999.

(c) There is no certification by the Board's lawyers, Carter Newell, that this is a true copy ofthe purchase agreement.

(d) The 1998 accounts referred to in clause 1.1 are not attached.

(e) Schedule 4 is blank.

These need to be addressed or explained as the case may be.

3.2 In relation to the requirement that the purchase monies are being paid to Fleet Ltdrather than the vendors, the Board's letter under reply states that this is in accordance witha direction in the purchase agreement and has enclosed copies of searches of bothcompanies to demonstrate that they are closely related. In support of this the letter fromCarter Newell dated 22 July 1999 which was amongst its enclosures states that the firmhas written directions from the vendors to pay the settlement monies to Fleet Ltd.

3.3 We acknowledge that clause 7.3(a) on page 8 of the purchase agreement contains adirection that the balance of settlement monies be paid to Fleet Ltd and that the searches

indicate that the two companies are closely related to each other. Subject to receivingcopies of the executed directions which we request be provided to us there is in our viewno problem regarding the proposed payment of the balance of settlement monies to FleetLtd and we have so advised Kina.

3.4 There is however one anomaly which is that the company searches both state that thelast annual return was lodged for the year ending 30 June 1996. On the face of it bothcompanies are in breach of the Companies Act and are potentially subject to striking offaction. Carter Newell should be asked to advise the Board on this.

4. Carter Newell's letter dated 22 July 1999

4.1 The above letter from Carter Newell which was enclosed with your letter was inresponse to the request contained in paragraph 6 of our letter of 2 July 1999 to the Board.As such it is satisfactory.

4.2 On our advice Kina will be writing directly to Carter Newell acknowledging its receiptand intimating that it intends to rely on it in order to discharge its legal obligations under theAdministration and Management Agreements between it and the Board and generally forits own protection.

4.3 The anomalies in the purchase agreement referred to in paragraph 3.1 above have notbeen addressed in this letter. In addition Carter Newell have not advised whether theconditions precedent set out in clause 5.1 and Part 2 of Schedule 2 of the agreement havebeen fulfilled to their satisfaction.

4.4 Carter Newell should be requested to advise whether any changes are proposed toclause 7.2(b)(ii) of the purchase agreement and in particular whether Darby Kila is to beappointed to the positions there referred to. To the extent there are any changes in thisregard or otherwise Kina and ourselves should be advised.

4.5 Finally Carter Newell should be requested to advise whether clause 12.3 (ministerialapproval under the Public Finances Management Act) of the purchase agreement hasbeen satisfied and if so provide Kina and ourselves with copies of the relevant approvals.

5. Pacific Capital Resources Management Limited

5.1 In Kina's letter dated 13 July 1999 under the hand of Mr. Yates, it was among otherthings recommended that it would be necessary to examine the performance of the sourceof the underlying revenue stream. He also said that there was insufficient information in hispossession to make a favourable recommendation and there listed what would benecessary in order for Kina to make a decision.

5.2 In response to this letter a large number of documents were supplied by Pacific CapitalLimited under cover of its letter dated 16 July 1999. However, Mr. Yates went on overseasleave on this date and was unable to review them until his return. Notwithstanding this, theinformation was supplied to PriceWaterhouseCoopers ("PWC") for assessment andappraisal during Mr. Yate's absence. By letter dated 2 August 1999 PWC recommended areport be obtained from an independent timber consultant and recommended JohnMcGrevvy of Twomacs Ltd.

5.3 As mentioned earlier in this letter, Mr. Yates only returned to the office on 2 August1999. However Mr. McGrevvy has been engaged and will have his report completed and inMr. Yate's hands prior to 5.00pm on 5 August 1999. In this regard it is considered by bothKina and PWC that as forecast earnings will be heavily underpinned by the quality andoperational capacity of the equipment and manpower, the availability of timber resourcesand the quality and the reliability of the transport infrastructure in the surrounding area, Mr.MeGrevvy's report is critical to deciding whether or not to proceed with this proposal.

5.4 Once Mr. McGrevvy's report has been obtained and reviewed, Kina WW advise theBoard of its recommendations as soon as it has obtained a financial appraisal from PWC.The latter require Mr. McGrevvy's report before they can complete this task. It is estimatedPWC's financial report will be ready by Tuesday, 9 August 1999.

6 The Board's letter of 2 August 1999

6.1 Kina strenuously denies that it is deliberately delaying either the Sandaun Motel orPacific Capital Limited proposal or for that matter delaying them at all. It has requestedadditional information in relation to these matters which is clearly both appropriate andnecessary consistent with its reputation as a prudent conscientious and successful fundmanager.

6.2 Accordingly the requests contained in this letter and in Kina's various correspondencesare in our view by any standard fair and reasonable on the one hand and constitute theminimum necessary before recommendations to invest can be made on fully informedbasis on the other.

6.3 The advice as to the Fund's liquidity is also strenuously denied. Kina has kept youregularly informed in this regard by appropriate written reports in accordance with itsobligations to do so under the Management and Administration Agreements. Mr. Narushould contact Mr. Yates urgently to discuss these unfounded rumours.

6.4 It follows from this that in our view there is no legal, commercial or any other justifiablebases for reviewing Kina's Management and Administration Agreements with the Board. Ifthe Board has any other legitimate concerns we request that they be placed in writing inorder to obtain Kina's detailed response to them.

We await further advices".

It will be noted that this letter addressed the issues raised in Mr. Naru's correspondenceand consistent with its purpose only dealt superficially with anomalies in the Share Saleand Purchase Agreement and did not attempt to analyse or criticise the substance of theAgreement.

The letter could have left no doubt in Mr. Naru's mind that his bluff had again been calledand that KSL were insisting on having the Deed of Indemnity which Mr. Naru had earlieragreed to sign.

(l) With Mr. Naru yet again having his bluff called by KSL it was not until 17th August 1999 that he wasable to reply to Messrs Blake Dawson Waldron and we will return to what then occurred later in thisopening.

22.12 Special Board Meeting 11/99 – 5th August, 1999

(a) As we have seen the fact a Board Meeting was to be held in the week commencing 2nd August1999 was known to Mr. Naru no later than 30th July 1999, when he wrote to Freeway Motors about Mr.Kila's vehicle changeover and said a Board Meeting to ratify his authorisation of that transaction wouldbe held the following week.

(b) The file of Board Papers produced to the Commission by DFRBF (Commission Document 96)contains no agenda and no Board papers for this meeting thus suggesting the meeting was called withminimal notice or preparation.

Mr. Richard Sinamoi said that during 1999 there were a number of Special Board meetingsand that it was common for no more than twelve to twenty four hours notice to be given. Hesaid that in some cases there was time for an agenda to be prepared and in others therewas not (Transcript p. 4311).

Mr. Sinamoi said that for this meeting held at 4.20pm on 5th August 1999 he believed thathe would have been asked to call the meeting on the same day on which it was held(Transcript p. 4312).

(c) The Minutes of the meeting show that Mr. Naru and Colonels Playah and Renagi were present, Mr.Vali Asi was yet again absent and Messrs Darby Kila and Richard Sinamoi were in attendance, thatthe meeting was opened at 4.30pm and that the meeting closed at 6.10pm.

A copy of the Minutes taken from Commission Document DCD 24 will be TenderedDocuments SM563 to SM568.

The first items of business concerned proposals to invest in PNG Home Finance CompanyLimited and purchase the property Lot 2 Section 88 Henao Drive, Gordons.

The second to fourth items of business involved noting investment, financial andadministration reports from KSL and a report on revised DFRB operations.

The fifth item of business, which we will come to shortly, dealt with the Blake DawsonWaldron letter.

The final items of business dealt with the Defence Advisors house in Canberra, noting areport on the status of the Members Housing Assistance Scheme and noting letters fromthe Minister for Corporatisation and Privatisation and from Major Arede the Chairman of Exand Service members.

On the Defence Advisors house the location of alternate properties and the discussionappears to be led by Colonel Playah (shown in the Minutes as doing all the talking) andresulted in the Board on Colonel Playah's recommendation resolving to purchase 36Jabaldi Crecent Ngunnawal. Colonel Playah is not shown as disclosing his conflict ofinterest as the Defence Advisor designate to Canberra and his pressing this matter, fromwhich he would benefit personally, is as transparent as his conflict of personal interest andduty as a DFRB Board member.

It is also clear that this matter constituted a "sweetener" for Colonel Playah.

(d) In respect of the fifth item of business – the Blake Dawson Waldron letter the Minutes read asfollows:­

"5.1 Kina Securities Limited – Blake Dawson Waldron's Letter

Mr. Darby Kila briefed the Board on the background of the matter. Upon noting the verbalbrief Col. Phillip Playah expressed his concern that KSL should always be given the benefitof doubt over all investment proposals and analysis as they are the Fund Managers. Hestated that KSL raised concerns over certain aspects of these investments which should beaddressed prior to any settlement. He also advised that as a small Fund DFRBF should doeverything correctly so as to avoid any bad publicity. On that note he asked the membersof the Board to re­think various earlier decisions to invest in certain projects.

Chairman noted Col. Phillip Playah's sentiments and expressed his concern over the BlakeDawson Waldron Lawyers advice to Kina Securities Limited.

He advised the Board that most of the issues that the lawyers have raised are exactly whatKSL has been saying to the Board over the last couple of weeks in respect to both thepurchase of Sandaun Motel and the acquisition of shares in Pacific Capital ResourceManagement Limited. He went further to advise that most of these issues have beenaddressed by the Board. Thus he does not understand why Blake Dawson Waldronlawyers have not been advised by KSL on these matters.

Furthermore he stated that the matter was referred back to the Board and therefore notanswering any­of our questions. He asked the Board why KSL would be delaying thematter any further then they already have. He thinks that one of the possible reasons isthat KSL has tied up DFRB funds by on lending to clients and are therefore immediatelynot has liquid as what they claim the fund to be.

Chairman stated further that although he agreed with Col. Phillip Playah's sentiments, hestill believes that the delay tactics used by KSL is only to provide them time in order toraise the necessary funds. This delay is costing the Fund through income forgone by theprofits not acquired from Sandaun Motel. On that note the Chairman asked that the Boardconsider taking over the investment component of the agreement with KSL and hold it withthe DFRB office.

Col. Reginald Renagi agreed that certain matters are been delayed by KSL, even after allthe necessary documents and information have been supplied. He further stated that KSLsay that the Fund is liquid and they can prove it too. However if there is speculation thenwe the Board will have to write to KSL and ask them to respond to our allegations.

Resolution:

Moved Col. Phillip Playah, seconded Col. Reginald Renagi, and unanimously resolved that:

i) the legal advice to KSL be noted;ii) the Chairman to meet with Blake Dawson Waldron Lawyers to provide information on thequeries and concerns raised;

iii) management to draft a letter for the Chairman's signature directing KSL to settle theoutstanding balances;

iv) Chairman to meet with Kina Securities Limited, General Manager to finalise settlement".

Plainly and after some initial comments by Colonel Playah to the effect that DFRB Boardshould address the concerns raised by KSL Mr. Naru dominated the discussion – at leastaccording to the Minutes – and turned the discussion into an attack on KSL.

We said earlier that matters raised by KSL and which had not earlier been addressed bythe DFRB Board included:­

(i) the need to obtain a business evaluation

(ii) the need to revise cashflows

(iii) the need to obtained audited financial statements up to the date of settlement.

Plainly these matters and others had not been addressed and Colonel Playah's suggestionthey should be addressed was diverted by the "red herring" issue raised by Mr. Naru.

Yet another opportunity to question how the Sandaun Motel transaction had progressed tothe stage it had without such matters being addressed and to question Mr. Naru's role inthat progress was lost.

It is amazing that no one at this meeting (other than Mr. Naru) could see that the delay byKSL was occasioned by Mr. Naru attempting to renege on his earlier statement that theDeed of Indemnity sought by KSL would be signed.

It is clear as day that KSL was not satisfied that the Sandaun Motel purchase was a viableor desirable investment for the DFRBF, that it could see its voice of reason (added to thoseof Mr. Kila, Mr. Ruimb, Mr. Uware and the Department of Finance & Planning) was fallingon deaf ears and the only way it could protect its position was to insist on the Deed ofIndemnity it sought and to delay and avoid paying out the balance purchase moneys until itwas assured the Deed of Indemnity was forthcoming.

It is in our view a sad indictment of the DFRB Board that it could not see or did not want tosee what was so clear and allowed Mr. Naru to distract its attention from the real issueswith a spurious questioning of the integrity of KSL.

22.13 Future Direction of Opening

With this Special Board meeting concluded and a yet further impasse between the DFRB Board as ledand advised by Mr. Naru and KSL as advised by Blake Dawson Waldron there was a lull in activity(save for some minor activities at Carter Newell) until mid August, 1999.

It has been established that at this time the Share Sale and Purchase Agreement between theshareholders of Banora Trading and the DFRB Board had been signed and it is in consequenceconvenient to now digress and evaluate that Agreement and then return to our chronologicalexamination of events.

23. EVALUATION OF SHARE SALE AND PURCHASE AGREEMENT

23.1 The Agreement

(a) We have compared the executed copy of the Share Sale and Purchase Agreement provided to

Blake Dawson Waldron (Tendered Documents SM529 to SM551) with the like copies on the CarterNewell file (Commission Document DCD3B) and are satisfied the documents are identical save thatthe Tendered Document is undated and that in the file is dated 1st June 1999.

(b) The Commission will be assisted in what follows by having a copy of the Tendered Share Sale andPurchase Agreement (now called "the Agreement") available.

23.2 Parties Execution and Date

(a) The parties to the Agreement are Natali Pia, Dillon Tyren Cullinan, Kevin Apita, Marlene Kupe andMarcus Amito (Vendors) and Defence Force Retirement Benefit Board (Purchaser) – See SM532.

(b) The Agreement is executed under the common seal of DFRB Board. One of the attestingsignatories, in whose presence the seal was affixed, is clearly Mr. Naru and the other appears to beColonel Playah – See M551. Clearly, both will have to be asked when and with what authority thedocument was so executed by them.

(c) Although the attestation provision for the vendors envisages signature as a deed (i.e. "SIGNED,SEALED and DELIVERED by") by all five vendors, it is in fact only signed by Marcus Amito Cullinan inthe presence of his father B.P. Cullinan – See M551.

(d) The signatory and witness for the vendors are relevant. According to the Movement Records(Tendered Document SM313), Mr. Brian Cullinan went to Australia on 12th April 1999 and onlyreturned to Papua New Guinea on 10th July 1999 and Mr. Marcus Amito Cullinan did not travel out ofPapua New Guinea (save perhaps to Jayapura) between 30th June 1998 and 31st December 1999.The Agreement was not complete prior to 12th April 1999 – indeed Carter Newell were still, accordingto their Invoices, amending the document up to at least 25th June 1999 and collating the documentson 28th June 1999 (See Tendered Document SM336). It, accordingly, seems clear that if theAgreement was signed, as it says, by Marcus Amito Cullinan in the presence of Brian Cullinan, it wasnot so signed until on or after 10th July 1999.

(e) The attestation provision for the five vendors requires their personal signature – it has not beenamended for the Agreement to be signed for them by an attorney appointed by Power of Attorney andthe document does not show on its face, as it should, if such were the case, that Marcus AmitoCullinan signed as the attorney for all five vendors. Additionally, where a document is executed underPower of Attorney, it is usual to have a Statutory Declaration as to non­revocation, signed before aperson authorised to take such declarations under the Oaths Act.

Whilst Clause 11.10 of the Agreement (See SM543) contains such a declaration, there isnothing on the face of the Agreement to show that Mr. Brian Cullinan is a personauthorised to take such a declaration under the Oaths Act.

(The position would be different if a direct dealing with land was involved as that situation iscovered by Part VIII of the Land Registration Act).

(f) There is a Power of Attorney attached to the Agreement (See Tendered Document SM552). Thatdocument though dated 7th April 1999, is not endorsed as having stamp duty paid on it and would, inconsequence, be inadmissible in evidence in a Court if the objection was taken.

It is plain on the face of this document, that it is not signed by Dillon Tyren Cullinan at all,but signed a second time by Natali Pia, who has added after her second signature "(MOTHER)".

The witness to all signatures on the document is Mr. Brian Cullinan.

The position over the vendor Dillon Tyren Cullinan is of legal importance for as we will seehe was the registered holder of one of the five shares in the capital of Banora TradingLimited, which the DFRB Board was purchasing under the Agreement.

Without doing any more than look at the face of the Power of Attorney (TenderedDocument SM552) it was apparent that document was signed by Natali Pia as the motherof Dillon Tyren Cullinan.

Carter Newell Lawyers were acting as the lawyers for the DFRB Board and, in our view,had a duty to ensure that the Agreement was properly executed by the vendors. We furthersay that there was a problem apparent on the face of the Power of Attorney under theauthority of which this Agreement was purportedly executed by the vendor, Dillon TyrenCullinan, which should have put Carter Newell on inquiry.

We have made the enquiry, which we say should have been made and ascertained that, atthe time, Dillon Tyren Cullinan was an infant of approximately four (4) years of age.

He, accordingly, lacked the legal capacity to validly dispose of the share of which he wasthe registered holder and the legal capacity to validly grant a Power of Attorney to MarcusAmito Cullinan to deal with that share or the rights attached to it.

Such a problem cannot be overcome by his mother signing for him.

This is not a minor problem but a fundamental one which goes to the ability to validlycontract to transfer this share to the DFRB Board and thus to the title, if any, which theDFRBF could validly obtain to this share.

The evidence suggests that Carter Newell failed in their duty to the DFRB Board in thisimportant respect.

The consequence may be that the DFRB Board's title to this share may be at risk at thesuit of Dillon Tyren Cullinan when he becomes sui juris.

23.3 The Company and the Share Sale

(a) The Agreement defines "Company" as "Banora Trading Ltd, whose corporate details are set out inSchedule 1" and defines "Shares" as "the Vendors shares in the Company described in Schedule 1"(See SM533).

(b) Schedule 1 (SM545) describes the Company as Banora Trading Ltd incorporated on 29th March1994, with five issued ordinary shares of K1.00 each; shows the registered holders of one share eachas Natalie Pia, Dillon Tyren Cullinan, Kevin Apita, Marlene Kupe and Marcus Amito; shows thedirectors as Marcus Amito and Kevin Apita and the Secretary as Marlene Kupe and shows theregistered office at Section 6, Allotment 11, Vanimo Sandaun Province.

(c) Recital A of the Agreement recites that the vendors are the registered holders and sole beneficialowners of the shares in the company and Recital B recites the Vendors wish to sell to the Purchaserand the Purchaser's wish to buy from the Vendors, all the issued shares (SM532).

(d) Clause 2 of the Agreement recounts the agreement by the Vendors to sell and by the Purchaser topurchase the Shares and associated rights free from any "security or third party interest" for thePurchase Price and on the terms and conditions of the Agreement.

It further provides that the Vendors waive any pre­emptive rights and that title to property inand risk of shares remains with the Vendors until completion and passes to the Purchaseron Completion.

(e) There are no specific warranties given in relation to the Company or the Shares save thewarranties in Schedule 8 (SM547):­

"1. Due Authorisation

1.1 This Agreement constitutes a legal, valid and binding obligation of the Vendorsenforceable in accordance with its terms by appropriate legal remedy.

2. Accuracy of Information

2.1 The facts set out in the recitals and in Schedule 1 are true complete and accurate in allrespects".

The veracity of the recitals and Schedule 1 is thus warranted.

It may be that Warranty 1.1 could offer DFRBF some relief over the share held by DillonTyren Cullinan who was legally incapable of entering an enforceable legal, valid andbinding obligation in respect of the share of which he was said to be the registered holderand beneficial owner.

(f) In my experience, the provisions included in the Agreement in these respects, are what wouldnormally be expected in a draft agreement prepared by the Vendor's lawyer. Definitions of the terms"security or third party interest" would also be expected.

Again, in my experience, it would be usual for a lawyer acting in the Purchaser's interest torequire the following warranties to be given in respect of the Company and the shares:­

"A. THE COMPANY

1. The Company having originally been incorporated under the Companies Act – ChapterNo. 146 of the Revised Laws of Papua New Guinea has been reregistered as a companypursuant to the Papua New Guinea Companies Act 1997.

2. The Company has not prior to the date of this Agreement adopted and will not prior toCompletion (save if and as required by this Agreement) adopt a constitution.

3. The Company satisfies the solvency test within the meaning of that expression inSection 4 of the Companies Act 1997

4. The Company has not gone into liquidation, called any meeting to consider or passedany resolution that it be would up and no application or petition for its winding up has beenpresented or threatened nor has any notice or purported notice under the Companies Act1997 been given to the Company by virtue of which the Company is liable to be wound up.

5. No receiver has been appointed nor is the appointment of a receiver or receiver andmanager threatened, in relation to the whole or any part of the undertaking or assets of theCompany and no event has occurred which entitles (or would, with the giving of notice orthe lapse of time, entitle) any person (other than the Company) to appoint or seek theappointment by a court or a receiver or receiver and manager.

6. No official manager of the undertaking or assets of the Company or any part thereof hasbeen appointed nor have any judgements been obtained against the Company whichremain unsatisfied nor has execution or process of any Court or other authority been leviedor enforced upon the Company or its assets or any part thereof.

7. The Company has not made or proposed any scheme arrangement or composition withits creditors or any class of its creditors.

8. The Company:­

(a) does not have any subsidiaries nor is it the holder or beneficial owner of any share orother capital of any company;

(b) is not a member of any partnership joint venture or unincorporated association;

(c) does not have any branch or any permanent establishment outside Papua New Guinea.

9. The Business and affairs of the Company have been conducted in accordance with theCompanies Act Chapter No. 146 and its former memorandum and articles of associationand since 2 September 1998 with the Companies Act 1997.

10. All books, records and registers of the Company required to be established, kept andmaintained under the Companies Act 1997 have been established, kept and maintainedand are up to date with true, complete and,' accurate entries and records made therein.

11. The Company has caused to be filed with the Registrar of Companies all documentsrequired to be so filed, the registration of the Company is subsisting and the Company is

not liable to be struck off the register of Companies.

B. THE SHARES

1. Recitals A and B of this Agreement are true and correct and the Shares are all and theonly issued shares in the capital of the Company.

2. The Shares have been validly allotted and issued and fully paid up in cash; no leviescalls or other moneys are owing to the Company in respect of the Shares and the Sharesare not liable to forfeiture.

3. There are no agreements, arrangements, options or understandings in force orsecurities issued which call for the present issue of or grant or accord to any person theright to call for or require the issue of any unissued shares in the capital of or securities ofany nature whatsoever in or of the Company.

4. The register of shareholders of the Company contains true and accurate records of itsshareholders from time to time.

5. All distributions made by the Company to shareholders have been properly and validlydeclared and paid."

(g) The purpose of such warranties, which may be varied, deleted or added to by negotiation, is toprovide comfort to which a purchaser is entitled to, compel disclosures of matters not detected duringdue diligence and to provide recourse against the Vendors if there are subsequent "surprises" as therewere in a number of matters in this respect for DFRBF.

There is no evidence any warranties along these lines were sought by Carter Newell andwe say they were accordingly remiss in their duty as lawyers for the DFRBF Board unlesssomeone on behalf of DFRBF gave instructions not to seek warranties along these lines.

23.4 The Contract and Completion

(a) In simple form, the Agreement envisages an exchange of contracts – at which time a deposit of10% the purchase price (the deposit in this case being K530,000.00) is paid – followed by completionon which, and subject to conditions, the balance purchase price (in this case being K4.77 million) ispaid.

(b) Clause 3 of the Agreement (which is wrongly headed) specifies the purchase price (SM535);Clause 4 (which is again wrongly headed as regards stamp duty) the exchange of contracts andpayment of deposit and Clause 7 with completion generally and Clause 7.3(a) with the paymentthereon of the balance purchase price particularly (SM537­9 and in particular SM539).

The expressions "Purchase Price", "Exchange of Contracts" and "Completion" are definedby reference to these clauses and "Completion Date" is defined to mean the later of 30thJune 1999 and any other date agreed in writing by the parties before 30th June 1999(SM533).

These clauses of the Agreement are in reasonably standard form.

It is of interest that the specified completion date was 30th June 1999, particularly when itseems the Agreement was actually signed after that date. Amendment to this date wouldhave been simple but as we will later see there was probably a reason for this and fordating the Agreement 1st June 1999.

23.5 Share Transfers

(a) The Agreement in Clause 9 imposes the responsibility on each party to bear its own costs of andincidental to the Agreement and the obligation on the Purchaser to pay stamp duty on the Agreement,share transfers and other instruments and transactions "including the Management Agreement" (whichis not identified or defined (SM540­1).

This is a standard clause and makes it quite clear that Carter Newell were not entitled to charge to theaccount of DFRBF costs which we have identified earlier and which clearly were payable by theVendors.

(b) With such an obligation regarding stamp duty and a structure of exchange of contracts followed bylater completion, it must be decided by a Purchaser and his Lawyer whether there is a sufficient timeafter exchange of contracts and before completion to have the stamp duty paid and to have stampedshare transfers available before completion.

The reasons why this is necessary flow from the facts that:­

I. a Purchaser wishes to have control of the shares and rights attaching to them as at completion; and

I. the Stamp Duties Act (Section 26) renders it an offence to enter a Share Transfer into the ShareRegister prior to it being duly stamped; and

I. by virtue of the Companies Act 1997 (Section 78(a)), a shareholder in a company is the personwhose name is entered in the share register as the holder of that share.

Whether the Share Transfers are stamped prior to settlement thus determines what it is said in theAgreement will occur on completion, the language of the resolutions at the "take over" Board ofDirectors meeting and whether Powers of Attorney, Representative appointments and Proxies arerequired to protect the Purchasers rights up to the time the Share Transfers are actually entered in theShare Register.

(c) The Agreement in Clause 7.2(a) provides in this regard, that on completion the Vendors mustcause to be delivered to the Purchasers:­

I. the share certificates in respect of the Shares;

I. share transfers duly executed by the respective holders and in registerable form; and

I. any other document which the Purchaser requires to obtain good title to the shares and to enablethe Purchaser to procure the registration of the shares in the name of the Purchaser or its nomineeincluding any power of attorney under which any document delivered under this Agreement has beensigned (SM537­8).

The Agreement further provides that the completion Board of Directors meeting the Vendors shallprocure the approval of the registration and the registration (subject to payment of stamp duty) of thetransfers of the shares, the issue of a new share certificate for the shares in the name of the transfereeand the cancellation of the existing share certificates (Clause 7.2(b)(i) – SM538) and at completionmust, "subject to stamping of shares by the Purchaser confer on the Purchaser title to the shares andplace the Purchaser in operating control of the Company" (Clause 7.2(c) – SM539).

Finally, the Agreement provides in Clause 7.4, that the Purchaser must ensure prompt registration ofthe Share Transfers (SM539).

(d) The Agreement thus provides adequately for what should occur in relation to the Share Transfersand it will be necessary to wait to see whether all appropriate steps were taken on completion.

23.6 The Directors and officers of the Company

(a) It is usual and indeed a critical part of any company "take over" that the Purchaser obtains controlof the Board of Directors of the target company, appoints nominees to the essential statutory offices ofthe Company and obtains the requisite consents to act from its appointees.

(b) We have seen this issue addressed not as it should have been at DFRB Board level, but by Mr.Naru by direction to Mr. Kila which was embodied in Mr. Kila's letter of 9th April 1999 to Carter Newell(Tendered Document SM307).

(c) Clause 7.2(a)(v) of the Agreement provides that at Completion, the Vendors must deliver to thePurchaser the written resignations of each director, secretary and public officer of the Company andprovides "No payment in lieu of notice, non­payment for loss of office will be required to be paid by thePurchaser…" (SM538).

The expression "non­payment" should clearly read "nor payment".

Clause 7.2(b) provides that at the Completion Board of Directors meeting, the Vendors willprocure:­

"(ii) the appointment as additional directors, secretaries and public officers of the Company of thepersons set out as follows:­

Directors: (a) Colonel Philip Playah (b) Colonel Reginald Renagi(c) Kelly Naru (d) Darby KilaSecretaries: Darby KilaPublic Officer: Darby Kila

(iii) the retirement of each existing director, secretary and public officer of the Company with effectfrom the end of that meeting with each retirement being by written notice by the retiring personacknowledging that he has no Claim of any kind whatsoever against the Company whether in respectof salary, fees, compensation or entitlement for loss of office, loans or otherwise (except in respect ofhis legal entitlements to accrued long service leave and annual holiday pay which is to be paid by thecompany prior to completion):"

Finally, Clause 7.3(b) of the Agreement provides that at completion the Purchaser must causesufficient instruments of consent to be available to allow passing of the resolutions in Clause 7(b)(ii)(SM539).

(d) The provisions of the Agreement are in reasonably standard form but again in my experience it isusual for a Purchasers Lawyer for the same reasons advanced earlier to cover his client by warrantiesalong the following lines:­

"C. DIRECTORS AND OFFICERS

1. The only present directors of the Company, each of whom will resign office as such at Completionare:­

(COMPLETE)

I. The only present secretary of the company, who will resign office as such at Completion, is(Complete).

I. No director or secretary of the company has any entitlement to:­

(a) payment by the company of any compensation for loss of office;

(b) payment of any unpaid fees, emoluments or expenses in respect of his holdingsuch office.

(c) any retirement benefit scheme, pension scheme, superannuation scheme or like orsimilar scheme to the cost of which the company is required to contribute."

23.7 Usual other provisions

(a) As is the case with most Share Sale and Purchase Agreements, there are a number of standardclauses as these are in the Agreement and it is convenient at this point to deal with those standardclauses in order to identify the parts of the Agreement, which remain to be considered.

(b) Such standard clauses in the Agreement include the following:­

(i) specific definitions – those remaining to be dealt with including "Accounts", "Asset Register","Business", "Claim", "Property", "Tax" and "Warranty" (Clause 1.1 – SM532­3).

I. General interpretation provisions (Clauses 1.2 and 1.3 – SM533­5) which include a definition – yet tobe dealt with of "knowledge".

(iii) Events to occur on completion including the date time and place of Completion (Clause 7.1) thehanding over by the Vendors of the Certificate of Incorporation, Constitution and Company Register

(Clause 7.2(a)(i) – SM538) the Accounts (Clause 7.2(a)(iv) – SM538) the fulfilment of conditionsprecedent – which we will come back to (Clause 7.2(b)(v) – SM538) and each of the Vendors andPurchasers executing such documents as the Agreement requires be executed at completion(Clauses 7.2(d) and 7.3(c) – SM539).

(iv) Notices (Clause 10 – SM541).

(v) General Provisions dealing with "Amendment", "Waiver", "Liability", "Entire Agreement" (which wewill come back to), "Severability", "Assignment", "No Merger", "Further Assurance", "Counterparts" and"Confidentiality" (Clause 11 – SM541­3).

(vi) Law and Jurisdiction (Clause 12 – SM543­4).

(c) Save as indicated in (b) above, these standard Clauses in the Agreement do not require comment.

23.8 The Accounts

(a) It is crucial in a company takeover where the company operates a going concern business, for aPurchaser and his Lawyer to ensure that meticulous attention is given to establishing a recordedfinancial base on which the share purchase is premised and to provide for the protection of theshareholders funds which he is in fact buying and the ordinary business conduct of the business whichthe target company operates.

(b) The foundation stone in this endeavour is a set of Accounts consisting at least a balance sheet,profit and loss account and cashflow statement with notes to them prepared to an acceptable andknown accounting standard. We have already seen what occurred in this case with the advice from allquarters of the need for such Accounts and of the eventual requirement that they be audited.

(c) In Clause 1.1 of the Agreement "Accounts" is defined as meaning "in relation to the Company, theprofit and loss account for the financial year ended on 1998 and the balance sheet as at 31stDecember 1998 in relation to the Company with the consolidated profit and loss account and balancesheet of the Company" (SM532).

The first other mention of "Accounts" we can find in the Agreement is in Clause 7.2(a)(iii) whichprovides that at Completion "the Vendors must…deliver or cause to be delivered to the Purchaser…the Accounts of the Company".

The only other reference we can find to "Accounts" is in the final condition precedent in Schedule 2Part 2 Item 1 of the Conditions precedent (SM546) which we will come to shortly.

(d) The document defined as "Accounts" is not annexed to or incorporated in any way in or as part ofthe Agreement and the reference to "Consolidated" accounts is quite strange, as one only hasaccounts consolidated for a holding company in a group corporate structure.

The only provision in respect of these 1998 "Accounts" is that they be handed to the Purchaser onCompletion.

(e) In my experience, it is usual for a Purchaser's Lawyer in a company takeover to require that thefinancial statements, which form the basis of the transaction, are either scheduled or annexed to theAgreement and that warranties in relation to them are given. In their letter of 5th August 1999 to Mr.Naru, Blake Dawson Waldron pointed out that the accounts were not attached to the Agreement(Tendered Document SM560 – Item 3.1(d)). Standard warranties sought are as follows:­

"D. THE ACCOUNTS

1. All the accounts books, ledgers and financial and other material records of whatsoever kind of theCompany have been fully properly and accurately made up, kept and completed and will pendingCompletion continue to be so made up kept and completed, that there are no material inaccuracies ordiscrepancies of any kind contained or reflected therein and they give and reflect a true and fair viewof the financial contractual and trading position of the Company and of its current and non­currentassets and liabilities (actual prospective and contingent) and debtors and creditors and stock in trade.

2. That the Balance Sheet prepared as at 31 December 1998 ("the Balance Date") and the Profit andLoss Account for the period ending on the Balance Date (hereinafter called "the Accounts") annexedand marked "A":­

(a) Have been prepared in accordance with all applicable legislation and generallyaccepted accounting principles and standards applied on a consistent basis;

(b) Show a true and fair view of the financial position and assets and liabilities of theCompany as at the Balance Date and of its income, expenses and results ofoperations for the financial period ended on the Balance Date;

(c) Are not affected by any unusual or non­recurring items save (specify ifexceptions);

(d) Take account of all gains and losses whether realised or unrealised, resulting fromforeign currency transactions;

(e) Include all reserves and provisions desirable to cover liabilities (including, withoutlimitation, liabilities for long service leave, annual leave entitlements and likeemployment incident entitlements of the employees of the Company;

(f) Make full disclosure of all material liabilities (whether actual, prospective,contingent or otherwise) and of all financial commitments and obligations of theCompany as at the Balance Date.

3. No material changes detrimental to the interest of the Purchaser have occurred in theassets and liabilities of the Company from those disclosed in the Accounts.

4. There are not any guarantees, material undertakings, material commitments on capitalaccount or unusual or contingent liabilities which have been made, given entered into orincurred by or on behalf of the Company and not disclosed in the Accounts.

5. There are not (except as disclosed in the Accounts):(a) any mortgages, charges, or other similar encumbrances on the whole or any partof the assets of the Company;

(b) any loan capital or other loans to the Company outstanding.

6. That the trade debts shown in the Accounts have and will be so far as the Vendors are aware dulyreceived less such provision for bad debts as has been made in the Accounts."

(f) Again, the purpose of such warranties is to ensure that the Purchaser obtains what he hasbargained to obtain, to compel disclosures of matters not detected on due diligence and to providerecourse against the Vendors if there are subsequent "surprises" as will clearly be the case withBanora Trading Limited for the DFRB Board.

(g) In short form there is no evidence that any warranties along these lines were sought by CarterNewell, as Lawyers for the DFRB Board. We say that the failure to include the "Accounts" as part ofthe agreement; to provide no obligation other than to hand over the Accounts on Completion and thefailure to require any warranties at all in respect of the Accounts are massive and fundamentalshortcomings in the Agreement and fall far, far short of fulfilling the duty owed to the DFRB Board asPurchaser.

What we do not know is whether there was a direction or instructions by any person on behalf of theDFRB Board to only include, the inadequate provisions which were included or whether Carter Newellwere remiss in their duty as the Lawyers for the DFRB Board.

Mr. Naru as a professional practicing lawyer and partner of Carter Newell would appear to be theperson to whom that question could be directed by the Commission.

23.9 The business assets and conduct of the business

(a) As we have said in 23.8(a) above, a second fundamental concern of a Purchaser is to be assuredthat since the date of the Accounts the business of the target company has been conducted in theordinary course and that there have been no extra ordinary events or unusual commitments oroccurrences.

(b) The Agreement in Clause 1.1 defines "Business" as meaning "in relation to the Company, the

business conducted by the Company as at the date of this Agreement" (SM532).

It is, in my experience, usual practice to actually describe the business and in doing so to havereference to all sources of income disclosed in the profit and loss Account and to the operating assetsdisclosed in the balance sheet.

The first reference we can find to the defined expression "Business" in the Agreement is in Clause7.3(a) which provides that the balance purchase price of K4.77 million shall be paid on Completion"less any adjustment for outstanding land rent or provincial government taxes or charges relating tothe Property or Business".

We will come later to "the Property" and even later what was done in relation to these "adjustment"items on settlement.

The only other reference we can find in the Agreement to the defined expression "Business" is inSchedule 3 Item 2.2, which deals with Warranties (SM547), which we will come to later.

(c) A third fundamental concern of a Purchaser is to ensure that he obtains the benefit and control ofthe assets underlying the Business as disclosed in the balance sheet.

(d) Clause 1.1 of the Agreement defines the "Asset Register" as meaning "the unencumbered assetsset out in Schedule 5" (SM532).

Clause 5 of the Agreement (SM536­7), which we will deal with more generally later, prescribes four (4)only conditions precedent to completion set out in Part 2 of Schedule 2, two (2) of which are:­

"2. The Purchaser undertaking a stock take of the Asset Register to satisfy itself the unencumberedassets of the Company are correctly recorded in the Asset Register.

3. Discharge of all security held by the any financier or third party against assets set out in the AssetsRegister." (SM546)

The "Assets Register" in Schedule 5 of the Agreement is of two pages (SM549­550). The document isplainly copied directly from the inventory of "Furniture, Plant and Equipment" at pages 11, 12 and 13 ofMr. Iori Veraga's valuation of the Sandaun Motel with only the following differences:­

(i) the air conditioning units in the bar and managers flat and the curtains in rooms 1 ­ 21 which areincluded in Mr. Veraga's inventory are not included in the Asset Register;

(ii) the Asset Register does not show the number of seats in each lounge in the lounge area and omitsthe item "2 x large glass top tables" in the lounge area which are included in Mr. Veraga's inventory;

(iii) the Asset Register does not include crockery in the kitchen which is included in Mr. Veraga's list;

(iv) the Asset Register includes in "Office" the vehicle shown separately as "Vehicle" and the radioequipment shown separately as "Others" in Mr. Veraga's inventory;

(v) the Asset Register omits the 25 KVA generator set which was included in Mr. Veraga's inventory.

As we have seen in our examination of the balance sheets for Sandaun Motel these items are only afraction of the assets, which were included. No attention appears, as we will see, to have been givento any other assets.

(e) In my experience, it is usual for a Purchaser's lawyer to require warranties as to both the Businessand the Assets of the Business conducted by the target company and those warranties are usually tiedto the date at which the Accounts close and cover the period from that date to Completion.

Warranties peculiar to the target company are usually formulated in addition to the standard warrantiessought which are as follows:­

"E. BUSINESS AND ASSETS

1. Between the Balance Date and the date of this Agreement the Business of the Companyhas been carried on in the ordinary and usual course and, without limiting the generality ofthe foregoing there has not been:­

(a) any material alteration to the terms of employment of its directors, executives oremployees;

(b) any material contract or arrangement entered or any liability or obligation incurredor agreed to be incurred or any assets disposed of or agreed to be disposed of,otherwise than in the ordinary course of business;

(c) any special resolution passed;

(d) any capital expenditure which is of an unusual nature or amount;

(e) any operational expense incurred or agreed to be incurred which is of an unusualnature or amount.

2. Between the date of this Agreement and Completion, the business of the Company willbe carried on in the ordinary and usual course and without limiting the generality of theforegoing:­

(a) There will not be any material alteration to the terms of employment of itsdirectors, executives or employees and no bonuses or increases in salary will be paidto its employees save in the ordinary course of business or as imposed by anindustrial award;

(b) No advances will be paid to any person;

(c) There will not be any material contracts or arrangements entered or liabilities orobligations incurred or agreed to be incurred nor will any assets be disposed of oragreed to be disposed of otherwise than for full consideration and in the ordinarycourse of business or as provided for in this Agreement without the prior writtenconsent of the Purchaser's representative;

(d) There will not be any special resolution passed other than as required by thisAgreement.

(e) There will not be any capital expenditure of an unusual nature or amount savewith the prior written consent of the Purchaser's representative;

(f) There will not be incurred or agreed to be incurred any operational expense whichis of an unusual nature or amount having regard to the customary business practicesapplicable to the business which the Company operates save with the prior writtenconsent of the Purchaser's representative;

(g) There will not be any debenture mortgage or charge created over the Company orany of its assets;

(h) All the property both real and personal of the Company will be adequatelymaintained to ensure that such property is kept in substantially the same state ofrepair as at the date of this Agreement;

3. There are no long term contracts, agreements, deeds or obligations binding upon theCompany and no existing contract, agreement, deed or obligation which contains any onerous,unusual or other provision material for disclosure to an intending purchaser of the Shares whichhas not been disclosed in writing to the Purchaser.

4. The Company has not entered into any hire purchase, leasing or credit sale agreement whichhas not been disclosed in writing to the Purchaser and has not defaulted and has not done oromitted to do any act, matter or thing which constitutes a default on the part of the Companyunder any such disclosed agreement.

5. The Company is not a party to any contract or arrangement which may be terminated by anyother person by reason of a change in the ownership of the Company.

6. The Company has good and marketable title to all its property and assets (including itsunissued and issued but uncalled share capital) free from any security or third party interest andthere is no agreement to give or create any security or third party interest and no claim has been

made by any person to be entitled to An interest of that kind.

7. The Company has obtained all permits, licences authorities and consents from any personauthorities and consents from any person authority or body necessary for the proper carrying onof its business in the manner in which the same has been and is being carried on.

8. The Company does not own, use, require to use or infringe any letters patent, trade or servicemarks.

9. The Company does not carry on business nor has it a place of business outside Papua NewGuinea.

10. The stock in trade of the Company is of good and merchantable quality and reasonably fit forthe purposes and uses for which it is intended."

(f) In the case of Sandaun Motel which was reliant for its income on a trading license for its Roomcharge revenue, liquor license for its bar and restaurant trade, poker machine licence for its incomefrom poker machines, food and beverage stocks for its restaurant income and stocks of consumableitems for its accommodation and laundry income, one would also expect to find purpose drawnwarranties and clauses in the Agreement as to the currency of licenses, their not being at risk and asto their transfer to the Purchaser's nominees and as to the adequacy at Completion of all lines ofrelevant stock and as to what was to occur with obsolete stock. Normally a minimum monetary level ofeach item of stock would be fixed in the Agreement with provision for a stock take and as to whatwould occur if stock was below the established minimum levels.

(g) The reasons for such warranties and other provisions are obvious.

(h) Again, there is no evidence that such warranties and provisions were sought by Carter Newell aslawyers for the DFRB Board.

We say, again, that this is a massive and fundamental shortcoming in the Agreement, which falls far,far short of fulfilling the duty owed to the DFRB Board as Purchaser.

Again, we do not know whether this was the result of an instruction or direction from someone onbehalf of the DFRB Board or whether Carter Newell were remiss in their duty as lawyers for the DFRBBoard.

Mr. Naru would again, in our submission, be the person to whom the Commission would direct thatquestion.

23.10 Conditions precedent

(a) Clause 5.1 the Agreement renders the obligations of the Purchaser conditional on the conditionsspecified in Part 2 of Schedule 2 being fulfilled or waived by the Condition Satisfaction Date (SM536).

The "Condition Satisfaction Date" is defined in Clause 1.1 as 30th June 1999 (SM533). Clause 5.2provides that if any such condition is not so fulfilled or waived the Agreement AUTOMATICALLYTERMINATES.

Clause 5.3 deals with waiver of any such condition either by the party for whose benefit it is includedor by mutual agreement in writing.

There are only four (4) such conditions in Part 2 of Schedule 2 which are all for the benefit of thePurchaser.

We have dealt with conditions 2 and 3. in 23.9(d) above regarding the Asset Register. Condition 1requires the Company to either pay off all staff prior to completion or ensure provision has been made"in the accounts of the Company" for payment of staff wages entitlements and benefits. Condition 4requires that all business names including "Sandaun Motel" are registered in the name of theCompany and are still current.

(b) The first condition is somewhat nonsensical given the only "Accounts" were at 31st December1998 and there were no other accounts in which such a liability could be entered prior to 30th June1999.

Normally in a company takeover a decision is made by the Purchaser that all or some of the Vendorsstaff are either terminated by the Vendor at completion or retained by the Purchaser and what is tooccur is specified in the contract and supported by appropriate warranties which avoid "surprises" forthe Purchaser.

The Agreement is silent on this aspect and condition 1 is almost meaningless. Condition 4 assumessome importance for as we have shown at the outset of this Opening, the business name "SandaunMotel" had not, in fact, been registered under the Business Names Act and was not so registered at30th June 1999. The name was, as we have seen, quite important to the business that DFRB Boardwas purchasing ­ at all times we see the transaction described not as a purchase of Banora TradingLimited but as a purchase of the name by which the business was commonly known "Sandaun Motel".

What is legally important was that this fact operated automatically to terminate the Agreement with norepercussions for DFRBF.

(c) In our view, Carter Newell, as the lawyers for the DFRB Board had an obligation to ascertainwhether these conditions precedent were, in fact, fulfilled as at 30th June 1999 and to the extent theywere not so fulfilled to advise the DFRB Board firstly of its right to waive the condition and secondly asto the consequence of automatic termination of the Agreement if the condition was not waived.

There is no evidence that this advice was given and no evidence that instructions were sought orobtained (save as we will see from Mr. Naru at completion).

To the contrary, Mr. Naru was telling the DFRB Board at its meeting on 22nd July 1999, as we haveseen, that it was at risk of losing its K530,000.00 deposit and being sued for damages for breach ofcontract when, in fact, the Agreement had by its terms and by virtue of the non fulfilment of Condition 4in Part 2 of Schedule 2 automatically terminated prior to that date.

The Commission will doubtless ask Mr. Naru to explain his conduct in this regard.

(d) The formulation of conditions precedent to a contract of this nature is largely dependent upondetailed due diligence which points up critical matters which require to be attended to. Even a simplecompany search disclosed that Annual Returns for Banora Trading Limited had only been filed up tothe year 1996 and this was pointed out by Blake Dawson Waldron by reference to the copy companysearch supplied to them by Mr. Naru (see Tendered Document SM360 item 3.4).

A condition precedent could have also been included making completion conditional upon DFRBBoard obtaining a business evaluation, which was reasonably satisfactory (see Blake DawsonWaldron letter ­ Tendered Document SM559 item 2.2(a)).

The most elementary due diligence would have pointed up multiple matters including the lack ofprescribed corporate records, Sales Tax records and other requisite records which could have beenmade the subject of conditions precedent.

(e) In our submission, the fact that in this transaction there were only four (4) conditions precedent isindicative of the amount of care and attention given to the Purchaser's interests rather than theVendor's interests in the Agreement. We would have expected far more and what we do see is yetagain, that either someone on behalf of the DFRB Board gave instructions that what was in theAgreement was adequate or Carter Newell as the lawyers for DFRB Board were far less pro­activethan they should have been in obtaining instructions and protecting the DFRB Board's interests.

Again, the Commission will probably require that the obvious question be answered by Mr. Naru.

23.11 Conduct pending completion.

(a) This topic is dealt with in Clause 6 of the Agreement which reads as follows:­

"6. CONDUCT PENDING COMPLETION

6.1 Confidentiality

All information of a confidential nature obtained by the Purchaser must be kept confidential by thePurchaser until Completion does not occur on or before the Completion Date, the Purchaser mustreturn to the Vendors, on demand, all materials in its possession which embody or refer to any or all of

that information and not disclose any such information to any persons without the Vendor's writtenpermission.

If any information obtained in the due diligence process of the Purchaser is later used or disclosed byany person to the detriment of the Vendors or Company then the Purchaser indemnifies the Vendorsand Company for any loss suffered by such use or disclosure of such information or records.

6.2 Notice of Change

Where before Completion an event occurs which has or may have a material effect on the profitabilityor value of the Company or the value of the Shares, the Vendors must, immediately upon becomingaware of that event, give notice to the Purchaser fully describing the event." (SM537)

(b) In my experience it is usual for a Purchaser in a company takeover to have at least one of itssenior personnel and relevant advisors have access to the historical and financial records of the targetcompany before a Share Sale and Purchase Agreement is entered into and such access is normallygoverned by a confidentiality agreement of similar effect to Clause 6.1 of the Agreement. The purposeof such access is to carry out due diligence and to identify matters to be included as conditionsprecedent and other matters requiring to be dealt with specifically in the Agreement. It is also usual inmy experience, for a Purchaser to again require that one of its senior personnel is actually physicallylocated at the business premises of the target company between exchange of contracts andCompletion to become familiar with the business systems and staff and the day to day running of thebusiness on the same confidential basis. Such person is usually appointed the "Purchasersrepresentative" for the purpose of warranties relating to the conduct of the business as referred to in23.9(e) above.

Such a requirement is usually included in the contract and the access is conditioned by aconfidentiality clause akin to Clause 6.1.

That confidentiality clause ­ unlike clause 6.1 is usually subject to the exception of disclosures by thePurchaser to advisors and financiers and disclosures made under compulsion of law (along the linesof those in Clause 11.11 of the Agreement ­ See SM543).

Clause 6.2 of the Agreement regarding disclosure by the Vendors of a material event is usual.

(c) Again, at risk of tedium, what the Agreement says falls short, in my view, of what a PurchasersLawyer should require in this regard and the same question arises ­ did someone on behalf of theDFRB Board give instructions that what was in the Agreement was adequate or was there a shortfall inprotection of the proper legal interests of the DFRB Board.

23.12 Records to be handed over on Completion

(a) The only historical, financial and corporate records of the Company, Banora Trading Limited, whichare required under Clause 7 of the Agreement be handed over at completion, are the Certificate ofIncorporation, Constitution, Company Register and the "Accounts" i.e. the 1998 Accounts as defined(SM538).

There is also provision for an authority for alteration of signatories to the bank account of theCompany in manner required by the Purchaser by notice before the Completion Date to behanded over (Clause 7.2(a)(iv) ­ SM538) and for the Completion Board meeting to resolve thatall existing authorities to operate bank accounts are revoked and to appoint the Purchaser'snominees as bank signatories (Clause 7.2(b)(iv) ­ SM539).

(b) When a company is taken over it, of course, remains in existence as a legal entity and theDirectors nominated by the Purchaser then assume the duties and obligations as such in place of theVendor's directors who resign at completion. Both the Income Tax legislation and the Companies Act1997, contain provisions, which require retention of records.

Even without that legislation the historical and financial records of a company are the property of thecompany itself and not of its directors or of the holders of shares in its capital.

Most importantly:­

(i) Section 154 of the Companies Act 1997 deals with the corporate records which must be retained bya company at its registered office for seven (7) years or seven (7) accounting periods

(ii) Section 188 of the Companies Act deals with the accounting records of a company which must beretained for the last ten (10) accounting periods.

In each case, non­compliance with these statutory requirements is an offence in the case of Section164 by the company and every director and in the case of Section 188, by every director.

(c) For the reasons stated in (b) above, it is a usual and obvious requirement to include in a ShareSale and Purchase Agreement either in general or specific terms, an obligation for the Vendors tocause to be delivered to the Purchaser on completion all of the historical records including historicalcorporate and financial records of the company and in particular those required to be maintained andretained by law for the periods they are respectively required to be so maintained and retained andwritten up to the date of Completion.

(d) There is no such obligation, which would normally be insisted upon by a Purchaser's lawyer in theAgreement.

Again, whether this was a result of instructions or directions from someone on behalf of the DFRBBoard or a shortfall on the part of Carter Newell as the lawyers for the DFRB Board will, in oursubmission, have to be asked by the Commission.

As regards the bank accounts, we will come back to that aspect when we deal with what occurred oncompletion.

As we have already shown at least Mr. Marcus Cullinan, Mr. Michael Tulake and Mr. Kelly Naru wouldhave had an interest in earlier financial records not being available as such records would expose theerrors in the financial statements for 1996, 1997 and 1998 and quantify such errors.

23.13 Tax and impository obligations

(a) When a company takeover target is operating a going concern business particularly in the retailsale of goods and services and with a number of employees, one of the fundamentally important areasin which due diligence must be conducted is compliance with its monthly and annual Group Tax andSales Tax (now VAT) stationery and payment obligations and compliance with its annual Income Taxstationery and payment obligations.

(b) Clause 1 of the Agreement defines "Tax" as meaning:­

"any income tax, capital gains tax, sales tax, tax instalment deductions, group tax, profit tax, interesttax, property tax, undistributed profits tax, withholding tax, municipal or analogous rates, stamp duties,import and export duties, training levies and other charges, licence fees, levies, royalties andimpositions, assessed, levied or charged, or assessable, leviable or chargeable, by or payable to anygovernmental taxation, revenue or excise authority and includes any additional tax, interest, penalty,charge, fee or other amount imposed or made on or in relation to a failure to file a relevant return or topay the relevant Tax" (SM533)

Clause 8 and Schedule 3 of the Agreement dealing with Warranties ­ which we will come to shortly ­deals with tax in Item 3 (for some reason headed "Indemnity") and Item 3.1 in particular which reads:­

"3.1 The Vendors warrant that all tax which has fallen due for payment has been paid by the companyup to and including the date of Completion or that provisions has been made in the accounts of thecompany for payment of the same." (SM547)

There is no obligation to produce the records in respect of "Tax" on completion.

As we have already seen, there was inadequate provision for Sales Tax in the 1998 balance sheet andno provision for Income Tax.

The warranty given is short.

Its efficacy probably turns on the meaning of the expression "tax which has fallen due for payment".The potential problem arises where tax has not in fact fallen due for payment because no return hasbeen filed and thus no assessment has issued.

The provision regarding a "provision" is in our view inadequate as there is nothing to require that theprovision is sufficient to meet the total liability.

(c) It is usual for the reasons which are now becoming tedious, in my experience, to include for theproper protection of a purchaser detailed warranties as to tax and other imposts, along the followinglines:­

"G. TAXATION AND IMPOSITORY OBLIGATIONS

1. All taxation returns of the Company pursuant to the Income Tax Act including monthly returnsrequired to be lodged by Group employers have been lodged with the Chief Collector of Taxes.

2. All such taxation returns made by the Company have been made with full and true disclosure of allrelevant matters and without any material non­disclosure of any relevant matter.

3. The Company has no liability in respect of any unassessed or unpaid tax under the Income Tax Act.

4. The Company will not become liable to pay or subject to any tax under the Income Tax Act:­

(a) on or in respect of or by reference to profits, gains or income for any period up toand including the Balance Date; or

(b) in respect of any other matter referable to a time prior to, or to any period endingon or before the Balance Date,

in excess of the provision for Income Tax included in the Accounts.

5. All sales tax returns of the Company pursuant to the applicable Provincial Sales Tax Act have beenlodged with the Provincial Chief Collector of Taxes.

6. All such sales tax returns made by the Company have been made with full and true disclosure of allrelevant matters and without any material nondisclosure of any relevant matter.

7. The Company has no liability in respect of any unassessed or unpaid sales­ tax under theapplicable Provincial Sales Tax Act.

8. The company will not become liable to pay or subject to any sales tax under the Provincial SalesTax Act in respect of or by reference to sales for any period up to and including the Balance Date inexcess of any provision for Sales Tax included in the Accounts.

9. All entries and returns of the Company pursuant to imports customs and excise legislation requiredto be made or lodged have been made or lodged with the appropriate authorities.

10. The entries and returns referred to in Warranty G9 have been made with full and true disclosure ofall relevant matters and without any material nondisclosure of any relevant matter.

11. The Company has no liability in respect of unassessed or unpaid import, customs, excise or likeduties or levies.

12. The Company will not become liable to pay or subject to any import customs excise or like dutiesor levies in respect of any goods imported or acquired by it prior to the Balance Date in excess of anyprovision for import customs excise or like duties or levies included in the Accounts.

13. All stamp and other like duties on instruments of whatsoever nature which the Company is liable topay have been paid.

14. No dispute or difference exists between the Company and any relevant authority with regard to theliability of the Company to lodge or file any return to pay any tax duty or charge or otherwise withrespect to compliance by the Company with the relevant revenue laws.

15(a)The Company has complied with and will comply up to Completion with all otherNational, Provincial, semi­Government, municipal and foreign revenue laws which apply tothe Company (which expression shall include without limiting the generality thereof all laws

with respect to income tax, stamp duty, payroll tax, sales tax, duties of customs and exciseand rates).

(b) In particular and without limiting the generality of sub­paragraph (i):

(A) the Company has duly made all returns required to be made pursuant to the saidrevenue laws and will duly make all such returns required to be made up to Completion;

(B) the Company has paid in full or adequately provided for in the Accounts all taxes,duties, rates and other charges payable by it up to the Balance Date pursuant to the saidlaws.

16. The Company has not done or omitted to do any act or thing in contravention or breach of any ofthe provisions of any exchange control regulation, taxation statute or other impository law."

(d) Yet again, in our submission, there were shortfalls in the protection of the interests of the DFRBBoard and the Commission will need to ascertain whether those shortfalls resulted from instructions ordirections given by someone on behalf of DFRB Board or by Carter Newell being remiss in their dutyas lawyers for the Board.

23.14 Property

(a) The essential trading asset of Banora Trading Limited was the State Lease over the propertyAllotment 11 Section 6, Vanimo.

The expression "Property" is defined in Clause 1.1 of the Agreement (SM533) as meaning"Allotment 11 Section 6, Vanimo, Sandaun Province".

The only other mention of the defined expression "Property" is in Clause 7.3 (a) of theAgreement (as dealt with in 23.9 (b) above) where on completion the balance purchaseprice of K4.77 million is said to be payable less any adjustment for outstanding land rent orprovincial government taxes or charges relating to the "Property…" (SM539)

(b) If one purchases a State Lease interest in property in Papua New Guinea it is standardconveyancing practice not only to conduct due diligence searches and inquiries but also to have aprovision in the Contract for Sale whereby the Purchaser is entitled to raise requisitions on title whichthe Vendor is obliged to answer and which answers have the force of warranties.

(c) It is in consequence, in my experience, and where real estate is a main asset of a target companyin a company takeover usual to request warranties as to that real estate similar to those which wouldnormally be obtained out of the raising and answering of requisitions on title in a land transactionTypical warranties in this regard would be along the following lines:­

"H. REAL ESTATE

1. The land and buildings of the Company as included in the Accounts is comprised of theparcels of land specified in Annexure "B" hereto and of the buildings erected thereon.

2. The Company is not party to any lease agreement whether as Lessor or Lessee otherthan:­

(a) the State Leases in respect of the parcels of land specified in Annexure "B"; and

(b) a certain Lease made (COMPLETE) between (COMPLETE) (Lessor) and the Company(Lessee) in respect of the property known as (COMPLETE)

which lease is not determinable by not more than one month's notice by the Company tothe other party or parties thereto.

3. In respect of the Lease referred to in Warranty H.2 (b):­

(a) The lease is valid, subsisting and binding in accordance with its terms;

(b) the Company has complied with the covenants and conditions on its part to be

observed and performed under the lease;

(c) there is no valid basis upon which the Lessor is entitled to terminate, exercise a right ofre­entry under or otherwise exercise rights or powers under the Lease to the detriment ofthe Company.

4. In respect of each of the State Leases for a parcel of land specified in Annexure "B":­

(a) the State Lease is valid, subsisting and binding in accordance with its terms;

(b) all State Land Lease rent payable under such State Lease has been paid to andincluding 31 December 1998;

(c) the improvement and other covenants contained in such Lease have been fullycomplied with;

(d) there is no valid basis upon which such State Lease could validly be terminated orforfeited pursuant to the Land Act 1996;

(e) No notice to treat or notice of acquisition by compulsory Process has been received inrespect of the land the subject of such State Lease;

(f) there is no person in adverse possession of or who has made a claim to entitlement toadverse possession of the land the subject of such State Lease or any part of such land;

(g) all Provincial Government Land taxes and rates have been paid in respect of the landcomprised in such State Lease to and including 31 December 1998 and there are nounpaid arrears thereof;

(h) all Local­level Government charges and Waterboard charges have been paid to andincluding the end of the latest charges period in respect of the land comprised in suchState Lease and there are no unpaid arrears of such charges.

(i) the State Lease title is not subject to any mortgage charge like financial encumbrance;.(j) there are no outstanding orders or notices affecting the land comprised in such StateLease and there are no proposals of any local or other authority (whether involvingcompulsory acquisition or requisition or otherwise) or any other circumstances knownwhich may result in any such order or notice being made or served or which may otherwiseaffect the land.

(k) all proper and just demands and requirements of local government, health, building andother constituted authorities have been complied with by the Company in respect of theimprovements erected on the land comprised in such State Lease.

(l) there are no encroachments or overhangs by the improvements erected on the landcomprised in such State Lease onto or over adjoining land."

(d) In some instances further and other warranties are added and it is also standard practice to requirethat the tenants copy of any lease or owners copy of any State Lease is specifically handed over oncompletion.

(e) Where the Company is the owner of a State Lease property and liable for unpaid State Lease rentand other charges attracted by such ownership it is unusual to find a requirement (as in Clause 7.3 (a)of the Agreement) that there is any adjustment of such outgoings as at completion and as between theVendor and Purchaser.

(f) The reasons for such warranties are again apparent and again we say the absence of suchwarranties and a provision requiring the owners copy of the State Lease to be handed over oncompletion are material shortfalls in the Agreement in the proper protection of the interests of theDFRB Board.

The Commission will again, in our view need to ascertain whether these shortfalls were

due to instructions or directions by someone on behalf of the DFRB Board or to CarterNewell being remiss in their duty as Lawyers for the DFRB Board.

23.15 Motor vehicles and hire car income

(a) The 1998 Accounts show:­

(i) In the balance sheet (SM457) motor vehicles at K138,000 and a reference to Note 8 (f)

(ii) In Note 8 (f) (SM460)

"Motor Vehicles – at cost (4 New Vehicles – 1997) 166,000Less: Accumulated Depreciation 28,000138,000"

(iii) In the profit & Loss Statement (SM461) income from hire cars of K78,840 in 1998 andcomparative income of K89,850.

(b) The Agreement makes no reference to motor vehicles save in the "Assets Register" (SM550)which includes under "Office" one vehicle "1 x Toyota double CAB Reg H1489".

(c) These facts above are sufficient to put a Purchaser's lawyer on enquiry as to why only one vehiclewas included in the "Assets Register" and not three and as to how income at the levels shown for hirecars in the profit and loss account could be sustained with only one vehicle.

It is also, in my experience, usual where motor vehicles are an important part of thebusiness of a target company to include warranties as to MVIL insurance being paid,appropriate registration being current, roadworthiness and safety stickers being current andas to ownership free from encumbrances by the company.

The Agreement only addresses the last aspect in Clause 5 (Conditions Precedent) andSchedule 2 Part 2. Items 2 and 3 (SM546) as to the one vehicle included in the "AssetSchedule".

(d) There is no evidence of any enquiry in respect of motor vehicles or hire car income and someusual warranties are not included in the Agreement.

Again the Commission will, in our view need to ascertain whether this is the result ofinstructions or directions given by someone on behalf of the DFRB Board or whether theBoard's interests were not adequately protected by its lawyers.

23.16 Inventory and Stock

(a) The 1998 balance sheet (SM457) indicates that material assets consisted Inventory (Food,Beverages, Cleaning supplies – K93,000.00) and stocks of beds, linen and towels (K217,000.00written down value). Such Inventory and stocks were thus an important part of what was beingacquired by the DFRB Board and it was important that there be on hand at completion adequateinventory of food, beverages and cleaning supplies as well as adequate quantities of towels linen,cutlery and crockery for the continued operation of the going concern business of the company theshares in which were being acquired.

(b) It is usual in such cases, and as part of the task of ensuring that the "TOTAL SHAREHOLDERSEQUITY" which the Purchaser is in effect buying has not been depleted since the date of the Accountsto provide for on completion stock take of such inventory and stock items and to legislative for what isto occur if the stocks are below minimum levels and what is to occur in respect of obsolete stock whichthe purchaser does not require.

(c) It is noteable that the Agreement does not address these matters at all and that there is noprovision for the taking of stock at completion at all and no warranty at all as to stock.

This, in our view is a shortcoming in the Agreement, which should have been addressed

and provided for in the Agreement in the Purchaser's interest.

Again we do not know and the Commission will need to ask whether that is the result ofinstructions or directions on the part of someone on behalf of DFRB Board or whether theBoards interests were not adequately protected by its lawyers.

23.17 Poker machines

(a) We have dealt earlier in 23.10 above with the Conditions Precedent under Clause 5 and Schedule2 Part 2 of the Agreement and the "Assets Register" in 23.9 above and in the latter with Items 2 and 3of such schedule regarding the conditions precedent that the Purchaser take stock "to satisfy itself theunencumbered assets of the Company are correctly recorded in the Asset Register" and to thedischarge of all security held against the assets set out in the Asset Register.

(b) The "Asset Register" (SM550) includes:­

"POKIES : 20 Olympic machine2 x UPS backup unitsSentinel register preview screen and complete monitoring 6m computer and printer".

(c) In our view the clear and clearly intended result of these provisions was that Banora TradingLimited owned this equipment which was part of its assets; that such assets were owned free fromencumbrance and that the Purchaser was entitled at the Condition Satisfaction Date to physicallycheck such assets and their freedom from encumbrance.

(d) There is no evidence that the DFRB Board was advised by its lawyers to make any checks in theserespects, let alone prior to 30th June 1999 which was the relevant date, or that any check was evermade to establish that these assets were the property of Banora Trading Limited and were free fromfinancial encumbrance.

We will see later what, if any, attention was given to this aspect on Completion.

(e) We know for a fact in view of the evidence of Mr. Yong of Lord and Company as the site operatoras dealt with earlier that at least the poker machines were and are not the property of Banora TradingLimited – but the property of Lord and Company.

(f) The failure to advise that relevant enquiries be made by 30th June 1999 and to make suchenquiries and advise on the consequences thereof (which as we have earlier said was automatictermination of the Agreement) was a serious shortfall.

Again the Commission will need, in our view, to establish whether this was a result ofinstructions or directions by someone on behalf of the DFRB Board or whether the Boardsinterests were not adequately protected by its lawyers.

23.18 Liquid funds, Directors fees, Distributions

(a) In the absence of an expressed agreement to the contrary the Purchaser in a company takeoverexpects to received for his money, the value of the Total Shareholders Equity as shown in theAccounts plus the net earnings of the business which the target company operates from the date ofthe close of the Accounts to the date of Completion resultant from trading in the normal course ofbusiness during that period. The nature of some of the assets and liabilities, which make up that TotalShareholders Equity may vary to some extent according to the nature of the business.

(b) It is in consequence usual to include in a Share Sale and Purchase Agreement provisions andwarranties which ensure that the value of the Total Shareholders Equity is preserved and which eitherpreclude the Vendors reducing that value or define the limits to which they are permitted to reduce thatvalue by paying money out of the target company's funds to themselves other than by way of specifiedsalaries for work actually done.

In some cases the payment of specified directors fees of the making of specified

distributions to shareholders is agreed between the parties and such agreement isrecorded in the Share Sale and Purchase Agreement.

(c) The facts that the 1998 accounts (SM461) show that Directors fees of K60,000 were paid in 1998and K50,000 were paid in 1997 and show (SM460) that retained profits reduced from K1,004,172 (i.e.K514,704 plus K489,468) at 31st December 1997 to only K96,896 at 1st January 1998 were, in ourview, sufficient of themselves to put the DFRB Board and its lawyers on notice that the subjects ofpayment of directors fees and distributions of accrued profits to shareholders needed to be addressedand provided for in the Agreement in respect of the period between 31st December 1998 and theCompletion Date.

(d) The Agreement makes no provision at all in these regards whether positive in terms of permittingsuch payments or negative in terms of prohibiting such payments.

This, in our view, is a very significant and fundamental flaw in the Agreement.

Whether it results from the lawyers for DFRB being remiss in protecting the interests oftheir client or is a result of instructions or directions by someone on behalf of the DFRBBoard will, in our view, need to be ascertained by the Commission.

As we will show later in this opening this flaw led to hundreds of thousands of Kina in liquidfunds of Banora Trading Limited being paid out for the benefit of the Vendors between 1stJanuary 1999 and the Completion Date.

23.19 Warranties

(a) Clause 1.1 of the Agreement (SM532­533) contains two relevant definitions as follows:­

"(i) "Claim" means in relation to any person a damage, loss, cost, expense or liabilityincurred by the person or a claim, demand, action, proceeding or judgement made againstthe person however arising and whether present or future, fixed or unascertained, actual orcontingent.

(ii) "Warranty" means each of the warranties and representations referred to in Clause 8".

(b) Clause 1.2(p) of the Agreement provides that unless the context otherwise requires:­

"a reference to a matter being "to the knowledge" of a person means the matter is "to thebest of the knowledge and belief after proper enquiry including enquiry which a reasonableperson would be prompted to make by reason of knowledge of a fact" of that person".(SM535)

(c) Clause 8 of the Agreement which is the only clause in the body of the Agreement dealing withwarranties reads as follows:­

"8. WARRANTIES

8.1 Vendors Warranties

The Vendors each warrant and represent to the Purchaser that to the knowledge of theVendors each of the statements set our in Schedule 3 (each as a separate warranty andrepresentation) is true, complete and accurate, both at the dated of this Agreement and atthe Completion Date (except that where a Warranty refers to only one of those dates. thatWarranty is given only as at that date).

8.2 Construction of Warranties

The meaning of any Warranty is not to be affected by reference to or as a result of anyimplication drawn from any other Warranty.

8.3 Purchaser's Warranties

The Purchaser warrants and represents to the Vendors. as an inducement to the Vendorsto enter into this Agreement and to sell the Shares, and it is a condition of this Agreementthat, at the date of this Agreement:­

(a) the execution and delivery of this Agreement has been properly authorised by allnecessary corporate action of the Purchaser;

(b.) the Purchaser has full corporate power, financial capability and lawful authority toexecute and deliver this Agreement and to consummate and perform or cause to beperformed its obligations under this Agreement.

(c) this Agreement constitutes a legal, valid and binding obligation on the Purchaserenforceable in accordance with its terms by appropriate remedy; and

(d) this Agreement does not conflict with or result in the breach of or default under anyprovision of its memorandum and articles of association or any material term or provision ofany agreement or deed or any writ, order or injunction, judgement, law rule or regulation towhich it is a party or a subject or by which it is bound.

(e) the Purchaser will ensure the Company honours all Existing contractual entitlements toCompany employee and officers.

8.4 The Purchaser may not claim for any breach of a Warranty unless full details of theclaim have been given to the Vendor against whom the claim is made within 24 months ofCompletion..

8.5 The Purchaser may not claim for breach of Warranties if the liability for breach or­ theWarranty is les than K10,000.00.

8.6 The total liability of any Vendor 'for breach of the Warranties shall not exceedK1,060.000.00.

8.7 Each Warranty is qualified by information which has been fully and accurately disclosedto or acquired by the Purchasers prior to the execution of this agreement and a Vendorshall not have any liability where information has been so disclosed or acquired". (SM539­540)

(d) Schedule 3 as referred to in Clause 8.1, reads as follows:­

"Vendors' Warranties

1. Due Authorisation

1.1 This Agreement constitutes a legal, valid and binding, obligation of the Vendorsenforceable in accordance with its terms by appropriate legal remedy.

2. Accuracy of Information

2.1 The facts set out in the recitals and in Schedule 1 are true, complete and accurate in allrespects.

2.2 All information which has been given by or on behalf of the Vendors in writing to thePurchaser (or to any director, agent or adviser of the Purchaser) with respect to theShares, the Company of the Business is true and accurate in all respects.

2.3 All information which is known to the Vendors relating to the Shares, the Company orthe Business or otherwise the subject matter of this Agreement which is material to beknown by a Purchaser of the Shares has been disclosed in writing to the Purchaser.

3. Indemnity

3.1 The Vendors warrant that all tax which has fallen due for payment has been paid by thecompany up to and including the date of Completion or that provisions has been made in

the accounts of the company for payment of the same.

3.2 The Vendors warrant that the business name (Sandaun Motel) of the company isregistered and that all documents of registration will be delivered to the Purchaser onCompletion" (SM547)

(e) Generally, and as we have said earlier, the warranty provisions are what one would expect to seein the first draft of a Share Sale and Purchase Agreement prepared by the Vendor's lawyer for the saleof shares in any target company heavily biased towards the Vendor and with minimal regard to aparticular transaction or a particular target company.

The only specific components referable to this transaction are the figure of K1,060,000.00in clause 8.6 and Warranty 3.2 in Schedule 3 regarding the business name Sandaun Motel.

As we have earlier illustrated and will further illustrate little thought appears on the face ofthe Agreement to have been given to the proper protection of the interests of the Purchaserby the inclusion of relevant and in some cases critical and fundamental warrantiesnecessary to achieve that protection.

The Vendors give only six (6) warranties and representations and the Vendors five (5) eachgoverned by the construction provision in Clause 8.2 and the qualification in Clause 8.7.

There are then limitations imposed in respect of the Vendors Warranties in Clauses 8.4, 8.5and 8.6.

(f) The Vendors Warranties

The general warranties which are included fall short in some respects of the standard warrantiesusually given by a vendor in that:­

(i) they do not include a warranty that the Vendors have full power and authority to transfer a good andvalid legal and beneficial title to the Shares free and clear of any liens, claims, charges or otherencumbrances.

(ii) they do not include a warranty that the Share Sale does not violate any commitment by which theVendors or any of their property is bound or violate any law regulation, judgment order decree or ruleof any court or governmental agency to which the Vendors or their property are subject.

The warranty clause, which is included, falls short of a standard clause usually included in that

(i) there is no provision entailing the Purchaser to terminate the Agreement if it is found prior tocompletion that any of the Vendor's warranties are untrue or misleading in a respect reasonablyregarded by the Purchaser as material and substantive and which goes to the root of the bargain.

(ii) there is no provision rendering the warranties continuing warranties and the non­merger provisionin Clause 11.7 of the Agreement (SM542) is made expressly subject to Clause 8.7.

Warranty 1.1 in Schedule 3 may afford the DFRB Board some comfort in relation to the infant DillonTyren Cullinan in respect of whom there was a clear and knowing breach of warranty because, as wehave earlier said, he was an infant without power to make an enforceable legal, valid and bindingobligation. The warranty is not a several warranty but one made by all Vendors and it wouldaccordingly seem the DFRB Board may have recourse for this falsity of the warranty against this otherfour Vendors.

We have earlier dealt with Warranty 2.1 in Schedule 3 (see 23.3(e) above). Warranty 2.2 in Schedule 3is of limited scope as it only relates to information given "in writing". As we have shown earlier in thisOpening, there was limited written material provided by the Vendor or on their behalf to the DFRBBoard or any of its agents.

The three written communications of information which came to mind are:­

(i) the "letter of offer" produced at the 1st March 1999 Board meeting which contained certain factualrepresentations which may be a basis for a claim.

(ii) the letter dated 12th July 1999 attaching the 1998 financial statements which were plainly false inall the respects we have shown earlier and which may again be a basis for a claim.

(iii) the inventory provided to Mr. Iori Veraga who was clearly an agent for the DFRB Board whichincluded the poker machines and equipment and which may again be a basis for a claim as to thatequipment.

Warranty 2.3 in Schedule 3 is a critical warranty in respect of disclosure of material matters. It isconditioned by "information which is known to the vendors".

Clause 1.2 (i) of the Agreement (SM534) provides that "where an expression is defined another part ofspeech or grammatical form of that expression has a corresponding meaning".

In our view the defined expression "to the knowledge" as quoted in 23.17(b) above applies to theexpression "is known" and extends the meaning of the latter expression beyond actual knowledge toactual knowledge after proper enquiry including enquiry which a reasonable person would beprompted to make by reason of knowledge of a fact.

The warranty may accordingly open up claims for the DFRB Board in respect of a wide range ofmatters including all the understatements and overstatements in the 1998 financial statements, thefact the Auditors Report was fraudulently obtained without any audit inspection in fact being carried outand the plethora of other falsities and untruths which it was material be known to the DFRB Board asPurchaser and which were not disclosed to the DFRB Board in writing by the Vendors.

In respect of Warranties 2.2 and 2.3 we have used the expression "may" have claims for two reasons.Firstly, Clause 8.7 specifically provides that each warranty is qualified by both information which hasbeen fully and accurately disclosed to the Purchasers (not in writing) and information, which has beenacquired by the Purchaser in each case prior to execution of the Agreement.

Secondly, Clause 11.4 (SM542) provides that the "Agreement constitutes the sole and entireagreement…and a warranty, representation, guarantee or other term or condition of any nature notcontained or recorded in this Agreement is of no force and effect".

The impact of these two Clauses on any potential warranty claim must be measured and whatknowledge Mr. Kelly Naru as chairman of the DFRB Board had or information he was given as to theinaccuracies, untruths and falsities may well impact on what rights the DFRB Board would have underthese warranties.

We have dealt earlier with Warranty 3.1 in Schedule 3 (See 23.13(b) above).

Warranty 3.2 in Schedule 3 warrants that the business name Sandaun Motel is registered and thatregistration documents will be handed over on completion.

Again, we have dealt in part with the subject of this warranty in 23.10(b) above in respect of the relatedcondition precedent.

The warranty was again false and we will see shortly what occurred on completion.

The measure of damage for breach of this warranty would probably be limited to the legal costs andCompanies Office fees payable to have the business name registered.

(g) The Purchasers Warranties

The first four (4) warranties included are reasonably standard save that the reference in Warranty8.3(d) has not been updated to reflect the Companies Act 1997.

It is notable, as we have shown, that the execution and delivery of the Agreement was not properlyauthorised as represented in Warranty 8.3(a) but that may be covered by the "Indoor Management"rule even though the DFRB Board is a statutory corporation.

Warranty 8.3(e) dealing with company employers and officers we have touched on in 23.10(b) above.That subject should, in our view, have been dealt with specifically in the Agreement in the Purchasersinterest so the exact nature and extent of its obligation was known. The failure to do so coupled withthis vague and "open ended" warranty is a shortcoming in the Agreement, which should have beendealt with by the lawyer acting for the DFRB Board.

(h) Further Warranties

As the company which DFRB was purchasing was an active trading company operating a goingconcern business with employed staff and premises open to the public one would have expected tofind warranties dealing with litigation, insurance and employees along the following lines:­

"I. LITIGATION

1. There are no industrial disputes existing or pending or threatened between the Companyand its employees or any union or other representative of its employees.

2. Neither the Company nor any person for whose acts or defaults it may be vicariouslyliable is involved in any civil criminal or arbitration proceedings and there are no facts,circumstances, claims or demands likely to give rise to such proceedings and no suchproceedings are pending or threatened against any of them or any such person exceptthose that have arisen or will arise in the normal course of business of the Company andwhich have been fully disclosed in writing to the Purchaser.

3. There is no writ of levy or writ of execution issued against the Company or any of itsproperty and there exist no circumstances which would allow or permit the issue of anysuch writ.

J. INSURANCE

1. All the assets of the Company of an insurable nature are insured in amounts to the fullreplacement value thereof against fire and other risks normally insured against by personscarrying on the same classes of business as those carried on by the Company and theCompany has at all material times been adequately covered by public risk insurance andnothing has been done or omitted to be done which would make any policy of insurancevoid or voidable.

2. Full particulars of all insurances of the Company have been supplied to the Purchaser.

K. EMPLOYEES

1. No moneys other than in respect of remuneration or emoluments of employment arepayable to any employee of the Company and the Company is not under any present,future or contingent liability to pay compensation for loss of office or employment to any ex­officer or ex­employee and there are no payments due by it in connection with theredundancy of any employee.

2. There are no retirement benefit schemes, pension schemes or other pensionarrangements, whether legally enforceable or not, relating to the Company in operation oreffect.

3. There is no agreement or arrangement whereby the Company is liable to be or becomebound now or at any time in the future to pay any superannuation to any person except asdisclosed to the Purchaser."

As it was known to the DFRB Board and Mr. Naru that Mr. Chris Vuhruri was acting as an agent forcommission on this sale it would also have been usual to include a warranty in relation to agents andcommission making the Vendors responsible for payment of any such agent and all agentscommission.

Yet again the failure to include such Warranties is, in our view, a shortcoming in the Agreementadequately protecting the interests of the DFRB Board's as Purchaser.

(i) Limitation of Warranties.

It is, in my experience usual in recent times for a Vendor to seek limitations on warranties as to thetime during which a breach of warranty claim must be made and as to the minimum amount of anysingle breach of warranty claim or group of breach of warranty claims. In this regard the two (2) year

and K10,000 limitations in Clauses 8.4 and 8.5 would in my opinion be considered reasonable.

It is, likewise usual, given a full and complete set of warranties, adequate for the protection of aPurchaser and that no Vendor is under any legal incapacity to place a ceiling on the aggregate liabilityof the Vendors which is equal to the purchase price as has been done in Clause 8.6 of the Agreement.

The situation in this case is however, different because one of the Vendors ­ Dillon Tyren Cullinan ­lacked the legal competence to give any warranties at all or to authorise any person to give warrantieson his behalf. The Agreement fails to address that circumstance and as a consequence, it would seemthat the rights of the DFRB Board are limited to K1,060,000 against each of the four legally competentvendors.

This again, we say, is a shortfall in the Agreement in the protection of the proper legal interests of theDFRB Board, which the Commission, in our view, would require be explained.

23.20 Restraint of Trade

(a) One of the most important considerations to a Purchaser in a company takeover, where thebusiness operated by the target company is in a limited market particularly in a remote location, is theprotection of that business from competition by the Vendors.

That protection is achieved by including restraint of trade provisions in the Share Sale andPurchase Agreement which prevent the Vendors and each of them within a reasonabletime period and within reasonable proximity to the premises at which the business operatesconducting a further business which is competitive with any of the main fields of businessof the target business.

(b) A modern day restraint of trade clause is usually drafted in a manner where the periods of restraintare tiered in a severable manner the geographic areas of restraint of trade are tiered in a severablemanner and the fields of business are tiered in a severable manner. A severability clause is thenincluded which, if the restraint of trade clause is ever challenged, enables the Court to leave thoseparts of the three phase tiering which are legally acceptable intact and to delete those parts of thethree phase tiering which the Court considers are legally offensive.

(c) In our view, the DFRB Board should have been advised to seek such a restraint of trade clause toprotect the income streams of Sandaun Motel derived from accommodation; restaurant and diningroom, hire cars and poker machines activities for a period of years and within at least the town ofVanimo.

(d) There is no evidence any such advice was given and no evidence any such restraint was sought.This, in our view, is a further shortcoming in the Agreement and a material shortfall in the properprotection of the interests of the DFRB Board as Purchaser.

The Commission will, in our view, yet again, need to ascertain whether such an omissionwas the result of instruction or directions from someone on behalf of the DFRB Board orwhether the Board's lawyers were remiss in their duty.

The absence of such a provision enabled the company to which DFRB Board paid theprice for its Banora Trading Limited shares ­ Fleet Limited ­ to promptly set up Club Agitawhich operates a poker machine facility on the outskirts of Vanimo Town which has a clearimpact on the revenue derived from the poker machines at Sandaun Motel.

23.21 Conclusions

(a) In this Section of this Opening, we have made numerous criticisms of the Agreement and haveendeavoured to illustrate how the Agreement, which was perused and reviewed many times accordingto the Carter Newell fees entries, was in effect, a "Vendor's Agreement" and did very little to protectthe interests of the DFRB Board.

It is important for the Commission to know that in making these criticisms my point ofreference has been a Share Sale and Purchaser Agreement negotiated and completedbetween August 1998 and November 1998 where the Vendors were represented by the

Sydney based corporate lawyers of one of the world's largest public companies and Irepresented the Purchaser a public listed company which is one of the largest tradingcompanies in Papua New Guinea.

All of the provisions, which I have said should have been sought, were sought on behalf ofthe Purchaser in that transaction and very few of them were not accepted as drafted by theVendor.

The criticisms are in consequence real, concrete and contemporaneous and are notacademic criticisms made in a vacuum.

(b) Generally and where the Vendor and Purchaser are separately represented, one finds firstly, agreat deal of detailed correspondence between the Lawyers debating the amendments to the ShareSale and Purchase agreement and the refinement of the terms of the warranties and secondly a greatdeal of detailed correspondence between each of the lawyers and their respective clients giving adviceas to the amendments and refinements sought.

In the result, there is an agreement including substantial warranty provisions which iscustom­made for the particular "take­over" transaction and each of the Vendor and thePurchaser are intimately familiar with the full details of the bargain they have concludedand what they have conceded.

(c) There is no evidence of any such process in relation to the Agreement in this case and thatperhaps serves to point up the untenable position in which Mr. Naru had placed his firm where it had apatent conflict of interest and could not properly serve the interests of the Vendors as well as those ofthe Purchaser.

(d) In the result, we submit that the Agreement did not properly protect the interests of the DFRBBoard as Purchaser and we submit that is clear.

(e) As we have pointed out, the reason why the Agreement did not properly serve and protect theinterests of the DFRB Board also points up the untenable position in which Mr. Naru had placedhimself personally.

We have earlier seen in full detail, now Mr. Naru had taken control of this transaction onbehalf of the DFRB Board.

He had excluded the Board itself and had not placed even a draft of the Agreement beforeit and had not obtained specific approval from the Board either to the Agreement, whichwas signed, or to the affixing of the Board seal to it.

We have also earlier seen in full detail how Mr. Naru excluded DFRB management fromthis transaction ­ making first contact with the valuers and accompanying them to Vanimo;directing cancellation of Mr. Ruimb's trip, seeking Mr. Ruimb's dismissal, engaging Mr.Michael Tulake and directing Mr. Kila to cease involvement in the transaction; assumingcontrol of the Ministerial approval process with personal pressure, pressure from ViceMinister Ebenosi and a directive by Minister Lasaro which avoided the Department ofFinance concerns and achieved Mr. Naru's insistence that a business evaluation not beobtained; ignoring Mr. Kila's letter of 2nd June 1999 advising as to a business evaluationand due diligence, directing Mr. McEniery to ignore Mr. Kila's comments on the Agreementand himself purporting to terminate Mr. Kila's employment as General Manager of DFRB;his ignoring and seeking to distract attention from the valid criticisms made by Mr. Yates ofKSL and Blake Dawson Waldron and his engineering the receipt by Mr. Sinamoi on 20thJuly 1999 of the 1998 financial statements with no adequate time to complete a businessevaluation before the Agreement was a fait accompli on 22nd July 1999.

We have further also earlier seen the links between Mr. Naru, Mr. Marcus Cullinan and Mr.Michael Tulake, concerning the false and misleading financial statements and thefraudulent Auditors Report.

Finally, we have earlier seen that the only person who was associated with the DFRBBoard in dealing with this transaction – its Chairman, Mr. Kelly Naru ­ was the only persongiving any instructions to Carter Newell Lawyers (as well as directing that Mr. Kila's

comments on the Agreement be ignored).

It is for this reason that in respect of these clear shortfalls in the protection of the legalinterests of the DFRB Board in the Agreement, we are in the situation where we cannot saywith certainty whether such shortfalls were a result of Carter Newell being remiss in theirduty as the lawyers for the DFRB Board or whether such shortfalls are a result ofinstructions or directions by someone on behalf of the DFRB Board i.e. the BoardChairman, Mr. Kelly Naru.

24. COMPLETION OF THE PURCHASE

24.1 Taking Stock

(a) We had digressed (see 22.13 above) at the point where DFRB Special Board meeting 11/99 hadbeen held on 5th August 1999 to consider among other things the letter from Blake Dawson Waldron.

The DFRB Board had been distracted fro the real issues by Mr. Naru and had left it in Mr.Naru's hands to deal with KSL and Blake Dawson Waldron and to demand KSL producethe balance purchase moneys for the Sandaun Motel purchase.

(b) Though Mr. Naru had in effect dealt with the DFRB Board and with Mr. Kila's return left the DFRBmanagement out of the transaction he must have seen (as the DFRB Board should have seen) thatKSL as advised by Blake Dawson Waldron were insisting, as Mr. Naru had earlier agreed, that KSL begiven the benefit of a Deed of Indemnity before they would allow the Sandaun Motel purchase toproceed to completion. There was, in consequence, a lull in activity until 17th August 1999, save forsome minor activity as Carter Newell which we will now come to.

(c) The Carter Newell Invoice 17360 (Tendered Document SM337) contains the following entries:­

"10 Aug 99 Document preparation attendance on matter ­ finalising searches12 Aug 99 Document preparation meeting with partner ­ discussing issues."

We are not able to identify on the related Sandaun Motel file (Commission Document 3B)any particular documents prepared at this time or any notations which otherwisesubstantiate these entries.

24.2 Mr. Naru addresses the KSL problem

(a) On 17th August 1999, Mr. Naru wrote to Blake Dawson Waldron on DFRB Board "Office of theChairman" letterhead a "by hand" letter which we will come to shortly.

(b) The Carter Newell Invoice 17360 (Tendered Document SM337) contains two relevant entries asfollows:­

"17 Aug 99 Drafting letter to Blake Dawson Waldron for KN""18 Aug 99 Letter to Blakes for DFRB ­ Kelly Naru"

There are other entries, which we will come to shortly on these dates.

These two entries suggest the letter was drafted on 17th August 1999 and finalised anddispatched on 18th August 1999.

(c) The original letter ­ a copy of which taken from Commission Document DCD13 will be TenderedDocuments SM569 to SM572, is date stamped as received on 18th August, 1999.

That letter reads:­

"Re: DRBF BOARD ("BOARD") AND KINA SECURITIES LTD ("KINA")

We refer to the above matter and to your letter of 5 August, 1999 and respond as follows:­

1. Deed of Indemnity

1.1 In our letter to your of 5 July, 1999, we said we were prepared to execute the Deed ofIndemnity. The board has subsequently resolved not to execute the Deed of Release forreasons mentioned in our letter of 27 July, 1999.

1.2 In any event, we advise it is not necessary to execute a Deed of Indemnity in view ofcurrent provisions in the Investment Management Agreement between your client and uscovering such situations. We draw your attention to clause 6.4 of the Fund InvestmentAgreement which states:

"The board shall ratify and confirm all acts and things which the Consultant does or causesto be done in performing its functions strictly in accordance with this agreement andindemnifies and shall keep indemnified the Consultant against every Loss and Claimarising out of such performance except in so far as such Loss or Claim results from an actor omission which constitutes fraud or gross negligence of the Consultant and or is not forthe purpose of effecting the terms of this agreement". (emphasis added).""

1.3 In view of this, we advise as the indemnity requested is already in place, there is noneed for Kina to be again indemnified. Your client will no doubt appreciate the logic of this.Otherwise, we will forever be giving indemnities to your client for every transaction that weapprove which your client does not agree to.

1.4 On this note, we reiterate our earlier concern to your client that the decision­makingauthority is vested with us. We have never delegated that function to your client. Your clientmust appreciate that it is engaged to assist in providing professional advice and as towhether or not that advice is followed by the board is a matter entirely up to the board todecide on. This is because your client has provided advice in the past, which the boardrelied on to make a decision that has not been beneficial to the Fund.

2. The Board Minutes of 21 March, 1999

2.1 Kina has been provided with copies of all board meetings that we have held to date.Any additional information required by Kina could easily be taken from our management.We do not see why Kina is trying to obtain all these documents it had already obtained orhad the benefit and access of obtaining.

2.2 For your information, the transaction is now completed. The other matters, which areconditions precedent to the settlement, will take place once the Vendors receive thebalance of the settlement cheque from your client.

2.3 We advise proper property valuations were done. These have also been forwarded toyour client. The business valuation can be extracted from the 1998 financial statementswhich the Vendor provided which your client also has. Your client in fact has not come backto us with its comments on the 1998 financial statements.

3. Agreement for Purchase of Sandaun Motel

3.1 The agreement has been dated. The copy that you have may not have a date,however, it was signed on the 1st of June 1999 to become effective as of 30th June. 1999.You will note that due to the delay caused by your client, we have well and truly gone pastthe completion date and we request you advise your client to expedite the settlementprocess.

3.2 Stamp Duty will be paid as soon as final settlement takes place.

3.3 A certification by our lawyers that this is a true copy of the purchase agreement can beseen on the copy of the purchase agreement enclosed herewith.

3.4 The 1998 accounts referred to in clause 1.1 have been forwarded to your client. Againwe do not understand why your client is continuously looking for documents that it hasalready been provided with. As indicated earlier, Kina was suppose to provide to us itscomments on the 1998 financial statements. It has not done so. For your information,another copy of the 1998 accounts is enclosed.

3.5 Schedule 4 of the purchase agreement is blank because both parties have agreed toleave out an employment contract which was suppose to form part of the agreement.

3.6 The updated lodgement of the company's annual returns have been brought to theattention of the board by our lawyers.

3.7 We have been informed by the Vendor that they are attending to that and the board willupdate company records on takeover.

4. Carter Newell's letter dated 22 July, 1999

4.1 We have been advised by Carter Newell on the conditions precedent to the agreement.

4.2 We have however, not been able to perform our part of the obligation because Kina hasnot released the balance of the purchase price. We again request that you advise yourclient to immediately attend to this.

4.3 We confirm Darby Kila's position remains unchanged.

4.4 Ministerial Approval under Public Finances Management Act has been obtained. Acopy of the approval is with your client. Again we see no justification as to why your clientshould again be requesting them through you. Our lawyers have advised us of thefulfilment of this condition.

5. Pacific Capital Resources Management Ltd

5.1 This is a separate investment project. Our response to this will be forthcoming to you inanother letter. However, we wish to raise our concern that Kina is unnecessarily delayingthe settlement of this purchase to the detriment of the Fund.

6. The Board's letter of 2 August, 1999

6.1 We request you to advise your client that as part of Kina's obligation to provide uswritten reports, we would require Kina to provide for the September board meeting dulycertified copies of all statements from all banks and financial institutions. These statementsmust be attached as annexures to Kina's financial reports for the Board's information anddeliberations.

6.2 We maintain our view that we will be justified in reviewing your client's managementagreements on the basis that your client has nor implemented some decisions made by theBoard, more particularly the shifting of deposit funds held in Kina Finance Ltd to treasurybonds held by the Central Bank.

Finally, we advise we have been informed by the Vendors that they intend to terminate theagreement on the basis of our inability to complete our obligation to the agreement. If thishappens, we will loose our deposit on the purchase as provided for under clause 4.2(b)(ii)of the agreement. Therefore, we request that you instruct your client to immediately settlethe balance of the purchase price to Fleet Limited."

(d) There are a number of observations, which need to be made about this letter.

(i) Firstly, the argument in respect of Clause 6.4 of the Agreement is clearly specious. Theindemnity given by that clause relates to acts and things done by KSL in its performance ofits functions under the Agreement and which the Board is obliged to ratify and confirm. Inthis case, the Board was ignoring KSL's advice and that is why KSL required the Deed ofIndemnity.

(ii) Secondly, Mr. Naru says "the transaction is now completed" and that the "conditionsprecedent to settlement will take place once the Vendors receive the balance of settlementcheque…" This is patently absurd. As we have shown, the conditions precedent were to besatisfied by the Condition Satisfaction Date, which was 30th June 1999 and if not sosatisfied, the Agreement automatically terminated. Mr. Naru's understanding of what theAgreement provided was, in consequence, appalling.

(iii) Thirdly, Mr. Naru quite amazingly says ­ as Mr. Richard Sinamoi says he earlier toldboth him and the DFRB Board "The business valuation can be extracted from the 1998financial statements which the Vendor provided". It is not credible that Mr. Naru (who had ahand in his man, Mr. Michael Tulake, preparing the 1998 financial statements) did notunderstand the difference between a single year set of financial statements and a properbusiness evaluation, which he had been studiously avoiding despite the advice of Mr.Ruimb, Mr. Kila, the Department of Finance and Planning and KSL and the resolution of hisown DFRB Board at its meeting of 7th July 1999.

(iv) Fourthly, Mr. Naru says the Agreement was dated 1st June 1999 to become effective30th June 1999 and seeks to place the delay at KSL's door. We have shown earlier in thisPart of the Opening, that it is likely the Agreement was not signed until on or after 10th July1999 (See 23.2(d) above) and also said (See 23.4(b) above) there was probably a reasonfor dating it 1st June 1999. In our submission, that reason is now being seen.

If the Agreement was in fact signed on 1st June 1999, Mr. Naru will, in our view, need to beasked to explain why he did not disclose that to the DFRB Board meetings held on 14thJune 1999, 21st June 1999, 25th June 1999 and 7th July 1999 and how the Agreementwas signed on 1st June 1999 when the deposit was not received by Carter Newell until17th June 1999 when the deposit was payable on exchange of contracts.

(v) Fifthly, Mr. Naru says stamp duty will be paid following final settlement. There is noevidence that stamp duty, even though quantified much earlier by Mr. McEniery, had beensought from the DFRB Board.

Stamp duty is payable as a result of an executed agreement and not on completion of it. Aswe have earlier shown, it would have been in the interests of the DFRB Board to havestamped Share Transfers available at completion. If the Agreement was in fact signed on1st March 1999, Mr. Naru will, in our view, need to be asked why in the intervening period,the Agreement and Share Transfers were not stamped.

(vi) Sixthly, Mr. Naru says the blank Schedule 4 in the Agreement was for an employmentcontract, which "both parties agreed to leave out". As we have earlier shown, this matterwas never put before the DFRB Board and Mr. Kila had advised Mr. McEniery in his letterof 2nd June 1999, that it should be left until later. Plainly, Mr. Naru had been discussing thismatter with Mr. Marcus Cullinan.

(vii) Seventhly, Mr. Naru says the position regarding Annual Returns only being filed up to1996, is being attended to by the Vendors and "the board will update company records ontakeover". Mr. Naru thus knew of the position and it will be a matter of ascertaining whatoccurred regarding corporate records on completion.

(viii) Eighthly, Mr. Naru says "We have been advised by Carter Newell on the conditionsprecedent to the Agreement". He then repeats the patently absurd statement dealt with in(ii) above. We have dealt with the conditions precedent in 23.10 above. In our view, theCommission will need to ask Mr. Naru what advice Carter Newell gave about the conditionsprecedent and if that advice was what it should have been, he will need to explain why hesaid what he did at the DFRB Board meeting on 22nd July 1999 and did not advise thatmeeting that the Agreement was already automatically terminated for non fulfilment by theCondition Satisfaction Date of 30th June 1999 of the conditions precedent regarding thepoker machines in the Asset Register and the non registration of "Sandaun Motel" underthe Business Names Act.

(ix) Ninthly, Mr. Naru again states, as he told the DFRB Board that the Vendors stated theyintended to terminate the Agreement and "If this happens we will loose (sic) our deposit".

Again, we say this is nonsense as the Agreement had already self­terminated for non­satisfaction of the conditions precedent by the Condition Satisfaction Date.

(x) Finally, the Commission will note, yet again, the threat to "review" KSL's managementarrangements which Mr. Naru had been so energetic in extending only a few monthsearlier.

(e) As we will see shortly, Carter Newell were pressing on with preparations to settle the SandaunMotel purchase but could not advance to settlement until they could be assured that KSL wouldproduce the cheque for the K4.77 million balance purchase moneys.

At whose instigation we do not know there was a meeting at Mr. Naru's office at CarterNewell on 18th August 1999 between Mr. Naru, Mr. Yates of KSL and Mr. Peter Coumbis ofBlake Dawson Waldron.

It could be inferred that at that meeting Mr. Coumbis pointed out to Mr. Naru the facts offorensic life because on 19th August 1999, Mr. Coumbis wrote to Mr. Naru a "by hand"letter in the following terms:­

"Kina Securities Limited and Defence Force Retirement Benefit Fund Board

We refer to the conference held in your office on 18 August 1999 between Mr. Yates, thewriter and yourself and now enclose re­drafted Deed of Indemnity for your review.

If the enclosed Deed is in order please make two further photocopies and arrange for it tobe executed under the Board's seal after which all three copies should be returned to us forexecution by our client company. We will then deliver to you one executed original for yourretention.

We draw your attention to the changes made to recital F being as discussed. We note wealso made minor changes to recital A for clarity.

If you have any queries please do not hesitate to contact the writer."

A copy of this letter taken from the Carter Newell file (Commission Document 3B) will beTendered Document SM573.

(f) Quite clearly, Mr. Naru's "bluff" had, yet again, been called and it was plain that KSL, acting onadvice from Blake Dawson Waldron, was not going to produce a cheque for the Sandaun Motelbalance purchase moneys until it had the signed Deed of Indemnity.

24.3 More action at Carter Newell

(a) While Mr. Naru was writing to Blake Dawson Waldron and meeting with Messrs Yates and Coumbison 17th and 18th August 1999, there was according to the Carter Newell Invoice 17360 (TenderedDocuments SM337/8) a deal of preparation for settlement going on on those two (2) days and on 19thAugust, 1999.

That invoice contains the following entries:­

"17 Aug 99 Document preparation Preparing for settlement17 Aug 99 Meeting with Paul Toua regarding settlement18 Aug 99 Document preparation Preparing for settlement18 Aug 99 Document preparation attendance on matter ­ organising due diligence searches ­ reviewing agreement ­ reviewing management agreement ­ reviewingpower of attorney19 Aug 99 Document preparation minutes of directors, form 13, 16 consents ofdirectors/secretary, transfer of shares, summary of docs19 Aug 99 Revise share transfers19 Aug 99 Document preparation Preparing for settlement19 Aug 99 Travelling 3273444/3212888 ­ ANL (booking for Seno to travel toVanimo)19 Aug 99 Document preparation Final preparation of Company forms for signing atsettlement19 Aug 99 Meeting with Senior Associate regarding settlement procedure, documents for exchange."

(b) Though there are numerous entries as there have earlier been and will further be, there is little onthe related Carter Newell file (Commission Documents DCD3A and 3B) to reflect what these chargeentries relate to. The only documents requiring preparation and as found on that file were:­

(i) resignations of two (2) directors, one (1) secretary and one (1) public officer;

(ii) consents of five (5) directors, one (1) secretary and one (1) public officer with relatedstatutory forms;

(iii) five (5) share transfers with related statutory form;

(iv) one (1) set of Minutes for the Completion Board meeting of Banora Trading Limited;

(v) the settlement schedule of documents to be received and given on settlement and stepsto be taken on settlement.

These had already been charged for in the same invoice on 15th July 1999 (see TenderedDocument SM337). All but the settlement schedule were simple standard documentssimply prepared by an efficient and experienced legal secretary.

It is notable that yet again, on the Agreement was reviewed as were the ManagementAgreement and most importantly, the Power of Attorney. The defects in the Power ofAttorney should, in our view, have been detected in this review as well as those in theAgreement.

What due diligence searches were organised apart from an updated company search, wecannot detect from the file.

On the file are three (3) documents ­ one (1) typed and two (2) handwritten, which relate todocumentary requirements on settlement.

(i) the typed document ­ a copy of which is Tendered Document SM574 ­ lists only thedocuments required in respect of the Company per se with hand written additions as to theoriginal Share Sale Agreements and original Power of Attorney.

(ii) the first hand written document ­ a copy of which is Tendered Document SM575 ­again, deals with the company per se, the Accounts and the bank authority and by handwritten addition, the Power of Attorney. It also contains notes apparently added atsettlement which we will come back to.

(iii) the third hand written document ­ copies of the front and reverse of which will beTendered Document SM576 and SM577, deals, on its face, with the same matters as theother two (2) documents and on its reverse, with the company seal, corporate register, landtitle and bank documents.

It is plain that arrangements were being made for the Carter Newell Lawyers, Mr. SenoWekina, to travel to Vanimo to settle this transaction and that those pathetically inadequatedocuments were being prepared to assist him in that endeavour.

(c) Mr Seno Wekina, who gave evidence on 28th May 2002, said he commenced work with CarterNewell as a lawyer in December 1996 soon after his admission as a lawyer.

He said he did not have carriage of the Sandaun Motel file but Mr Paul Toua did and that because MrToua was unable to travel to Vanimo he – Mr Wekina – was instructed by Mr Toua to attend onsettlement.

Mr Wekina said his first involvement in this regard was on 19th and 20th August 1999 when he wasgiven the file – which he did not have time to review – and selected documents by Mr Toua, orallybriefed by Mr Toua and the lists of matters to be attended to on Completion (Tendered DocumentsSM574 to SM577) were prepared by Mr Toua and discussed with Mr Wekina.

Mr Wekina said that though he had the file he did not have an opportunity to go though the Agreementand was relying on the list given to him by Mr Toua (Transcript pp.4485­90).

(d) We will come back to these settlement preparations shortly.

24.4 KSL gets its Deed of Indemnity

(a) Following his meeting with Messrs Yates and Coumbis on 18th August 1999, his receipt of theBlake Dawson Waldron letter of 19th August 1999 with the revised Deed of Indemnity and withsettlement arrangements being advanced, Mr. Naru was faced with reversing the earlier DFRB Boarddecision not to execute the Deed of Indemnity required by KSL in order to obtain from KSL the chequefor the balance purchase moneys.

(b) It seems that rather than address this matter face to face with the other DFRB Board members, oralternatively, because time was short, Mr. Naru adopted the extra­legal course, not prescribed by theDFRB Act, of a telephone conference meeting in which he allegedly spoke to other members of theBoard and of which he, Mr. Naru, prepared the "Minutes".

(c) These "Minutes" ­ a copy of which taken from Commission Document 24, will be TenderedDocuments SM578 and SM579, read as follows:­

"MINUTES OF A MEETING

DEFENCE FORCE RETIREMENT BENEFIT FUND BOARDSPECIAL BOARD MEETINGBY TELEPHONE CONFERENCE ON 19 AUGUST, 1999

Those Present

1. Kelly Naru ­ Chairman2. Vali Asi ­ Deputy Chairman3. Reginald Renagi ­ Member4. Philip Playah ­ Member

Meeting opened at 9.00 am.

Agenda

1. Delegate Authority to Kina Securities Ltd.2. Deed of Indemnity with Kina Securities Ltd ­ Sandaun Motel Purchase.

Discussions

This was a telephone hook­up meeting with all members of the Board and the Chairman todiscuss the above two agendas. Due to the urgency of the matter, members contributedtheir thoughts and ideas, to the Chairman through telephone.

In terms of the first matter, the Chairman pointed out that, the Board members were notaware of a delegated authority issued by the previous Board under the Chairmanship ofJames Melegepa, former Secretary of the Dept of Defence and Chairman of the DFRBBoard to Kina Security Ltd. The Chairman pointed out that he was of the view that therewas no delegated authority and under the DFRB Act, the Board had the power to doanything it was required to do by law. The Chairman went onto point out that at a meetingbetween Mr. Syd Yates of Kina Securities Ltd and his lawyer, Mr. Peter Coumbis of BlakeDawson Waldron Lawyers yesterday (18 August, 1999), it was brought to the Chairman'sattention that there was a document that appeared to, be a delegated authority from theBoard to Kina Securities Ltd. This was the first time the Chairman had seen this documentand it became apparent that this came into conflict with the view held by members of theBoard that in fact no such delegated authority existed. The Chairman further pointed out atthat meeting that it was something that the Board would consider.

Based on that, Kina Securities Ltd wanted the Board to give an indemnity on the purchaseof Sandaun Motel on the basis that Kina as the delegated authority had indicated that itwas not entirely satisfied with the information provided to recommend and approve thepurchase of the Sandaun Motel and if the Board wants to proceed with it, pursuant to thedelegated authority it now had, it would be seen as acting negligently and in that regard itwould require an indemnity from the Board.

All other members of the Board expressed concern and were in fact surprised that such adelegated authority existed which they did not know about.

Deputy Chairman, Vali Asi pointed out that as it was done by the previous Board, it wouldbe in order if this Board revoked it as the current Board's intention is to exercise its powers,duties and obligations without delegating it to any other third party. Members Playah andRenagi also expressed the same concerns and agreed that the delegated authority wasgiven by the previous Board and impinged on this Board's ability to exercise its powers andfunctions freely. The delegated authority would therefore need to be revoked.

Resolutions1. It was resolved that the delegated authority bestowed on Kina Securities Ltd by theprevious Board under the Chairmanship of Mr. James Melegepa or for that matter anyother previous delegated authority issued by any other previous Board be now revokedforthwith.All agreed.2. It was resolved that the Deed of Indemnity be entered into with Kina Securities Ltd forpurpose of the Sandaun Motel purchase.All agreed.

There being no further business, the Chairman closed the meeting through telephone at9:30 am.

For Purposes of verifying the above resolutions, the Board members hereby endorse theseminutes with their respective signatures hereunder:

(Signed) (Signed) (Signed) (Signed)Kelly Naru Vali Asi ReginaldRenagi Philip Playah"

It is plain from the Minutes that the "change of heart" over the Deed of Indemnity was put tothe other Board members by Mr. Naru as being due to the delegation of powers we haveearlier dealt with in the topic "Structure" and on the basis KSL "was not entirely satisfiedwith the information provided to recommend and approve the purchase of the SandaunMotel".

In our view, little needs to be said as the intellectual dishonesty of what was put is soapparent.

The real need for the Deed of Indemnity and the reason KSL were insisting upon it isequally apparent as is the fact that discussion of the real issues was avoided and attentionshifted to terminating the delegated authority of KSL.

(d) The DFRB Board Secretary, Mr. Richard Sinamoi, said he only became aware of "that so calledtelephone conference meeting" when the Minutes of it were tabled "and the Board was asked tobasically verify and adopt the minutes of that telephone conferencing as a Board meeting".

Mr. Sinamoi said he played no role in the arrangement of this telephone "meeting" or in thepreparation of the "minutes" of it, which he agreed clearly bear a Carter Newell computerreference (Transcript pp. 4313­4). Mr. Sinamoi added:­

"…At the time it was discussed, I recall that colonel Renagi did make a comment that it wasthe chairman who called him. He was of the opinion that it was just a normal conversation.He was not aware that his comments or his discussions with the chairman was going to bepart and parcel of the meeting. I recall that. So for purposes of your question, I believe itwas the chairman calling him out." (Transcript p.4313)

(e) It would seem from this evidence that there was not a telephone conference where each Boardmember could hear what was said by others but rather that Mr. Naru spoke to the Board membersindividually and then constructed the "Minutes" in the terms apparent on the face of them.

The Commission may wish to ask the other Board members whether this is in fact whatoccurred.

(f) Based on these occurrences, Mr. Naru wrote a "Hand delivery" letter on DFRB Board "Office of theChairman" letterhead to Blake Dawson Waldron for the attention of Mr. Peter Coumbis on 19th August1999. That letter reads as follows:­

"RE: DEFENCE FORCE RETIREMENT BENEFIT FUND BOARD AND KINASECURITIES LIMITED

Thank you for your letter today with the amended Deed of Release.

We have executed the Deed under seal and three copies of these are enclosed herewith.

Please have your client execute the Deed and forward to us a sealed copy for our records.

We also advise the delegated authority bestowed on Kina Securities Limited by theprevious Board is now revoked. We will publish the appropriate notice for your client'srecords and our record soon.

In the meantime, we would request that you advise your client to immediately forward toour lawyers the balance of the purchase price."

A copy of the original of this letter, taken from the Carter Newell file (DCD3B) will beTendered Document SM580.

(g) Mr. Naru also forwarded to Mr. Yates at KSL by facsimile at 15:01 on 19th August 1999 on thesame letterhead a letter:­

"RE: SANDAUN MOTEL PURCHASE

Further to our discussions yesterday, we advise we are in the process of executing theDeed of Release required by you.

We would require you to forward to Carter Newell Lawyers the balance of the purchaseprice payable to Fleet Limited."

Copies of this letter and the facsimile confirmation also taken from CommissionDocument DCD3B will be Tendered Documents SM581 and SM582.

(h) On receipt of Mr. Naru's letter, Mr. Coumbis wrote to KSL confirming receipt of the signed Deed ofIndemnity and advising that Mr. Naru had been informed the cheque for the balance purchase moneyswould be available on the morning of 20th August, 1999.

Mr. Coumbis also faxed Mr. Naru at 16.49 on 19th August 1999 advising him the monieswould be available early on 20th August 1999 and that he should contact KSL to arrangecollection.

Copies of these letters taken from Commission Document DCD13 will be TenderedDocuments SM583 and SM584.

(i) To complete this round of correspondence Carter Newell faxed KSL a letter at 17.34 on 19th August1999 which reads:­

"RE: SANDAUN MOTEL PURCHASE

We refer to your discussion with our lawyer Kelly Naru this afternoon and confirm ouradvise for you to pay the balance of the purchase price, namely K4,770,000.00 (Fourmillion, seven hundred and seventy thousand Kina) to the trust account for Carter NewellLawyers".

A copy of this letter taken from Commission Document DCD13 will be TenderedDocument SM585.

(j) The Carter Newell Invoice 17357 which was cancelled (Tendered Document SM239) contains thefollowing entries:­

"19 Aug 99 Letter to Blake Dawson Waldron for Kelly Naru19 Aug 99 Document preparation Minutes for DFRB for Kelly19 Aug 99 Drafting letter to Kina Securities19 Aug 99 Review letter to Blake Dawson Waldron20 Aug 99 Review Minutes of Meeting".

The entries are clearly explained by the letters to Blake Dawson Waldron and KSL andshow clearly that the "Minutes" of the telephone conference "meeting" were prepared byCarter Newell.

(k) The Deed of Indemnity which KSL had thus obtained is in the following terms:­

"DEED OF INDEMNITY

DATE 1999.

PARTIES

(1) KINA SECURITIES LTD ("Kina").

(2) DEFENCE FORCE RETIREMENT BENEFITS FUND BOARD (the "Board")

RECITALS

A. Kina is the manager and administrator of the Defence Force Retirement Benefits Fund(the "Fund") pursuant to four agreements dated 31 July 1998 (x 2) and 17 May 1999 (x 2)(the "Agreements").

B. Kina has received legal advice to the effect that it may be in breach of the Agreementsor of certain statutory duties and obligations or both if it does not review all investmentproposals on behalf of the Fund and not allow them to be entered into if it is unable torecommend them.

C. The Board has advised Kina that it has legal advice to the effect that the Board has thelegal power to authorise the Fund to enter into and acquire investments recommended bythe Board whether or not they are reviewed, recommended or approved by Kina.

D. The Board has recommended an investment proposal to the Fund being the acquisitionof Allotment 11, Section 6, Vanimo better known as the Sandaun Motel (the "SandaunMotel") by way of purchasing all the shares in a Company known as Banora Trading Ltd forK5,300,000.

E. Kina has been shown certain documents in relation to the above investment proposalbut in the absence of further satisfactory materials which it has requested but not receivedis unable to recommend the purchase by the Fund of the Sandaun Motel in the manneraforesaid.

F. Having regard to the conflicting legal advice as referred to recitals B and D and also asto whether an indemnity contained in the Agreements extends to and protects Kina in theabove circumstances the Board has agreed to fully indemnify Kina from any liabilitiesarising from a breach of the Agreements or its statutory obligations and duties in exchangefor Kina releasing sufficient monies to enable the acquisition of the Sandaun Motel toproceed.

NOW THIS DEED witnesses that the parties mutually agree as follows:

1. The Board acknowledges that it is aware of the following:

(a) the letter dated 2 June 1999 from Thirlwall Aisi and Koiri, Lawyers to the then GeneralManager of the Fund and the Board Mr. Darby Kila ("Mr. Kila") a copy of which is annexedand marked "A";

(b) the letter dated 3 June 1999 from Mr. Kila to the lawyers for the Board and the Fund a

copy of which is annexed and marked "B";

(c) the facsimile letters dated 10, 22, 25 and 30 June 1999 from Kina to the Acting GeneralManager of the Board and the Fund, Mr. Richard Sinamoi copies of which are annexed andmarked "C", "D", "E" and "F" respectively.

2. The Board acknowledges that it has taken legal advice in respect of the above mattersand is satisfied with that advice such that it wishes to proceed with the purchase of theSandaun Motel in the manner outlined in Recital D above notwithstanding that Kina as theduly appointed manager of the Fund has not recommended and does not approve of suchpurchase.

3. The Board claims that the legal position in relation to the Fund and investment proposaland decisions is as set out in the letter dated 29 June 1999 to Kina from the Chairman ofthe Board, Mr. Kelly Naru, a copy of which is attached and marked "G".

4. In consideration of this Deed, the Board its successors and assigns hereby fullyindemnify and save harmless Kina its successors and assigns from any costs, expenses,losses, actions, suits, demands, damages or other liabilities whatsoever and howsoeverarising to or which may be suffered by or which may be brought against Kina in relation tothe acquisition by the Board on behalf of the Fund of all the shares in Banora Trading Ltdwhich Kina is informed is the registered owner of the Sandaun Motel.

5. The Board its successors and assigns hereby fully release and fully indemnify Kina itssuccessors and assigns from any breach of the Agreements or of its duties and obligationsunder the Defence Force Retirement Benefits Act (chapter 76) and any amendments madethereunder and the Board's resolutions of 22 October 1996 and 27 January 1997.

6. The Board hereby warrants that it has full power and authority to enter into this Deedand that it has passed all necessary resolutions and other formalities to enable it to do so.

7. In consideration of this Deed, Kina agrees to release the Funds, which it holds on behalfof the Fund to enable the purchase of the Sandaun Motel to proceed and be completed.

EXECUTED as a Deed".

A copy of the Deed (but not its annexures all of which have already been tendered) asexecuted under the DFRB Board common seal and attested by Mr. Kelly Naru and Mr. ValiAsi taken from Commission Document DCD16, will be Tendered Documents SM586 toSM588.

(l) With this Deed signed and KSL indemnified from the folly of this transaction, which it obviouslycould see, the acquisition of the Sandaun Motel was able to proceed to completion.

It is also clear, in our view, where the responsibility for the transaction proceeding as it did,lay. The DFRB Board had minimal involvement and was lead into the transaction and itsproceeding by Mr. Naru despite the protestations of Colonel Renagi and in latter days, ofColonel Playah and the DFRBF management had been excluded and its advice ignored.

The clear responsibility lay by his own actions on the head of the DFRB Board Chairman,Mr. Kelly Naru and on his legal firm, Carter Newell as the lawyers engaged by the DFRBBoard on the direction of Mr. Kelly Naru.

24.5 Mr. Michael Tulake put in place

(a) With settlement of the Sandaun Motel purchase approaching it is notable that Mr. Michael Tulake,who said he was to be engaged as Manager when the DFRB Board and who prepared the falsefinancial statements and arranged the fraudulent Audit Report appears back on the scene.

(b) The Sandaun Motel Room Register for the first half of August 1999 – a copy of which taken fromCommission Document DCD42 will be Tendered Document SM589 shows he was accommodatedat Sandaun Motel:­

I. in Room 9 from Sunday 8th August 1999 to Wednesday 11th August 1999

II. in Room 5 on Thursday 12th August 1999III. in Room 9 on Saturday 13th August 1999IV. in Room 8 on Sunday 14th August 1999

(c) The Room Register for the second half of August 1999 – a copy of which will be TenderedDocument SM590 – and to which we will shortly be referring further shows Mr. Tulake was furtheraccommodated at Sandaun Motel:­

I. still in Room 8 from Sunday 15th August 1999 to Tuesday 17th August 1999II. in Room 3 on Wednesday 18th and Thursday 19th August 1999III. in Room 3 from Sunday 22nd August to Thursday 26th August 1999

It will be noted Mr. Tulake is not shown as accommodated on Friday 20th and Saturday21st August 1999.

24.6 Settlement arrangements at DFRBF

(a) Even though it was not until 19th August 1999 that progress to settlement of the Sandaun Motelcould be assured, earlier preparations were underway at the DFRB office.

On 17th August 1999 the DFRB Executive Manager Corporate Affairs Mr. George Uwarewrote an inter­office memorandum to the Executive Secretary Ms. Molly Baeau as follows:­

"RE: TRAVEL ARRANGEMENT TO VANIMO

This is to inform you that Director Playah has this morning issued instruction pursuant toChairman's direction to proceed with travel arrangement to Vanimo to finalize the purchaseof Sandaun Motel.

Proposed date of travel out of Port Moresby is Friday 20th August, 1999 and return onTuesday 24th August, 1999, preferably on the mid­morning flights.

Provided below are names of persons travelling:­

1. Kelly Naru ­ Chairman2. Vali Asi ­ Deputy Chairman3. Col. Reginald Renagi ­ Director4. Col. Phillip Playah ­ Director5. George Uware ­ Executive Manager, Corporate Affairs

You are advised to proceed to arrange Travel Allowances for the travelling party at theapplicable daily rate for five (5) days and have them ready and delivered to personsconcerned by 4:00 p.m. on Thursday 19 August, 1999.

In addition please confirm accommodation for four (4) nights at Sandaun Motel and issue apurchase order to me prior to departure for persons listed above".

A copy of this memo taken from Commission Document DCD10A will be TenderedDocument SM591.

The direction for these five persons – the full Board plus Mr. Uware to travel was said tohave come from Mr. Naru through his messenger Colonel Playah.

(b) On the same day Ms. Baeau responded with an inter­office memorandum to Mr. Uware whichreads:­

"Subject: TRAVEL ARRANGEMENT TO VANIMO

As per your memo dated 17/8/99, I have organised travel arrangement with Dove Travel forthe following persons travelling to Vanimo.

1. Mr. Kelly Naru2. Col. Phillip Playah

3. Col. Reginald Rena4. Mr. Vali Asi5. Mr George Uware

In view of this the following costs will need to be settled for this trip:

1. Airfares

1.1 Return tickets Port Moresby to Vanimo

Ticket at K987.80 per persons X 5 K4,939.00

Please note that the payment is to be made payable to Dove Travel (see attacheditinerary).

2. Travel Allowances

2.1 The delegation will be travelling on Friday, 20th August, 1999 and returning onTuesday, 24th August, 1999.

Their allowances are as follows:

i) Mr Kelly Naru ­ K150.00 per day x 5 days = K750.00ii) Col. Phillip Playah ­ K150.00 per day x 5 days = K750.00iii) Col. Reginald Renagi ­ K150.00 per day x 5 days = K750.00iv) Mr. Vali Asi ­ K15 0. 00 per day x 5 days = K750.00v) Mr. George Uware ­ K150.00 per day x 5 days = K750.00

Please note that all allowances to be opened for cash payment.

3. Accommodation

3.1 Sandaun Motel single room rate @ K159.50 per night (including VAT).

i) Mr. Kelly Naru ­ K159.50 x 4 nights = K638.00ii) Col. Phillip Playah ­ K159.50 x 4 nights = K638.00iii) Col. Reginald Renagi ­ K159.50 x 4 nights = K638.00iv) Mr. Vali Asi ­ K159.50 x 4 nights = K638.00v) Mr. George Uware – K159.50 x 4 nights = K638.00

K3,190.00

Please note that a purchase order will be raised for Motel thus no payment is required untilinvoiced.

4. Total Costs

4.1 Airfares : K4,939.00

4.2 Allowances : K3,750.00

4. Accommodation : K3,190.00

Total Costs : K11,879.00

Forwarded for your endorsement".

A copy of this memo signed by Ms. Baeau and endorsed by Mr. Uware taken fromCommission Document DCD10A will be Tendered Documents SM592 and SM593.

Mr. Uware had only a vague recollection of these memos and said he was told by Mr. Naruthat he was to travel as a DFRBF Management member accompanying the Boardmembers on this trip (Transcript p. 4457).

(c) On 18th August 1999 the following DFRBF cheques were drawn in pursuance of the arrangementsshown in these two inter­office memo's:­

(i) cheque # 328542 for K4,939.00 in favour of Dove Travel for return airfares to Vanimo forMessrs Naru, Asi and Uware and Colonels Playah and Renagi – the vouchers have beenearlier tendered as Tendered Documents F287.

(ii) cheque # 328548 for K750.00 payable to Kelly Naru but endorsed to pay cash beingfive days allowance at K150.00 per day – the vouchers have been earlier tendered asTendered Documents F297.

(iii) cheque # 328549 for K750.00 payable to Vali Asi but endorsed to pay cash being fivedays allowance at K150.00 per day – the vouchers have been earlier tendered asTendered Documents F298.

(iv) cheque # 328551 for K750.00 payable to George Uware but endorsed to pay cashbeing five days allowance at K150.00 per day – the vouchers have been earlier tenderedas Tendered Documents F299.

Mr. Uware said he would not have been directly involved in the ticketing arrangements butthat the allowances cheques would have been received and cashed by the persons entitledto them and that he received his allowances (Transcript pp. 4458­4459).

(d) On 19th August 1999 the Executive Secretary Ms. Molly Baeau wrote a further memo which wasendorsed by Mr. Uware as follows:­

"Subject: TRAVEL ARRANGEMENT TO VANIMO

As per verbal instruction from the Chairman, Mr Kelly Naru the following people will travelwith DFRB Board delegation to Vanimo:

1. Mr. R. Sema2. Mr. D. Kila

In view of this the following costs are as follows:

1. Airfares

1.1 Return tickets Port Moresby to Vanimo

Ticket at K987.80 per persons x 2 K1,975.60

Please note that the payment is to be made payable to Dove Travel (see attacheditinerary).

2. Travel Allowances

2.1 Messrs. D. Kila & S. Rai will be travelling together with the DFRB Board delegation onFriday, 20th August, 1999 and returning on Tuesday, 24th August, 1999.

Their allowances are as follows:

i) Mr Darby Kila ­ K150.00 per day x 5 days = K750.00ii) Mr. Sema Rai ­ K150.00 per day x 5 days = K750.00

Forwarded for your endorsement".

A copy of this further memo taken from Commission Document DCD10A will beTendered Document SM594.

(e) On 19th August 1999 the following DFRBF cheques were drawn in pursuance of the arrangementsshown in this further memo:­

(i) cheque # 328553 for K1,975.60 in favour of Dove Travel for return airfares to Vanimo forMessrs Kila and Rea – the vouchers have been earlier tendered as Tendered DocumentsF288.

(ii) cheque # 328555 for K750.00 in favour of Sema Rea but endorsed to pay cash for fivedays allowance at K150.00 per day – the vouchers have been earlier tendered asTendered Documents F300.

Mr. Uware said his only role was endorsing the memo and he was not involved in theimplementing of it (Transcript pp. 4459­4461).

(f) On 17th August 1999 a DFRBF Purchaser Order 0044 was raised in favour of Sandaun Motel andsigned by Mr. Uware for "ACCOMMODATION AND ASSOCIATED COSTS FOR DFRB DELEGATION,CHECK IN 20/08/99 CHECK OUT 24/08/99" – a copy is found in the vouchers earlier tendered asTendered Document F281.

(g) Among the vouchers obtained from Sandaun Motel are the original vouchers and charge cards andSandaun Motel Invoice No. 42 for the charges incurred on this trip.

Those original documents will be Tendered Documents SM595 to SM603.

The vouchers show total charges of K3,300.42 were incurred and paid by DFRBF cheque# 328570 on 31st August 1999 (see Tendered Document F281). Those charges consistthe following:­

(i) 22nd August 1999

4 rooms @ K145.00 K580.00Bar charges K208.00K788.00

(ii) 23rd August 1999

4 rooms @ K145.00 K580.00Breakfast charges K5.50Lunch charges K172.50Dinner charges K266.00Phone calls K14.84Laundry K33.00Bar charges K456.20K1,528.54

(iii) 24th August 1999

3 rooms @ K145.00 K435.00Breakfast charges K66.70Lunch charges K136.90Phone calls K30.84Bar charges K14.40K683.84ADD VAT K300.04

K3,300.42

(h) In addition to the room charge for this period of K1595.00 amounts had been spent of K647.60 onmeals, K45.68 on phone calls K33.00 on laundry and K679.10 on bar charges.

It will be seen from the vouchers – Tendered Document F281 – that payment of thesecharges was recommended by Mr. Uware and approved by Darby Kila.

(i) The Sandaun Motel Room Register for the second half of August 1999 (Tendered DocumentSM590) shows that in addition to Mr. Michael Tulake the following persons attributed to DFRBB, and

no others stayed at Sandaun Motel on each of Sunday 22nd and Monday 23rd August 1999.

(i) Mr. George Uware in Room 13(ii) Mr. Kelly Naru in Room 14(iii) "Sema" who we believe was Mr. Sema Rea in Room 15(iv) Mr. Seno Wekina (a lawyer from Carter Newell) in Room 19

(j) It is known from his evidence that Mr. Kila was not in Vanimo for settlement of this transaction andearlier tendered documents (see Tendered Documents F366) confirm that between 15th and 21stAugust 1999 Mr. Kila was on a trip to Canberra regarding the acquisition of the Defence Attaché'sresidence, which Colonel Playah was later to occupy. In addition the cheque for allowances for Mr. Kilawas either not drawn or not presented.

This perhaps explains why Mr. Naru's instructions as to arrangements for this trip wereactioned by Mr. Uware and Ms. Baeau.

Mr. Kila said that the persons he was aware travelled on this trip were Mr. Kelly Naruanother lawyer from Carter Newell, Mr. Seno Wekina and Mr. George Uware (seeTranscript p. 331).

Mr. Kila said as he understood it, Mr. Naru was present on settlement as the lawyer for theVendors and that Mr. Wekina was present as lawyer for the DFRB Board (see Transcriptp. 343).

(k) It would also seem that neither Colonel Renagi nor Colonel Playah travelled to Vanimo on this tripfor although air tickets were purchased for them no cheques for allowances for them were presented.

Mr. George Uware gave evidence that the only persons who travelled and all of whomtravelled together on Friday 20th August 1999 were Mr. Kelly Naru, Mr. Seno Wekina, Mr.Sema Rea and himself and that none of Mr. Vali Asi, Colonels Playah and Renagi and Mr.Kila travelled (Transcript pp. 4462­4464).

(l) It will clearly be necessary for the Commission to establish by evidence:­

(i) What happened with the air tickets purchased for each of Colonels Playah and Renagiand Messrs Kila and Asi and whether one of those tickets was made available for Mr. SenoWekina.

The latter possibility exists as there is no charge for airfares for Mr. Wekina in the CarterNewell Invoices and Mr Wekina did not know but believed Carter Newell paid for his ticket(Transcript p.4491).

(ii) What happened with the cash of K750.00 drawn for Mr. Vali Asi's allowances.

(iii) How is it that there was charged to the DFRB Board between 22nd and 24th August1999, sums of K647.60 on meals, K45.68 on phone calls, K33.00 on laundry and K679.10on bar charges, when each of Messrs Naru, Uware and Rea had received allowances forfive days of K750.00 each which five days included the period 22nd to 24th August 1999.

In this last respect, Mr Seno Wekina said his accommodation and room charges were"booked up" but he did not know who paid for them (Transcript p.4491).

These are, in our view, important matters in a proper accounting for DFRBF funds anddependent upon the explanations given may have criminal consequences.

(m) Mr. Uware was unsure whether the air tickets purchased for Colonels Playah and Renagi andMessrs Asi and Kila were returned but said normally they would have been and would either berefunded or converted to MCO's.

Mr. Uware said he thought Carter Newell would have paid Mr. Wekina's airfares andexpenses. He also did not know what happened with the travelling allowances of K750.00for Mr. Asi.

Mr. Uware was to check these matters and advise the Commission (Transcript pp. 4472­4473).

On the charges incurred at Sandaun Motel it is plain from Mr. Uware's evidence(Transcript pp. 4470 to 4471) that these charges were incurred largely by Mr. Naru. Theirmagnitude cannot be explained by reasonable expenses for Mr Wekina.

Mr. Uware agreed that these charges should not have been debited to the Board's accountwhen Mr. Naru had already received his daily allowances (Transcript p. 4471), that therewas no basis on which he could see Mr. Naru was entitled to debit those charges to theDFRB Board and that it was improper (he did not agree "criminal in nature") for Mr. Naru tohave done so (Transcript p. 4473).

We say Mr. Naru's conduct in this regard was criminal in nature and that in the absence ofa satisfactory explanation the constituting authority should be advised to refer Mr. Naru tothe Commissioner for Police in relation to this misappropriation of DFRBF funds.

24.7 Settlement arrangements at Carter Newell

(a) The Carter Newell Invoice 17360 (Tendered Document SM338) contains the following entries:­

"20 Aug 99 Document preparation preparing for settlement – finalising corporatedocumentation including all minutes, resignations, share transfers etc – conferences withSeno Wekina to attend at settlement – checking through settlement procedure – finalisingflight details – organising cheque requisitions for payment of 10% deposit – conferencewith Finance Manager to arrange cheque for balance.

20 Aug 99 Attendance at Kina Securities to uplift cheque for balance of purchase price,attendance at ICPNG for signing of cheque.

20 Aug 99 Travel to Vanimo for settlement".

(b) There are yet further changes for the corporate documentation, which we have described earlierand for the briefing of Mr. Seno Wekina checking settlement procedures and arranging Mr. Wekina'sflight details.

There are no further documents in the related Carter Newell file (Commission Document3B) which substantiate these entries other than those already described and some ofwhich have been tendered.

(c) The entry regarding the cheque requisition for the 10% deposit is not easily understood.

The deposit of K530,000.00 had as we have already seen been deposited to the credit ofCarter Newell trust Account on 18th June 1999 (see 15.2 above).

As we will later see this deposit was not accounted for until 31st August 1999 and we arethus unable to explain why the cheque requisition is said to be being arranged on 20thAugust 1999.

There is no document or notation on the related Carter Newell file (CommissionDocument DCD3B) to substantiate this charge entry on this date.

(d) The entries regarding the cheque for the balance purchase price are explained. As had beenforeshadowed by Messrs Blake Dawson Waldron, KSL, had on 19th August 1999 advised Bank ofSouth Pacific that it wished to call a deposit of K4,270,000 plus accrued interest on 20th August 1999.

A copy of such advice taken from Commission Document DCD13 will be TenderedDocument SM604.

Bank of South Pacific on 20th August 1999 produced its bank cheque # 229033 in favourof DFRBF for K4,353,428.05 which was banked to the credit of the DFRB Account on 20th

August 1999.

Copies of the bank cheque and deposit slip taken from Commission Document DCD13will be Tendered Document SM605.

KSL then drew on the DFRB account cheque # 954870 in favour of Carter Newell LawyersTrust Account for K4,770,000.00.

A copy of that cheque taken from Commission Document DCD13 will be TenderedDocument SM606.

This cheque was deposited to the credit of Carter Newell Trust Account on 20th August1999 with a request endorsed on the deposit slip for a same day clearance.

Copies of the deposit slip in respect of such deposit and the bank statement recording suchdeposit and debit of the K30 special clearance fee taken from Commission DocumentDCD26 will be Tendered Documents SM607 & SM608.

Against these funds a Carter Newell Trust Account cheque # 766490 in favour of FleetLimited was drawn for K4,770,000.00 such cheque being originally dated 20th August 1999but then altered to 23rd August 1999.

A copy of that cheque, as presented, taken from Commission Document DCD26 will beTendered Document SM609.

(e) The final entry is indicative of the fact that on 20th August 1999 someone from Carer Newelltravelled to Vanimo at the legal cost of DFRB Board for settlement of the Sandaun Motel transaction.That person was Mr. Seno Wekina.

24.8 What happened in Vanimo – 21st to 24th August 1999

(a) The travel vouchers (see Tendered Documents F287 & F288) show that all of Mr. Naru, Mr.Uware and Mr. Sema Rea were scheduled to fly to Vanimo on flight PX140 on Friday 20th August1999 departing Port Moresby at 11.50 and arriving in Vanimo at 14.14 and to return from Vanimo toPort Moresby on Tuesday 24th August 1999 departing Vanimo at 14.40 and arriving in Port Moresby at17.05.

There is abundant evidence before the Commission that at this time Air Niugini only flew asingle flight to Vanimo each Friday, Sunday and Tuesday.

The Carter Newell Invoice entry shows that travel to Vanimo for settlement occurred onFriday 20th August 1999 and it could reasonably be inferred that Mr. Wekina travelled onthe same flight on that day as Messrs. Naru, Uware and Rea.

(b) The Sandaun Motel Room Register (Tendered Document SM590) consistently with the SandaunMotel Charge cards (Tendered Document SM595 to SM603) show that none of Messrs Naru, Uware,Rea and Wekina were accommodated at Sandaun Motel on Friday 20th August 1999 or Saturday 21stAugust 1999 but only that all four were so accommodated on Sunday 22nd August 1999 and Monday23rd August 1999.

(c) Logically this would indicate either:­

(i) that all four men did not travel on Friday 20th August 1999 but rather travelled onSunday 22nd August 1999 from Port Moresby to Vanimo – in which case Messrs Naru,Uware and Rea were overpaid their daily allowances by K300.00 each; or

(ii) some or all did travel on Friday 20th August 1999 but did not stay at Sandaun Motel onthe Friday or Saturday nights.

(d) We have earlier seen on other occasions that DFRBF parties have travelled to Vanimo and aFriday flight then travelled straight from Vanimo to Jayapura returning late in the day a day or two laterto Vanimo. This would be consistent with this party travelling to Vanimo on Friday 20th August, 1999and returning to the Sandaun Motel on Sunday 22nd August, 1999 at such time that no meals werecharged to DFRBF but K208.00 in bar charges and accommodation for four was charged to DFRBF

on that day. It would also explain why Mr. Michael Tulake was not accommodated at Sandaun Motelon those two days.

(e) Mr. Uware gave evidence that before he left for Vanimo Mr. Naru told him on the morning of Friday20th August 1999, that he should take his passport "just in case they decided to go across the border".He said he was not asked to tell anyone else to take their passport.

Mr. Uware said that after arriving at Vanimo on the afternoon of Friday 20th August 1999 aparty consisting Mr. Naru, Mr. Wekina, Mr. Rea and himself and Mr. Michael Tulake (whowas already in Vanimo) accompanied by Mr. Robert Tekrie (who spoke Bahasa) left Vanimotravelling together in a white patrol which he thought was from Sandaun Motel to travel tothe border. He said they were not accompanied by Mr. Chris Vihruri or any of the Cullinanfamily. After passing through the customs and migration checks, Mr. Uware said this partythen travelled from the border in an Indonesian taxi to Jayapura where they arrived on theFriday evening (Transcript pp. 4464­4468).

Mr. Uware said that the party all stayed at the Metoa Hotel on both the Friday and Saturdaynights and that about mid morning on Sunday 22nd August 1999 the group left Jayapuratogether for the approximate four hour journey back to Vanimo where they arrived late onthat Sunday afternoon (Transcript pp. 4465 & 4468­4469).

He said that to his knowledge none of the party met up with other people in Jayapura butthat he stayed in his room most of the time because he had difficulty understanding thelanguage.

Mr. Uware said he paid for his own accommodation and meals in Jayapura and that theothers appeared to do likewise (Transcript p. 4469). He later said in answer to questionsfrom the Commission, that he thought Mr. Tulake's expenses in Vanimo and Jayapura werepaid by the Cullinans because, "he was up here acting for the Cullinans or Banora Trading"(Transcript p. 4481).

Mr. Uware said as anticipated that when the group arrived back at the border a SandaunMotel vehicle was waiting to convey the group to Vanimo (Transcript pp. 4469 ­ 4470).

Mr Seno Wekina's evidence of this trip confirmed what was said by Mr Uware (seeTranscript pp.4493­8).

Though Mr. Uware sought to justify the payment of daily allowances for Mr. Naru, Mr. Reaand himself from Friday 20th August to Sunday 22nd August 1999 on the basis of theairline schedules for flights to Vanimo he was obliged to agree that the two daysallowances could have been saved and the same work time achieved by the grouptravelling to Vanimo on the Sunday (rather than Friday) flight and not travelling to Jayapura(Transcript p. 4471).

In our view, recovery of two days allowances from Mr. Naru and Mr. Uware should besought by the DFRB Board. Mr. Rea has of course since passed away.

(f) The Carter Newell Invoice 17360 (Tendered Documents SM338 & SM339) contains the followingcharges entries for the period 21st to the 27th August, 1999.

"21 Aug 99 Settlement22 Aug 99 Settlement23 Aug 99 Telephone in Seno – advising on procedures for settlement23 Aug 99 Review of settlement – attending to post completion preliminary details.23 Aug 99 Vanimo – Settlement24 Aug 99 Letter to seno (sandaun motel)24 Aug 99 Document preparation finalising settlement details – telephone in bySeno – discussing various issues including chq clearance – conference with Partner (JDB)and Finance Manager – telephone to Seno in Vanimo – discussing various issues relatingto corporate register, common seal, Constitution, IPA certificate, audited accounts, powerof attorney.24 Aug 99 Telephone out Chairman – seeking clarification of various issues with theChairman – discussing letter of waiver – telephone

conference with Seno – discussing bank account transfer letter – discussing signing ofcorporate documents – discussing signing of share transfers under power of attorney –discussing resignations of directors – cross checking company search24 Aug 99 Document preparation drafting resignations of old directors – drafting coveringletter – telephone out to Seno advising him of resignations being faxed – discussing otherissues – further telephone conference with Chairman – finalising issues24 Aug 99 Settlement, travel Vanimo – POM26 Aug 99 Memorandum to Paul Toua regarding settlement of matter at Vanimo26 Aug 99 Document preparation report to client – coference (sic) with SW26 Aug 99 Review file, draft report to Senor Associate regarding settlement27 Aug 99 Review and revise Memo to Paul Toua27 Aug 99 Review and finalise report, conference with Paul Toua".

The first two entries suggest both those days were spent and charged for a lawyerattending on settlement.

In light of the evidence of Mr Uware and Mr Wekina, that the Friday afternoon 20th August,all of Saturday 21st August and most, if not all of Sunday 22nd August 1999 were spent ona trip to Jayapura, it would seem a review of these charges would need to be sought.

(See also Mr. Uware's evidence at Transcript pp. 4473­4474 and regarding the actualsettlement).

(g) The specific entries on 23rd August 1999 are of an inward phone call from Mr. Wekina, a review ofsettlement and attending "post completion preliminary details".

The final entry suggests this day was also spent and charged for a lawyer attending onsettlement.

There are no documents or notations on the related Carter Newell file (CommissionDocument 3B), which substantiate these entries.

(h) There are three documents on the Carter Newell file (Commission Document 3B) which, takenwith these charge entries, indicate what occurred from 24th August 1999 being:­

(i) the notes on the handwritten settlement schedule which is Tendered DocumentSM575.

(ii) a file note dated 24th August, 1999 – a copy of which will be Tendered DocumentSM610 which reads:­

"STATUS: Seno (T/I)­ Conducting settlement in Vanimo­ Issues (see below)

ACTION:

I. Conducted settlement

­ probs with chq – CN Trust A/C chq. & not bank chq as req.

I. Conf with JDB & BP

­ BP conf that chq for settlement was cleared by ANZ & PNGBC Vanimo­ Cleared funds

I. T/O SW (24/8)

­ advised him to proc. with settlement: no delay­ SW raised probs on settlement­ No corporate register: Vendor to fixup­ Common seal to remain in Vanimo: KN is aware­ No Constitution­ No IPA certificate – not req.

­ SW has copy of Certif of Incorp­ SW is arranging bank tfr letter­ SW & PT confirmed:­­ PT sighted audited A/Cs­ Power of Attorney: not stamped­ SW has any share tfr to be signed

I. T/I SW (24/8)

­ does not have signed resignation of Dir­ PT faxed resig to SW in Vanimo­ Conf Directors"

(iii) An internal Carter Newell memo of 26th August, 1999 from Mr. Seno Wekina to Mr.Paul Toua – a copy of which will be Tendered Documents SM611 & SM612 and whichreads:­

"RE: Settlement ­ Section 6, Allotment 11 Vanimo Sandaun Province

Paul,

Settlement for the above property was deferred on various occasions and finally tookplace on 24 August, 1999.

The following documents were signed by Marcus Amito as Director of Banora TradingLtd and as power of attorney for Natali Pia, Dillon Tyren, Kevin Apita and MarleneKupe:­

1. Minutes of Meeting of Directors held at the Sandaun Motel on 24 August, 1999 at 11:00am;2. Notice of appointment or change of Secretaries or particulars of Secretaries (Form21);3. Notice of change of Directors and particulars of Directors (Form 16);4. Notice of change of Shareholder (Share Transfer) [Form 13];5. Resignation as Director signed by Marcus Amito on behalf of Kevin Apita;6. Resignation as Secretary and Public Officer signed by Marcus Amito on behalf ofMarlene Kupe;7. Signed resignation of Marcus Amito as Director;8 Transfer of Shares for Dillon Tyren Cullinan, Kevin Apita, Marcus Amito, MarleneKupe and Natali Pia signed for and on behalf of each shareholder by Marcus Amito.

Regarding the cheque required to be presented to the vendor at settlement:­

(i) the cheque for the balance of the purchase price was presented to the vendor byMr Naru on Friday 20 August, 1999 prior to settlement.

Regarding the documents required to be presented to the purchaser at settlement,the following transpired:­

1. Corporate register

According to Marcus Amito no actual register containing all the company formsexisted. We were presented a copy of the Certificate of Incorporation on Change ofName of company however no further company documents exchanged hands.

2. Share Certificates

As with the previous documents, no share certificates were forthcoming from thevendor.

We were advised by Marcus however that he would endeavor to compile all companydocuments into some form of a register for forwarding to the purchaser at somefuture time.

3. Bank authority for alteration of account

Once again, we did not receive any such authority from the vendor however we wereinformed that a letter was to be prepared authorizing the alteration of the account and a copy to be forwarded to us for our file. Mr Narualso requested that any bank forms required to be completed be forwarded to him.

It should also be noted that some arrangements was made between the Chairmanand the purchaser that although settlement took place on 24 August, 1999 the actualcut off date regarding ownership changing hands would be on 31 August, 1999.

We do not comment on the commerciality of this transaction ........................."

All the entries on 26th and 27th August 1999 appear to relate to drafting, reviewing andfinalising this 1 ½ page memo.

(i) By recourse to these documents we can discern that the following took place:­

(i) Mr. Naru apparently handed the Carter Newell cheque # 766490 for K4,770,000.00 infavour of Fleet Limited to Mr. Marcus Cullinan on 20th August, 1999 – 4 days beforesettlement took place.

This cheque was banked to the credit of the Account of the Cullinan company Fleet Limitedwith PNGBC Vanimo on Monday 23rd August, 1999 – the day before settlement tookplace.

Copies of the front and reverse of the deposit slip and of the bank statement recording thatdeposit on that date taken from Commission Document DCD 30 will be TenderedDocuments SM613 to SM615.

There was apparently concern that this cheque was a Carter Newell Trust Account chequerather than a bank cheque as required by the Agreement.

Mr. Wekina telephoned Mr. Paul Toua of Carter Newell on this aspect. Mr. Toua thenconferred with Mr. John Beatty ("JDB") and Ms. Barbara Perks ("BP"). Mrs Perks advisedhim that the settlement cheque had been cleared both by ANZ Bank (Carter Newell's bank)and PNGBC Vanimo (the bank of Fleet Limited) and thus cleared funds had been paid.

Mr. Toua then telephoned Mr. Wekina to advise him to proceed with the settlement with nodelay (see SM610 and SM338).

(ii) Mr. Wekina asked for the corporate register of Banora Trading Limited, the Certificate ofIncorporation and Constitution and the IPA Certificate (presumably of re­registration underthe Companies Act 1997) and was told, but queried the originals were with Marcus Cullinan(see SM575). Mr. Wekina reported to Mr. Toua by phone that there was no corporateregister and he was told the vendor would fix that up; there was no Constitution; there wasno IPM Certificate which he was told was not required and he obtained a copy only of aCertificate of Incorporation on Change of Name (presumably from Tagoro Pty Limited toBanora Trading Pty Limited) (see SM610 and SM338).

Mr. Wekina reported that on the subject of corporate register and historic corporate recordshe was told no corporate register existed and received nothing other than a copy of theCertificate of Incorporation on Change of Name (see SM612).

(iii) Mr. Wekina asked for the common seal of Banora Trading Limited and was told that thecommon seal was to remain in Vanimo and that Mr. Naru was aware of this and hereported that to Mr. Toua (see SM610 and SM338).

(iv) Mr. Wekina asked for the share certificates for the five vendors shares beingtransferred to the DFRB Board so they could be cancelled and was told these were withMr. Marcus Cullinan (see SM575). He apparently did not report this to Mr. Toua by phone(see SM610 and SM338) but did report in his memo that no share certificates wereforthcoming and that Mr. Marcus Cullinan "would endeavour to compile all companydocuments into some form of register for forwarding to the purchaser at some future time"(see SM612).

(v) Mr. Wekina asked for the Accounts (as defined) and as required to be handed over

under the Agreement and it seems he did not receive them but queried this with Mr. Toua(see SM575) and SM338). This was apparently dealt with by Mr. Toua informing Mr.Wekina that he – Mr. Toua had sighted the audited accounts (see SM610).

(vi) Mr. Wekina apparently asked for and obtained the Power of Attorney under whichdocuments were signed by Mr. Marcus Cullinan on behalf of the other vendors but noted itwas not stamped and he confirmed that fact with Mr. Toua (see SM610 and SM338).

(vii) After speaking with Mr. Wekina on these aspects Mr. Toua spoke with Mr. Naruseeking clarification and a letter of waiver (see SM338).

(viii) It seems that something may also have been earlier said about the alteration of banksignatories and share transfers as Mr. Toua noted in his notes of his conversation with Mr.Wekina that the latter was arranging a bank transfer letter and that Mr. Wekina had anyshare transfers to be signed (see SM610). After speaking with Mr. Naru, Mr. Toua alsospoke again with Mr. Wekina about the signing of corporate documents and the sharetransfers under Power of Attorney and about resignations of directors (see SM338).

(ix) It could be inferred that Mr. Wekina then checked the documents needed for thesettlement Board meeting of Banora Trading Limited and discovered he did not have theresignation forms for resignation of the existing directors. Mr. Naru apparently told Mr.Wekina that he would be satisfied with the resignation in the Minutes of the completionBoard of Directors meeting (see SM575). Mr. Wekina phoned Mr. Toua about this and Mr.Toua apparently checked the company search, drafted up resignation forms and a coveringletter and faxed them to Mr. Wekina in Vanimo (see SM610). Mr. Toua then phoned Mr.Wekina to advise the forms had been faxed, discussed other unspecified issues and alsospoke at the same time to Mr. Naru finalising unspecified issues (see SM338).

(x) Mr. Wekina then apparently had the faxed resignations (of Marcus Cullinan and KevinApita as directors and of Marlene Kupe as Secretary and Public Officer) and the sharetransfers for all five Vendors signed by Mr. Marcus Cullinan for himself and under Power ofAttorney for the other parties; the Minutes of the Completion Board Meeting signed by Mr.Marcus Cullinan (with no apparent evidence the other director Kevin Apita was present)and the Statutory forms flowing from that meeting – Forms 13, 16 and 21) signed by Mr.Marcus Cullinan (see SM611).

(xi) In relation to the alteration of bank signatories Mr. Wekina noted, "Letter prepared andsigned. Transfer on 31.8.99" (see SM575). He plainly discussed this aspect with Mr. Toua(see SM338 and SM610).

What in fact occurred is clearly recorded in his memo (SM612). There was somearrangement between Mr. Naru and the Vendors (the memo says "the purchaser") that thechange of ownership would be effected on 31st August 1999. There was in consequenceno authority regarding the change of bank account signatories but that was to be preparedlater and "forwarded to us for our file" with any bank forms requiring completion to be sentto Mr. Naru (see SM612).

Mr. Wekina's impression with what occurred is clear in the final comment in his memo "Wedo not comment on the commerciality of this transaction…"

(j) Mr Wekina said that an older man he thought was Mr Marcus Cullinan's father (but whose name hecould not remember), Marcus Cullinan (who was walking in and out), Mr Naru and himself attended onsettlement and that settlement took place in the inner office (at the back of the Reception andAccounts area to the left of the Restaurant entrance) at Sandaun Motel (Transcript pp.4498­9).

Mr Wekina was questioned as to what occurred by reference to what was apparent from thedocuments as set forth in (i) items (i) to (xi) above but said that from general memory that "most of thedocuments that Paul instructed me to pick up from the vendor were not readily available at settlement"(Transcript p.4500).

Generally, Mr Wekina agreed with what has been said in (i) above but some added matters bearmention.

Mr Wekina agreed it was not usual to hand over the cheque for the balance purchase moneys until allother aspects were complete and that this was usually the last document handed over on settlement.

He could not recall expressing any concern to Mr Naru at the cheque being handed over four (4) daysbefore settlement and agreed that his reticence was because Mr Naru was a partner of Carter Newelland he was only an employee (Transcript pp.4500­1).He recalled the vendors discomfort with receiving a Trust Account cheque rather than a bank chequeand his phone calls on that aspect with Mr Toua who instructed him to proceed to settlement withoutdelay (Transcript pp.4501­2).

Mr Wekina agreed as to what occurred as to the corporate register that he received only a Certificateof Incorporation on Change of Name and that an undertaking was given that the documents, whichwere there, would be compiled into a corporate register and forwarded to Carter Newell. He said hewould not have been comfortable accepting this himself but he reported the fact to Mr Toua by phoneand had confirmed instructions from him to accept the position (Transcript pp.4502­3).

Asked about those instructions – which he said were from Mr Toua and not Mr Naru ­ Mr Wekina said"I think eventually I was instructed to proceed with the settlement. The cheque had already beenpresented, the settlement cheque. So it was just a matter of getting the documents which we requiredto complete the settlement" (Transcript p.4503).

Over the Common Seal, Mr Wekina said, "the vendor, I think, was not happy to release the commonseal to us". Again, he recalled raising this matter with Mr Toua and being told the seal could remain inVanimo as long as Mr Naru was aware (Transcript pp.4503­4)

Of the share certificates Mr. Wekina said "Marcus said that he would compile the certificates andforward them to us, to the purchaser at some future time" and of the Accounts he said Mr. Toua toldhim he had sighted them and that his – Mr. Wekina's – notes indicated that was adequate (Transcriptpp.4504­5)

Asked about the Power of Attorney, Mr. Wekina said he thought the document he received was signedbut not stamped. He said he was aware Mr. Toua spoke to Mr. Naru by phone but he was not privy tothat discussion (Transcript pp.4505­6).

Over the bank accounts alterations, Mr. Wekina said "from memory, there was I think some reluctanceby the vendor to have the bank account immediately changed over or transferred to the purchaser".With recourse to his notes he said he thought he did not receive, at completion, any letter regardingthe change of bank signatories but one was to be forwarded after the end of August. Mr. Wekina couldnot add, from memory, to what was said in his notes about the handover being deferred to 31st August1999 though the money had been paid eleven days earlier (Transcript pp.4507­8).

In relation to the Completion Board meeting, Mr. Wekina confirmed he had forgotten to bring theresignation documents from Port Moresby and that they were faxed to him by Mr. Toua but that he hadcarried the prepared Minutes which were then signed by Mr. Marcus Cullinan (Transcript pp.4508­9):He said he had met Mr. Kevin Apita in Vanimo but did not think he was involved at all in settlementand, though he said it was too long to remember, it would seem from his evidence (see Transcriptp.4510) that there was no actual Board meeting but that Mr. Marcus Cullinan just signed the Minutesas he did the resignations share transfers and statutory returns (Transcript pp.4509­10).

Of the final line in his post settlement memo as to the commerciality of the transaction, Mr. Wekinasaid "I think that line was added by request of Paul and it referred to the purchase price, I think.Basically all we did was prepare the documentations, but in terms of whether it was a fair price theywere paying for the hotel, we did not make any comment on that".

He said that he did form an impression "It seemed they were paying a bit much for the property" andagreed the impression he had was that there was no way in the world the place was worth K5.3 million(Transcript pp.4510­11).

Of his personal attitude to so few things being available on settlement, Mr. Wekina's evidenceproceeded:­

"A: Our problem was that the cheque had been presented and the attitude that, I think, Paul and Iadopted was, let us get as much of this documentation in place as we can to ensure that thepurchaser is protected as much as we can. I mean, because the cheque had been presented earlier Ido not think there was anything we could do other than to acquire as much of what was required atsettlement and if anything did not go according to normal settlement procedures and I do not knowhow much that would assist the purchaser. But, I think that is the attitude that we had.

Q: Would you agree with me that if the cheque had been sitting on the table you would have said thevendor is not ready and able to settle, we will pack our bags and go home and we will come backwhen you are ready?

A: Yes.

Q: Do you consider that that was what properly should have occurred?

A: Yes.

Q: The reason you could not do that was that Mr Naru had already given the vendors the cheque.

A: Yes.

Q: Did that concern you professionally?

A: Yes, it did.

Q: What in particular concerned you? That you were not able to protect the purchaser's interestproperly because the money had already been paid?

A: That is right. Basically, because the normal settlement procedures were not adhered to.

Q: Did you have any remonstration with Mr Naru about that?

A: No, I did not.

Q: Did you complain to Mr Toua about that?

A: Yes.

Q: What was Mr Toua's reaction?

A: I cannot recall but I think our attitude at the time was that we just needed to get as much paper workas we could in case we needed in case the settlement fell through and we needed to try and recoverthe monies, I think.

Q: You would agree with me that what you were asked to do on settlement related essentially to thecorporate aspects per se of the settlement?

A: Yes.

Q: Did you raise any questions about whether there were any wider duties that had to be performed atsettlement?

A: No." (Transcript pp.4511 – 2)

(k) Mr. George Uware who was the Executive Manager Corporate Affairs of the DFRBF and a qualifiedaccountant said he was assigned no role in relation to the settlement processes, that he was simplyaccompanying Mr. Naru and was told that he would be witnessing the transaction; that basically hewas not allowed into the office and that he accordingly had no idea what went on (Transcript p. 4474).

Mr. Uware said he was not present at any settlement meetings, was assigned no tasks andhad no involvement and that, given his qualifications, that seemed odd to him at the time.

He said he was not aware Mr. Naru had given Mr. Marcus Cullinan the cheque for K4.77million before the party departed for Jayapura on Friday 20th August 1999 and that he wasconcerned at what he observed, "for an acquisition that involved that kind of money thedegree of secrecy that was involved in finalising the transaction" (Transcript pp. 4475­76).

Mr. Uware said he was surprised at not being asked to participate – "it was very strangeand the fact that I appeared to have been just marginalised and no significant role given inthe whole process".

Mr. Uware said that he was reticent because he had previously given advice on thistransaction and because it was present to his mind what had happened in earlier instanceswhen DFRBF staff had questioned this transaction (Transcript pp. 4476­77).

(l) In our evaluation of the Share Sale and Purchase Agreement in 23 above we have illustrated thatthere were severe shortfalls in that Agreement as a result of which the matters to be dealt with atCompletion were far fewer than they should, in the proper legal interests of DFRB Board, have been.

We have there drawn attention to some matters where we have said we would wait andsee what happened on Completion and have also drawn attention to other matters which,despite the limitations of the Agreement, should as a matter of practical business sensehave been dealt with on Completion.

Twenty such matters which should, in our view, have arisen, been detected or been raisedon Completion are:­

(i) The fact the Power of Attorney was limited in its ambit to the grantors rights asshareholders of Banora Trading Limited, showed on its face that Dillon Tyren Cullinan wassigned for by his mother and that the Power of Attorney had not been stamped althoughdated in April 1999.

(ii) Whether in respect of documents signed under the Power of Attorney such documentsfell within the scope of the Power of Attorney; were shown on the face of the document asbeing signed on a person's behalf by his or her Attorney and whether there was adeclaration of non revocation of the Power of Attorney in respect of each documentpurportedly signed under Power of Attorney.

(iii) Whether any check was made that the Shares being sold to DFRBF were free of anysecurity or third party interest – there is cause for concern in this regard if for example theshare certificate cannot be produced on Completion because of the possibility that it mayhave been lodged or deposited as security.

(iv) Whether all historical company records were handed over on completion includingthose prescribed by Section 154 of the Companies Act and whether all relevant statutoryreturns had been filed including Annual Returns subsequently to 1996.

(v) If the Share Transfers were not stamped prior to completion whether steps to protectthe Purchaser's rights were taken at Completion such as obtaining Powers of Attorney,Representative appointments and proxies to enable the Purchaser to control the rightsattaching to those Shares between Completion and the entry of the share transfers in theshare register.

(vi) Whether if the Share Transfers were unstamped the Completion Board meetingminutes were cast in terms not involving contraventions of Section 26 of the Stamp DutiesAct and Section 78(a) of the Companies Act.

(vii) Whether the Accounts (as defined) were handed over on completion and whether allhistorical financial records were handed over on completion including those prescribed asbeing required to be maintained and retained under the Income Tax Act and Section 188 ofthe Companies Act.

(viii) What checks were made as to the land rent and provincial government taxes orcharges in respect of the Property and the Business to ascertain what, if any, adjustmentsneeded to be made to the balance purchase moneys of K4.77 million as required by theAgreement.

(ix) What checks were made to verify the "Asset Register"; to establish that the pokermachines were the property of Banora Trading Limited free from all security and to verifythe other assets as included in the balance sheet which was part of the Accounts (asdefined) were present and that such assets were free from security interest.

(x) What checks were made of the licenses necessary for operation of the business,including trading license, liquor license and poker machines licenses and what checkswere made to ensure those licenses were current and that no fees or payments due for

them were in arrears.

(xi) What stock takes, if any were taken of the inventories of food and beverages andcleaning supplies, crockery and cutlery and stocks of bed linen and towels, if for no otherreason than to ensure their adequacy and to establish opening and closing balances.

(xii) What checks were made in respect of the Conditions Precedent and in particular toensure that the assets in the Assets Register were present and free from encumbrance,that staff had been paid or provision made for them in the financial records and that thebusiness name "Sandaun Motel" was registered.

(xiii) What action was taken as regards the alteration of bank signatories (which wassupposed to be effected by resolution at the Completion Board meeting), to identify therelevant bank accounts; to obtain and to check the historical records for them and toestablish closing and opening balances and to take custody of the deposit and chequebooks relating to them.

(xiv) What action was taken to obtain and check the Income Tax, Group Tax, Sales Tax andVAT records of Banora Trading Limited and to check that both the stationery and paymentobligations in respect of them were current and up to date.

(xv) What action was taken to obtain the Owners copy of the State Lease for Allotment 11Section 6 Vanimo, and to check there were no arrears of State Lease rent or ProvincialLand Tax or Land Rates outstanding.

(xvi) What, if anything, was done to ask about the four vehicles purchased in 1997 shownin the "Accounts" as against one vehicle only in the Asset Register and about the hire carincome.

(xvii) What action, if any, was taken to check the liquid funds position and to check whetherand if so what directors fees had been paid and distributions to shareholders had beenmade since the date at which the Accounts (as defined), ended – i.e. 31st December 1998.

(xviii) What if any check was made prior to actual Completion whether the Vendors wishedto give any further written information or to make any further disclosures under Warranties2.2 and 2.3 respectively in Schedule 3 to the Agreement and to verify the Warranties 3.1and 3.2 in Schedule 3 that all "Tax" as defined had been paid and that the business name"Sandaun Motel" was registered.

(xix) What check was made if the buildings at Sandaun Motel were insured, whether therewas adequate Public Risk insurance in place and whether there was WorkersCompensation (with Common Law extensions) insurance in place to cover the employees.

(xx) What enquiry, if any, was made as to who was going to manage the business afterCompletion and upon what terms that was to be done.

(m) It is plain from the Schedules that were prepared for him that Mr. Seno Wekina was only instructedto attend to a limited number of matters, not even all of those expressly envisaged by the Agreement,and that his attention was focussed on the corporate documents to be dealt with at the CompletionBoard meeting, the corporate register and corporate documents per se, the Power of Attorney and thechange of bank signatories.

This is apparent from the lists (Tendered Documents SM574­SM577) the Invoice chargeentries (Tendered Documents SM338 and SM339), the File Note (Tendered DocumentSM610) and Mr. Wekina's memo (Tendered Documents SM611 and SM612).

(n) Again, the matters listed in (l) items (i) to (xx) were raised with Mr. Wekina who said of them that:­

(i) though he perused the Power of Attorney on settlement he thought that it would nothave been legally competent for the resignations of Kevin Apita as a director and MarleneKupe as Secretary and Public Office to be signed by Marcus Cullinan under Power ofAttorney (which they were) as these required personal signature, that he could not recallwhether that occurred to him at the time; that he did not notice at the time that the Power of

Attorney was signed for Dillon Tyren Cullinan by Natalie Pia as his mother but he agreedthat created legal problems (Transcript pp.4513­4)

(ii) he was concerned at not receiving the Vendor's share certificates at the time as thatmay have enabled the Vendors to deal with them. He also agreed that their not beingproduced also admitted of the possibility that they may have been lodged as security(Transcript p.4515).

(iii) he did not receive historical corporate records and could not recall whether there weresearches which showed whether annual returns were filed up to date (Transcript pp.4515­6)

(iv) he did not recall considering whether the Completion Board meeting minutes requiredamendment or steps were needed to protect the Purchaser because the Share Transferswere unstamped "but it seems that those considerations were not taken onto account andsettlement proceeded on the basis that these documents would eventually be provided tothe purchaser" (Transcript p.4516).

(v) he was not aware that the Stamp Duty Act rendered it an offence to enter a sharetransfer in the register if it has not been stamped (Transcript p.4516).

(vi) he did not query with Mr. Toua that not obtaining the historical financial records requiredto be maintained and retained under the Income Tax Act and Companies Act may exposethe new DFRBF directors to prosecution (Transcript p.4517)

The other matters which we have said in (l) above were put to Mr. Wekina item by item andhe agreed at Transcript pages 4517 to 4521 that he had not been instructed to attend tothem. The evidence in this regard then concluded:­

"Q: Would you agree that they are the normal sorts of things that one would be checkingon settlement of a company purchase of an ongoing business.

A: Yes, prior to settlement all those checks should have been made". (Transcript p.4521)

(o) Mr. Naru clearly made sure that the Vendors received payment of the balance purchase moneys ofK4.77 million and was clearly involved in the settlement processes and in discussions with Mr. Wekinaand by telephone with Mr. Toua and in deciding what was or was not acceptable.

(p) In the result Mr. Wekina as the lawyer representing the DFRB Board at settlement came away fromthe so­called "Completion" in Vanimo with nothing more than:­

(i) the unstamped Power of Attorney;

(ii) a copy of a Certificate of Incorporation on Change of Name;

(iii) the resignations (x3) faxed to him by Mr. Toua all signed by Mr. Marcus Cullinan;

(iv) the share transfers (x5) and statutory returns Forms 13, 16 and 21 (i.e. 3) which hadtaken to Vanimo with him and which were signed by Mr. Marcus Cullinan;

(v) a vague statement that at some unspecified future time Mr. Marcus Cullinan would"compile all company documents into some form of register for forwarding to thePurchaser".

(vi) a statement the common seal would remain in Vanimo and that Mr. Naru was aware ofthat;

(vii) a statement from Mr. Naru that even though the balance purchase moneys cheque hadbeen handed over four days prematurely ownership would not change until 31st August1999 and that the change of bank signatories would take place by a letter in a manner notspecified at some time in the future a copy of which would be forwarded to Carter Newellfor their file.

Those matters were all put to Mr. Wekina at Transcript pp.4521­2 and he agreed that wasall he received.

(q) It almost goes without saying that what occurred was in our submission, a total disgrace and thatalthough Mr. Wekina made an effort in areas specified in his limited instructions those efforts bore littlefruit. The Vendors were not ready and able to settle even on the terms of the Agreement and, in ourview, the Purchasers lawyer's should have accordingly refused to settle and deferred settlement untilthe Vendors could comply with their Completion obligations.

What is said in the preceding paragraph was put to Mr. Wekina at Transcript pp.4522­3and he agreed with it and that the fetter, which he had was that the money had alreadybeen paid.

In consequence, the rights and interests of the DFRB Board as Purchaser were, in oursubmission, disgracefully neglected by its lawyers whilst the Vendor's interest in receivingpayment of the balance purchase moneys without delivering even the limited matterscovered by the Agreement were well served by the same lawyers.

Whilst some of the consequences to the DFRB Board of this neglect of its interests areplain from what has already been said there are still further consequences yet to bedisclosed.

24.9 Special DFRB Board meeting 12/99 – 26 August 1999

(a) With Messrs Naru, Wekina and Uware having returned from their trip to Vanimo to "complete" theSandaun Motel purchase on Tuesday 24th August 1999, leaving Mr. Marcus Cullinan and Mr. MichaelTulake at the Sandaun Motel and with Mr. Kila having earlier returned from his trip to Canberra toarrange the purchase of the Defence Advisors residence, which was to be occupied by ColonelPlayah, Mr. Naru clearly thought it appropriate to convene a Special Board meeting to advise the otherDFRB Board members at least part of what had occurred.

(b) The file of Board papers produced by the DFRB Board in respect inter alia, of this meeting(Commission Document DCD 96) show that an agenda was prepared for this meeting to be held at12.00 noon on 26th August, 1999 and that no Board papers were prepared.

The agenda, a copy of which will be Tendered Document SM616, lists three items ofBusiness Matters:­

1.1 Canberra Trip1.2 Sandaun Motel1.3 Tele­Conferencing Minutes

It would accordingly seem from the earlier evidence of Mr. Richard Sinamoi that this wasyet another Special Board meeting called on Mr. Naru's instructions with minimal advancenotice given to other Board members.

Mr. Sinamoi had it will be recalled said that he knew nothing of the earlier telephoneconference "meeting" until Mr. Naru sought to have the "minutes" of it confirmed at asubsequent Board meeting. It is also noteable that Mr. Sinamoi said and the Board Minutes(Commission Document 24) confirm that minutes of previous meetings were not dealtwith at Special Board meetings as a general rule but were dealt with at the next regularBoard meeting.

(c) On 24th August, 1999 – four days after he had received the balance purchase moneys cheque ofK4.77 million, one day after he had banked that cheque and on the day the so called "Completion" hadtaken place but with the "handover" deferred to 31st August, 1999 and the bank signatoriesunchanged Mr. Marcus Cullinan wrote on Sandaun Motel letterhead a letter in the following terms toMr. Naru:­

"Subject: WORKING CAPITAL REQUIREMENT (WCR)

The purpose of this letter is to request your goodself to organise the above.

As mentioned in my letter regarding deferement of settlement date to 1st September 1999,we would require some working capital which we estimate to be over K60,000 for the firstmonth of operation. Details of which are as follows:

I. Inventory (Food & Beverages) K25,000II. Wages K12,000III. Rental K6,000IV. Electricity K2,500V. Communication K2,500VI. Hitron K1,500VII. Fuel K500VIII. Sundry K5,000IX. Freight K1,000X. Petty Cash/Change Fund K4,000

It would be greatly appreciated if you would make the necessary arrangement to have thefunds transferred to the Operating Account at Westpac Bank, Vanimo, No. 501166001 by1st September, 1999".

A copy of this letter taken from Commission Document DCD 23 will be TenderedDocument SM616A.

It will be noted that letter does not bear any facsimile imprint suggesting it was handed toMr. Naru when he was in Vanimo on 24th August 1999.

This letter was shown to Mr. Wekina who had no recollection of having previously seen it(Transcript pp.4523 and 4526)

The letter – which we will come back to shortly – does not appear to have evoked anynegative response from Mr. Naru who was thus faced with asking the DFRB Board foranother K60,000.00 for working capital for the business for which it had just paid K5.3million.

(d) The Minutes of this meeting show that Messrs Naru and Asi and Colonels Playah and Renagi werepresent; that Mr. Darby Kila and Mr. Richard Sinamoi were in attendance; that the meeting opened lateat 1.30pm and that the meeting concluded at 3.00pm.

The Minutes in respect of the Business Matters at the meeting (the only other matters dealtwith being the opening, next meeting and closure) read as follows:­

"1.1 Canberra Trip – Acquisition of Defence Advisors Residence

Mr Darby Kila presented a verbal report on his trip to Australia to follow up on this matter. Itwas noted that a written report will be tabled at the next Board Meeting. Mr Darby Kilaadvised of the various developments that took place whilst in Australia namely; the drawingup of the contracts which are currently with our lawyers for their advice, on application tobe forwarded to the Department of Foreign Affairs & Trade for this investment.

Mr Darby Kila also acknowledged the Deputy High Commissioner's involvement in thisparticular investment. His assistance was very much appreciated.

Resolution:

Moved Col. Phillip Playah, seconded Col. Reginald Renagi, and unanimously resolved thatthe verbal report be noted and accepted.

1.3 Tele­Conferencing Meeting ­ Minutes

The Chairman tabled the minutes of the telephone conference on the 19th August, 1999with all the Board members and request that this item be discussed earlier, as item 1.2 willtake some time, to discuss.

The Chairman briefed the Board as to the urgency of the tele­conferencing and the background surrounding this matter. The Board was advised of the meeting that took place

between the Chairman and Kina Securities Ltd's, General Manager, Mr Syd Yates and hislawyer, Mr Peter Coumbis of Blake Dawson Waldron Lawyers.

It was from this meeting which prompted the Chairman to conduct the teleconferencing todiscuss the following items:

i) Delegated Authority to Kina Securities Ltd.

ii) Deed of Indemnity with Kina Securities Ltd ­ Sandaun Motel Purchase.

All discussions and deliberations of the meeting are now tabled for the Board to confirm asa true and correct representation of the proceedings that took place.

Resolution:

The Board unanimously resolved that the minutes of the Special Board Meeting held viathe telephone on the 19th August, 1999 is a true and correct representation of theproceedings that took place.

For purposes of verifying the minutes of the meeting each Board members endorsed andratified the minutes with their respective signatures (refer to the attachment).

1.2 Sandaun Motel

Chairman briefed the Board on the trip to Vanimo for the final settlement of the Boarddecision to purchase Sandaun Motel.

The delegation that travelled to Vanimo was headed by himself. The Board was informedthat the final payment has been made to the proprietors of the Motel and thus concludingthe settlement. The official take over will happen next week presumably on the 1stSeptember, 1999. The Chairman informed the board that an extra K60,000 would have tobe endorsed or any other amount found suitable by the Board, for the purposes of workingcapital for the first month.

Col. Reginald Renagi expressed his concern over the settlement, stating to the Chairmanthat he could not recall a Board resolution to settle the difference and complete thepurchase without the proper due diligence to be completed by the Fund Managers. As faras he could recall the Board was still awaiting the business evaluation report on the Motelfrom Kina Securities Ltd. Col. Reginald Renagi pointed out that the audited statementswere presented however this is only part of a business evaluation and it is this report thathe has not sighted thus he made it known that there should not have been any settlement.

Chairman responded to Col. Reginald Renagi's comments regarding the audited financialstatement, advising that the accountant that had completed the audit are CertifiedPracticing Accountants who were engaged independently to complete these tasks. Thus hecould see no possibility as to why the books would be bias in any way.

Mr Vali Asi noted that he was not party to the initial decision to purchase the Motel, he onlysupported the idea because he had faith in the other Board members to make rational andconstructive decisions. He is now doubting that, because of these mixed emotions that isnow evident among the Board members. He stated, that we should not question thedecision now when we have already completed the settlement. If Board members had theirreservations over the purchase they should have noted this earlier when the proposal wasinitially tabled. He believes that we are making a mockery of ourselves by behaving in sucha manner. He expressed to the Board that he had lost faith in the Board's ability to makeeffective and constructive decisions.

Col. Reginald Renagi agreed with Mr Vali Asi's sentiments and believed that in most caseswe the Board seem to be repeating ourselves. He noted that the normal due' diligenceshould have been persued by the Board from the beginning. His only concern now that thefinal settlement has occurred, is that information could have already been leaked out to thepublic and this could have sever repercussions on the Board.

Col. Reginald Renagi expressed further that without the normal due diligence, how do weknow that the amount paid by DFRB the market value. We do not know if we have

purchased at the right price, a price which represents the motels true value.

He also informed the Chairman and other Board members that there was a conflict ofinterest when Carter Newell Lawyers was engaged to coordinate the purchase for both thevendor's and the purchaser's as the Chairman is also from Cater Newell Lawyers. Heexpressed discontentment that the Board has discredited Kina Securities Ltd's ability asFund Managers and the Board's advisor's on investment by not adhering to their advice,which was forth­coming. Col. Reginald Renagi summed up his comments by asking thatthis matter be kept in­house and that we the Board members and management have to bediscreet about the whole matter especially when in public.

Chairman responded to Col. Reginald Renagi comments by advising that he could not seeany conflict of interest, as it was common practice in his business for one legal firm to actfor both the vendor and purchaser to settle these sort of business deals.

Col. Phillip Playah expressed his concerns over the final settlement without a proper Boardresolution. He advised that he had no problems with the initial Board decision to acquireSandaun Motel. However he would have rather seen the normal procedure followed inorder to come to the final settlement. Currently the transaction incomplete without athorough due diligence carried out by our in­house management and Kina Securities Ltd.Therefore we should not have rushed into completing the final transaction. He advised thathe wanted to state this discontentment for the record.

Col. Reginald Renagi asked about the request from the General Manager of Sandaunmotel for K60,000 for the first month's working capital. He advised the Board that what hedid not want to see this sort of request every one or two months. He wanted to see theMotel self­reliant, as this is what was portrayed to us in the beginning.

Chairman advised that his money was needed in order to pay of the first month's servicethat were currently renting and not to pay the creditors. They require this only for the firstmonth after this they should be generating money plus a profit for the Fund. He to endorsethe full amount, we can further advised that the Board does not have endorse any amountthat we feel is justifiable and reasonable for this purpose.

Resolution:

Moved Mr Vali Asi, seconded Col. Reginald Renagi, and unanimously resolved that theconcerns and comments made by the respective Board members be noted and accepted;furthermore as part of the same resolution the Board endorse the amount of K60,000 to bepaid to Sandaun Motel Operation Account at Westpac Bank, Vanimo ­ Account No. 501166001 by the 1st September, 1999.

2. OTHER BUSINESS

2.1 Sandaun Motel ­ General Manager's Contract

Noted:

Chairman advised that the Board on the back ground of this matter. It was noted that acontract for the General Manager for Sandaun Motel, Mr Marcus Amito will have to befinalised prior to the commencement of operations.

Mr. Vali Asi agreed to this comment stating that a contract needs to ' be entered into by theBoard and Mr Amito to ensure that he performs his duties. The contract will protect thefund by providing the Board with the power to terminate his services, if he is not achievingour goals.

Col. Phillip Playah expressed his concern over the General Manager candidate forSandaun Motel, Mr Marcus Amito. He stated that he had reservations regarding hisbehavior and thus he would feel more comfortable if he was put on a probationary period ofthree or six months.

Resolution:

Moved Col. Phillip Playah, seconded Col. Reginald Renagi, and unanimously resolved that

Mr Darby Kila and his management be tasked to provide to the board a suitable contractfor the General Manager of Sandaun Motel that is reflective of what the industry offers toother officers in this position".

A copy of the Minutes taken from Commission Document DCD 24 will be Tendered DocumentsSM617 to SM621.

(e) The order of business is again, in our view, relevant. The first item concerned progress on thepurchase of the Defence Advisor's residence in Canberra which was to be occupied by the DefenceAdvisor designate to Canberra Colonel Playah. The Colonel did not disclose his interest and in fact isshown in the Minutes as moving that Mr. Kila's progress report be noted and accepted.

It is in our view clear this item was dealt with first by design and not by accident.

In respect of the "Tele Conferencing Meeting" we have earlier made comment and it isnoteable that Mr. Naru did all the talking – again avoided the real issue as to why KSL wasseeking a Deed of Indemnity and had all the Board members sign the "Minutes" preparedby Carter Newell at the legal cost of the DFRB Board.

Mr. Naru had thus covered his exposure in having executed the Deed of Indemnity, whichwas required before KSL would release the balance purchase moneys.

Mr. Naru's brief on the actual settlement of Sandaun Motel was just that – brief. It is notablethat what he told the Board was that he headed the delegation to Vanimo – though he didnot say in what capacity and that as we will see, is important. He told the Board finalpayment was made and settlement concluded, that official takeover would occur probablyon 1st September 1999 and that K60,000.00 would be required for working capital for thefirst month.

At long, long last Colonel Renagi formulated a questioning about the Board's role pointingout the Board had not authorised payment of the balance purchase price or proceeding tosettlement without due diligence and without a business evaluation which had seen. Mr.Naru's response is quite revelatory – the Auditor was certified and independent (both ofwhich were clearly untrue and we say almost certainly untrue to Mr. Naru's knowledge) andhe could see no possibility that the books could be biased in any way (which again wasclearly untrue and we again say the financial statements prepared by Mr. Naru's colleague,Mr. Michael Tulake, were almost certainly false to Mr. Naru's knowledge).

Mr. Vali Asi was quick to disassociate himself from the decision to purchase Sandaun Moteland place responsibility on his fellow Board members in whom he said he had lost faith.

Mr. Asi apparently thought that his absence from Board meetings in some way relieved himfrom responsibility which is, of course, legally incorrect such absences simply evidencing afurther dereliction of his duty as a Board member. He also appears to have forgotten thatthe four Board meetings, which he did attend – on 25th March 1999, 29th March 1999 and22nd July 1999 – and the so­called "Tele­conferencing meeting" of 19th August 1999, wereall the meetings (save that of 1st March, 1999) at which the critical decisions regarding theSandaun Motel were made. It may well be that Mr. Asi's attendance at these meeting wasnot a coincidence and that his presence could avoid a situation such as that at the meetingof 7th July 1999 where in his absence, Colonel's Playah and Renagi combined to outvoteMr. Naru on the Sandaun Motel issue.

Colonel Renagi also raised the question of price, the conflict of interest of Carter NewellLawyers and the discrediting of KSL and not adhering to their advice.

Again Mr. Naru's explanation that "he could not see any conflict of interest" is notable.

Finally and to complete the record in this respect, Colonel Playah took a "fence sitter"position but asked that his discontent at rushing into completion prior to completing duediligence be noted.

Quite amazingly the reaction to the request for K60,000 for working capital was quite mild.

No one seems to have asked why a working capital injection was required where what hadjust been completed was the purchase of a company for K5.3 million which as at 31stDecember 1998, was said to have K110,000 cash in the bank and K93,000 in consumableinventories and which had the prospective income flows which had been represented to theBoard in the "letter of offer" and Mr. Vihruri's presentation at the 1st March 1999 Boardmeeting.

Though the Board had received little information at all on this transaction, it is surprisingthat no one questioned why any injection of working capital was necessary at all.

Mr. Naru's explanation as recorded in the Minutes does not make sense.

Having weathered the storm over completing the purchase and obtained the approval ofthe Board to advance K60,000.00 in working capital, Mr. Naru was left with one task – toobtain Board approval for the senior management team he had put in place at SandaunMotel consisting Mr. Marcus Cullinan and Mr. Michael Tulake which had not previously, atleast according to the minutes, been formally raised with, let alone approved by the DFRBBoard.

The minutes on this aspect are delightfully vague with Mr. Naru recorded as saying that acontract "will have to be finalised prior to the commencement of operations" – which wasjust five days later and Mr. Asi supporting him saying a contract "needs to be entered into".

What the Board was faced with was in fact a fait accompli because despite ColonelPlayah's expressed reservations, there was no time for any alternative to be considered.

Two things are notable.

Firstly, that Mr. Tulake's employment was not mentioned at all and secondly, that the Boardresolved that "Mr. Kila and his management" were tasked to come up with a contract"reflective of what the industry offers to other officers in this position".

We will come back to what occurred in this regard.

(f) Mr. Kila appears to have been concerned at the events at this Board meeting because on the samesay and at 15.54 – less that an hour after the Board meeting ended, he sent a fax to Mr. Paul Toua atCarter Newell Lawyers reading as follows:­

"RE: SETTLEMENT OF SANDAUN MOTEL ACQUISITION

Please, advice as soon as possible on the status o the settlement of the above acquisition.

We would like to create and organise our records properly hence would appreciate fullbriefing and all necessary documentations. These include all statutory documents andbusiness information i.e: share transfers, resignation letters, stock listing etc.

Your immediate attention is appreciated'.

A copy of this fax taken from the Carter Newell file (Commission Document DCD3B) willbe Tendered Document SM621A.

It would also seem likely that by this time Mr. Uware would, as he said, have voiced hisconcern to Mr. Kila about what had occurred in Vanimo (see Transcript p. 4478).

24.10 What happened to the K4.77 million

(a) We have shown that the K4.77 million cheque handed by Mr. Naru to Mr. Marcus Cullinan on 20thAugust 1999 before the DFRB party departed Vanimo for Jayapura with Mr. Tulake was banked to thecredit of the Account of Fleet Limited with PNGBC Vanimo on 23rd August 1999.

That the trip to Vanimo was pre­planned by Mr. Naru appears clear from the fact that all ofMessrs Naru, Uware, Rea and Wekina must have been forewarned to carry their passportswith them so that they could make the border crossing.

(b) The Commission will note from the bank statement (Tendered Document SM615) that:­

(i) prior to the deposit of this K4.77 million the balance held to the credit of this FleetLimited Account was only K3,102.40 and after the K4.77 million deposit wasK4,773,102.40. There was only one other deposit prior to 30th August 1999 of K6,995.20.

(ii) By 30th August 1999, the balance held in this account was only K3,479,499.14. In theperiod of a week following the deposit of the K4.77 million cheque an aggregate ofK1,300,558.46 had thus been paid out of this account, (yet the formal handover to theDFRB Board had not yet taken place) and paid out by fifteen cheques # 583106 to #583120 inclusive.

(c) Whilst we will be dealing in the final part of this Opening with what happened to this K4.77 million itis necessary at this point to have regard to five (5) of those cheques being cheques # 583106,#583107, #583108, #583109 and #583113.

(d) It will be recalled that one of the reasons given to the DFRB Board for Mr. Brian Cullinan wishing todispose of the Sandaun Motel was that he needed to travel to Australia urgently for medical treatment.

The records of Westpac Bank Vanimo show that on 25th January 1999 Mr. Brian Cullinanapproached that Bank seeking a temporary advance of K40,000.00 to take his ill son toAustralia for medical treatment.

As security he delivered to the Bank the title to a property and represented to the Bankrepayment would come from the poker machine receipts of Sandaun Motel.

Copies of the loan request and related managers diary – memo from which this can beascertained taken from Commission Document 209 will be Tendered DocumentsSM622 and SM623.

This loan application was approved the same day and noted for review on 30th April 1999.

A copy of the approval from the same Commission Document will be TenderedDocument SM624.

The Bank file (Commission Document 209) shows that the Bank pursued Mr. MarcusCullinan from 30th April 1999 to obtain repayment of this facility and were given variousexcuses all recorded in Managers Diary Memos four of which assume relevance.

The first (Tendered Document SM625) records that when he called at Sandaun Motel on30th June 1999 the Bank Manager was told "that Makis (sic) diverted his flight to POM fromWewak on Tuesday 29/6/99".

The second (Tendered Document SM626) records that on 2nd July 1999 "Maki (sic)Cullinan called from Airways Motel POM this morning to discuss above matter" promisingto settle the debt in Port Moresby that day.

The third (Tendered Document SM627) records that on 14th July 1999 "Makis (sic)Cullinan is still in NCD", that he was scheduled to return on Friday 16th July 1999 and thatthe Manager would report further on 20th July.

The fourth (Tendered Document SM628) dated 20th July 1999 records that "Makis calledin person to let us know that he is back in town. Also advised that his parents have alsoreturned back from Brisbane".

On 3rd August 1999 the Bank wrote to Mr. Brian Cullinan threatening legal proceedings ifthe debt of K40,615.38 was not cleared by 17th August 1999.

A copy of this letter will be Tendered Document SM629.

These documents not only show the Cullinan's attitude to paying debts but confirm Mr.Marcus Cullinan's presence in Port Moresby and at Airways Hotel up to 16th July 1999 andthe professed inability to meet a liability of just over K40,000.00.

The first cheque drawn from the Fleet Limited account after the K4.77 million wasdeposited was cheque # 583106, a copy of which – taken from Commission DocumentDCD40 – will be Tendered Document SM630.

The cheque is dated 23rd August 1999, drawn in favour of Brian Cullinan for K41,332.99signed by Mr. Marcus Cullinan and was banked at Westpac Bank Vanimo on 23rd August1999.

The cheque butt for this cheque – a copy of which taken from Commission DocumentDCD39A will be Tendered Document SM631 confirms the date and payee and shows thepayment as for "LOAN ACCOUNT" and at the bottom the word "CLEARED".

Plainly, this money was used the day before actual "Completion" to pay off this loan.

(e) It will be recalled that the financial statements for 1997 and 1998 showed that four new vehicleswere acquired by Sandaun Motel in 1997 at a cost of K166,000.00 and that Mr. Tulake gave evidenceabout the vehicles being leased.

The cheque payment records produced by Mr. Marcus Cullinan (Commission Document39C) contain three faxed letters all dated 23rd August 1999 from AGC (Pacific) Limited alladdressed to the Manager of Westpac Bank Vanimo giving payout details for leases onthree motor vehicles being:­

(i) Account LM01505656 (Brian Peter Cullinan) Toyota Landcruiser 10 Seater Troop CarrierRegistration No. VAA­479 – payout K15,663.88.

(ii) Account LM01505657 (Nia Cullinan) Toyota Hilux 4 X 4 Ute Registration No. VAA­480 –payout K11,627.00.

(iii) Account LM00507218 (Brian Peter Cullinan) Nissan Patrol Registration No. MAC­172 –payout K3,442.58.

The aggregate payout for all those vehicles was thus K30,733.46.

Copies of these letters will be Tendered Document SM632 to SM634.

The "letter of offer" from Mr. Brian Cullinan (Tendered Document SM209) represented"the motel operates 3 Hire Cars only available to Guests and are constantly booked, somelong term".

None of these vehicles were included in the "Assets Schedule" in the Agreement – therewas only one vehicle – a Toyota double cab Registered No. H1489.

The second cheque drawn on the Fleet Limited account after the K4.77 million wasdeposited was cheque # 583107 a copy of which – taken from Commission Document 40– will be Tendered Document SM635.

The cheque is dated 23rd August 1999, drawn in favour of AGC Finance for K30,733.48and was banked at Westpac Bank in Vanimo on 23rd August 1999.

The cheque butt for this cheque – a copy of which taken from Commission DocumentDCD39A will be Tendered Document SM636 confirms the date and payee and shows thepayment as for "LEASE PAYMENT 3 X CARS" and at the bottom the word "CLEARED".

Plainly this cheque was used to payout the three vehicles it was represented the DFRBBoard would be receiving as part of the assets of Sandaun Motel but which had not beenincluded in the "Asset Register" and which were thus not handed over at Completion. Thatconduct was not so far as we can see even detected let alone questioned.

(f) The next cheque drawn on the Fleet Limited account was cheque # 583108 copies of the front andreverse of which taken from Commission Document DCD40 will be Tendered Documents SM637and SM638.

This cheque was drawn on 24th August 1999 – the date of Completion – payable to cashfor K50,000.00, signed by Mr. Marcus Cullinan and cashed on 24th August 1999 atPNGBC Vanimo with the cash being taken as to K25,000.00 in notes of K50, as toK20,000.00 in notes of K20 and as to K5,000 in notes of K10.

This was the first of the cheques drawn to be recorded as presented.

The next cheque drawn was cheque # 583109 – copies of the front and reverse of whichtaken from Commission Document 40 will be Tendered Documents SM639 and SM640.

This cheque was drawn on 25th August 1999 – the day after Completion – again payableto cash for K50,000, signed by Mr. Marcus Cullinan and cashed at 16.48 on 25th August1999, with the cash being taken as to K30,000.00 in notes of K50, and as to the residualK20,000.00 in notes of K20.

The cheque butts on both cheques – copies of which taken from Commission DocumentDCD30A will be Tendered Documents SM641 and SM642 – confirm what is shown onthe cheques and show them as being for "MATMAT" with the same word on the bottom ofboth "CLEARED".

When asked what the first of these cheques were for Mr. Cullinan said, "Matangara in myhome in Brisbane, my house in Brisbane. That is the street, Matangara Street" (Transcriptp.179).

He then said he thought the money was for traveller's cheques.

Of the second cheque he gave the same explanation.

He said he bought traveller's cheques, which he bought from Westpac Bank or PNGBC ormaybe even ANZ Bank.

He was not able to specify where the traveller's cheques were purchased "because I drawa substantial amount of cash because of the decline of the Kina. I draw a lot of cash outspecifically for changing into traveller's cheques or foreign currency which I keep in a safeplace where I know where it is. That is basically all those".

Apparently, Mr. Cullinan did not consider that the Commission was well acquainted with thelimitations imposed on foreign currency dealings in traveller's cheques and cash in foreigncurrency and had formulated this explanation to explain these cash withdrawals and latercash withdrawals.

The evidence is clear that both cheques were cashed and the cash was taken in PNGcurrency.

The first was cashed as the first transaction recorded on the Fleet Limited account on 24thAugust 1999 – when the DFRBF delegation was still in Vanimo and the second on the dayafter that delegation left Vanimo.

As we will show later a great deal more was taken out in cash on the following days.

(g) Cheque # 583113 drawn on the Fleet Limited account was dated 26th August 1999, originallypayable to cash but then altered to "SANNIA" for K500,000.00 and signed by Marcus Cullinan.

A copy taken from Commission Document DCD40 will be Tendered Document SM643.

The cheque butt – a copy of which taken from Commission Document SM39A will beTendered Document SM644 confirms the date and amount, shows the payment to"SANNIA A/C" and again has the word "cleared" at the bottom. We will come back to thischeque shortly.

24.11 Mr. Naru buys the Ex DFRBF Mitsubishi Pajero

(a) We have dealt in our separate Opening on the subject "Tenders Procedures" and briefly at 22.10above with the arrangements made in July 1999, and soon after Mr. Kila returned to work, for Mr. Kilato trade­in the Mitsubishi Pajero motor vehicle of which he had had the use since November 1998 toFreeway Motors and to exchange the vehicle for a Toyota Landcruiser VX at a "changeover" cost tothe DFRBF Board of K59,500.00.

We have there shown how the transaction was delayed by Mr. Kila putting a "stoppayment" on the DFRBF cheque for K59,500.00 and suggested that by this action Mr. Naruwas able to put in place his clear plan to purchase the Mitsubishi Pajero from FreewayMotors for the trade­in price of K20,000.00.

(b) We have now shown that on the day Mr. Naru left Vanimo – 24th August 1999 – Mr. MarcusCullinan had cashed the Fleet Limited cheque # 583108 for K50,000.00 which was taken in notes ofK50, K20 and K10 denominations.

(c) Two days later on 26th August 1999 and before he went to the DFRB Board meeting (which wentfrom 1:30pm to 3:00pm) Mr. Naru or someone on his behalf had been at the Westpac Bank at Waiganibuying a bank cheque # 141182 for K10,000.00 in favour of Freeway Motors.

Copies of the front and reverse of the bank cheque application taken from CommissionDocument DCD127 will be Tendered Documents SM645 & SM646.

It will be noted that Mr. Naru signed the front of the application form and from the reversethat the transaction took place at 12:24; that K7,000.00 was paid in notes of K50denomination, K10 by a note of that denomination, that K3,000.00 was debited to a bankaccount and that K5.30 was given in change.

Later on the same day a second bank cheque # 148436 was purchased from the samebank also for K10,000.00 and also in favour of Freeway Motors.

Copies of the front and reverse of this second bank cheque application taken fromCommission Document DCD127 will be Tendered Documents SM647 & SM648.

It will be noted the front of the application form appears to be signed for Meltuna 23 Ltd bya "K. Pople" and from the reverse that the transaction took place at 15:48 and that itappears the cost of the cheque and stamp duty was paid from a bank account.

Copies of the two bank cheques taken from Commission Document DCD127 will beTendered Documents SM649 & SM650.

(d) The bank statements for Mr. Kelly Naru's account (number given) record a debit at Westpac BankWaigani of K3,000.00 on 26th August 1999 and show credit funds in such account after that debit ofalmost K12,000.00.

A copy of the relevant statement taken from Commission Document DCD202 will beTendered Document SM651.

This debit reflects the K3,000 for the bank cheque obtained by Mr. Naru which was not paidin cash.

(e) The bank statements for the account of Meltuna Twenty Three Pty Limited with Westpac Bank PortMoresby (number given) record a debit of K10,004.70 on 26th August 1999 and show credit funds inthat account after that debit of just over K2,000.00

A copy of the relevant statement taken from Commission Document DCD313 will beTendered Document SM652.

(f) These two Westpac Bank cheques # 141182 and # 148436 each for K10,000.00 and aggregatingK20,000.00 were used by Mr. Naru to purchase in his own name on 31st August 1999 the DFRBFMitsubishi Pajero CAI­362 which had been traded in to Freeway Motors.

Copies of the application form, invoice and two bank cheques in respect of suchtransaction taken from the Freeway Motors file (Commission Document DCD25) will beTendered Documents SM653 to SM656.

(g) The Commission would, in our view, require Mr. Naru to explain the source of this K7,000.00 cashin K50 notes given the facts:­

(i) There were sufficient funds in his bank account not to require cash.

(ii) There was no need for Mr. Marcus Cullinan to draw sums of K50,000 cash on each of24th and 25th August 1999 unless for separate purposes as he could simply have drawnK100,000.00 in one cheque.

(iii) Cash is the currency of corruption and an intelligent person does not bank cash soderived but uses it mixed with legitimately obtained funds to avoid detection.

In the absence of a reasonable verifiable explanation we would ask that the obviousinference be drawn.

24.12 Events to 31st August 1999

(a) On 30th August 1999 Mr. Kila, in pursuance of the DFRB Board resolution of 26th August, sent aninter­office memo to Mr. Yates of KSL requesting that the K60,000.00 working capital be credited tothe Sandaun Motel account at Westpac Bank Vanimo by 1st September 1999.

That memo – a copy of which taken from Commission Document DCD23 will beTendered Document SM657 attached copies of Mr. Cullinan's letter and of the Boardminutes of 26th August 1999.

(b) On 31st August 1999 KSL drew DFRBF cheque # 328568 in favour of Sandaun Motel.

Copies of the cheque requisition and cheque taken from Commission Document DCD13will be Tendered Documents SM658 & SM659.

(c) The Carter Newell Invoice 17360 (Tendered Document SM339) contains the following entries:­

"30 Aug 99 Conference with Kelly Naru, copy title and certificate of incorporation, arrangefor search of Company Register and arrange for copies of certificates etc.30 Aug 99 Review report to client.31 Aug 99 Travel to Vanimo for settlement.31 Aug 99 Settlement, Vanimo.31 Aug 99 Search of Banora LTD's Company Register and Business Name 'SandaunMotel'."

The only documents we are able to locate on the related Carter Newell file (CommissionDocument 3B) which support the first and last entries are two searches both dated 1stSeptember 1999 (ordered by Mr. Seno Wekina) being:­

(i) a full search of Banora Trading Limited including copies of "everything on file". A copy ofthis search will be Tendered Documents SM660 to SM664.(ii) a full search of Sandaun Motel. A copy of this search will be Tendered DocumentsSM665 to SM668

There is also a copy of the State Lease title for Allotment 11 Section 6 on the file.

(d) The Banora Trading Limited search (SM660­SM664) is dated 1st September 1999 and noted as"Rec'd by IKV 2/9/99".

It shows that the company was re­registered on 2nd September 1999 (under theCompanies Act 1997); the directors, secretary and shareholders were as shown in theAgreement, that there was no constitution and no registered charges and that the last

Annual Return filed was for the year ending 30th June 1996 and lodged on 26th August1996.

On the Carter Newell file (Commission Document 3B) and stapled together are theoriginal copies of all documents on the Companies Office file for Banora Trading Limitedand a photocopy of them.

This search was clearly obtained, as we will see, after the transaction was completed andnot, as is usual practice, before completion.

As Blake Dawson Waldron had much earlier pointed out to Mr. Naru, Annual Returns hadnot been filed for three (3) years and the company was, in consequence, susceptible toderegistration.

The failure to earlier address this aspect, which had been drawn to Mr. Naru's notice, againevidences the apparent lack of concern for DFRBF's interests.

(e) The Sandaun Motel search (SM665­SM668) is again dated 1st September 1999 and date stampedas received on 13th September 1999.

It was not ordered until 1st September 1999 (SM666) and the delay is explained by theinterim fax from AC Fox & Associates to Carter Newell on 2nd September 1999 (SM668)that the same "Sandaun Motel" was not registered.

As we have earlier pointed out this search should have been conducted prior to 30th June1999 (the Condition Satisfaction Date) to ascertain whether the Condition Precedent wassatisfied.

There is no earlier search for this name on the Carter Newell file and the negligence infailing to protect the interests of the DFRB Board by earlier making this search andadvising as to the consequence (i.e. automatic termination of the Agreement) is patent.

(f) The two entries of 31st August 1999 suggest that someone from Carter Newell travelled to Vanimoon that day and attended on settlement.

We can locate no document or notation on the Carer Newell file (Commission DocumentDCD3B), which substantiates those entries.

(g) Mr Wekina said that after he came back from Vanimo to Port Moresby he arranged the searchesreferred to in (c), (d) and (e) above which he identified. He also identified the bundle of documentsobtained from the Companies office for Banora Trading Limited as referred to in (d) above.

Mr Wekina said the purpose of obtaining the search for Banora Trading Limited, he thought "was to tryand reconstruct from the Companies office a corporate register…with whatever documents they hadthere on file". He said he was not asked to do anything on this aspect – which was clear as thedocuments were still in a bundle on the file. He also said the search showed annual returns were onlyfiled up to mid 1996; agreed that at settlement a check should have been made to ensure they werefiled up to at least 1998 but said he was not asked to do anything about that (Transcript pp.4526­8).

Of the search of Sandaun Motel, Mr Wekina said it showed Sandaun Motel was not a registeredbusiness name and again that he was not asked to do anything about that (Transcript pp.4528­9).

Mr Wekina said that his only other involvement related to assisting Mr Toua prepare a report letter tothe DFRB Board which he identified. He said his role was to provide information for that letter of whichMr Paul Toua was the author (Transcript p.4529).

We will come to that letter later in this Opening.

(h) At 31st August 1999 Carter Newell Lawyers still held in their Trust Account the deposit moneys ofK530,000.00 for the Sandaun Motel purchase which, as we have earlier seen was banked into suchTrust Account on 18th June 1999.

The banking records of Carter Newell Trust Account show that on 31st August 1999 two

cheques were paid out of that account namely cheque # 800190 for K464,000.00 andcheque # 800191 for K66,000.00 aggregating K530,000.00

Copies of these cheques and of the bank statements recording their debit on 31st Augustand 7th September 1999 respectively all taken from Commission Document DCD26 willbe Tendered Documents SM669 to SM673.

(i) It will be noted the Carter Newell Trust Account cheque # 800190 (SM669) was a computer­generated cheque dated 31st August 1999 in favour of Fleet Limited and from its reverse (SM670) thatit was banked at PNGBC Waigani branch.

This cheque was in fact banked at PNGBC Waigani on 31st August 1999 for direct credit tothe account of Fleet Limited (number given) with PNGBC Vanimo.

A copy of the deposit slip taken from Commission Document DCD30 will be TenderedDocuments SM674.

The deposit is recorded on the bank statement a copy of which is Tendered DocumentsSM615.

(j) It will be noted the Carter Newell Trust Account cheque # 800191 (SM671) was also a computergenerated cheque dated 31st August 1999 in favour of Carter Newell Lawyers General Account andthat it was banked at ANZ Bank Port Moresby on 1st September 1999.

We are endeavouring to obtain documents in relation to this cheque and will advise theCommission further when those documents have been obtained and of what we say inrelation to them.

(k) With the financial aspects thus completed and the deposit moneys accounted for less the Vendorslegal fees, the Vendors had obtained all that they were entitled to, and indeed more than they wereentitled to, under the Agreement.

We will show later why we say "more than they were entitled to" later in this Opening.

(l) It will be noted from the Fleet Limited bank statement (Tendered Document SM615) that after thebalance deposit cheque for K464,000.00 was recorded, two further cheques were presented drawnagainst that account being cheque # 583122 for K30,000.00 and cheque # 583126 for K50,000.00.

Copies of the front and reverse sides of these two cheques taken from CommissionDocument DCD40 will be Tendered Documents SM675 to SM678.

(m) Fleet Limited cheque # 583122 (SM675) is dated 30th August 1999 payable to "CASH CHRISVIHRURI" for K30,000.00 and was signed by Mr. Marcus Cullinan.

The front of the cheque shows it was presented on 31st August 1999 and the reverseshows that K15,000.00 of the K30,000.00 was taken in notes of K50 denomination and theresidual K15,000.00 applied to "VARIOUS A/Cs".

Mr. Marcus Cullinan said this cheque was for consultancy fees paid to Mr. Vihruri and thatthere was an invoice for it (Transcript p. 184).

A copy of that invoice taken from Commission Document 39C will be TenderedDocument SM679.

We have dealt earlier with the vague evidence of Mr. Marcus Cullinan regarding theengagement of Mr. Vihruri who he said conducted all the negotiations with the DFRB Boardpursuant to an oral agreement for a fee which was not discussed but which was chargedas consultancy fees (see Transcript pp. 156­159).

This evidence was given early in the Commission's hearings and at a time when Mr.Marcus Cullinan was seeking to create an impression – evident from the Transcript – that

he was only minimally involved in this transaction and that Mr. Vihruri and Carter Newell didall the work (see Transcript pp. 156–163).

Mr. Cullinan said then that Mr. Vihruri had not been paid his full consultancy fees and wasstill owed about K38,000.00 on his final invoice.

Mr. Chris Vihruri who also sought to minimise his involvement, as we have also earliershown, said that his fee – which he said was 2% of the sale price or K106,000.00 – waspaid by installments.

Mr. Vihruri said he submitted invoices for the first two installments of K30,000.00 eachwhich were paid; that he had to ask for another K7,500.00 because he was in dire straits atthe time and he was owed a balance which he said was K48,000.00 but which he thenagreed would be reduced by the K7,500.00.

Mr. Vihruri said the first two payments of K30,000.00 each were paid by cheque and theK7,500.00 in cash.

Mr. Vihruri's evidence on this aspect merits reading (Transcript pp. 237­239) as hisvagueness and imprecision as to what he was to be paid (he said K168,000) and what hehad been paid and was still owed was in our view, quite unsatisfactory.

Whilst we will deal with the later payments to Mr. Vihruri when we look at where the K5.3million (less K66,000.00 legal fees) went to, this cheque does evidence the payment of thefirst installment of K30,000.00 to Mr. Vihruri.

(n) Fleet Limited cheque # 583126 (SM677) is dated 31st August 1999 payable to cash for K50,000.00and was signed by Mr Marcus Cullinan.

The reverse (SM678) is noted an signed by Marcus Cullinan "Please pay to ArnoldTautau".

The Commission is aware that Mr. Arnold Tautau is a long­term barman at Sandaun Moteland will recall that he failed to keep an appointment to give evidence to the Commission inVanimo.

As will become more apparent as we proceed, Mr. Tautau was one of a number of staff atSandaun Motel used by Mr. Marcus Cullinan to obtain cash and make investments andforeign exchange remittances, which were for Mr. Marcus Cullinan's benefit.

(o) The significance of this withdrawal may assume relevance when we know if anyone from CarterNewell (other than Mr Wekina who did not so travel) in fact travelled to Vanimo on 31st August 1999as the invoiced legal costs entries suggest.

24.13 Why working Capital was required

(a) When considering Mr. Marcus Cullinan's request for K60,000.00 for working capital we have earlier(see 24.9(e) above) said that it was surprising in light of the cash and Inventory items in the 1998balance sheet and the representations as to the profitability of the Sandaun Motel that no onequestioned why there was a need for working capital to be provided by the DFRB Board at all.

(b) When earlier evaluating the Share Sale and Purchase Agreement and the settlement procedureson 24th August 1999 we also commented on:­

(i) the lack of provision in the Agreement in relation to Inventory and Stock levels and theneed to establish that at Completion adequate levels of Inventory and stock (having regardto the figures in the 1998 balance sheet) were held.

(ii) the lack of provision in the Agreement regarding the payment of directors fees anddistributions to shareholders (other than wages) between 31st December, 1998 andCompletion to protect the value in "liquid" shareholders funds which were being purchased,the lack of requirement for historical financial records to be handed over on Completion,the need at completion to check the liquid funds position and what if any directors fees had

been paid and distributions had been made to shareholders and the need on Completion toobtain and check the historical financial records and in articular the bank records.

(iii) though the Agreement dealt with alterations of bank signatories on Completion theneed to identify bank accounts, check the historical bank records to establish balances andto take custody of the cheque and deposit books.

(c) We have seen that nothing in these respects was done on Completion and that indeed the bankaccounts were left in the hands of the Vendors at the express instruction of Mr. Naru.

(d) The request of Mr. Marcus Cullinan on 24th August, 1999 that the DFRB Board provideK60,000.00 for working capital, for among other things food and beverages inventory, petty cash /change fund and recurrent costs for wages, electricity, Hitron and fuel should, in our view, haveprovoked questions about what had happened to the K93,000.00 in Inventory shown in the 1998balance sheet and to the liquid shareholders funds (as shown in the 1998 balance sheet and asaugmented by the profit from 1st January to 24th August, 1999) yet no questions were raised save byMr. Kila's letter to Carter Newell of 26th August, 1999.

(e) An explanation was clearly necessary and we sought to find that explanation as it seemed boththat Inventory must have been run down and that the company must have been cash stripped.

The 1991 balance sheet for Banora Holdings Pty Limited (Tendered Document SM62)recorded cash at bank of K1,076.00 and stocks of K2,600.00.

The 1998 balance sheet recorded:­

(i) cash at bank of K110,000.00 (SM457) said by Note 5 (SM459) to be held as toK60,000.00 in PNGBC Vanimo and as to K34,000.00 in Westpac Bank Vanimo and as toK16,000.00 in cash on hand for "Pokies, Petty Cash, change fund".

(ii) Inventories of Food, Beverages and Cleaning supplies of K93,000.00.

At 24th August, 1999 Mr. Marcus Cullinan was asking for K60,000,.00 (SM616A) whichincluded K25,000.00 for food and beverages inventory and K4,600.00 for the Petty Cash /Change Fund.

(f) With no stock take of the food and beverages or other inventory taken on Completion the positioncannot be stated with certainty but it is plain that the Inventory (probably overstated) of K93,000.00 at31st December 1998 had been run down to the extent that by 24th August 1999 there was an injectionof K25,000.00 required.

This is significant when one bears in mind that food and beverages inventory is brought toaccount at cost and is then marked up by at least 100% on sale. Thus K93,000.00 in foodand beverages inventory should produce in the order of K180,000 in income. Thesignificance will emerge shortly.

It was, in our view, by design and not by accident that no stock take was made onCompletion and that will, we say, become clear when we come to Mr. Uware's trip toVanimo in September 1999 as will who was preventing that stock take.

(g) In relation to liquid funds the position is more easily dealt with and what occurred is quite clear.

The 1997 accounts (SM445 and Note 2 on SM448) showed cash assets at 31st December,1997 as follows:­

Cheque Account PNGBC Vanimo K32,000.00Cheque Account Westpac Vanimo K54,000.00Cash Drawer – Pokies payout K12,000.00Petty Cash K2,000.00Change fund (Bar, Restaurant etc) K2,300.00K102,300.00

The 1998 Accounts (SM457 and Note 5 on SM459) showed cash assets at 31st December1998 as follows:­

Cheque Account PNGBC Vanimo K60,000.00Cheque Account Westpac Vanimo K34,000.00Pokies, Petty cash, Change fund K16,000.00K110,000.00

In Part 2 of this Opening at 19.2 (b) above (Transcript p.4085) we said that though bankbalances could be established from bank statements they could not be reconciled forunrecorded deposits and unpresented cheques and thus took these items no further at thatstage.

We also showed how the figures for the Cash Drawer and Petty Cash and Change Fundwere not real verified figures but (overstated) guesstimates given to Mr. Michael Tulake byMr. Marcus Cullinan (see 19.2 (c) and (d) above at Transcript pp. 4086­7).

With this request for working capital requiring examination it was necessary to revisit thesematters.

(h) By questioning witnesses and issuing Summons we were able to establish that the Sandaun Motelbusiness operated three (3) bank accounts during 1999 being:­

(i) An Account No 501166001 styled "Banora Holdings Pty Ltd T/as Sandaun Motel" withWestpac Bank ,Vanimo

(ii) An Account No 2224508 styled "Banora Trading" with Westpac Bank, Vanimo

(iii) An Account No 8422 styled "Sandaun Motel Pty Ltd" with PNGBC, Vanimo.

We now turn to each of these accounts.

(i) The Westpac Bank Vanimo Account No 501166001 was established prior to 1st January 1996 andwas closed in March, 2000.

The bank statements are contained in Commission Document DCD211.

The statements show the account was reasonably active during 1998 up to October andwith many of the debits recorded being in round thousands of Kina. There was little activityon the account in November and December 1998.

The closing balance of this account at 31st December 1998 and opening balance as at 1stJanuary, 1999 was a credit balance of K55.28.

During the period 1st January 1999 to 31st August 1999, this account was essentiallyinoperative. We have drawn up a schedule from the bank statements found inCommission Document DCD211 of transactions for this period and that schedule isTendered Document SM680.

It can be seen there was one deposit only of a cheque from Bank of Papua New Guinea ofK1,485.00 on 17th February, 1999 and that the credit balance of K55.28 plus this depositwere eroded away by bank charges and a few small cheque payments to the point whereby 31st August, 1999 the account was overdrawn to the extent of K3,078.12.

This is the account to which the DFRBF working capital injection of K60,000.00 wasdirected to be paid and the account was clearly activated in early September, 1999 as isevidenced by the bank statement a copy of which will be Tendered Document SM681.

It will be noted from this bank statement that the closing balance at 31st August, 1999 ofK3,078.12 overdrawn was eliminated by a deposit of K3,078.12 on 3rd September, 1999.

That deposit was of Fleet Limited cheque # 583135 dated 3 September, 1999 forK3,078.12 in favour of Westpac. A copy of the cheque butt for this cheque taken from

Commission Document DCD39A will be Tendered Document SM682. The purpose ofpayment is "SANDAUN MOTEL A/C CLEARED NEW SANDAUN MOTEL STARTED".

It will be further noted that a second deposit of K573.51 was recorded again on 3rdSeptember and then eliminated by bank charges for August, 1999 resulting again in a nilbalance.

That deposit was again of Fleet Limited cheque # 583137 dated 3rd September forK573.51. A copy of the cheque butt for this cheque will be Tendered Document SM683.

It will finally be noted that the deposit of the DFRBF cheque for working capital ofK60,000.00 is recorded on 7th September, 1999.

Two things can be said of this account on both are crystal clear.

Firstly as at 1st January, 1999 the balance of this account was a credit balance of at mostK55.28. There were no outstanding deposits as no deposit at all was made until six weekslater on 17th February, 1999. There were clearly bank fees due which eliminated the creditbalance and there may have been unpresented cheques. At the most optimistic thebalance of account was K55.28.

Secondly as at the "handover" date this account was in debit to the tune of K3,078.12 butthat debit and subsequently recorded August, 1999 bank charges of K573.51 wereeliminate by cheques paid by Fleet Limited to the result there was a nil balance whenDFRBF transactions began to be recorded.

(j) The Westpac Bank Vanimo Account No 2224508 was established prior to September, 1998 andwas closed on 27th August, 1999.

The bank statements are contained in Commission Document DCD294.

The statements show the account was quite active during 1999 and again it is noteablethat there are a number of debits recorded being in round thousands of kina.

The closing balance of this account as at 31st December, 1998 and opening balance as at1st January 1999 was an overdrawing of K3,098.81.

Though the bank statement shows deposits of K8,257.55 on 4th January 1999 andK4,499.69 on 8th January, 1999 there was no further deposit until 11th January 1999.Against that the last cheque presented on 31st December, 1998 was cheque # 543185;there are a number of cheques with lower numbers presented later (including # 0543137 –K2,073.60, # 0543139 – K1,390.87, # 0543138 – K6,274.35, # 0543151 – K445.00 and #0543161 – K1,700.00) and cheques were presented on 8th January, 1999 for an aggregateK16,194.75 which took the balance of account at that day to an overdrawing of K6,536.32.

Again we have drawn up a schedule from the bank statements found in CommissionDocument DCD294 for this account showing transactions for the period 31st December,1999 until 27th August, 1999 and that schedule is Tendered Documents SM684 toSM688.

It is plain from the transactions in the first half of January that this account was in overdraftand that the overdraft balance rose from K3,098.81 at 31st December, 1998 to K6,536.32at 8th January, 1999 and then to K23,656.06 at 13th January, 1999 with the deposits failingincreasingly to cover the cheques which were being presented and with a number of earlierwritten cheques being then unpresented.

The cash book balance as at 1st January, 1999 having regard to the unpresented chequeswould have been unlikely to have been higher than the recorded overdrawn bank balanceof K3,098.81.

It is also plain that at times when there were funds to the credit of this account they weresystematically withdrawn often in sums of round thousands of kina and that the regularity ofthis clear course of conduct increased from May (SM687) through to August (SM688).

The selection of these round figure cheques drawn in this period which we have obtainedare noted (the cheques being in Commission Document DCD314) and show large sumsbeing taken out by cash cheques in notes usually of K50 denomination by the SandaunMotel employees Arnold Tautau (K25,000.00), Eki Angale (K15,000.00), Mr. MarcusCullinan's relative Graham Darling (K12,000.00 and K15,000.00), by Marcus Cullinanhimself (K5,000.00) and by unspecified persons (K30,000.00 and K11,000.00). Theseselected transactions alone account for K113,000.00 stripped out of this account in cash inthis manner and the modus operandi is quite clear.

By 23rd August, 1999 – the day before completion – the balance of this account was onlyK1,750.36 to which a deposit of K3,599.92 was added to take the balance to K5,350.28.

On 25th August, 1999 the Fleet Limited cheque # 583113 for K500,000.00 which we havedealt with in 24.9 (g) above and which was said to be for banking to the "SANNIA A/C" wasin fact deposited into this account and on 27th August, 1999 the sum of K505,333.62 waspaid out of this account by cheque # 541782 in favour of "SANNIA A/C NO # 6000170936"by Mr. Marcus Cullinan.

A copy of this cheque taken from Commission Document DCD314 will be TenderedDocument SM689.

The balance in the account of K16.66 was taken up in bank charges and the account wasclosed on 27th August, 1999.

This was quite clearly the main operating account of the Sandaun Motel up to late August1999.

It began with a debit balance of K3,098.81 on 1st January, 1999 and between that date and27th August, 1999 a total (disregarding the Fleet Limited cheque for K500,000.00) ofK545,445.96 was deposited into the account and a total (disregarding the sameK500,000.00) of K542,347.15 was paid out of the account.

Thus whatever had not been paid out of this account (which had a debit balance at 1stJanuary, 1999) for the legitimate business expenses of Sandaun Motel during 1999 hadbeen stripped out in cash to the result there was a nil balance and the account was closedbefore DFRBF took over.

(k) The PNGBC Vanimo Account No 8422 was established in May, 1996 and was operating until atleast June, 2000.

The original signatories to the account were Mr. Brian Cullinan and Mr. Marcus Cullinanfrom May, 1996 to 17th November, 1999.

They were then replaced by any two of Colonel Renagi, Mr. Marcus Cullinan and Mr.Michael Tulake from 17th November, 1999 to 27th November, 2000.

Copies of the bank authorities taken from Commission Document DCD194 will beTendered Documents SM690 to SM695.

The bank statements for this account are in Commission Document DCD194.

The closing balance of this account as at 31st December 1998 was K271.74 and therewere few but regular transactions recorded between that date and 16th August, 1999 whenthe account balance was K103.03.

We again prepared a schedule from the bank statements found in CommissionDocument DCD194 showing transactions for the period 1st January to 31st October 1999and that schedule is Tendered Document SM696.

With that schedule prepared it rapidly become apparent to us that with the sole exceptionof a deposit of K1900.00 on 5th March, 1999 made by direct credit from Goroka thisaccount related solely to the receipt and disposal of poker machine commissions receivedby Sandaun Motel from Lord and Company in respect of the months from December 1998to October 1999.

The system was perfectly clear – the cheque from Lord and Company for a given month(as detailed in Commission Document DCD51A) was banked to the credit of this accountat about the middle of the next following month.

The amounts so deposited were:­

Month Date of Deposit Amount Cheque NoDecember 1998 14/01/99 K38,418.42 877719January 1999 15/02/99 K24,619.57 877734February 1999 11/03/99 K15,531.72 877749March 1999 15/04/99 K30,208.39 877684April 1999 13/05/99 K20,456.68 691717May 1999 15/06/99 K29,957.29 691733June 1999 07/07/99 K18,678.13 691760July 1999 13/08/99 K29,082.29 691777August 1999 10/09/99 K29,184.34 691795

K236,136.83

Shortly after the Lord and Company cheques were banked the funds credited to theaccount (including the K1900 from Goroka) were systematically withdrawn in cashessentially in denominations of K50, K20 and K10 in three cases using the name of theSandaun Motel barman Arnold Tautau.

The cheques in respect of these withdrawals showing the cash break­up on the reverse arefound in Commission Document DCD254.

The amounts so withdrawn were:­Date Cheque No Amount Paid to

14/01/99 580026 K38,000.00 * Cash15/02/99 7570 K25,500.00 Cash11/03/99 7571 K17,400.00 Cash15/04/99 7572 K30,150.00 Cash14/05/99 7573 K20,400.00 Cash15/06/99 7574 K29,900.00 Cash20/07/99 7575 K18,423.00 Cash16/08/99 7576 K29,480.00 Cash13/09/99 7577 K29,184.34 Cash

K238,437.34 * This cheque was signed by Mr BrianCullinan. All other cheques weresigned by Mr Marcus Cullinan.

What occurred is perfectly clear and all the poker machine income was thus bled out ofBanora Trading Limited up to and including that income for August, 1999.

The income for August 1999 was appropriated by Mr. Marcus Cullinan in cash after thedate of the takeover by the DFRB Board and was able to be so appropriated because Mr.Naru had allowed the alteration of the bank signatories to be delayed and because DFRBFhad not put expenditure controls in place.

We will come back to the September 1999 commission a little later.

With this modus operandi so clearly established for 1999 and an opening balance as at 1stJanuary 1999 in this account of only K271.74 we prepared a like schedule of transactionsfor 1998 using the bank statements (found in Commission Document DCD194), the Lordand Company cheque details (found in Commission Document DCD51A) and the cheque

withdrawal details (found in Commission Document DCD254) and that schedule will beTendered Documents SM697 to SM699.

Though there are more deposits to the account than the Lord and Company cheques theamounts of commission on poker machines from Lord and Company deposited to thisaccount in 1998 were:­

Month Date of Deposit Amount Cheque No.December 1997 14/01/98 K47,903.00 000398January 1998 17/02/98 K28,823.61 691611February 1998 16/03/98 K32,590.80 691631March 1998 22/04/98 K35,177.15 691649April 1998 26/05/98 K6,000.90 691666May 1998 11/06/98 K26,819.99 691681June 1998 14/07/98 K24,280.43 877612July 1998 12/08/98 K33,731.53 877631August 1998 09/09/98 K31,683.79 691696September 1998 15/10/98 K23,594.39 877647October 1998 16/11/98 K21,393.56 877665November 1998 14/12/98 K13,744.45 877701

K325,743.60The major amounts withdrawn in 1998 were as follows:­

Date Cheque No Amount Paid to05/01/98 7547 K700.00 Not Checked16/01/98 7548 K50,700.00 Cash17/02/98 7550 K28,000.00 Cash18/02/98 7551 K1,000.00 Cash02/03/98 7552 K1,900.00 Cash06/03/98 7553 K8,000.00 Cash13/03/98 7557 K700.00 Cash17/03/98 7556 K32,594.50 Sannia27/04/98 7558 K36,000.00 Cash26/05/98 7559 K6,000.00 Cash09/06/98 7560 K6,400.00 Cash11/06/98 7561 K26,800.00 Cash14/07/98 7562 K25,000.00 Cash13/08/98 CNTR K34,000.00 Cash09/09/98 7563 K38,900.00 Cash16/10/98 7564 K23,600.00 Cash17/11/98 7565 K21,600.00 Cash20/11/98 7566 K1,300.00 Cash08/12/98 7567 K40,000.00 Cash14/12/98 7569 K20,500.00 Cash

K403,694.50Again the pattern is clear with K403,894.50 bled out of Banora Trading Limited in 1998through this account in cash.

With this exercise complete, the amounts held to each of these accounts established as at 31stDecember 1998 and at the time DFRBF took over and the balance in respect of the PNGBC accountestablished at 31st December 1997, we also sought to ascertain the bank balances at the other twoaccounts as at 31st December 1997 and the result was in total as follows:­

Account 31/12/97 Bal 31/12/98 Bal Takeover Bal.

Westpac 501166001 K77,143.77 K55.28 cr NilWestpac 2224508 Not available K3,098.81 dr NilPNGBC 8422 K79.70 cr K271.74 cr K103.03 cr

Through the absence of statements for the Westpac Account No 2224508 as at 31stDecember 1997 (which the Bank has been unable to retrieve) limits what can be concludedit is plain that the balance shown in the 1997 financial statements (SM448) for the PNGBCVanimo Account of K22,000.00 was massively overstated as the balance was only K719.70and it is likely the balance so shown for the Westpac Vanimo Account of K34,000.00 wassubstantially understated when the balance of one only of the two accounts wasK77,143.77.

There is no evidence that there was a systematic bleeding of funds out of the threeaccounts in 1997.

The conclusions, which can be drawn in respect of 1998 are, in our submission, quite clear.

The 1998 balance sheet (SM457) and Note 5 to it (SM459) falsely showed the balanceheld in the PNGBC Vanimo account at K60,000.00 when that account was only in credit tothe extent of K271.84 and it additionally falsely showed the balance held in the WestpacVanimo Account at K34,000.00 when one account was in credit to the extent of onlyK55.28 and the other was overdrawn to the extent of K3,098.81. In the result the item"Cash at Bank – K110,000" in the 1998 balance sheet (SM457) was overstated by overK112,000.00.

This adds to the comments earlier made about the falsity of the accounts prepared by Mr.Michael Tulake and of the explanations he gave in evidence but has a significantconsequence for Mr. Marcus Cullinan. Mr. Cullinan signed the "Statement by Directors" inthe 1998 Accounts (SM453), which included the "true and fair view" statement both as tothe affairs and results for the period of "the Organisation".

Mr. Marcus Cullinan signed all the cheques whereby K403,694.50 was taken out of thePNGBC Account on the systematic basis we have shown and also signed the chequeswhereby both the Westpac accounts were overdrawn to virtual zero balance during 1998.The systematic nature of his conduct renders it undeniable that he knew the "Cash at Bank– K110,000.00" included in the balance sheet was false and further renders it undeniablethat he knew virtually all the liquid funds had been "bled out" of the company in cash by31st December 1998 yet he "signed off" on accounts which did not disclose that fact andwhich represented that the trading profit after tax of K633,107) (see SM461) for 1998 wasretained in the company as at 31st December 1999 (see SM457).

Section 420 (1) of the Companies Act deals with knowingly false statements in respect of adocument required for the purposes of the Act rendering such conduct an offence for whichthe penalty is prescribed by Section 413 (4) of the Act – a fine not exceeding K200,000.00or imprisonment for a term not exceeding five years or both.

There is clear evidence of numerous offences under the Companies Act involving Mr.Marcus Cullinan of which this is but one and in our submission the Commission would beobliged to advise the constituting authority that he should be referred to the Registrar ofCompanies for possible prosecution action pursuant to Section 418 of the Companies Act.

The conclusions, which can be drawn in respect of the period 1st January 1999 to the pointwhere DFRBF "took over" are again, in our submission, quite clear.

All the liquid funds – including K238,437.34 from the PNGBC Account – were "bled" out ofthe company as were all other funds from the two Westpac Accounts on a continuing andsystematic basis to the result that when DFRBF "took over" there were "NIL" balances inboth the Westpac Bank accounts and a miserable credit balance of K103.03 in the PNGBCaccount. Even after the DFRBF "took over" and when the cheque from Lord & Company forthe August, 1999 poker machine commissions of K29,184.34 was banked on 10thSeptember, 1999 Mr. Marcus Cullinan was able to "help himself" to that sum and withdrawit in cash on 13th September, 1999 because the bank account signatories had not been

changed and DFRBF had no external financial controls in place.

Finally what occurred with the "Cash at Bank" also, in our submission, enables inferencesto be drawn in respect of the other liquid fund items for the poker machines cash drawer,petty cash and the change fund. It could in our submission fairly be inferred with theabsence of cash in the bank at 1st January 1999; the fact Mr. Brian Cullinan was at 25thJanuary, 1999 seeking to borrow K40,000.00 for a medical trip to Australia and theevidence of Ms. Rita Moteko as to what petty cash was held that there would have beenminimal cash held and that the sum of K16,000.00 for this item was overstated in the 1998Accounts.

With the clear evidence of "cash stripping" in 1999 and the virtual zero bank balances atthe date DFRBF "took over", coupled with the request at 24th August, 1999 of Mr. MarcusCullinan including K4,000.00 for "Petty Cash / Cheque Fund" it could in our submission befairly inferred there was no cash held at the time DFRBF "took over" as all the availablecash had clearly been "stripped".

(m) Mr. Marcus Cullinan gave evidence to the Commission on 9th July 2001 and his evidence in fullwas as follows:­

Q: "Why would there have been a need for a cash input of working capital in a companythat was purchased or assessed the value for purchase purposes of K5.3 million and whichat 31 December 1998 was said to have a K110,000 in liquid funds?

A: I do not know.

Q: Well, you are the one who would know. What I am asking you is when I look at thosefinancial statements for 1996, 1997, 1998 ­ I will Just go through the figures with you. 1996,that is in MFI MC2 it is said there areliquid funds of K63,300 and in 1997, it is said there are liquid funds ofK102,300 and in 1998, it is said there are liquid funds of K110,000 and it is being run as an ongoing business. Why would not there be working capital come 1September 1999 sufficient to keep the business going?

A: I do not know. I cannot answer that, I do not know.

Q: Well, the only answer could be is that the cash was stripped out, can it not?

A: I am not too sure. Yes, that could be.

Q: Well, why would the cash have been stripped out of the business up to the point in timewhen it was sold to somebody else?

A: I do not know.

Q: You are the only one who should know. That is why I am asking you. Why was there notcash in the business just at the point in time when DFRBF took over, where there had to bean input of liquid funds for working capital?

A: Based on that information yes.

Q: That is what I am asking. Where did the money go?

A: I am not too sure. I mean it must have been drawn out, I do not know, prior to theacquisition.

Q: You were the manager before the acquisition, were you not, and you were the managerafter the acquisition so you are the one that should be able to tell us where did all theliquidity go?

A: Based on information I think there would have been a nil balance to start off, somethinglike that. There was a request for a company loan of K60,000 which I requested the board.

Q: Why would there be a nil balance as at the date DFRBF took over, when they are taking

over a going concern? The working capital should still be in there, should it not?

A: Precisely, there should be correct.

Q: Why was it not?

A: I do not know.

Q: You must know, Mr Cullinan.

A: Yes, I think it was drawn out, yes.

Q: You and your family stripped the money out, did you, so there was no cash there?

A: I think that is precisely ­ I think that is probably right, I am not too sure.

Q: How much cash did you strip out?

A: I am not too sure.

Q: How would you establish what amount of cash you stripped out of that business?

A: Well, I think it was on that time, I mean there was you know, the execution was going, itwas a slow process of getting the finance and that from the parent company, DFRB and atthat time I was using one of these ­­­

Q: Do you understand what I am putting to you? Why would there have been any need toget money from DFRB? This is an ongoing business said to be worth for what you got paidfor, K5.3 million. The previous three years' balance sheets had very substantial cash funds.Now, why was there no cash there when DFRBF came to take over that business?

A: I am not too sure on that. That must have been drawn out.

Q: Must have been drawn out by you and your family. How much did you strip out prior toDFRBF taking over?

A: I am not too sure.

Q: How would you be able to ascertain how much money you stripped out?

A: I cannot remember. It has been a while ago.

Q: So what, K20,000, K30,000, K100,000?

A: No, no. Probably K10,000. I do not know.

Q: You run that business on K10,000 working capital?

A: No, mean I am just presuming, I do not know.

Q: Why would you think you are entitled to take the cash fund out of the business whenyou sold it as a going concern, and you sold the shares in the company in fact whichowned the money?

A: I am not too familiar with that.

Q: Well, who else would be familiar? You are the manager. You managed it before thisoccasion, before DFRBF took over and you managed it after. Who else would know?

A: I was not ­ you know, the understanding the time of ­ the time frame which was executedwould have been the appropriate time. At that time it was not handed over yet so you know,prior to that it would have been, you know, users.

Q: Why would you think you would be entitled to pull the money out before the purchaser

took over?

A: Well, I mean it was not executed at that time so I mean there was no ­ ­ ­

Q: So you can just whip the money out if they are not silly enough to stop you.

A: No, I was not ripping the money out.

Q: I did not say rip, I said whip.

A: Oh, whip. Yes, as I said it was based on the hand over take over, we were still operatingprior to the execution of the contract was done.

Q: You were operating as at settlement on a balance of nil, were you not because the cashmoney had been taken out?

A: Well, I mean it all boils down at the end of the day that when it is settled and is notsettled, you know. what you do with that is totally different, is it not?

Q: Do you understand that in companies there is ways you can get money out, you cannotjust strip money from a company?

A: I was not stripping money out. I mean it was used specifically as a day to day thing.

Q: Was not taken out by you or your family?

A: Yes, it was probably used for that purpose you know, of the motel but the money therewould have been solely on the basis as to when it was taken over what date period.

Q: Do you understand that is not relevant? It is an ongoing business, the cash stays in.

A: I thought it was an ongoing business when it is executed at the appropriate time. Prior tothat would be a different story. I was in the assumption as that.

Q: I do not understand. An ongoing business is an ongoing business. It keeps going. Themoney keeps getting turned over. The money stays in there. The stock keeps rolling over.The profit keeps rolling in and no one whips it out.

A: It probably was used specifically for other things and family stuff".(Transcript pp. 819­823)

At the time Mr. Cullinan gave this evidence we did not have the information and had notcarried out the investigations dealt with earlier.

The reluctance of Mr. Cullinan to admit what had occurred and his attempts to minimise hisrole in what occurred are both apparent when the true facts and his role are known.

His evidence probably falls short of perjury.

By way of conclusion it is plain why a working capital injection was required and it is, our submission,equally plain who was responsible for that circumstance arising and who permitted it by act oromission to arise.

25, SEPTEMBER 1999

25.1 Action at Carter Newell – 1st to 6th September 1999

(a) With the handover date for Sandaun Motel to DFRBF having passed and the total purchase price(less legal fees) paid to the Vendors there was a deal of action at Carter Newell between 1st and 6thSeptember 1999.

The Carter Newell Invoice 17360 (Tendered Document SM339) contains the following entries duringthat period:­

"1 Sep 99 Letter to Darby Kila – DFRB1 Sep 99 Document preparation drafting final report to client – conferences with chairman,Seno Wekina1 Sep 99 Document preparation continuing with final report – drafting letter to Vendor –telephone conference with Darby1 Sep 99 Document preparation continuing with Final report – drafting letter to Vendor –telephone conference with Darby1 Sep 99 Letter to Lord & Co.1 Sep 99 Review Company searches, meeting with Paul Toua to finalise report.6 Sep 99 Review letter to GM – DFRB6 Sep 99 Facsimile Sandaun Motel (Marcus Amito)6 Sep 99 Letter to Darby Kila (Final)6 Sep 99 Prepare share certificate (banora trading) revise s/cert.6 Sep 99 Document preparation finalising report to client – fax to client – fax to Banora".

(b) The first document in the related Carter Newell file which evidences what occurred is a faxedmessage from Mr. Paul Toua to Mr. Marcus Cullinan on 1st September 1999, which reads as follows:­

"We need to finalise certain legal matters required under the Agreement for Sale.

We need from you, the following:­

1. The Corporate register for our review. We note your comments to our Mr. Wekina andthe Chairman of DFRB, Mr. Kelly Naru that no corporate register exists. You are requiredby the Companies Act 1997 to compile a corporate register and keep it at the registeredoffice of the Company.

2. Confirmation in writing that all outstanding land rates and other outstanding municipalrates for water, sewerage, garbage etc have been paid up to 24 August 1999. Copies ofreceipts of payment will be much appreciated.

3. The old share certificates issued to Marlene Kupe, Natalie Pia, Dillon Cullinan, KevinApita and yourself. These share certificates need to be cancelled. If you can locate them,send them to us with the Corporate register. If not, then we must receive the following fromthe shareholders.­

i. Apply to the company to issue a duplicate share certificate for cancellation to MarleneKupe, Natalie Pia, Dillon Cullinan, Kevin Apita and yourself

ii. Provide a statutory declaration that the share certificate has

i. been lost or destroyed; andii. has not been pledged, sold, or otherwise disposed of; andiii. if lost, that proper searches have been madeiii. a written undertaking that if the holder of the shares finds or receives the sharecertificates, he will return it to the company.

4. A letter from you confirming the following: ­

I. that the Bank account signatories have been changed to include the nominated DFRB Director'sII. that, all wages, entitlements and benefits to all staff were paid out on 20 August 1999.III. that there are no encumbrances secured by any third party.

As we need to finalise our final reports to you and to DFRB, your urgent attention to thematters raised will be much appreciated.

Please call me if you require any further clarification".

A copy of this facsimile and the facsimile confirmation in respect of it taken from CommissionDocument 3B will be Tendered Documents SM700 to SM702.

It perhaps suffices to say that all these matters were required to have been attended to by CarterNewell as the paid lawyers for the DFRB Board either before or on Completion. It also indicates nousual searches were done prior to Completion in respect of Allotment 11 Section 6 Vanimo.

(c) The second set of documents on the Carter Newell file which evidence these entries, are afacsimile at 14:53 on 6th September 1999 from Mr. Paul Toua to Mr. Darby Kila requesting copies ofDFRB Board minutes approving the Sandaun Motel purchase and a copy of the Ministerial approvaland a response from Mr. Kila at 16:47 on the same day faxing copies of the Board minutes of 1stMarch 1999 and 7th and 22nd August 1999 and the Ministerial approval letter.

Copies of Mr. Toua's fax and the related facsimile confirmation and Mr. Kila's response (but not theattachments to it) will be Tendered Documents SM703 to SM705).

(d) We are able to ascertain from the DFRBF file (Commission Document DCD23) that on 6thSeptember 1999 Mr. Toua sent a further facsimile addressed to Mr. Marcus Cullinan reading, "We referto our facsimile of 1 September, 1999 (enclosed for ease of reference) and urgently request you toreply to the matters raised".

A copy of this facsimile will be Tendered Document SM706.

We are not able to locate a copy of this facsimile on the Carter Newell file (Commission DocumentDCD3B)

(e) We are not able to locate any letter to Mr. Kila of 1st September 1999, any notations in respect ofconferences with Mr. Naru and Mr. Wekina on 1st September 1999 or any letter to Lord & Company on1st September 1999 on the related Carter Newell file (Commission Document 3B).

(f) Though the Carter Newell file (Commission Document 3B) contains a copy of a four­page letter toMr. Kila, which is dated 6th September 1999, there are reasons to believe that letter was not in factsent on that day. Those reasons include:­

(i) the fact the letter was not stamped as received by Mr. Kila until 27th September 1999.

(ii) it is patent from typographical errors in the letter which were not corrected that the letterwas typed after 24th September 1999.

(iii) Mr. Kila only acknowledged receipt of the only document he was asked to acknowledgeon 27th September 1999.

We will accordingly deal with this letter in our chronology on the date it was received by Mr. Kila.

25.2 Revoking the Delegation to KSL – 8th to 13th September 1999

(a) It will be recalled that the so­called "Tele­conferencing meeting" of 19th August 1999 the "Minutes"of which were approved and signed at the Special DFRB Board meeting on 26th August 1999 weresaid, among other things, to have approved the revocation of the purported delegation of power by theDFRB Board to KSL in 1996, which had been published in the National Gazette.

(b) It seems this task was again allocated by Mr. Naru to Carter Newell for in its Invoice 17360(Tendered Document SM339) the following entries are recorded.

"8 Sep 99 Letter to Kina Securities Limited8 Sep 99 Drawing and engrossing DFRB's Act for Gazettal Notice8 Sep 99 Facsimile Mr. Amito Marcus Cullinan regarding his revised salarypackage8 Sep 99 Review and revise letter to Kina Securities Ltd8 Sep 99 Review and revise DFRB's Act for Gazettal Notice8 Sep 99 Review and revise fax to Mr. Marcus Amito Cullinan8 Sep 99 finalise DFRB's Act for Gazettal Notice8 Sep 99 Letter to Syd Yates (amending)8 Sep 99 Document preparation organising copy of State Lease – finalising letter to client10 Sep 99 Document preparation finalising letter and sending same to client13 Sep 99 Telephone in from Mr. Darby Kila regarding Gazettal Notice13 Sep 99 Print out (x2) copies of Gazettal Notice as per Mr. Darby Kila's instructions".

It would further seem that all entries, other than the facsimile to Mr. Marcus Cullinan which accounts

for two entries on 8th September 1999 and the singly entry on 9th September 1999 relate to thatmatter and to the notice of 13th September 1999 – with which we have dealt in the topic "Structure" –revoking the delegation to KSL.

It is somewhat surprising that the cost entries for this work are included in the Invoice dealing with thepurchase of Sandaun Motel but that perhaps reinforces the impression that this action was part of Mr.Naru's "payback" for KSL insisting on the Deed of Indemnity. As we have shown in the topic"Structure" that action was in a sense facile because KSL had been delegated powers in the form ofprovisions in its agreements with the DFRB Board and those provisions were embodied in aninstrument under the DFRB Board seal which conformed with the delegation requirements of Section15 of the DFRB Act.

There are no documents in the related Carter Newell file (Commission Document 3B), whichsubstantiate these entries but there is equally little doubt that what is reflected in these entries did infact occur and documents supporting them are found in Carter Newell file 990166 (CommissionDocument DCD76).

(c) In relation to the two entries of 8th September 1999 regarding a facsimile to Mr. Marcus Cullinan itis clear that a facsimile was drafted "regarding his revised salary package" (the first entry) and thatsuch facsimile was reviewed and revised (the second entry).

We are not able to locate any draft or final facsimile to Mr. Cullinan at about this date on that subject inthe Carter Newell file (Commission Document DCD3B).

Furthermore, it will be recalled (see 24.9(e) above) that at the DFRB Special Board meeting of 26thAugust 1999 it was resolved that Mr. Kila and his management provide to the Board, a suitablecontract reflective of industry standards for Mr. Cullinan.

It would thus seem, yet again, that Mr. Kila was being marginalised on this matter.

(d) The entry of 9th September 1999 clearly relates to a copy of the State Lease for Allotment 11Section 6 Vanimo and the "finalising letter to client" appears to relate to the letter dated 6th September1999 to Mr. Kila, which we will come to later.

(e) The Carter Newell Invoice 17357 which was cancelled (Tendered Document SM239) contains anentry:­

"13 Sep 99 Letter to Sandaun Provincial Administration".

We are not able to locate any copy of such a letter on the related Carter Newell file 990166(Commission Document DCD76) or the Sandaun Motel file (Commission Document DCD3B),which substantiates this entry.

The final three (3) entries in this invoice on 15th and 17th September 1999 relate to customary landnear the Wutung border for which supporting documents are found on the related file (CommissionDocument DCD76).

Our consideration of entries in this invoice is thus completed.

(f) Even though KSL had its Deed of Indemnity it still remained DFRB Board's contractedAdministration Manager and Investment Advisor and on 13th September 1999 Mr. Yates sent a fax toMr. Kila as follows:­

"SANDAUN MOTEL

To enable us to update our records would you please advise whether the above purchasehas been completed.

If so, could you please supply memo investments is held in company information, sharecertificate etc."

A copy of this fax taken from Commission Document DCD13 will be Tendered Document SM707.

25.3 Mr. Kila sends Mr. Uware to Vanimo

(a) It is plain that with Mr. Kila having learned at the Special Board meeting of 26th August 1999 thatCompletion was effected on 24th August 1999; having actioned the Board decision to provideK60,000.00 in working capital; having heard from Mr. Uware about what occurred in Vanimo andhaving received no response from Carter Newell on the transaction, he was more than a littleconcerned.

Mr. Kila accordingly conferred with Mr. Uware and discussed with him what DFRBF Managementrequired and on 2nd September 1999 arrangements were commenced for Mr. Uware to return toVanimo.

(b) Mr. Uware said this trip to Vanimo was a DFRBF Management initiative and he agreed that itspurpose was to seek to obtain some financial control, to take control of bank accounts, to establishopening balances and things of that nature (Transcript pp. 415 and 4478).

The trip apparently emanated from a direction issued by Mr. Kila verbally to Mr. Uware which wasconfirmed in a memo from Mr. Uware to Mr. Kila which reads as follows:­

"This is to confirm your verbal instruction to travel to Vanimo on Tuesday, 7th September 1999 for thepurpose of finalizing Post acquisition procedures in relation to the purchase of Sandaun Motel byDFRBF: Please refer to the attached for details.

I am advised that settlement was scheduled on 1 September 1999, consequently all expenses inrelation to Sandaun Motel should now be borne by the Motel as its normal operating expense.

Alternatively, DFRBF may pay such expense which is to be noted as loan to Sandaun Motel to bereimbursed in due course.

In view of the urgency for my travel to Vanimo I suggest the later course of action.

Consequently you are hereby requested to authorize the following expense to be incurred on behalf ofSandaun Motel to facilitate my travel and return this memo for further action.

I. Return airfares to VanimoII. Travel allowance @ K150.00 per day for 4 days.III. Hotel accommodation (to be provided by Motel.)".

A copy of this memo taken from Commission Documents 151A­D will be Tendered Document SM708.

The memo was endorsed by Mr. Kila and apparently handed on to Ms. Dianne Kala who on 2ndSeptember, 1999 prepared a memo which was endorsed by Mr. Kila and which read as follows:­

"As per your memo dated 02/09/99, I have organised travel arrangement with Dove Travel for theExecutive Manager, Corporate Admin travelling to Vanimo.

In view of this, the following costs will need to be settled for this trip:

1. Airfares

1.1 Return tickets Port Moresby to Vanimo

Ticket at K987.80 x1 = K987.80

Please note that the payment is to be made payable to Dove Travel (see attached itinerary).

2. Travel Allowances

2.1 The delegate will be travelling on Tuesday, 7th September 1999, and returning on Friday 10thSeptember, 1999.

His travelling allowance is as follows:­

i) Mr. George Uware ­ K150.00 per day x 4 days = K600.00

Please note that all allowances to be opened for cash payment.

3. Accommodation

Please note that a purchase order will be raised for Motel thus no payment is required until invoiced.

4. Total Costs

4.1 Airfares : K987.804.2 Allowances : K600.00

Total Costs: K1,587.80

Forwarded for your endorsement".

A copy of this memo also taken from Commission Documents DCD 151A – D will be TenderedDocuments SM 709 and SM 710.

We have copied these documents as they corroborate the evidence that this trip was a DFRBFManagement initiative, that only Mr. Uware was originally intended to travel and that the travel wasoriginally intended from Tuesday 7th September to Friday 10th September, 1999.

In their planning of this trip Mr. Kila and Mr. Uware prepared a fifteen point document described as"Scope of Works & Check List" a copy of which will be Tendered Document SM 711.

The document tends to illustrate just how little DFRBF management had been involved and how littleknowledge it had acquired.

(c) The arrangements for Mr. Uware's proposed trip were promptly implemented.

On 3rd September 1999, DFRBF cheque # 328583 payable to Dove Travel for K987.80 for Mr.Uware's airfare was drawn and his ticketing arranged – the vouchers are already tendered asTendered Document F289.

On 3rd September 1999, DFRBF cheque # 328582 payable to Mr. Uware but endorsed to cash for histravelling allowances of K600.00 was raised – again the vouchers are already tendered as TenderedDocument F301.

On 6th September 1999, DFRBF Purchase Order No 0047 addressed to Sandaun Motel was signedby Mr. Kila for "Accommodation costs for Mr. George B. Uware whilst in Vanimo – Sandaun MotelManagement Arrangements".

A copy of this purchase order taken from Commission Document DCD 10A will be TenderedDocument SM 712.

Mr. Kila also sent a facsimile to Mr. Marcus Cullinan on 6th September, 1999 as follows:­

"Subject: GEORGE B UWARE'S TRIP TO VANIMO

This is to inform you that George B Uware is due to arrive in Vanimo on PX 140 at approximately 2.00pa Tuesday 7 September 1999. PX 140 departs Port Moresby at 12:05 pm.

The purpose of Mr. Uware's visit is in r elation to DFRBF's acquisition of Sandaun Motel which ofnecessity requires questions relating to managements and specifically to institute procedures forfinancial management/controls. In addition he will be assessing funding requirements of the motel andwill undertake any other work as he determines necessary to safeguard DFRBF's interests.

Please accord Mr. Uware as much co­operation and assistance as you can on this trip.

He has been booked to return on Friday 10 September 1999, however his departure may be deferredsubject to completion of tasks assigned to him.

Your are finally requested to have a room available for Mr. Uware during his stay in Vanimo".

For convenience of reference a copy of this facsimile taken from original Sandaun Motel vouchers,which we will come to shortly, is Tendered Document SM 713.

(d) Mr. Uware said that the check list (Tendered Document SM 711) was prepared by him afterdiscussion with Mr. Kila and that he had little specific knowledge but knew that the Sandaun Moteltransaction involved a share sale acquisition. Mr. Uware was not sure if he double checked the list withMr. Kila (Transcript pp.418 – 420).

25.4 Mr. Naru accompanies Mr. Uware

(a) With the clear arrangements made for Mr. Uware to travel to Vanimo and so travel alone it is clearthat Mr. Naru heard of this planned trip and things then changed.

When asked how it cause that Mr. Naru accompanied him on this trip Mr. Uware said "The initiativewas taken by Management at that time. I believe upon hearing that I was returning he decided to comealong for the trip". (Transcript p. 4478)

There are no prizes for guessing how Mr. Naru learned of Mr. Uware's travel, nor as we shall seeshortly why Mr. Michael Tulake was "away" from the Sandaun Motel when Mr. Uware arrived.

Plainly Mr. Uware's travel plans were altered either on 6th or 7th September 1999 and his travel wasdeferred to Friday 10th September, 1999.

(b) We are not able to locate any DFRBF payment vouchers, which account for Mr. Naru's air ticket forhis travel to Vanimo with Mr. Uware. It may be that the answer will come when Mr. Uware ascertainsand advises the Commission, as earlier noted, what happened with the air tickets earlier obtained forthe intended travel in August, 1999 by Colonels Playah and Renagi and Messrs Asi and Kila.

25.5 What Happened in Vanimo

(a) Though it seems clear that both Mr. Naru and Mr. Uware travelled to Vanimo on Friday 10thSeptember, 1999 the Room Register for Sandaun Motel for September 1999 – a copy of which takenfrom Commission Document DCD 42 will be Tendered Documents SM 714 and SM 715 shows:­

(i) that Mr. Michael Tulake (who as we have earlier shown as accommodated in Room 3 up toThursday 26th August, 1999 (see Tendered Document SM 590) and was not further accommodateduntil Friday 24th September, 1999 in Room 1 except on Tuesday 14th September, 1999 when he wasaccommodated in Room 13.

(ii) that the only other persons accommodated at the expense of DFRBF in September 1999 and allaccommodated only on Sunday 12th and Monday 13th September, 1999 were Mr. Kelly Naru in Room13. Mr. George Uware in Room 14 and "Robert T" who as we will see was the Sandaun Motelemployee Robert Tekrie in Room 17.

(b) The Sandaun Motel charge cards invoiced in respect of the DFRB Purchase Order No 0047confirm what is shown in the Room Register – the original vouchers which include the charge cardstaken from the Sandaun Motel records are Tendered Documents SM 716 to SM 723 and include thefacsimile of 6th September, 1999 from Mr. Kila to Mr. Cullinan as quoted earlier.

The total charges of K3,021.73 were paid by DFRBF cheque # 305029 the vouchers for which wereearlier tendered as Tendered Document F282.

Those charge cards record the following charges:­

Sunday 12 September, 1999

3 rooms @ K145.00 K435.00Bar charges (entered 13/09/99) K309.40 K744.40

Monday 13 September, 1999

3 rooms @ K145.00 K435.00Breakfast charges K 42.50

Lunch charges K 19.00Dinner charges K 52.50Laundry charges K 19.00Phone charges K 24.60Bar charges K378.50 _______K971.19

Tuesday 14 September, 1999

1 room @ K145.00 K145.00Breakfast charges K 53.00Lunch charges K 16.50Dinner charges K 86.90Laundry charges K 27.50Phone charges K 48.21Bar charges K118.70 _______K495.81

Wednesday 15 September, 1999

1 room @ K145.00 K145.00Breakfast charges K 10.50Lunch charges K 8.50Dinner charges K 16.00Phone charges K 14.57Bar charges K 27.10 _______K221.97

Thursday 16 September, 1999

1 room @ K145.00 K145.00Breakfast charges K 21.00Lunch charges K 22.00Dinner charges K 27.00Phone charges K 8.52Bar charges K 1.60 _______K225.12

Friday 17 September, 1999

Breakfast charges K 16.50Lunch charges K 61.50Phone charges K 3.84Bar charges K 7.60 _______K 88.54ADD VAT K 274.70K3,021.73

Though we will come back to these charges shortly the present relevance is, as we earlier said, thatthey confirm what is shown in the Room Register.

(c) It accordingly again seemed that a further Friday afternoon trip to Jayapura with a return on thefollowing Sunday in time to incur K309.40 in bar charges was likely.

The fact this occurred was confirmed by Mr. Uware who said that it was only Mr. Naru and himself whotravelled to Jayapura on the Friday night and came back on the Sunday. He said none of Mr. MichaelTulake, Mr. Chris Vihruri or Marcus Cullinan travelled with them and that so far as he was aware noneof them were met in Jayapura.

(Transcript pp. 4479 – 81)

(d) Mr. George Uware said that when he arrived in Vanimo Mr. Marcus Cullinan told him that the manhe needed to see to assist him with what he was doing was the financial controller for the motel whowas Mr. Michael Tulake and that Mr. Tulake was not there.

Mr. Uware said that Mr. Cullinan had been advised of his pending arrival by Mr. Kila's letterof introduction (Tendered Document SM713). He said that Mr. Cullinan told him Mr.Tulake "had a death in the family and had to travel to Mt. Hagen" (Transcript pp. 421­423).

Mr. Uware said that when he went to undertake the first item on his "check list" which wasto conduct a stock take and create an inventory of the bar, kitchen, rooms, furniture andeverything that was on the premises he was not able to do so as Mr. Naru told him thatMarcus and Michael would be retained by the motel and that the management would beretained to undertake normal management functions (Transcript p. 423).

Mr. Uware said the sole reason he did not undertake the stock take was that he was told byMr. Naru not to do it, the managers would be retained and therefore it would be part of theirduty to undertake those activities. Mr. Uware said he understood the importance of anindependent stock take – "That is the reason why I went up there" – to establish openingbalances and that though he said he stressed the importance of this to Mr. Naru, he wastold in clear terms by Mr. Naru not to do it and "I felt a bit intimidated" (Transcript pp. 424­425).

Mr. Uware said of the second item on his "check list" to determine the cut­off point andestablish opening balances for trade creditors, trade debtors, staff entitlements and otheron­going liabilities and obligations he was told, "the managers who would be retained tocontinue under employment of the motel, under the ownership of DFRB would undertakethose activities of those tasks". In the result Mr. Uware did not establish any openingfigures at all (Transcript p. 425).

Of the third item on his "check list" which was to take provision of the financial books,cheque books, deposit books, purchase order books and other accountable documents,Mr. Uware said, "Again I was told that these would be normal activities which the managerswould perform as part of their duties".

Asked whether he saw any such books Mr. Uware said, "I was not allowed into the officearea" and then, "… I was not invited into the office. I only entered the motel premises andwas sat in the lounge area, but I was not actually invited into the office at that time". Mr.Uware said he sought access but was told by Mr. Naru "that because the managers wereto continue, you know, it was not proper to interfere" (Transcript pp. 425­426).

Mr. Uware said that though Mr. Naru left Vanimo on the Tuesday he did not accompany himback to Port Moresby as he waited for Mr. Tulake to return so he could advance matters(Transcript pp. 426­427).

By this time Mr. Naru had clearly "set the scene" and as Mr. Uware later agreed, like asheepdog with a sheep had made sure he did not get anywhere near the financial records(Transcript pp. 4478­4479).

(e) Though there are other aspects of Mr. Uware's evidence to which we will return shortly he said thatwhen he returned to Port Moresby he wrote a report to Mr. Kila on this trip. That report is bothimportant and informative and must be read in full. That report which is dated 22nd September 1999,reads:­

"1.0 Purpose

To inform you of my trip to Vanimo covering the period 10 September to 17 September1999, in relation to the abovementioned motel.

I advise that I was initially scheduled to return on Tuesday 14 September 1999 however mytrip was extended to Friday 17 since Michael Tulake, the Financial Controller for the Motelwas given emergency leave to attend to a personal matters on the day of my arrival inVanimo and returned on Tuesday 14 September 1999.

2.0 Scope of Works

I attach for your information and reference copy of the scope of works that was to be

undertaken while in Vanimo.

For ease of reference I will advise in the order appearing on the Scope of Works & CheckList.

a) Stock­take of inventory

I advise that my meeting with Marcus and Michael revealed that no stock­take wasundertaken on or about 1 September 1999 ( settlement date). This was necessary for tworeasons. Firstly, to ascertain the value of inventory to be taken up in the company books asopening stock on 1 September 1999, being the date of settlement and change ofownership of the motel to DFRBF. Secondly, to confirm the physical existence of assetsacquired in a assets register which inherently minimizes opportunities for loss of assetsduring transition period and to determine the fairness of value taken up.

Since this was not done, I requested Marcus and Michael to undertake this exercise at theend of September 1999, so that the stock figures can be taken up as opening stock valuesfor October 1999. The sooner this exercise is undertaken, the better it is for the DFRBF asmore accurate figures would be available for budget and account preparation,

b) Determine cut­off point and ascertain following balances:­

i. Trade creditorsii. Trade debtorsiii. Staff entitlementsiv. Other liabilities and obligations to be carded forward

In the case of items i and ii above, I was unable to determine the amount of trade creditorsand debtors as at 1 September 1999. I was informed that the computer had encountered aproblem which prevented retrival (sic) of relevant data. I was informed that as soon as theproblem was resolved, the information requested would be furnished.

During this time also I was approached by Mr. Brian Cullinan with a request to bereimbursed a sum of approximately K19,000. This request was made on the basis that thepayment related to invoice issued for services rendered in July 1999 although receiptedand deposited into the Motel account after 1 September 1999. I advised that under normalcircumstances, the acquisition of a business as a going concern results in the operatingdebtors and creditors to be acquired by the purchaser. In the present situation, I advisedthat the matter would be brought to the attention of the Board and an appropriate responsegiven in due course,

In the case of items iii & iv, these are matters which formed conditions precedent to thecompletion of the sale, however I was unable to verify these as no accounts were providedto 1 September 1999.

It was also revealed during this meeting that contrary to conditions of sale, no auditedaccounts were prepared and tendered to DFRBF covering the period to settlement date.

3.0 Take Possession of Financial Documents

I was advised that all necessary steps were taken at settlement date to attend to thesematters. Signatories to the bank account are now Marcus Amito as General Manager andMichael Tulake as Financial Controllers.

4.0 Establish Financial Management & Control Procedures

As you may be aware no properly documented system existed as the previous owners runthe motel as primarily a family business. If there were any control measures in place,however crude, these would have been through intiution (sic) rather than any systemicmethod.

I have suggested to Michael that these matters be instituted as a matter of urgency toensure proper systems and procedures are in place for good corporate governance andfinance control.

5.0 Prepare Budget P & L & Cashflow Forecast

i. P&L and Cashflow forecast for 4 months to 31 December 1999; andii. P&L and Cashflow forecast for 12 months to 31 December 2000 attached.

A copy of the P&L and cashflow for the 4 months to Dec 1999 was given to Michael andMarcus to review and forward to me for finalization. I am still awaiting receipt of this.

6.0 Assess Funding Requirement & Prepare Funding Proposal To Bank

This is a matter now to be undertaken by the Financial Controller, W Michael Tulake.

Financing requirements relate to funds for the acquisition of a fleet of vehicles for the hirecar operation and normal operational funds. Initial estimates puts funding requirement forvehicle acquisition at between K300,000 and K400,000. Vehicle fleet will consist of thefollowing:­

1 x 15 seater Hiace toyota bus/van K50,0001 x toyota hilux 2 wheel drive ute K25,0004 x toyota hilux 4 wheel drive utes @ K80,000 ea K320,000Total Estimated Cost K395,000

Further funding requirement will relate to normal operating cost for the first month andfunding for the acquisition of computer plus accessories and other office equipment. Iunderstand that the amount of K60,000 has already been advanced to the motel as a intercompany loan to be repaid in due course.

I wish to point out that the withdrawal of motor vehicles and office equipment from themotel, although these were shown as assets ­of the company per audited 1998 financialsappears unusual especially when a substantial amount of money was paid (K5.3 million)for the acquisition of the business. These assets would under normal circumstances haveformed part and parcel of the acquisition. This abnormality has given rise to furtherexpenditure of approximately K400,000 to acquire a new fleet of vehicles and officeequipment to replace those withdrawn.

7. Arrange Change of Signatories

This has been done. I was advised that Michael and Marcus are now signatories to theMotel bank account.

8. Notify Bank of Change of Signatories & Ownership

This has been done. As an ongoing PR and relationship exercise a dinner was hosted bythe Chairman on the evening of Monday 13 September 1999 where managers of bothWestpac and PNGBC attended and were entertained.

9. Meet and Talk to Staff

This was to have been undertaken by the Chairman, however he requested this matter tobe deferred pending a detailed evaluation of the motel's staffing requirements and termsand conditions of employment.

Michael and Marcus have been requested to carry. out this exercise an& furnish theirreport ASAP. This information is also necessary to input a more realistic salary expenditureestimate in the budget.

10. Review Motel Staffing Level With View to Rationalization

This is to be undertaken by Michael and advised as a matter of urgency.

11. Ensure all Previous Owners Vacate the Motel

All members of the family appeared to me to continue to play a major part in the operationof the motel and continued to occupy rooms that were not in use.

I was not at the time aware of the management contract entered into between the moteland Marcus and therefore not in a position to determine the entire family's involvement inthe management of the motel. It is clear now that only Marcus is employed as GeneralManager and therefore the involvement of other family members and the question of theirremuneration and other terms of engagement etc should be clarified to avoid disputes infuture.

To have some effect, instruction or directives to this effect must of necessity come, from theBoard.

12. Contact & Notify Creditors/Debtors Of Change of Ownership & NegotiateContinuation of Credit Facilities

Michael to undertake this.

13. Management of Motel

Marcus Amito retained as General Manager on a three year contract and engagement ofMichael Tulake as financial controller. These two now comprise the executive managementteam of the motel.

13. Stationery & Office Supplies

Michael to attend.

14. Purchase of New Computer + Accessories and Photocopier

Michael to attend.

There are certain matters noted in this report that need to be followed up to ensureappropriate action is taken to the satisfaction of DFRBF.

I trust that this report will prompt such action to be taken".

A copy of this report taken from Commission Document DCD23 will be TenderedDocuments SM724 to SM727.

(f) It is apparent from Mr. Uware's report that Mr. Naru's instructions and "shepherding" had a markedeffect as most of the tasks he was to undertake, as recorded in the "check list" were dealt with by wayof requests and advice to Mr. Marcus Cullinan and Mr. Tulake.

That, in our view, is understandable given the history of this transaction and Mr. Uware'sknowledge of what had earlier occurred with Mr. Ruimb and Mr. Kila.

There are some points which are, however, of marked importance being:­

(i) It was not until the day of Mr. Uware's arrival in Vanimo that Mr. Tulake was given"emergency leave" and Mr. Uware persisted in extending his stay until Mr. Tulake returned.

(ii) No stock­take was undertaken as at 1st September 1999 and no verification of assetswas undertaken.

(iii) The excuse given for no opening balances being available was that there was acomputer problem but it was clear no accounts were prepared as at 1st September 1999.

(iv) The ominous shadow of Mr. Brian Cullinan was lurking in the background seeking toobtain further K19,000.00 from the DFRB Board.

(v) Mr. Uware was alert to the fact that the vehicles for hire car operations had beenremoved as had office equipment and that in addition to the purchase price of K5.3 millionand the K60,000 working capital, the DFRB Board was facing a further bill of K400,000,00to "acquire a new fleet of vehicles and office equipment to replace those withdrawn".

(vi) The Cullinan family were still at the Motel and utilising unoccupied rooms as thoughthey still owned the business.

(vii) Mr. Uware had been told (by Mr. Naru) that Marcus Cullinan was General Manager andthat Michael Tulake was financial controller and was told by someone that Marcus Cullinanhad a 3 year contract.

What had happened was clear and yet again, DFRBF management were beingmarginalised and excluded and Mr. Naru was making the decisions and reinforcing thepositions of his associates Michael Tulake and Marcus Cullinan.

(g) Mr. Uware agreed that the first thing he achieved on this trip was preparing a profit and loss andcashflow for the four months – September to December 1999 and for year 2000 and further said, "Andat that time I was told that the motel needed to purchase a fleet of vehicles so I did list some analysison that … I prepared some lease purchase analysis" (Transcript pp. 422­423).

In recounting this we are not being critical of Mr. Uware as it is quite clear that his failure toachieve his main mission was due entirely to the very questionable interference of Mr. Naruas was acknowledged expressly by Mr. Uware in questions from Mr. Wilson and theCommission (Transcript pp. 434­431).

Even on this last aspect about vehicles Mr. Uware said, "At that time I had no informationabout – there were vehicles there but was told they were not motel vehicles. I was told toprepare a financial proposal to lease a fleet of vehicles". Asked who told him to do that theanswer somewhat predictably was Mr. Naru (Transcript p. 428). Mr. Uware said that inpursuance of this direction he obtained quotes from Ela Motors whilst in Vanimo.

We will come back to this topic shortly.

(h) To complete our consideration of this trip it is necessary to complete the cost aspect to the DFRBBoard.

In addition to the airfare for Mr. Uware, dealt with in 25.3(c) above (F289), Mr. Uware'sdaily allowance of K600.00 for four days also dealt with in 25.3(c) above (F301) and theSandaun Motel bill of K3,021.73 dealt with in 25.5(b) above (F282) three further paymentswere made in respect of this trip being.

(i) a sum of K352.84 for "Hire car for Mr. Kelly Naru & Mr. George Uware on the 10­9­99and 12­9­99" – the vouchers have already been tendered as Tendered Document F290.

(ii) a sum of K750.00 for daily incidental allowances for Mr. Kelly Naru for five days atK150.00 per day – the vouchers have already been tendered as Tendered DocumentF302.

(iii) a sum of K600.00 for additional daily incidental allowances for Mr. Uware for four daysat K150.00 per day – the vouchers have already been tendered as Tendered DocumentF303.

It is quite clear from the days for which they were charged that the K352.84 in hire carcharges related to transportation of Messrs Naru and Uware from Vanimo to the Wutungborder on Friday 10th September 1999 and from the border to Vanimo on Sunday 12thSeptember 1999.

Mr. Naru travelled to Vanimo on Friday 10th September 1999 and returned on Tuesday

14th September 1999 – i.e. 5 days of which 2 days were spent in Jayapura.

Mr. Uware travelled to Vanimo on Friday 10th September 1999 and returned on Friday 17thSeptember 1999 – i.e. 8 days, 2 of which days were spent in Jayapura.

Each should, in our view, be asked to refund two days allowances or K300.00 each for thetime spent in Jayapura and to refund between them the hire car costs of K352.84.

Mr. Naru and Mr. Robert Tekrie should be asked why Mr. Robert Tekrie was accommodatedat Sandaun Motel at the expense of DFRBF on Sunday 12th and Monday 13th September1999.

Mr. Uware has already said he did not know Mr. Tekrie was so accommodated (Transcriptpp. 4479).

Mr. Naru and Mr. Uware should be asked why between 12th and 14th September 1999meal charges of K270.40, laundry of K46.50, phone charges of K72.81 and bar charges ofK806.60 were debited to the DFRBF account when both received daily allowances forthose days. Mr. Uware should additionally be asked why he incurred meal charges forK183.00, phone charges of K26.93 and bar charges of K36.30 from 15th September to17th September 1999. Mr. Uware's debiting these charges may be explicable on the basishe did not anticipate an extended stay for which he had not received allowances inadvance but in such case he will need to be asked to show where he reimbursed thecharges debited to the DFRBF account when he received his additional allowances.

In our view, these matters require answers as it may well be that there are criminalconsequences in terms of misappropriation of DFRBF funds.

On the day Mr Naru left Vanimo – 14th September 1999, he was paid out of the SandaunMotel Westpac bank account and by cheque # 486802 drawn in his favour a sum ofK1,604.98.

Copies of the cheque and attached voucher, taken from the Sandaun Motel vouchers, willbe Tendered Documents SM727A and SM727B and of the bank statement recordingpresentation of that cheque, taken from Commission Document DCD211 will beTendered Document SM727C.

It will be noted that the voucher attached (SM727B) is a receipt for liquor purchased at ElaBeach Liquor Barn on 10th September 1999 for K615.82 and that the copy cheque bearsthe note "Paid to Kelly Naru. Reimbursement Motel Alcohol, air ticket. Accom. M Tulake"(SM727A).

The attachment is explanatory of the alcohol component but Mr Naru will need to be askedfirstly, why he was paying for an air ticket and for accommodation for Mr Tulake andsecondly, why he was being reimbursed for those payments out of the Sandaun Motelcheque account.

25.4 Hon. Peter Waieng goes to Vanimo

Though the Room Register of Sandaun Motel (Tendered Document SM715) does not record the factHon. Peter Waieng is shown by the Charge Cards of Sandaun Motel to have been accommodatedthere on 19th September 1999 and to have been charged accommodation charges of K135.00.

A copy of the charge card taken from the Sandaun Motel vouchers will be Tendered DocumentSM728.

25.5 More cash drawn from Fleet Limited

(a) Though, as we have said earlier, we will later deal with tracing the K5.3 million received by FleetLimited for the sale of the shares in Banora Trading Limited some withdrawals made in cash areworthy of note at this point.

(b) On 14th September 1999 – the day Mr. Naru returned from Vanimo to Port Moresby, Fleet Limitedcheque # 583142 for K60,000.00 drawn to cash and signed by Mr. Marcus Cullinan was cashed.

Copies of the front and reverse of that cheque – taken from Commission DocumentDCD40 will be Tendered Documents SM729­SM730.

The bank statement recording the debit of this cheque is Tendered Document SM615.

It will be noted the reverse of that cheque bears the words "please pay to Natalie Cullinan"and shows the K60,000.00 cash was paid as to K50,000.00 in notes of K20 and as toK10,000.00 in notes of K10 denomination.

(c) On Friday 17th September 1999 – the day Mr. Uware returned from Vanimo to Port Moresby andthe Friday before Hon. Peter Waieng was shown as accommodated at Sandaun Motel on Sunday 19thSeptember 1999 – Fleet Limited cheque # 583143 for K40,000.00 drawn to cash and signed by Mr.Marcus Cullinan was cashed.

Copies of the front and reverse of that cheque – taken from Commission DocumentDCD40 will be Tendered Documents SM773­SM732.

It will be noted from the reverse that the K40,000 cash was paid as to K15,000.00 in notesof K50, as to K16,000.00 in notes of K10 and as to the balance the note suggests probablyin notes of K5 denomination.

The debit of this cheque is shown in the bank statement, a copy of which taken fromCommission Document DCD30 is Tendered Document SM733.

(d) On Monday 20th September 1999 – the day after Hon. Peter Waieng was shown asaccommodated at Sandaun Motel two Fleet Limited cheques # 583144 and # 583147 were cashed.

Cheque # 583144 was for K60,000.00 drawn to cash and signed by Mr. Marcus Cullinan.

Copies of the front and reverse of that cheque – taken from Commission DocumentDCD40 will be Tendered Documents SM734­SM735.

It will be noted from the reverse that the K60,000,00 in cash was paid as to K40,000.00 innotes of K50 and as to K20,000.00 in notes of K20 denomination.

Cheque # 583147 was for K50,000.00 drawn to cash and signed by Mr. Marcus Cullinan.

Copies of the front and reverse of that cheque – taken from Commission DocumentDCD40 will be Tendered Documents SM736­SM737.

The break­up of the K50,000.00 taken in cash is not recorded on the reverse of thischeque.

The debit of these cheques is shown in the bank statement, which is Tendered DocumentSM733.

25.6 More activity at Carter Newell

(a) The final entries in the Carter Newell Invoice 17360 – Tendered Documents SM339 and SM440 –which covered the period 5th May 1999 to 24th September 1999 and which was for an aggregateK66,691.07 were as follows:­

"23 Sep 99 Prep docs for lodgement24 Sep 99 review of docs for lodgement24 Sep 99 draft ltr to irc, attend to attachments24 Sep 99 Document preparation chasing up on documents lodged24 Sep 99 Document preparation letter to SDO – conference with Chairman".

Subject to what is now said we have completed dealing with this Invoice.

(b) The initial entry in the subsequent Carter Newell Invoice on the Sandaun Motel file 990218 –Invoice 17839 is:­

"27 Sep 99 Telephone in from Darby Kila chasing up on documentation".

A copy of this further Invoice taken from Commission Document DCD23 will beTendered Documents SM738 to SM740.

It should be noted that this Invoice was withdrawn by Carter Newell by a letter dated 25thJanuary 2000 a copy of which from the same Commission Document will be TenderedDocument SM741.

Though the bill was "withdrawn" it still serves, as did the cancelled Invoice 17357, a usefulpurpose in showing what cost entries carter Newell were recording.

(c) The related Carter Newell file (Commission Document 3B) contains a copy of a letter dated 24thSeptember 1999 to the Internal Revenue Commission, Stamp Duties Office, enclosing five (5) sharetransfers, the Sale and Purchase Agreement and a copy of the "Audited financial statements" forassessment of stamp duty.

A copy of this letter and the five (5) attached share transfers will be Tendered Documents SM742 toSM747.

Several things will be noted about the share transfers. All five (5) are dated 24th August, 1999 and allfive (5) for each of the five (5) vendors are signed by Mr Marcus Cullinan and witnessed by Mr SenoWekina. On the four (4) transfers for vendors other than Mr Marcus Cullinan (who is shown as MarcusAmito) the attestation provisions show the transfer as signed personally by the vendors – Kevin Apita,Marlene Kupe, Natalie Pia and Dillon Tyren Cullinan. There is nothing on the face of the documents toshow they were signed for and on behalf of those vendors by an attorney under Power of Attorney andthere is no declaration of non­revocation of Power of Attorney.

The attestation provision for the DFRB Board is appropriate for a company "affixed by the Director ofthe company in with (sic) its Constitution" and is signed by Mr Naru and Colonel Playah in thepresence of Mr Kila but the actual common seal does not appear to have been affixed.

The legal sloppiness in these respects is obvious.

I. It would seem, as stated earlier, that the Carter Newell report letter dated 6th September 1999, hadnot been sent to Mr Kila at that time and that Mr Kila obtained it as a result of his telephone callrecorded on 27th September 1999 (see SM738) "chasing up on documentation".

Presumably, the document was being held pending a response by Mr Marcus Cullinan to theCarter Newell letter of 1st September 1999 (SM700­02) and the follow up letter of 6th September1999 (SM703­4).

It also seems reasonably clear from a handwritten note on the Carter Newell file that for thepurposes of that letter, someone made a phone call about the Conditions Precedent in Schedule2 Part 2 of the Agreement and noted:­

"Sch 2 of Share Sale AgreementPart 2

I. Paid up to last Friday 22nd August.II. III. IV. Sandaun Motel not registered business name"

A copy of this note will be Tendered Document SM748. It further seems likely that Mr Kilaobtained this letter on Monday 27th September 1999 because his handwritten receipt for the onlydocument he was asked to acknowledge, as found on the Carter Newell file, i.e. the State Leasefor Section 6 Lot 11 Vanimo, written on the back of a Carter Newell Locus printout, is dated 27thSeptember 1999.

A copy of this receipt will be Tendered Document SM749.

It even further seems likely Mr Kila received this letter on 27th September 1999, as that is the

date of the DFRBF received stamp, which appears on it.

A copy of the letter with that date stamp taken from Commission Document DCD13 will beTendered Documents SM750 to SM753.

The letter reads as follows:­

"RE: PURCHASE OF SANDAUN MOTEL

As instructed, we enclose our report of settlement.

We confirm that settlement took place on 24 September 1999 at the Sandaun Motel Vanimo.Present at settlement were our Mr. Seno Wekina as lawyer for DFRB, the Chairman, Mr. KellyNaru and Marcus Amito on behalf of the Vendors.

At the outset, we do not comment on the commerciality of the purchase rather we have sought toensure that the legal requirements relating to the conditions precedent have been complied withto protect the interest of the DFRB. These conditions precedent are listed in Part 2 of Schedule 2(copy annexed for ease of reference) and in clause 7.2 (copy annexed for ease of reference).

We also note that the purchase has Board and Ministerial Approval and these are annexed forthe sake of completeness. We also enclose a copy of our company search.

At settlement, in exchange for a Carter Newell Trust Account cheque for K4,770,000.00 madepayable to Fleet Ltd, we received the following:­

1. Signed Minute of Meeting of Director's of Banora Trading Ltd;2. Signed Form 21 ­ Notice of change of Secretary;3. Signed Form 16 ­ Notice of Change of Directors;4. Signed Form 13 ­ Share Transfer5. Signed Resignation of Director forms;6. Signed Resignation of Secretary and Public Officer form;7. Signed Transfer of Shares forms;8. Original Owners copy of State Lease Volume Folio 449. Copy of Power of Attorney10. Copy of Certificate of Incorporation

Except for No.8, all copies of the above documents are enclosed for your review.

The Original Owners copy of the State Lease is enclosed for your safe keeping. Pleaseacknowledge receipt of same.

A copy of the Shareholders Agreement and a copy of the audited accounts, having beenreceived earlier, are enclosed for your file.

No allowances have been made for the following:­

1. State Lease land rent;

2. Municipal rates including Garbage, Water and Sewerage rates.

We are endeavouring to ascertain from Mr. Amito what outstanding rates are applicable up to 24August 1999.

The following requirements are still outstanding:–

1. Corporate Register – According to Marcus Amito, no actual corporate register for thecompany exists. We were presented with a copy of the Certificate of Incorporation on Change ofName (enclosed). We are following up with Mr. Amito on this and we hope to receive theupdated corporate register for our inspection soon.

Please note that the registered office of the company is listed as Section 6 Lot 11 Vanimo. Underthe Companies Act 1997, the corporate register and all company documents must be placed inthe corporate register and kept at the registered office of the Company.

2. Share Certificates ­ we did not receive the old share certificates for cancellation. According toMr. Amito, there were no share certificates in existence. We have written to Mr. Amito requestingthe cancellation of the old certificates. In case they cannot be located, we have outlined to Mr.Amito, the steps to take to ensure compliance with the Companies Act 1997. We have prepareda fresh Share Certificate in the name of the DFRB for signing by the Directors of DFRB and safe­keeping by you.

3. Bank Authority for alteration of account ­ At settlement, no authority was received howeverwe were informed that a letter was to be prepared authorising the alteration of the account and acopy was to be forwarded to us for our file. The Chairman was advised of this and he confirmedthat this was satisfactory. We are following up with Mr. Amito on this and shall send you a copyof the letter shortly.

4. Common Seal ­ We advise that the common seal is currently with the management of theSandaun Motel, at the request of the Chairman.

In relation to the conditions precedent stipulated in Part 2 of Schedule 2, we advise as follows: ­

1. The company has paid all wages, entitlements and benefits to all staff as of Friday 20 August1999. We are endeavouring to obtain a confirmation letter from Mr. Amito.

2. The Chairman inspected the assets and satisfied himself that the Assets correctly recorded aslisted in Schedule 5

3. Our Mr. Seno Wekina and the chairman were informed that there were no assets secured by athird party­ Our title search shows that the only encumbrance, that is, a Westpac Mortgage No.3841 was discharged on 17/02/1999. Our company there were no charges registered against theCompany. We are endeavouring to obtain a letter confirming same from Mr Marcus Amito foryour comfort.

4. Our Mr Wekina was advised that the business name "Sandaun Motel" be not registered. OurBusiness name search (enclosed) confirms it.

In order to complete all legal formalities, the following will need to be completed:­

1. Consent to act as Director for signing by Col. Reginald Renagi, Col. Philip Playah, Vali Asi andyourself. NOTE: Please date the consents 24 September 1999.

2. Form 15 ­ Consent to Act as Director for signing by Col. Renagi, Col. Playah, Vali Asi andyourself at the places where indicated in pencil.

These forms were given to Mr Kelly Naru.

Please arrange for all forms to be signed sent back to me for filing at the Registrar of CompaniesOffice before 24 September 1999 along with a Bank cheque made payable to the InvestmentPromotion Authority for K75.00 being lodgement fee's.

Once you send to us the original Share Transfers, we will need to attend to payment of stampduty.

We note the comments of Mr. Robert Aisi in his letter to you of 2 June 1999 on the subject andadvise that we concur with Mr. Aisi's view.

If we were to lodge the transfers, based on a valuation of K1, 600.000 being the value of each ofthe five shares, stamp duty will be assessed on 1 % of the principal. We estimate that stampduty liability will be in the vicinity K53, 000.00.

We note that the Share Sale and Purchase Agreement is dated 1 June 1999. We are of the viewthat stamp duty payable on the Agreement is nil. Stamp duty will be payable on the sharetransfers, though and as discussed they are assessed at 1 % of the principal.

The share transfers are to be dated 24 August 1999. You will have 1 month to lodge the sharetransfers for assessment of stamp duty, that is 24 September 1999. If you obtain professionalaccounting advice on the value of the shares in relation to stamp duty; this will need to beobtained as a matter of urgency. If the transfers are lodged after 24 September 1999, substantial

penalties will apply so your urgent action is required.

In the alternative, you may lodge the documents at the stamp duties office for assessment andpay the assessed rate of stamp duty.

TO recap, you will need to attend to the following:­

1. PRIORITY: Ensure that the company bank account signatories have changed;2. PRIORITY: Engage an accountant to determine the value of the shares for the purposes ofstamp duty before 24 September 1999 or give us instructions to lodge the transfers forassessment of stamp duty.3. Review the documentation supplied by our firm and advise on any further action required byour office;

4. Ensure that all Forms required by the Companies Office have been signed and sent back toour office for lodging with the Companies Office with a bank cheque for K75.00 made payable tothe Investment Promotion Authority.5. Liase with our office to ensure those all­outstanding issues have been finalised before 24September 1999.

Should you require any further clarification on the above, please contact the writer."

(e) It is plain, in our view, from the uncorrected error on page 1 of this letter "settlement took place on24th September 1999", the request on page 3 of the letter "NOTE: Please date the consents 24September 1999" and the emphasis of the need to have documents filed at the Companies office anddocuments lodged for stamp duty by 24th September 1999 that there was a rush to complete thisletter around that date.

Several aspects of this letter and its enclosures require comment, being:­

I. In the second paragraph of the letter, it is said "Present at settlement were our Mr Seno Wekina aslawyer for DFRB, the Chairman, Mr Kelly Naru and Marcus Amito on behalf of the Vendors".

When Mr Darby Kila gave evidence on who was present on settlement, theCommission appeared incredulous when he said that as he understood it, Mr Naruwas present on settlement as the lawyer for the vendors and that Mr Wekina waspresent as the lawyer for the DFRB Board (see Transcript p.343).

When Mr Wekina was asked the same questions, this paragraph of this letter of 6thSeptember 1999 was put to him and his evidence proceeded:­

"Q: Is that what happened on settlement that you were there representing theDefence Force Retirement Benefits Board and Mr Naru and Mr Marcus Cullinan werepresent representing the vendors?

A: No, Mr Naru was not representing the vendors. He was there as chairman ofDFRBF.

Q: What was his role? You were the lawyer who was reporting as you said earlier toMr Toua. Was anyone representing the vendors?

A: No, there was not any lawyers representing them.

Q: What was Mr Naru's role? Was he just an observer, was he?

A: Hang on. Sorry, I think Mr Naru was counsel for the vendor. I cannot quite recall, Ithink he did act for the vendors but I am not too sure.

Q: Do you see any problem in that?

A: Yes.

Q: What problem do you see?

A: There was a conflict of interest I think with him being the chairman and the lawyeracting for the vendor.

Q: Fairly obvious and fairly serious conflict of interest, is it not?

A: Yes.

Q: Other than being involved in that report letter, did you have any furtherinvolvement in the transaction?

A: No, I cannot recall any further involvement.

Q: Mr Chairman, I have no further questions of Mr Wekina.

THE CHAIRMAN: I do not have any questions but I want to confirm one thing. You said that Kelly Narudid not represent the vendors and then later on I understand you to say that he actually did representthe vendors.

A: Yes, I cannot really recall but I think we acted for both parties in the transaction.My memory is not that good and I was assisting Paul who acted for the purchasersand I think Mr Naru was acting for the vendors, but I cannot be sure.

Q: No further questions." (Transcript pp. 4530­1)

The answer is perhaps found in the Carter Newell Invoice 17153 eventually produced to theCommission under Summons on 30th May 1999.

A copy of that Invoice taken from Commission Document DCD400 will be Tendered DocumentSM754 to SM756.

The invoice is addressed to "The Manager, Banora Ltd" for the attention of Mr Marcus Cullinan and isdescribed as "Interim memorandum of fees re sale of Sandaun Motel" for the period 18th March 1999to 18th June 1999 and bears the reference "Matter No. 990204/KN".

The document even though it relates to an earlier period – and to which it will be necessary to return ina supplement to this opening – leaves no doubt who was acting for the vendors and no doubt as to theuntenability of his so doing.

I. Carter Newell in paragraph 3 of the letter and after disowning the commerciality of the transaction,describe their role as seeking "to ensure the conditions precedent have been complied with to protectthe interest of the DFRB" and then refer to only Part 2 of Schedule 2 and Clause 7.2 of the Contractcopies of which are attached to the letter "for ease of reference".

Some may think that for the fees which were charged attending to the four (4)conditions precedent hardly described what the DFRB Board was entitled to expectfrom the lawyers engaged at Mr Naru's direction to act for it on this transaction.

What was done in this regard is dealt with later in the letter and merits examination. Itis first said of this first condition precedent, all wages to staff were paid as of Friday20th August, 1999 and Carter Newell were endeavouring to obtain a confirmationletter from Marcus Cullinan.

It is notable that Mr Wekina said nothing in this regard was done by him whilst inVanimo; that this is one of the questions asked in the letter after Completion to MrCullinan on 1st September 1999 (see SM701) and that the file note (SM748) records"paid up to last Friday 22nd August".

Of the second condition precedent ­ verifying the Assets Register, it is said Mr Naru(who was acting for the Vendors) inspected the assets and satisfied himself theywere correctly recorded in the Asset Register. Mr Wekina on the other hand, says hemade no such inspection at Completion and the file note (SM748) simply shows theitem ticked.

As to the third condition precedent – checking no assets were encumbered – it is

simply said Mr Wekina and Mr Naru "were informed there were no assets secured bya third party"; that title and company searches showed no registered mortgages orcompany charges and again that confirmation was being sought "from Mr MarcusAmito for your comfort".

It is, again, noteable that Mr Wekina said he did nothing at Completion in this regard;that this is another of the questions asked in the letter after Completion to Mr MarcusCullinan on 1st September 1999 (SM701) and the file note (SM748) again simplyshows the item as ticked.

There is no mention of the fact that only one vehicle was included in the AssetRegister yet the 1998 Accounts showed four (4) vehicles were owned and had beenpurchased in 1997 and it seems to have escaped detection that the poker machinesincluded in the Asset Register were in fact, owned by Lord and Company.

Of the fourth condition precedent – the registration of Sandaun Motel as a businessname – it is simply said the name is not so registered and a copy of the search(which was only ordered on 1st September 1999) is attached. Not a word is saidabout the consequences.

As we have earlier said, the agreement provided in Clause 5.1 (see SM536) that theconditions precedent in Schedule 2 Part 2 were to be fulfilled by the ConditionsSatisfaction Date which was defined as 30th June 1999 (see SM533) and that if notso fulfilled or waived "on or before the Condition Satisfaction Date then thisAgreement automatically terminates and is of no further force or effect" (see clause15.2 – SM536).

There is no evidence of any waiver (which is required by clause 11.2 (see SM541­2)to be in writing; there is no evidence of any checks of fulfilment of the ConditionsPrecedent being fulfilled prior to 30th June 1999 and there is no evidence the DFRBBoard was ever advised of the consequences of non­fulfilment.

It can only be concluded that if, despite the terms of the retainer letter and the level offees charged, Carter Newell was only retained to "ensure the conditions precedenthave been complied with to protect the interests of the DFRB" then they failedmiserably in that task.

(iii) The first numbered document enclosed for review was the signed Minutes of meeting of directorsof Banora Trading Ltd. These were the minutes of the Completion Board meeting held 24th August1999. A copy of these minutes, taken from the Carter Newell file (Commission Document 3B) will beTendered Documents SM757 and SM758.

The first item of those minutes records that the chairman, Mr Marcus Cullinan, tabled consents to actas directors of the company of Kelly Naru, Colonels Philip Playah and Reginald Renagi and Darby Kilaand Vali Asi and a resolution that these men be appointed directors of Banora Trading Limited"effective termination of this meeting".

In the Carter Newell letter of 6th September 1999 which we are now considering forms of consent andStatutory forms 15 are enclosed for Colonels Playah and Messrs Vali Asi and Darby Kila with the"NOTE: Please date the consents 24th September 1999".

Section 114 of the Companies Act 1997 provides that a director of a company shall not act or agree tothe company acting, in a manner that contravenes the Act or the Constitution of the company and thata director who acts in contravention of that requirement commits an offence and is liable on convictionto the penalty set out in Section 413(2).

Section 130 of the Companies Act 1997 provides that a person shall not be appointed as a director ofa company unless he has consented in writing, in the prescribed form, to be a director…"

Section 413(2) prescribes a fine not exceeding K10,000.00.

It seems, on this evidence, that offences were committed by Mr Marcus Cullinan on 24th August 1999in respect of the appointment as directors of each of Colonels Playah and Renagi and Messrs Asi andKila.

It will further be noted that the resolutions as to the five (5) share transfers admit of registration of thetransfers and issue of the new share certificate prior to stamping and we will need to wait to see whatoccurred in this regard.

The minutes do not deal with alterations of bank signatories as required by the Agreement.

(iv) The seventh and eight numbered documents enclosed for review were the resignations of MarcusCullinan and Kevin Apita as directors and Marlene Kupe as Secretary and Public Officer. Copies of theoriginally signed documents taken from the Carter Newell file (Commission Document DCD3B) willbe Tendered Documents SM759 to SM761.

It will be noted the documents were those faxed to Vanimo by Mr Toua on 24th August 1999 at 15.58.

The resignations of Kevin Apita and Marlene Kupe are not signed by those persons but by MarcusCullinan.

Section 135(l) of the Companies Act 1997 provides the office of director of a company is vacatedwhere "the person holding that office resigns" in accordance with Section 135(2). Section 135(2)provides "a director…may resign office by signing a written notice of resignation…"

The language suggests a personally signed document is required and not a document signed byanother person under Power of Attorney. Neither document shows on its face that it was signed by MrMarcus Cullinan as attorney under Power of Attorney and, yet again, there is no declaration of non­revocation of the Power of Attorney.

In our view it is legally doubtful that the documents so signed are legally effective the more so in thecase of Kevin Apita as a director.

(v) Even though the Agreement provided for a Completion adjustment for state lease rent andprovincial charges, the letter of 6th June 1999 simply says no allowance was made and "we areendeavouring to ascertain from Mr Amito what outstanding rates are applicable up to 24th August1999".

We will wait to see what occurred on this aspect.

Again, it is noteable that Mr Wekina said he did nothing on Completion in this regard and this again isone of the questions raised after Completion in the letter of 1st September 1999 to Mr Marcus Cullinan(see SM700).

(vi) The matters of the corporate register, vendor's share certificates and alterations to bank authoritywere still noted as "outstanding" and all had again been included in the questions raised afterCompletion in the letter of 1st September 1999 to Mr Marcus Cullinan (see SM700­1).

(vii) The final item advised at the eleventh hour about stamp duty which had been addressed by theCarter Newell letter of 24th September 1999 (SM742) as Carter Newell had all the required documentsand probably only needed the share transfers signed on behalf of the DFRB Board.

Little more needs to be said of this "report letter" as it is plain what attention had been given to theinterests of the DFRB Board in this transaction where its lawyers had a clear conflict of interest anddespite the purchase price of K5.3 million and the level of legal fees charged.

(f) On 27th September 1999, Carter Newell wrote to the Registrar of Companies attaching forms 15,16, 20 and 21 regarding the changes of directors and secretary of Banora Holdings Limited.

These forms, 16 and 21, had been taken by Mr Wekina to Vanimo and signed by Mr Marcus Cullinan.Copies of the forms as so signed which it will be noted were blank as to the dates of appointment orcessation taken from the Carter Newell file (Commission Document 3B) will be TenderedDocuments SM762 to SM765. Copies of the Carter Newell letter of 27th September 1999 to theRegistrar and of the forms attached to it also taken from the Carter Newell file (CommissionDocument 3B) will be Tendered Documents SM766 to SM775. It will be noted all these documents,or the first page of the returns, bear the Registrars stamp of 27th September 1999. The following willbe observed:­

I. the prescribed Form 15 Consent and Certificate of Directors are dated –

­ Kelly Naru ­ 23.9.99­ Philip Playah ­ 8.9.99­ Reginald Renagi ­ 08/09/99­ Darby Kila ­ 8/9/99

It thus seems clear, as suggested in (d)(iii) above that there were four (4) contraventions of Section130 of the Companies Act 1997.

(ii) The Form 16 first signed by Mr Marcus Cullinan (SM762­3) is different to that filed with theRegistrar (SM770­1) in that Mr Vali Asi appears as a director in the former but not in the latter, theformer is dated 24th August 1999 and the latter 23rd September 1999 and the former leaves the dateof appointment and cessation in blank whereas the latter shows all changes on "23.9.1999".

(iii) The prescribed Form 21 first signed by Mr Marcus Cullinan (SM764­5) is different to that filed withthe Registrar (SM773­4) in that the former is dated 24th August 1999 and the latter 23rd September1999 and the former leaves the date of appointment and cessation in blank whereas the latter showsthe changes on "23.9.1999".

Section 137 of the Companies Act 1997 requires a notice in the prescribed form (Form 16) to be givento the Registrar in respect of changes of directors (with in the case of new directors the form ofconsent and certificate (Form 15) attached) within one month of the change occurring.

Section 170 of that Act similarly requires notice in the prescribed form (Form 21) to be given to theRegistrar in respect of changes of Secretary (with in the case of a new Secretary the form of consent(Form 20) attached) within one month of the change occurring.

Late lodgement of these returns attracts an additional fee of K25.00 per return if it is up to 1 month lateor K100.00 per return of it is more than one month late – this flows from Section 2 and Schedule 2 ofthe Companies Regulation 1998.

In an apparent effort to avoid the small fines payable on these returns it is clear that the changes wereshown to have occurred on 23rd September 1999 in both the Forms 16 and 21 rather than 24thAugust 1999. Another reason would be to conceal the fact that the appointments made of directors on24th August 1999 had contravened Section 130 of the Act because the requisite consents had notbeen signed in the prescribed form.

The consequences of avoiding the additional fees and concealing the Section 130 contraventions inthis way and getting so clearly caught doing it, are two­fold.

First, it attracts Section 420 of the Companies Act, which provides that every person who with respectto a document required by the Act makes or authorises the making of a knowing false or misleadingstatement commits an offence and is liable on conviction to the penalty set out in Section 413(4) – afine not exceeding K200,000.00 or imprisonment for a term not exceeding five (5) years or both.

Second, Section 420 appears by its reference to "person" to extend not only to the person who madethe false statement (or we say signed the false document) but to other persons who were privy to thatconduct.

In our submission and in the absence of a reasonable and verified explanation to the contrary, theCommission would be obliged to advise the constituting authority that these further apparentcontraventions be referred to the Registrar of Companies with a view to prosecution of all personsinvolved in those contraventions.

25.7 Marcus Cullinan purchases two new vehicles

(a) We have already dealt with Mr Uware's evidence that when he was in Vanimo from 12th to 14thSeptember 1999 with Mr Kelly Naru, he was instructed to examine the purchase / lease of a new fleetof vehicles and from Mr Uware's memorandum to Mr Kila (Tendered Document SM725) that MrUware stated the fleet would consist of one (1) 15 seater Hiace bus, one (1) Hilux 2 wheel drive utilityand four (4) Hilux 4 wheel drive utilities at an estimated cost of K395,000.00.

(b) With no prior reference to or authority from the DFRB management, Mr Marcus Cullinan wentahead and traded in the only vehicle included in the Asset Register in the Agreement and purchasedthe first two (2) of the intended vehicles – the 15 seater bus and the two wheel drive Hilux utility at atotal cost of K68,749.00. He paid for the vehicles out of the Fleet Limited bank account into which the

K5.3 million (less legal fees) had been paid and by cheque # 583155 drawn on that account in favourof Ela Motors, Vanimo.

A copy of the cheque, taken from Commission Document DCD40 will be Tendered DocumentSM776.

The debit of the cheque is recorded on the bank statement, which is Tendered Document SM733.

(c) Mr Cullinan then wrote to Mr Kila on 27th September 1999 a faxed letter a copy of which (withattachments) taken from Commission Document DCD23 will be Tendered Documents SM777 toSM780, which read:­

"FUNDING FOR MOTOR VEHICLES K68,749

I wish to bring to you attention that we have purchased two (2) motor vehicles from Ela Motors earlythis month (17th of September 1999). Details of which are as follows:­

(1) Toyota Hilux 2 wheel Drive, S/C. We traded in our old D/C 4 x 2 K18,000.(2) Toyota 15 seater – bus K50,749Total Cost K68,749

These vehicles were to have been funded by AGC Finance however with the delay in getting thepaper work (cashflow, financial statement etc) organized, and the vehicles having been released byEla Motors on 17/09/99, my family company proposes to purchase them for the Motel.

The understanding would be that once funds from AGC Finance is secured by early next month themoney can be reimbursed to my family company at no cost to the Motel. Alternatively the Motel couldlease the two (2) vehicles under the similar terms and conditions to that which is offered by AGCFinance. The arrangement would not affect our cashflow situation, as these vehicles would be self­funding.

We propose to acquire two (2) vehicles for the Vehicle hire business. These would also be financed byAGC Finance.

I trust the above arrangement is agreeable with you."

(d) The kindest one could be to Mr Cullinan is to say he was clearly not used to a system where theowner of the business he was managing needed to approve capital purchases and significantexpenditure in advance.

We will come back to the vehicles and evidence in respect of them when we deal with the furthervehicle purchase in October 1999.

26. OCTOBER 1999

26.1 Questions raised in the National Parliament

(a) It would seem that on 22nd September 1999, questions were raised in the National Parliamentregarding the Sandaun Motel acquisition and as a consequence of those questions, the Chief of Staffof the Office of the Prime Minister, Dr. Jacob Jumogot, contacted Mr Kila and requested a brief.

(b) Mr Kila provided to Dr. Jumogot a quite frank brief dated 1st October 1999 – a copy of which, takenfrom Commission Document DCD23, will be Tendered Documents SM781 to SM783 and whichreads:­

"As per your request of even date, hereunder is a brief on the purchase of the Sandaun Motel inVanimo, Sandaun Province, by the Defence Force Retirement Benefit Fund. Due to time limit, I amable to provide an executive brief.

1. PROPOSAL ­SANDAUN MOTEL SALE

This proposal was introduced to the Board by the Chairman in their Meeting No. 1/99 of 1st March,1999. The meeting was then held in Vanimo. The proposal was in a form of a letter from the owners

expressing an offer of sale of the motel at US $ 2.5 million. The exchange rate at that time was ataround point four one (.41) US cent, hence was at approximately K 6.0 million.

The Board­then resolved to acquire the Motel subject to:

­ Property valuation

­ Business valuation­ A counter offer

2. VALUATIONS

Two property valuations were received from Veraga Valuation and Port Moresby First Real Estate.Both valuations were at the same vicinity of K 5.1 to 5.5 million.

Unfortunately, a Business valuation was never undertaken despite Management's constant advice tothe Board. This process would normally be based on the previous three years Financial accounts,however, although the financial reports of the Motel were received, the Fund managers considered itincomplete and therefore would not proceed to evaluate.

Despite this, the Board continued to push for the purchase regardless with a counter offer of K 5.3million.

3. FINANCIAL RETURNS

The push to purchase was basically for the following:

a) Based on the financial report of the Motel then, it was making a gross revenue of approximately K1.0 million per year. With the Fund's investment of K 5.3 million, the returns were at more than 12%minimum as per the Funds investment policy.b) The payback period of our investment would be within 10 years.c) With the proposed declaration of the Free­Trade zone around the Vanimo area, this would enablemore activities which would great benefit to the Motel in the long run.

4. CONTRACT OF SALE

A contract of sale was executed with the amount of K 5.3 million paid in the followingbreak­down;

­ K 530,000 to Carter Newell Lawyers trust account as a 10% deposit, and­ K 4.770 million to Fleet Limited for the balance."

5. FUTURE PLANS

The Funds plan through the new Sandaun Motel Board is to engage a reputable andprofessional hotel manager to manage the Motel under a professional contractarrangement. Currently, a temporary management arrangement is in place until this plan isfinalized.

6. CONCLUSION

In conclusion, this investment was a rushed and was pursued vigorously at Board levelwithout any of the Management involvement. Although some expression of concerns wererelayed by certain Board Members, these were basically ignored.

However, since the purchase has been finalized, it is now the Management's intention andproblem to ensure that this particular asset is not abused nor mismanaged. We are nowmonitoring the performance closely until a professional Hotel Manager is properly engaged.

At enclosed are all the documents pertaining to the investment.

Sir, should you require further assistance, I will be much obliged to avail myself at yourconvenience."

(c) KSL also reacted to the matter being raised in the National Parliament and on 18th October 1999wrote to the Prime Minister a letter in the following terms:­

"RE: DFRBF – PURCHASE OF SANDAUN MOTEL

The matter concerning the purchase of Sandaun Motel was raised in Parliament on Friday, 22ndSeptember 1999.

Please find enclosed a full report concerning the above matter in chronological order to facilitate theprocess of evaluation.

Subsequent to the purchase, the Fund had to advance K60,000 for working capital. Kina Securitiesobject to the investment after an extensive evaluation process which subsequently resulted in KinaSecurities Limited loosing its right to veto inappropriate investments that would jeopardize the Fund.

Should you require further information, please contact the writer."

Copies of the original letter, brief and document summary taken from the Finance Department fileCommission Document DCD22 will be Tendered Documents SM784 to SM789.

The brief summarises KSL's limited role, the advice it had given to DFRB Board and attaches sometwenty (20) key documents in the possession of KSL.

Notes on the face of the original letter, show it was received in the Office of the Prime Minister on 26thOctober, 1999 and the Office of the Secretary for Treasury and Corporate Affairs on 2nd November1999. It was then marked out to the Deputy Secretary Policy with a note "Dep Sec (Policy) Pls review /analyse and draft memo / response (INITS) 4/11/99". The date stamp of the Deputy Secretary Policy is5 November 1999 and it appears he wrote a further note "FAS(EPU) O. Avea.I. This is a very serious matter.II. Did they obtain Sec 61 approval and all necessary evaluation requirements including boardapproval prior to purch.III. Review and brief / response for PM by 12/11IV. For immediate action (INITS) 9/11"

The letter is date stamped in the Office of Public Enterprises and Asset Management as received on10th November, 1999 and there is a note:­

"Was, Review and advice plse (INITS) 21/11".

It seems from the documents provided by the Department, that absolutely nothing was done and thereis no evidence of any brief to the Prime Minister.

The commission may wish to have the relevant officers (who were the same people as were involvedin the Section 61 application) called to explain how this matter appears to have died a bureaucraticdeath.

26.2 Some activity at Carter Newell

(a) The Carter Newell Invoice 17839 (Tendered Document SM738) contains the following entries:­

"4 Oct 99 Peruse letter from Internal Revenue Commission and review file. Letter to Darby Kila.5 Oct 99 E­mail message to Paul Toua reporting on letter from Internal Revenue Commission re:Action taken and further action required by him.6 Oct 99 Letter to the General Manager of Defence Force Retirement Benefit Fund.8 Oct 99 Redrafting Form 16 and letter to Investment Promotion Authority."

All entries appear to relate to stamp duty and the Form 16 lodged with the Companies office.

(b) The related Carter Newell file (Commission Document DCD3B) contains three relevantdocuments.

First, a Stamp Duty Assessment dated 28th September 1999 and received on 4th October a copy ofwhich will be Tendered Documents SM790 to SM792.

Second, a faxed letter from Mr Seno Wekina to Mr Kila dated 6th October attaching the assessment

letter, requesting a bank cheque for the assessed duty of K53,060.47 and advising Mr Toua will returnfrom leave on 11th October 1999. A copy of this letter will be Tendered Document SM793.

Third, a letter from the Registrar of Companies dated 28th September 1999 and received 7th October1999 confirming the Form 21 has been accepted and registered. A copy will be Tendered DocumentSM794.

There is also a later letter from the Registrar of Companies dated 12th October and received 13thOctober 1999, confirming the Form 16 has been accepted and registered. A copy will be TenderedDocument SM795.

This later letter is consistent with the Registrar raising a requisition on the Form 16, which wasattended to.

The relevant matters flowing from these documents are that the company returns, which had beenfiled, had been accepted and stamp duty assessed.

The single matter of note is that the stamp duty assessed consists duty, penalty and interest of K60.47on a Power of Attorney and K53,000.00 on transfer of marketable securities (i.e. Share transfers).

DFRB Board was, thus, asked whether by accident or design by its lawyers to pay the stamp duty,penalty and interest on the Power of Attorney, which was clearly the responsibility of the other client ofthose Lawyers – the Vendors.

Yet again, the interests of the DFRB Board were not being protected.

26.3 Some activity at DFRBF – the tide turns

(a) Mr Kila referred the question of the motor vehicles acquisition to Mr George Uware who respondedwith a memo to Mr Kila dated 4th October 1999, a copy of which, taken from Commission DocumentDCD23, will be Tendered Documents SM796 and SM797.

Mr Uware recommended that the unrequested loan from Fleet Limited be accepted with acommercial rate of interest to be paid until lease finance was secured.

Mr Kila endorsed the memo accepting Mr Uware's advice, asking him to prepare a letter toadvise Marcus Cullinan accordingly and to advise that he, Mr Kila and Mr Uware wouldtravel to Vanimo on 10th October 1999.

(b) Mr Uware prepared a letter to Marcus Cullinan dated 4th October 1999. The letter did as askedand added two (2) things.

First, it advised that the travel allowances for the planned trip from 10th to 12th October1999 of K450.00 each for Mr Kila and Mr Uware should be paid by Sandaun Motel.

Second, it advised that at a Banora Trading Limited Board meeting held on 4th October1999 – which we will shortly come to ­

"it was unanimously resolved that the official channels of communications from the motelshould be through the office of General Manager of the DFRBF Board. Both you and Ishould liase closely with each other on matters affecting the operation of the motel so thateverything is co­ordinated through a central point where there are proper checks andbalances. The Banora Board will only be advised of our operations on a periodic basis,preferably on a quarterly basis. They should not be involved in administrative or operationalmatters."

A copy of this letter from Commission Document DCD23 will be Tendered DocumentsSM798 and SM799.

(c) On Monday 4th October 1999 a Board meeting of Banora Trading Limited 2/99 was held.

The minutes – a copy of which taken from Commission Document DCD23, will beTendered Documents SM800 to SM803 – show that Colonel's Playah and Renagi and MrKila were present, Mr Naru apologised and Mr Richard Sinamoi was in attendance; that the

meeting commenced at 1.40pm and closed at 2.14pm and that by agreement ColonelPlayah acted as Chairman.

The first item of substantive business concerned the two (2) motor vehicles, which hadbeen acquired. Mr Kila reported that Mr Naru had negotiated leases of the two (2) vehiclesthrough AGC Finance; that the vehicles were released by Ela Motors; that AGC Financehad not released funds as the leases were not finalised and Marcus Cullinan's familycompany had accordingly paid Ela Motors and made the offer in the letter earlier dealt with.

The minutes record that Colonels Playah and Renagi "raised concerns over the currentpurchase as they were both under the assumption that at least three motor vehicles wereincluded in the purchase price".

The second item of substantive business concerned management of the Sandaun Moteland the recent trip taken by Messrs Naru and Uware.

Mr Kila reported, "Mr George Uware was not involved with the business discussionsbetween Mr Kelly Naru and the General Manager for Sandaun Motel". Thus he was unableto raise any concerns that was found to be evident among the current operation of theMotel" and that the Cullinan family were still on and around the property. The Boardconsidered it evident that professional management was necessary to obtain a return oninvestment and made resolutions to call closed tenders for management from four majorPNG hotel groups and that "all future operations of the motel should come from DFRBFManagement and not the Chairman and Board members of Banora Trading Limited or theDFRB Board and that liaison and dialogue on operational matters should be betweenDFRBF management and Sandaun Motel management".

The third substantive item of business concerned the Board of Banora Trading Limitedwhere it was resolved that if he agreed Mr. Vali Asi would be Chairman and Colonel RenagiDeputy Chairman or if Mr. Asi declined then Chairman and that Mr. Brown Sinamoi shouldbe invited onto the Board. Mr. Richard Sinamoi was appointed Board Secretary and it wasresolved that the General Manager of Sandaun Motel be given a duty statement, beinformed his primary concern was to lower costs and create profits and that he wasrequired to report and would be monitored monthly.

(d) Following this Board meeting Colonel Playah, as Acting Chairman, wrote to Mr. Marcus Cullinan on6th October 1999 making it clear he was to report to and act on directions of DFRBF management andnot individual Chairmen or Directors and secondly questioning the presence of other Cullinan familymembers at the motel.

A copy of this letter from Commission Document DCD23 will be Tendered DocumentSM804.

(e) Emboldened by the support he had received Mr. Kila also wrote on 6th October 1999 to Mr. Naru aletter a copy of which taken from Commission Document DCD23 will be Tendered DocumentsSM805 & SM806, in the following terms:­

"Dear Mr. Naru,

RE: SANDAUN MOTEL ­ HIRE VEHICLES

You would recall that during discussions to acquire the Sandaun Motel, and included in thecopy of the financial reports of the Motel, were a few vehicles listed as assets.

Unfortunately, these vehicles could not be verified at the last meeting with my managementrepresentative. On observation, there was only one. Furthermore, the chattels and capitalitems as recorded and listed could not be verified by my management representativeeither.

These are my grave concerns, as such actions are preventing my management toeffectively ascertain total asset listing and value as at settlement date. It would seem thatthe Motel's asset register and record is incorrect. Until and unless all chattels are verified,there is no guarantee that the assets we have acquired are still intact or existing in our

motel assets listing as to date. These assets should have been verified before any newpurchases should be considered.

I am also in receipt of a proposal from the Sandaun Motel General Manager regarding thehire vehicles. As you are aware, you negotiated the release of two vehicles from ElaMotors without the approvals being firstly obtained from the Motel's financiers. As financingis slow in coming, the two vehicles have been purchased by the General Manager's familycompany. This is sadly bad business practice and now brings into question the creditabilityof the Motel's new owners ­ the DFRB Fund.

In view of this, it is now my plea and recommendation for you to refrain from beinginvolved in management and operational functions of the Motel except to give us directionthrough the Banora Trading Board wherever necessary.

Such action will ensure that the Board/Fund management in liaison with the Motelmanagement should now be actively involved in the Motel business. In this way, there willbe proper checks and balances to ensure the profitability of the Motel. It is now mymanagement's problem and I earnestly request you to cease any involvement in the futureand leave it to both managements alone. We will both come to you through the BanoraBoard in respect to matters beyond our jurisdiction.

I write this with all due respect, concern for the current Executive Management and theFund's future creditability in business dealings.

Yours

DARBY G.V. KILA (Mr)General Manager

cc: Deputy Chairman (DFRB Board) ­ Mr. V. Asi Board Member (DFRB Board) ­ Col. R. Renagi OBEBoard Member (DFRB Board) ­ Col. P. Playah, MBE".

It seems plain that with the different constitution of the Board of Banora Trading Limited thedynamics of power regarding Sandaun Motel had changed and with that the tide appearedto be turning against Mr. Naru's involvement.

(f) It will be recalled that Mr. Uware had in his report on his visit to Vanimo with Mr. Naru mentioned anapproach by Mr. Brian Cullinan to reimburse about K19,000.00 for services rendered in July 1999 butfor which payment was banked after 1st September 1999 (see 25.3(e) and SM725).

On 5th October 1999 Mr. Kila wrote to KSL regarding this payment made by Elcom saying,"Our views differ on this matter as we believe that DFRBF acquired Sandaun Motel as a'going concern' and therefore trade debtors and creditors should have been part and parcelof the business acquired and therefore we are not obliged to reimburse the formerproprietors" and seeking KSL's advice.

A copy of this letter and of the fax cover under which it was faxed on 6th October 1999 byMr. Yates to Mr. Coumbis at Blake Dawson Waldron taken from Commission DocumentDCD13 will be Tendered Documents SM807 and SM808.

(g) On 7th October 1999 Mr. Marcus Cullinan faxed two letters to Mr. Kila one addressed to ColonelPlayah and the other to Mr. Kila.

Copies of the fax cover and two letters taken from Commission Document DCD23 will beTendered Document SM809 to SM812.

The letter to Colonel Playah deals with essentially three matters – first the direction as tocommunications, second a vigorous denial of the Cullinan family being at the Motel otherthan as customers and a catalogue of assistance said to have been given by Fleet Limitedbetween 1st and 18th September 1999, "while awaiting Working Capital from DFRB" and

third a list of management achievements said to have been made including, "Carry outstock take on 30/09/99".

The letter to Mr. Kila deals with vehicles and the proposed visit by Messrs Kila and Uware.On the vehicles, Mr. Cullinan says, "The present position of the Motel in terms with regardto motor vehicles is not so good. There is a need to purchase at least 2­3 additional unitsfor the hire car business. This would need to be clarified to you on your visit.

Arrangements have been made with AGC Pacific Finance to purchase two (2) unitspending approval from your office".

On the trip it is said air tickets were sent and "Your TA would be paid on arrival".

26.4 DFRB Board meeting 3/99 – 6th October 1999

(a) The minutes of this meeting – a copy of which taken from Commission Document DCD24 will beTendered Documents SM813 to SM817 – show that Mr. Naru and Colonel's Playah and Renagi werepresent, Mr. Vali Asi was not present and Messrs Darby Kila and Richard Sinamoi were in attendance;that the meeting opened at 3:25pm and was closed at 6:25pm so the Board could meet with theDefence Minister Hon. Alfred Pogo for a briefing at 6:30pm.

(b) The DFRB Board had not previously met since Special Board meeting No. 12/99 on 26th August1999 and it is notable that the first item of business involved approval of the minutes of nine (9) Boardmeetings held between 14th May 1999 and 26th August 1999. This clearly substantiates Mr. Sinamoi'sevidence that minutes of prior Board meetings were only dealt with at ordinary Board meetings andthat Mr. Naru dealing with the "Minutes" of the so­called "Tele­conferencing meeting" at the SpecialBoard meeting on 26th August 1999 was not usual.

(c) Somewhat surprisingly there is no mention of the Sandaun Motel according to the minutes of thismeeting. Noteable items dealt with at the meeting were:­

(i) A board direction to require KSL to reduce Term Deposits with Kina Finance Limited toK3.0 million and to involve DFRB management in the bidding process for Term deposits.

(ii) rejection on KSL's advise of three investment proposals including a proposal to acquireshares in Freeway Motors (the business which dealt with the sale to DFRBF of Mr. Kila'sToyota Landcruiser and the sale to Mr. Kelly Naru of the ex DFRBF Mitsubishi Pajero).

(iii) approval, against KSL's advice of an investment in Pacific Capital ResourceManagement Limited – which though it is not within in the Commission's Terms ofReference, we understand has also been a disaster.

(iv) abandonment of the proposal to invest in customary land on the Vanimo/Jayapuraborder.

(v) the proposal to purchase land for the Members Housing Assistance Scheme wasplaced on hold, "due to the change in Defence Ministers and the letter from the PrimeMinisters office instructing that all land matters be placed on hold forthwith".

(vi) Mr. Kila reported on the purchase of the Canberra property and yet again theratification (the minutes say "verify") of Mr. Kila's action in signing the contract was movedby Colonel Playah who even to this time had not declared his interest as the DefenceAdvisor designate to Canberra.

26.5 Messrs Kila and Uware Travel to Vanimo

We have no direct evidence about what occurred on this trip but it seems from what occurssubsequently that there would have been discussions about financial aspects including the figures forthe month of September 1999 and in relation to vehicles. We will deal with those aspects when therelevant documents are later considered.

26.6 Mid October activity at Carter Newell

(a) The Carter Newell Invoice 17839 (Tendered Document SM738) contains the following entries:­

"12 Oct 99 Transcribing tape and memo to Mr. Kelly Naru.13 Oct 99 Transcribing fax to Sandaun Motel.13 Oct 99 Memorandum to Mr. Kelly Naru requesting cheque for stamp duty and telephoneout to Darby Kila. Letter to Banora Trading.14 Oct 99 General file attendance".

(b) The related Carter Newell file (Commission Document 3B) contains three documents whichsubstantiate some of these entries.

On 12th October 1999 Mr. Paul Toua sent an inter­office memo to Mr. Kelly Naru attachinga copy of the stamp duty assessment and asking Mr. Naru to organise a bank cheque forthe assessed duty of K53,060.47 before 28th October 1999.

A copy of this memo will be Tendered Document SM818.

On 14th October 1999 there is a handwritten note of an outward phone call which reads:­

"T/O Darby Kila – DFRB 14/10/99

I. Stamp Duty included in 10% depositII. Located in Share Sale Agreement – Clause 4III. Bank authority – settled IV. Share certificates – yet to comeV. PT to send L to Banora cc. Mr. Kila".

A copy of the note, which is largely self­explanatory, will be Tendered Document SM819.

The letter from Mr. Toua to Marcus Cullinan is in fact dated 13th October 1999 and reads:­

We refer to our letters of 1 September 1999 and 6 September 1999 (enclosed for ease ofreference) and request that you kindly attend to the requirements in our letter of 1September 199 so that we may complete our file in this matter".

A copy of this letter will be Tendered Document SM820.

26.7 Mid October activity at Sandaun Motel

(a) Though there was activity at Sandaun Motel in the form of the financial statements for September1999 and in relation to motor vehicles we will deal with those matters in the next section concerningwhat happened at DFRBF.

(b) As shown in Tendered Document SM696 (and evidenced by the bank statements in CommissionDocument DCD194, the Lord & Company monthly statements in Commission Document DCD51Aand the vouchers and copy cheques in Commission Document DCD254), the Lord & Companycheque # 877769 for K22,863.35 in respect of poker machine commissions for September 1999 wasbanked to the credit of the Sandaun Motel bank account 8422 with PNGBC Vanimo on 12th October1999.

On 13th October 1999 cheque # 7578 payable to PNGBC for K22,683.35 was presented atPNGBC Vanimo and debited to the Sandaun Motel bank account 8422 with PNGBCVanimo.

A copy of this cheque taken from Commission Document DCD254 will be TenderedDocument SM820A.

We are still tracing what occurred with this cheque and will deal with that tracing in asupplement to this opening.

(c) As we have said earlier we will deal with the tracing of the K5.3 million (less legal fees) paid intothe Fleet Limited account with PNGBC Vanimo in a separate and later part of this opening. It is worthyof note that from 4th October to 26th October 1999 air tickets were purchased from Air Niugini andconsiderable sums were withdrawn from this account in both cash and travellers cheques (as can beseen from the cheques in Commission Document DCD40).

Such transactions were in advance of Mr. Brian Cullinan, Mr. Kevin Apita and Dillon TyrenCullinan returning to Australia on 26th October 1999 as shown in the Movements Records(Tendered Documents SM313).

(d) On 15th October 1999 three cheques were drawn on this Fleet Limited account:­

(i) Cheque # 583169 was drawn payable to cash for K30,000.00 and signed by Mr. MarcusCullinan.

Copies of the front and reverse of the cheque taken from Commission Document DCD40will be Tendered Documents SM821 and SM822.

The reverse of the cheque shows that K20,000.00 was taken in cash in notes of K50denomination and that K10,000.00 was credited to a bank account 319­6­9784.

We will come back to this account when we deal with tracing the money.

(ii) Cheque # 583170 was drawn payable to cash for K50,000.00 and signed by Mr. MarcusCullinan.

Copies of the front and reverse of the cheque taken from Commission Document DCD40will be Tendered Documents SM823 and SM824.

The reverse of the cheque shows the whole K50,000.00 was taken in cash in notes of K50denomination.

(iii) Cheque # 583171 was drawn payable to PNGBC for K36,723.92 and signed by Mr.Marcus Cullinan.

Copies of the front and reverse of the cheque taken from Commission Document DCD40will be Tendered Documents SM825 and SM826.

The reverse of the cheque bears a note apparently signed by Mr. Marcus Cullinan reading:­

"Consultancy Fee – M. TulakePlease pay Mr. Tulake accordinglyThank you".

The reverse is also noted "Purchase T/Cheques AUD20,000­".

(e) This third cheque is clearly of concern for it shows at face value that the Kina equivalent ofAUD20,000 was paid to Michael Tulake as "consultancy fees" and there are no prizes for guessingwhat those fees were for given Mr. Tulake's role in the false financial statements and obtaining thefraudulent Auditors Report.

(f) When asked about his payment Mr. Tulake said he was doing the banking for the Motel at the timeand that Mr. Marcus Cullinan gave him to cheque to pick up travellers cheques for him – MarcusCullinan.

He said he phoned the bank and obtained the exchange rate for AUD20,000.00 intravellers cheques. He said he conveyed the information to Marcus Cullinan who drew thischeque and gave it to him and that he went to the bank and got the traveller's cheques andgave them to Marcus Cullinan. The evidence then proceeded:­

"Q: Now, who signed the travellers cheques?

A: Me.

Q: With your signature?

A: Yes.

Q: Whose name were the travellers cheques bought in?

A: Marcus.

Q: In Marcus's name.

A: For Marcus Cullinan.

Q: Well, you see, travellers cheques need two signatures. They need the signature of theperson when they buy it and they need the signature of the person when they present it.Now, how could those travellers cheques have been used by anyone but you if you signedthem?

A: Well, definitely they were not for me.

Q: Well, if you signed them, you are the only person who could have encashed them?

A: They were not for me. You can ask Marcus that.

Q: Well, I do not need to ask Marcus. You see, I know how travellers cheques work. Theway you get security from travellers cheques is, you sign them in the bank when they areissued and you sign them at the other point in front of the person who is cashing themwhen they are cashed. Now, if you signed those travellers cheques at the bank, they could not cashed by anyone else except you. So, what happened to those travellerscheques?

A: I am telling you, they were not for me, all right.

Q: I understand that. Did you go somewhere and sign them again to get them cashed?

A: Never. I never left Vanimo. I never travelled anywhere. See if I went to Jayapura andsigned that or not but you can check with the banks.

Q: Well, see, they could not be encashed unless you signed them?

A: I know that.

Q: Well, it is a pointless exercise unless you got the benefit of those cheques, is it not?

A: I have not.

Q: Well, did you sign any cheques in advance for Marcus? Did you sign as the personreceiving the money and give them to Marcus? You only signed them once at the bank andyou are sure you gave them to Marcus. So, he is the person that should be able to explainwhat happened to them?

A: Yes.

Q: And you did not obtain any benefit from them.

A: You might think I benefited but I have never used it.

Q: Well, you can see how peculiar it looks, can you not?

A: Yes". (Transcript pp. 711­713)

(g) When Mr. Marcus Cullinan was asked about this cheque and what it was for his evidenceproceeded:­

"A: That is for travellers cheques for me.

Q: Travellers cheques for you?

A: Yes.

Q: How were those travellers cheques for you obtained?

A: Michael I think was going to the bank doing some banking, deposits and all that for themotel at that time and I asked him if he could purchase some travellers cheques for me.

Q: Purchase them in your name?

A: Yes, for me.

Q: How were they going to be signed at the bank?

A: Well, I think at that time I thought I was only, you know, I could have been over the limitand all that so I was using that so I asked him if he could grab them for me.

Q: Using his name?

A: Using his name.

Q: So he would have signed for them?

A: He would have signed the top bit, yes.

Q: Have a look at the reverse of that cheque and tell me whose writing that is and whosesignature that is on the reverse of the cheque?

A: That is not my signature, I mean very different to my signature, that one.

Q: And the words on the back says; "Consultancy fee, M. Tulake. Please pay Mr Tulakeaccordingly. Thank you" and then what appears to be your signature?

A: I did not do this writing.

Q: It is a forgery, is it?

A: Yes.

Q: Think long and hard about that because this is fairly important and forgery is a veryserious offence.

A: Yes, I understand that.

Q: Do you recognise whose writing that is?

A: It could be mine but it was not for consultancy fees or anything. He purchased thesetravellers cheques for me as I could have been over the limit.

Q: Why would the words be written on the back of the cheque; "Consultancy fee, M.Tulake. Please, pay Mr Tulake accordingly. Thank you" and what appears to be yoursignature?

A: This payment was never for Michael Tulake. He was going to the bank to purchasesome travellers cheques for me.

Q: Why would the note be on the back?

A: I do not know.

Q: You have no idea?

A: I have no idea.

Q: Now, how were those travellers cheques going to be cashed if they had his signature onit at the bank?

A: They did not have his signature on, they are unsigned.

Q: Unsigned, that is all?

A: That is correct.

Q: How did you arrange that?

A: Well, it is the responsibility of the purchaser, if he loses them that is his problem.

Q: So the travellers cheques signed in blank, that is what you are telling us?

A: That is correct, yes, you can purchase them today.

Q: Mr Tulake told us that he signed them?

A: He signed the top bit, yes.

Q: What is the top bit?

A: I mean, if you get a travellers cheque, you go into the bank, you walk to the bank now,you buy a travellers cheque, it is for you, you sign all of them cheque by cheque.

Q: The bank asks you to do that?

A: Right. Okay, now he only signed the top bit, it is the first copy as the preparation ofgetting these travellers cheques. He did not sign all the actual travellers cheques, no.

Q: So, the other copy underneath somehow the signature was not put on that, is thatcorrect?

A: That is correct.

Q: You have done this before, have you?

A: Yes, I get some like that.

Q: So you consider that there is nothing wrong with that?

A: Yes.

Q: Signing the top part, so you got a travellers cheque in blank using Mr Tulake's name andthen you can convert those travellers cheques?

A: I can use them when I want to use them, yes. When I go overseas or my familymembers or my dad, yes.

Q: And you do not see anything illegal about that, using his name to obtain those travellerscheques which you then convert to your use?

A: Well, I was of the impression that he is an employee there, he is working there and hewas getting them for me as he was not travelling overseas or anything and he had nointention.

Q: And you use his name because you thought you might be over the limit?

A: You are probably right, yes.

Q: Well, that is what you told us?

A: Yes.

Q: You do not see any problem with that under the central banking rules?

A: I mean, it is up to the central bank, is it not?

Q: No, not when people use fraudulent devices to obtain documents and conceal the truthfrom them?

A: No, I did not see the point in that, no.

Q: You did not see the point in using someone else's name for you to get foreign currencyin excess of the limits?

A: Well, I mean it was for me so­­­

Q: Why you use his name? Why not go down yourself'?

A: Well, I mean, as I said I could have purchased more than the required limit.

Q: Do you not understand why there are limitations?

A: No.

Q: I see. You do not understand the limitations about foreign currency?

A: Well, I sort of understand. I mean, I get my uncle to do it, my aunty, my sister. I mean, if Iwanted to give it to my sister to use or something like that or my uncle or you want to buysomething like that, I mean, that is the purpose of having it unsigned.

Q: You know the true reason for the limits? You know why the limits are imposed?

A: No.

Q: Well, you do, do you not? You know that if you are going to draw over a certain amount,you have to get a tax clearance. That is the reason, is it not?

A: I am not too sure.

Q: Why would you get someone else to do it when you can do it yourself. There is no limit,as long as you get tax clearance?

A: That is right, yes.

Q: The only reason for limits is there is a limit to the amount you can send?

A: That is right.

Q: Without a tax clearance?

A: That is right.

Q: And that is why you are using someone else's name, is it not?

A: Yes, that would be correct.

Q: Because you could not have got a tax clearance because your never put in a tax return?You have told us that.

A: That is correct, yes.

Q: So that is why you are doing it?

A: That would be right, yes." (Transcript pp. 793­798)

(h) The credibility of the account given by Mr. Tulake in his evidence on 8th July 2001 is questionable.It is plain that when he came to give evidence on this matter on 9th July 2001 Mr. Marcus Cullinanknew of the problems faced by Mr. Tulake and had contrived an explanation which he gave.

The evidence given points up contraventions of the foreign exchange laws, avoidance ofthe need to obtain tax clearance and criminal acts involving possible forgery and perhapspayment for Mr. Tulake's roles in generating and obtaining false and fraudulent accountingdocuments.

In our submission, the Commission would be obliged to advise the constituting authority torefer both Mr. Marcus Cullinan and Mr. Michael Tulake to each of the Governor of the Bankof Papua New Guinea, the Commissioner General for Internal Revenue and theCommissioner for Police for further investigation and with a view to prosecution.

26.8 Further activity at DFRB and three further vehicles

(a) On 12th October 1999 Mr. Marcus Cullinan wrote to Boroko Motors Madang confirming theintention to purchase three vehicles for a total cost of K277,195 and stating "In order to meetcommitments on the 19th October 1999 we request that you work on the units straight away andarrange to have them landed in Vanimo preferably before 19th October 1999".

A copy of this letter taken from the DFRB file Commission Document DCD23 will beTendered Document SM827.

(b) On 13th October 1999, Mr. Michael Tulake wrote to Mr. Kila requesting funding of K346,000.00 tofinance the purchase of a maroon Nissan Patrol and two Nissan Navara double cab utilities at a costof K227,255.00 and to refinance the two vehicles earlier purchased for a cost of K68,749.00.

The basis of the request was that business was being lost by the lack of hire cars andquotes were attached. A loan was sought to avoid high financing costs.

Copies of this letter and the attached funding calculation taken from CommissionDocument DCD23 will be Tendered Documents SM828 and SM829.

(c) On 15th October 1999 Mr. Kila wrote to Mr. Marcus Cullinan advising that a funding submission forK346,000.00 had been completed and would be circulated to the Board over the next few days; thathe had spoken to the Chairman and other directors who expressed support and that he wouldendeavour to have the funds transmitted by 17th October.

Mr. Kila asked Mr. Cullinan to take the steps necessary to secure delivery of the vehiclesby 19th October 1999.

A copy of this letter taken from the DFRB file Commission Document DCD13 will beTendered Document SM830.

(d) On 15th October 1999 Mr. Marcus Cullinan wrote to Mr. Kila advising that Sandaun Motel was ableto repay the Working Capital advance of K60,000.00 to the DFRB Board and attaching a cheque #491634 drawn on Westpac Bank Vanimo for that sum.

Copies of the letter and cheque taken from Commission Document DCD23 will beTendered Documents SM831 & SM832.

As will later be seen this cheque was not banked until much later and it is not known why.This may be explained later when we come to the Board meetings held in Vanimo on 15thNovember 1999.

(e) On 18th October 1999 Mr. Kila prepared a submission of some four pages seeking DFRB Boardapproval for an inter­company loan of K346,000.00 to Sandaun Motel.

The brief – a copy of which taken from Commission Document DCD14 will be TenderedDocuments SM833 to SM836, which bears reading in full.

The brief recounts what had occurred in respect of vehicles, contains elements of reportabout the trip made by Messrs Kila and Uware, advises on the need to have and the

income derived from hire cars and as to the high cost of commercial leasing of vehiclesassessing the difference between leasing and a DFRBF loan at 25% interest at K34,600.00and recommends an inter­company loan of K346,000.00.

Quotes are attached to the brief, as are what purport to be financial statements forSeptember 1999 the balance sheet for which is nonsense as it carries forward figures fromMr. Tulake's 1998 false financial statements and the profit and loss statement for whichshows a profit of only K20,014.20.

(f) For some reason, which will require explanation a physical DFRB Board meeting was not held andat someone's suggestion a document described as a "CIRCULAR RESOLUTION" dated 18th October1999 was drawn up. We will come to that document shortly.

(g) On 20th October 1999 Mr. Kila wrote to Mr. Marcus Cullinan stating, "the Motel's request for a loanof K346,000.00 for the purpose to purchase five units of hire vehicles has been approved by the DFRBBoard at their recent meeting", and that details would be advised.

A copy of this letter taken from Commission Document DCD23 will be TenderedDocument SM837.

Also on 20th October 1999 Mr. Kila wrote to Mr. Marcus Cullinan a letter which requiresreading by the Commission analysing the performance of Sandaun Motel in September1999 and calling for explanations.

A copy of this letter taken from Commission Document DCD14 will be TenderedDocument SM836A & SM836B.

(h) By 25th October 1999 the three additional vehicles had arrived in Vanimo and Boroko Motors faxedMarcus Cullinan seeking payment and Mr. Cullinan conveyed the message in a letter to Mr. Kila sentby fax.

Copies of these letters taken from Commission Document DCD23 will be TenderedDocuments SM838 & SM839.

(i) As at 26th October 1999 the "Circular Resolution" referred to in (f) above had apparently beencirculated and signed by Mr. Naru and Colonel's Playah and Renagi but not Mr. Vali Asi and someonehad dated it 26/10/99.

The body of the document – a copy of which taken from Commission Document DCD23will be Tendered Document SM840 reads:­

"Having perused and considered the attached submission on the subject matter, we theundersigned members of DFRB Board of Directors, herewith approve the loan to SandaunMotel (Banora Trading Limited) at a realisation of K346,000.00 as an inter­company loan atprevailing market interest rate with a nominal margin to cover associated costs".

As we have dealt with in detail in the NPF Commission of Inquiry these so­called "CircularResolutions" we will only deal with this matter shortly.

Section 12 of the DFRB Act prescribes the only manner and forum in which decisions canlegally be made by the DFRB Board and that is in accordance with a majority of votes castat a meeting of the Board at which a quorum is present.

There is no provision in the DFRB Act which resembles those in the Companies Act 1997permitting resolutions to be passed or deemed passed by written resolutions or electronicmeans.

It accordingly follows that it is not legally competent for the DFRB Board to make aresolution by this "Circular Resolution" method and its purporting to do so is extra legal andlacking legal efficiency unless ratified later in the only prescribed forum i.e. a Boardmeeting held in accordance with Section 12 of the DFRB Act.

(j) On 25th October 1999 Mr. Richard Sinamoi had written a memo to Mr. Kila seeking Mr. Kila's

endorsement for payment of the stamp duty requested by Carter Newell of K53,060.47.

A copy of this memo taken from Commission Document DCD14 will be TenderedDocument SM841.

(k) On 27th October 1999 Mr. Kila also wrote to Mr. Yates at KSL seeking urgent payment to SandaunMotel of K464,000.00, attaching copies of his Board submission and the "Circular Resolution" andadvising that the Board's lawyers had been instructed to draw the appropriate loan agreement.

A copy of this memo taken from Commission Document DCD14 will be TenderedDocument SM842.

(l) The Carter Newell Invoice 17839 (Tendered Document SM738) contains an entry:­

"28 Oct 99 Telephone out to Richard Sinamoi discussing outstanding matters".

That entry is substantiated by a handwritten note on the related Carter Newell file(Commission Document 3B) which reads:­

"T/O Richard – 28/10/99

I. DFRB does not have a certificate of incorporationII. Faxed him my letter of reportIII. Also advised him that I needed SD cheque".

A copy of this note will be Tendered Document SM843.

(m) On 28th October 1999 Mr. Marcus Cullinan clearly phoned Mr. Kila regarding pressure fromBoroko Motors to pay the K277,255.00 owing for the three vehicles delivered on 19th October 1999.

With the delay in the loan funds being remitted (which we interpose KSL was only asked todo on 27th October 1999) Mr. Cullinan sought approval to make the payment.

This was confirmed in a letter from Mr. Cullinan to Mr. Kila – a copy of which taken fromCommission Document DCD23 will be Tendered Document SM844. Mr. Kila respondedon the same day approving the payment of K277,255.00 "from funds to be sourced locallyfor this purpose" and saying he would "expedite the loan funding to Sandaun Motel by theend of next week".

A copy of Mr. Kila's response from the same source will be Tendered Document SM845.

(n) Pursuant to these arrangements a cheque # 583179 was drawn on the account of Fleet Limited(into which the K5.3 million purchase price less legal fees had been paid) in favour of Boroko Motorsfor K277,255.00 and signed by Mr. Marcus Cullinan.

A copy of this cheque taken from Commission Document DCD40 will be TenderedDocument SM846.

(o) Two reports were also sent by Mr. Marcus Cullinan to Mr. Kila which are dated 28th October 1999,the first being a Management Report and the second a response to Mr. Kila's analysis of theperformance of Sandaun Motel in September 1999 (i.e. Tendered Documents SM836A andSM836B). We will deal with those reports shortly and at the time they were received by Mr. Kila.

26.9 DFRB Board meeting 3/99 continues – 29th October 1999

(a) As earlier stated this Board meeting was closed at 6.25pm on 6th October 1999 to enable theBoard to attend on the Defence Minister for a briefing.

(b) The minutes of the continuation meeting show that Messrs. Naru and Asi and Colonel's Playah and

Renagi were all present and Messrs Darby Kila and Richard Sinamoi in attendance; that the metingwas opened at 11:00am and that the meeting closed at 12:35pm.

A copy of the minutes taken from Commission Document DCD24 will be TenderedDocuments SM847 to SM852.

The minutes show that some of the same matters as dealt with at the earlier meeting weregone over again that terms and conditions of DFRBF staff were considered and thatfinancial delegations were made of up to K50,00.00 to the General Manager and up toK100,000.00 to the Supply and Tenders Committee.

In General Business, obtaining a new office space for DFRB and staff contracts andremuneration were dealt with followed by discussions of the KSL contracts and costduplication, purchasing a car for DFRBF management (which was in fact used by Mr. Naru)the purchase of mobile phones for the Board members and the appointment of Mr. RichardSinamoi as Board Secretary.

We have dealt with these items in short as those of importance have been dealt with indetail in earlier openings and the only present significance is contextual.

(c) The only mention of the Sandaun Motel at this meeting was in the final item concerning the nextBoard meeting where it was resolved that a Special Board meeting 13/99 be convened at SandaunMotel on 8th November 1999 and that "the Board invite the Defence Minister, his First Secretary andtwo representatives from Finance, namely, Mr. Mete Kahona and Mr. Vele Iamo to accompany theBoard to see the DFRB investment, Sandaun Motel".

27. NOVEMBER 1999

27.1 Reporting on Sandaun Motel

(a) On 1st November 1999 Mr. Yates of KSL wrote to Mr. Kila following up his letter of 13th September1999 (Tendered Document SM707), seeking as a matter of urgency, the settlement statement forSandaun Motel, a list of post completion audit or due diligence and a report of those items, a copy ofthe monthly accounting statements for the motel (including budget and actuals comparisons) and ageneral operational report and overview.

A copy of this letter taken from Commission Document DCD14 will be TenderedDocuments SM853 & SM854.

(b) On 2nd November 1999 Mr. Kila received the first of the two reports dated 28th October 1999 fromMr. Marcus Cullinan – the Management Report – Sandaun Motel. This report, a copy of which takenfrom Commission Document DCD23, will be Tendered Documents SM855 to SM860 bears readingsome points of note being as follows:­

(i) it is said Mr. Marcus Cullinan was appointed General Manager and Mr. Michael Tulakeas Financial Controller both effective 1st September 1999 (SM855).

(ii) a computer and printer (cost K4,653.00) and petty cash safe (cost K2,200.00) had beenpurchased (SM858) and MYOB accounting software programmed into the computer.

It is notable these items were purchased after Completion.

(iii) the level of staff at the motel was 30 (against 16 and over 16 in Mr. Tulake's financialstatements) and "a number of staff members have been with the company for over 4­10years. Their entitlements in relation to Long Service Leave etc. needs to be ascertained.The Management of DFRB fund has assured the staff that their entitlements such as LongService Leave, Leave pay etc. will continue to be accrued … " (SM856­7).

Clearly this matter was not addressed at Completion as required by the Agreement andwarranty in that regard.

(iv) a budget for year 2000 was prepared including capital works for K15,000 to purchasethe Vanimo Guest House for staff accommodation and a further hire vehicle.

(v) purchases of supplies were to be made on bulk order in Lae with the first shipment ofbeer and meat made at a cost of over K25,000.00.

(vi) contrary to what he had earlier reported Mr. Cullinan said a stock take of all inventorywas not taken at 1st September 1999 but carried out to establish figures at 1st October1999 and "asset register of all company assets is being drawn up. This should becompleted by mid November 1999. The accounts of the company would be adjustedaccordingly".

In our view, the last statement is as revelatory as it is amazing. As we have earlier shownthis should have been done at Completion and its being done this time after Completionserves to demonstrate the extent to which the interests of the DFRB Board as Purchaserwere attended to at Completion.

Finally, the accounting for September was revised from that earlier submitted and quiteamazingly the operating profit earlier reported is said to have doubled to K41,633.00. It willbe noted in the explanation that K10,941.34 was paid for insurance cover for January toDecember 1999 in September 1999 again demonstrating that the insurance was notchecked as it should have been at Completion (SM859).

(c) On a date which is not clear but which we believe would have also been 2nd November 1999 Mr.Kila also received the second of the two reports dated 28th October 1999 from Mr. Marcus Cullinan –the Review of Operations.

A copy of this report taken from Commission Document DCD14 will be TenderedDocuments SM861 to SM863.

What this document makes clear is that the accounting system was in mess with numerousadjustments needing to be made to reflect payment after 1st September 1999 ofobligations which had been incurred prior to 1st September 1999 but which had beendebited in September and which included "Consultancy Fees (June­September) –K4,900.00, payment to Hitron for TV Decoder – K3,019, Hire car by Chairman K400 andPetty Cash Reimbursement of K1,000" as well as wages adjustments of K3,466.22 for theperiod 21st to 31st August 1999.

Mr. Naru will need to be asked to explain the K400.00 and Mr. Tulake the K4,900 whichwas paid to his company.

(d) On 2nd November 1999 Mr. Kila wrote to Mr. Yates of KSL in response to his letter of 1stNovember 1999 (Tendered Documents SM853­4) attaching copies of the Carter Newell report letterof 6th September 1999 and the two reports of Mr. Marcus Cullinan both dated 28th October 1999 andnoting Mr. Yates comments as to a monthly management reporting system for Sandaun Motel.

A copy of this letter taken from Commission Document DCD14 will be TenderedDocument SM864.

27.2 Progress on Stamp Duty and Vehicles

(a) As we have seen DFRBF management had made requests to its contracted fund administrationmanager and investment advisor KSL both for a cheque for K53,060.47 for stamp duty and for apayment of K346,000.00 to Sandaun Motel for the inter­company loan for the motor vehicles and Mr.Kila had also advised that the Board's lawyers were briefed to draw up the inter­company loandocuments.

(b) On 2nd November 1999 Fiocco Possman and Kua wrote to Mr. Kila referring to earliercorrespondence and dealing essentially with two topics.

First, on the purchase of Banora Trading Limited, the lawyers advised that a check shouldbe made at the Companies office to ensure that notices of change in shareholding and

directors have been filed.

Secondly, a draft of the inter­company loan agreement was attached, advice given as to adrawdown notice, comments made as to no security being taken and advice given as to aBoard minute confirming acceptance of the loan by Banora Trading Limited.

A copy of this letter taken from Commission Document DCD23 will be TenderedDocuments SM865 & SM866.

The advice as to checking that notice of change in shareholding had been given was timelyfor as we have seen to date no such notice had been filed by Carter Newell and the reasonfor that was probably that the Share Transfers had not been stamped and thus that thechange could not be entered in the Share Register.

(c) Whilst Mr. Kila was obtaining advice from Fiocco Possman and Kua, KSL were also obtainingongoing advice from Blake Dawson Waldron contained in a letter from Mr. Coumbis to Mr. Yates dated3rd November 1999.

A copy of this letter will be Tendered Documents SM867 & SM868.

The letter advised that the stamp duty payable by the DFRB Board should only beK53,000.00; that the 1998 balance sheet for Sandaun Motel showed as an asset, fourmotor vehicles purchased in 1997 at a cost of K166,000.00 and that "if the company doesnot in fact own these or any vehicles the Board should in our view, be able to sue thevendors for breach of warranty" and finally that the investment guidelines and what wasdisclosed to the Minister for Finance in the Section 61 application should be reviewed for"Subject to these, in our view the acquisition of the motor vehicles now being sought by theBoard at a value of K350,000.00 or more in connection with the purchase of the SandaunMotel will require the approval of the Minister for Finance before it can proceed because itwas not disclosed either directly or indirectly at the time approval was obtained".

(d) Mr. Yates accepted the Blake Dawson Waldron advice and on 3rd November 1999 wrote to Mr. Kilaon the vehicle aspect making all the points about what was shown in the 1998 balance sheet, thepossibility of a breach of warranty claim and the need to make disclosure to the Treasurer and asking,"Please advise whether you wish us to seek approval from the Treasurer".

A copy of this letter taken from Commission Document DCD23 will be TenderedDocuments SM869 & SM870.

(e) There appears to be some confusion over the stamp duty but it seems clear that KSL conveyed toDFRBF the message that the stamp duty should only be K53,000.00 but were prevailed upon toprovide to Carter Newell a cheque for the fully duty assessed of K53,060.47.

The following documents are tendered in this regard with the respective numbers:­

(i) facsimile of Mr. Yates to Mr. Kila of 9th November 1999 advising the fund should onlypay K53,000.00 with the additional K60.47 being to the account of the vendor – Tendereddocument SM871 taken from Commission Document DCD23.

(ii) facsimile of Mrs. Kubaram of KSL to Mr. Richard Sinamoi of 9th November 1999referring to a telephone conversation and attaching copies of a letter to Mr. Toua of CarterNewell Lawyers and a cheque (DFRBF Management Account cheque # 954919 payable tothe Internal Revenue Commission for K53,060.47), which will be forwarded to Mr. Toua –Tendered document SM872 to SM874 taken from Commission Document DCD23.

(iii) letter from Mr. Wong of KSL to Carter Newell Lawyers dated 12th November 1999attaching PNGBC Port Moresby bank cheque # 0540907 in favour of the Internal RevenueCommission for K53,060.47 – Tendered document SM875 & SM876.

(f) On 11th November 1999 Mr. Kila sent a facsimile to Mr. Yates thanking him for his response on theloan to Banora Trading Limited and advising his comments were noted and would be tabled at thenext company Board meeting.

A copy taken from Commission Document DCD23 will be Tendered Documents SM877.

(g) The Carter Newell Invoice 17839 (Tendered Document SM738) contains on entry:­

"16 Nov 99 Meeting with Stamp Duties Office paying stamp duty for transfers, telephoneout, Kina Securities for receipt ready for collection".

The related Carter Newell file (Commission Document 3B) contains an original withcompliments card of KSL noted "12.11.99, Paul Toua, could you kindly obtain a receiptfrom IRC on our behalf …" and a copy of the stamp duty receipt dated 16/11/99 and noted"original receipt given to Kina Securities 16/11/99 as requested. T/O Accountant – KS –16/11/99 – Receipt ready to be collected".

Copies of these documents will be Tendered Documents SM878 & SM879.

There is also a copy of a letter dated 16th November 1999 from Mr. Toua to the stamp dutyoffice covering this payment, a copy of which will be Tendered Document SM880.

(h) What occurred is reasonably clear.

After KSL drew a cheque for only K53,000.00, Mr. Richard Sinamoi prevailed on them todraw a cheque for the full duty of K53,060.47.

The cheque originally provided to Carter Newell for that sum was an ordinary cheque andto meet stamp duties office requirements was replaced by a bank cheque. The bankcheque was presented and receipted and the original receipt collected by KSL from CarterNewell.

The payment of stamp duty was thus completed with the DFRB Board paying the K60.47payable by the Vendors in respect of the Power of Attorney.

The loan of funds from the DFRB Board to Banora Trading Limited was at a stalematepending a response to KSL's letter of 3rd November 1999.

27.3 Board meetings in Vanimo – 15th November 1999

(a) As we have seen it was resolved at the continuation of DFRB Board meeting 3/99 on 29th October199 to have a Special Board meeting in Vanimo on 8th November 1999 with the Minister for Defence,his First Secretary and Messrs Vele Iamo and Mete Kahona from the Finance Department also to beinvited to attend.

(b) The vouchers, which we have already tendered in the topic "Board Fees and Allowances", indicatethat there was also be a Board meting of Banora Trading Limited at the same time.

(i) Preparations for travel were made and on 4th November 1999 DFRB cheque # 305121was drawn in favour of Dove Travel for the return airfares of K7,902.40 less an MCO ofK2,480.40 with a net payment of K5,417.00. The eight air tickets were for Mr. Naru, Mr. ValiAsi, Colonel's Playah and Renagi, Mr. Kila, the Ministers First Secretary Mr. Peter Bare andMessrs Iamo and Kahona from the Finance Department. It was said Mr. Richard Sinamoiwould travel using an earlier obtained ticket for a trip, which was not taken. The vouchersare Tendered Document F176.

(ii) The further preparations for travel involved the drawing of cheques for travel allowancesfor the persons who were to travel for FIVE DAYS EACH at K150.00 per day i.e., K750.00less K40 each for visas to travel to Indonesia resulting in a net K710.00 each.

DFRBF cheque # 305122 for K360.00 payable to cash was drawn for nine (9) visaapplications at K40.00 each – the vouchers are Tendered Document F183.

Cheques were drawn for the K710.00 travel allowances for Mr. Kelly Naru – cheque #365126 the vouchers being Tendered Document F185; Mr. Peter Bare – cheque # 305127the vouchers being Tendered Document F186; Colonel Phillip Playah – cheque # 305129

the vouchers being Tendered Document F187; Colonel Reginald Renagi – cheque #305130 the vouchers being Tendered Document F188. Mr. Richard Sinamoi – cheque #305132 the vouchers being Tendered Document F189; Mr. Sema Rea – cheque # 305133the vouchers being Tendered Document F190 and Mr. Vali Asi – cheque # 305128 thevouchers being Tendered Document F191.

It will be noted Mr. Kila has endorsed the memo covering these allowances "why haveincidental allow if all costs are being paid by the hotel". It is notable Mr. Kila did not drawany allowances for himself.

(iii) The final preparation for travel, involved payment of sitting allowances for this meetingto Mr. Naru of K400.00 (paid by cheque # 305123 the vouchers being TenderedDocument F221); Colonel Playah of K300.00 (paid by cheque # 305124 the vouchersbeing Tendered Document F222) and Colonel Renagi of K300.00 (paid by cheque #305125 the vouchers being Tendered Document F223).

After this trip was concluded, DFRBF also paid by its cheque # 305183 a sum of K1,305.60to Mr. Robert Takran for "Tour services" provided to the DFRB Board from 12th to 15thNovember 1999 consisting:­

R. TAKRAN (K150 X 3 DAYS) 450.00BOAT HIRE (K200 X 2 BOATS) 400.00VEHICLE HIRE (K100 X 3 VEHICLES) 300.00EXTRAS 155.60K1305.60

The address given on the Invoice was the Sandaun Motel Post Office Box i.e. PO Box 35,Vanimo.

The vouchers for this payment are Tendered Document F196.

(c) The Room Register for Sandaun Motel for the first half of November 1999 shows that persons wereaccommodated on Sunday 14th November and Monday 15th November 1999 as follows:­

I. Mr. Darby Kila in Room 3II. An unnamed person in Room 5 (who we take to be Mr. Vele Iamo)III. Colonel Renagi in Room 13IV. Mr. Kelly Naru in Room 15V. Colonel Playah in Room 17VI. Mr. Richard Sinamoi in Room 18VII. "Seno" who we take to be Mr. Sema Rea in Room 19VIII. "Peter" who we take to be Mr. Peter Bare in Room 20

The Register also shows Mr. Naru stayed on in Room 14 on Tuesday 16th November1999.

Copies of the Room Register for November taken from Commission Document DCD42,will be Tendered Documents SM881 & SM882.

The DFRB Board has, in answer to the Commission Summonses produced only part of theminutes for the DFRB Board meeting in Vanimo on 15th November 1999 and no minutesfor any meeting of Banora Trading Limited held in November 1999.

A copy of the first three pages of the minutes of the DFRB Board meeting ­ which are allthat were produced ­ taken from Commission Document DCD24 will be TenderedDocuments SM883 to SM885. Such Board minutes as were produced for Banora TradingLimited are found in Commission Document DCD55.

From the DFRB Board Minutes produced it can be seen that present at the meeting wereMr. Kelly Naru and Colonels Playah and Renagi, Messrs Darby Kila and Richard Sinamoiwere present, that Messrs Vele Iamo and Peter Bare were observers and that the meetingopened at 9:45am.

In the opening remarks Mr. Naru acknowledged the apology of Mr. Vali Asi "who could not

make it due to the cancellation of the flight into Vanimo on Sunday".

The minutes produced only deal with the subjects of Staff Contracts and RemunerationPackage and the new Office Space.

It will be necessary to have further documents produced but for present purposes we candiscern from later documents what occurred in relation to Sandaun Motel.

(d) It seems plain on the evidence that all of Mr. Naru, Colonels Playah and Renagi and Messrs Kila,Sinamoi, Rea, Iamo and Bare travelled to Vanimo on Friday 12th November, 1999 and headed off toJayapura on that day; that Mr. Robert Takran accompanied the party to Jayapura (as he had in thepast) and provided transport and that this party returned from Jayapura to Vanimo on Sunday 14thNovember, 1999.

There could be no valid reason beneficial to the DFRBF for this trip because the border land proposalhad already been abandoned and the DFRB Board had already committed to "offshore" investmentssuch a sum that very little if any of its K1.0 million limit remained available for investment outsidePapua New Guinea.

(e) It will in our view be necessary to establish:­

(i) What happened with the air tickets purchased for Mr. Vali Asi and Mr. Mete Kahona whodid not travel and whether one of those tickets was used by Mr. Rea.(ii) What was it necessary for Mr. Rea to travel at all.

(iii) What happened with the travel allowance of K710.00 drawn for Mr. Vali Asi.

(iv) Why were the persons who travelled (other than Mr. Kila) paid travelling allowances forthe time spent in Jayapura which could not have been of benefit to the DFRB Board.

(v) Why were any travelling allowances paid at all when Mr. Kila (who was not paid anysuch allowances) thought the stay at Sandaun Motel was free of charge.

(vi) What costs were booked up at Sandaun Motel by those who had already receivedtravel allowances.

(vii) Why were the costs incurred with Mr. Robert Takran paid by DFRB Board and was heusing vehicles and boats which were his own or which were supplied by Mr. MarcusCullinan or Fleet Limited.

(viii) Was it proper for airfares and allowances for Mr. Vele Iamo and Mr. Peter Bare as wellas the late Sema Rea to be paid out of the DFRB fund.

In our view these are important questions as this is but one more instance of the DFRBBoard and Management indulging themselves and their associates and doing so at thecost of the DFRBF members.

(f) It would seem that it was on this trip to Vanimo that Mr. Marcus Cullinan's letter dated 15th October,1999 was written (see 26.8 (d) above and Tendered Documents SM 831 and SM 832) with themonth misstated because the cheque it refers to in repaying the K60,000.00 working capital is dated15th November, 1999.

This is supported by the fact that on 19th November 1999 Mr. Sinamoi sent this letter andcheque to Mr. Yates at KSL for receipting.

A copy of Mr. Sinamoi's memo taken from Commission Document DCD 14 will beTendered Document SM 886.

(g) Though as we have repeatedly said we will later come back to the tracing of the K5.3 million (lesslegal fees) banked to the account of Fleet Limited with PNGBC Vanimo it needs to be stated in thiscontext that two large cash cheques were drawn on that account in proximity to this DFRB Board trip.

On 10th November 1999 – two days before the DFRBF party arrived in Vanimo – cheque #583185 was drawn to cash for K200,000.00 and signed by Mr. Marcus Cullinan.

Copies of the front and reverse of that cheque taken from Commission Document DCD40 will be Tendered Document SM 887 and SM 888.

The front shows the amount of the cheque was changed from K100,000.00 to K200,000.00and the reverse that the whole K200,000.00 was taken in notes of K50 denomination.

On 16th November, 1999 – the day Mr. Naru is shown as having remained in Vanimo andthe day at least the rest of the DFRB party left Vanimo – cheque # 583187 was drawn tocash for K100,000.00 and signed by Mr. Marcus Cullinan.

Copies of the front and reverse of this cheque taken from Commission Document DCD40 will be Tendered Documents SM 889 and SM 890.

The reverse shows that the whole K100,000.00 was taken in notes of K50 denomination.

(h) On 22nd November, 1999 Mr. Kila wrote to Mr. Marcus Cullinan thanking him "on behalf of theBoard and management of DFRB for your hospitality whilst in Vanimo" and bringing to his attention"the Board's direction and resolutions during the meeting in Vanimo…."

The first matter concerned staffing with a requirement to review staff levels with the aim ofreducing staff to 20 within a month; deferring salary increases and adjustments for sixmonths and a comment that staff efficiency displayed needed to reflect that staff were in aservice industry requiring courtesy and efficiency.

The second advised of the Banora Trading Board with Colonel Renagi as chairman andMessrs Kelly Naru and Darby Kila as the other Board members.

The third almost predictably concerned Board fees with Mr. Cullinan asked to prepare apaper for the next Board meeting.

The final matter concerned budget.

Mr. Kila asked that all Board submissions be presented to him for review and he finallythanked Mr. Cullinan for the K60,000.00 repayment of Working capital.

A copy of this letter from Commission Document DCD 23 will be Tendered DocumentsSM 891 and SM 892.

27.4 Final activity at Carter Newell

(a) The Carter Newell Invoice 17839 (Tendered Document SM 738) contains the following entries:­

"22 Nov 99 Letter to client enclosing duly stamped documents.23 Nov 99 Letter to Darby Kila.23 Nov 99 Reviewing letter to Darby Kila".

These are the final entries in that Invoice, which as we have earlier said was withdrawnand our consideration of that Invoice is now complete.

(b) The related Carter Newell file (Commission Document 3B) contains a copy of a two page letterdated 23rd November, 1999 to Mr. Kila which substantiates these entries.

Though these are notes of telephone calls from Mr. Kila on 29th November and 15thDecember 1999, which complete this file they are not of any apparent substance.

A copy of the original of this letter taken from Commission Document DCD 23 will beTendered Documents SM 893 and SM 894.

The letter attaches the originals of documents stamped by the Stamp Duties Office, thecorporate consents and resignations and minutes.

It is then said the Companies Act requires the documents kept in a corporate register, thatfailing to maintain proper corporate records is an offence under that Act and recommendsthat DFRBF recreates a corporate register and changes its registered office to Port

Moresby.

The letter then turns to the incomplete matters saying in effect that the corporate registerand common seal are "Discussed above", noting that Mr. Kila has attended to the banksignatory changes and finally saying that rent and rates on Allotment 11 Section 6 Vanimoare still outstanding as Mr. Cullinan has not responded, that the old share certificates havenot been received and asking Mr. Kila to "chase this up to ensure there are no extra ShareCertificates in circulation".

With this pathetic finale Carter Newell apparently thought their task was at an end leavingthe problem over the corporate register and share certificates which they had allowed to becreated to DFRBF to fix and the allowances over the property, which according to theAgreement should have been made on completion unresolved.

Carter Newell also appear to have neglected to deal with the Notice of Change ofshareholder and the new share certificate for DFRBF.

The original statutory Form 13 – Notice of Change of Shareholder (Share Transfer) signedby Mr. Marcus Cullinan and dated 24 August 1999 is still on the Carter Newell file – a copyis Tendered Documents SM 895 and SM 896 and though preparation of a sharecertificate was charged for it appears never to have been completed or forwarded toDFRBF.

(c) As we have earlier stated (see Transcript p.3589 and Tendered Document SM 49) it appearsthere were substantial arrears of State Lease rent on Allotment 11 Section 6 Vanimo (simply checkedby a financial research at the Lands Department) and given the Cullinans attitude to impositoryobligations it would be predictable (though we have not checked) that Provincial Land Tax has neverbeen paid.

There are not minor matters for a Purchasers Lawyer to have simply left unresolved as nonpayment of State Lease rent can result in title to a property – in this case the main asset ofthe company for which K5.3 million was paid – being forfeited by the Minister for Lands fornon payment.

The failure yet again to protect the proper legal interests of the DFRB Board is apparent.

27.5 The vehicle loan unresolved

With over a month having elapsed since the additional vehicles were delivered by Boroko Motors andno sign of the K346,000.00 loan funds from the DFRB Board Mr. Marcus Cullinan wrote a complainingletter to Mr. Kila on 29th November, 1999 recounting what had occurred, confirming Fleet Limited hadassisted with funding on the understanding it would be reimbursed and asking when the loan fundswould be available. He concluded "The long delay results in the Motel incurring interest which it can illafford at this stage".

A copy of this letter from Commission Document DCD 23 will be Tendered Document SM 895A.

27.6 KSL Approach Deloittes

Mr. Yates of KSL was apparently concerned about the accounting and reporting systems and thefinancial controls in place at Sandaun Motel and on 22nd November, 1999 sent a facsimile to Deloittesasking for a quote to conduct a business review over the following two to three weeks of the systemsin place at Sandaun Motel and to review control measures.

A copy of this fax taken from Commission Document DCD 13 will be Tendered Document SM896A.

28. DECEMBER 1999 AND BEYOND

The Commissions Terms of Reference deal with the period ending 31st December, 1999 however toascertain what occurred in that period it is necessary to have some regard to events in early 2000.

28.1 Deloittes respond to KSL

On 6th January, 2000 Deloittes responded to KSL suggesting that the scope of works be extended tothe main revenue areas and gave a time estimate and quote for the extended scope of works.

A copy of this letter will be Tendered Document SM 897A taken from Commission DCD 14.

28.2 Report on Sandaun Motel to December 1999

(a) There were clearly to be Board meeting of both the DFRB Board and the Board of Banora TradingLimited in Port Moresby on 14th and 15th January 2000 respectively.

(b) For the purposes of the Banora Trading Limited Board meeting Mr. Marcus Cullinan prepared adocument described as "FINANCIAL REPORT – 1ST SEPTEMBER – 31ST DECEMBER 1999" withvarious attachments.

A copy of the report itself taken from Commission Document DCD 23 will be TenderedDocuments SM 897 to SM 900.

The whole report and the attachments to it turn around the profit and loss statementsresults of which are summarized on the second page of the report. The balance sheetsattached are in our view worthless because they include extensions of the overstatedvalues of fixed assets taken from the earlier false balance sheets prepared by Mr. Tulake.

The profit and loss summary contained on page 2 of the report is as follows:­

"Summary of Profit & Loss AccountSeptember to December 1999

Income Sept Oct Nov Dec Total %

Rooms 33783 42423 39784 41707 157697 36%Rest/Bar 42253 42354 30431 38949 153987 35%Poker 22863 26022 23812 26815 99512 23%Hire Car 782 1787 6810 5310 14689 3%Others 2454 3134 5161 3304 14053 3%TOTAL 102135 115720 105998 116085 439938 100%

Cost Of sales 18685 23450 17531 26312 85978 20%

Gross Profit 83450 92270 88467 89773 353960 Less:EXPENSESIncome Sept Oct Nov Dec Total %

Administration 4271 4171 7751 2520 18713 12%Marketing 998 2648 0 0 3646 20%Operations 156 1211 1609 1734 4710 3%Employment 18772 21465 18644 23884 82765 52%Occupancy 27000 6045 8419 7544 49008 31%TOTAL 51197 35540 36423 35682 158842 100%

EBIT 32253 56730 52044 54091 195118 100%Prov for Tax 11289 19855 18215 18932 68291 35%NET PROFIT 20966 36875 33829 35159 126827 65%

The before tax profit for the four month period was shown at K195,118 with a provision fortax of K68,291 resulting in a net profit after tax of only K126,827.

If the four month period was typical the net profit after tax annualises at K380,481 whichrepresents a return on funds invested of K5.3 million (disregarding stamp duty, legal costs,valuation fees and other expenses) of 7.1788%. In his report Mr. Cullinan describes thisresult as "exceptional".

In our view few investors would agree.

Mr. Cullinan also points out that revenue would increase with the impact of the three newhire cars (which increased income from that source from October 1999) however thatimpact would also have to be evaluated taking account of the added capital cost forvehicles of K364,000.00 and of the fact the cost of those vehicles would have to be writtenoff over their expected economic lives.

The report showed the cash balances as follows:­

ITEM 30/09/99 31/10/99 30/11/99 31/12/99Cheque Amount 83,881.25 118,035.49 122,546.81 174,151.11Cash Drawer 3,827.06 1.00 1.00 1.00Petty Cash 1,000.00 194.25 194.25 194.25Charge fund 1,000.00 1,000.00 1,000.00 1,000.00

89,881.25 119,280.74 123,792.06 175,396.36The cash figuresserve twopurposes. Firstthey indicate thatthe figures usedfor Cash Drawer,Petty Cash andCharge Fund inthe 1996, 1997and 1998financialstatementsprepared by Mr.Tulake weregrosslyoverstated.

Second, they tend to indicate the levels of cash which had been systematically stripped outof this business by the Cullinan family – who appear to have had no regard to taxobligations – up to the time DFRBF took over and when there were virtually no liquid funds.

In the final parts of his report Mr. Cullinan on the one hand draws attention to the need toextinguish the K346,000 liability for motor vehicles and on the other hand recommendspayment of a dividend of 40% of the gross profit before tax (K195,118) in the sum ofK78,040.00

28.3 Banora Trading Limited Board Meeting – 15 January 2000

(a) The Minutes of this meeting – a copy of which, taken from Commission Document DCD 23 willbe Tendered Documents SM 901 to SM 905 show the meeting was held at Ballroom one of the ParkRoyal Hotel in Port Moresby on 15th January 2000, that Colonels Renagi and Playah and Mr. Naruwere present and Messrs Marcus Cullinan, Michael Tulake and Richard Sinamoi were in attendance,that Mr. Kila was absent, that the meeting opened at 4.30pm and that the meeting closed at 5.25pm.

(b) The first item of business concerned confirmation of the Minutes of a meeting held on 15thNovember 1999 – thus indicating there was such a meeting and minutes of it should be available toproduced – and the second the only matter arising from that meeting which was directors fees.

The third item dealt with the financial report described in 28.2 above and resulted in thatreport being noted and accepted and the Board noting and accepting a cheque for"K75,000.00 being interim dividend payments for year ending 31st December, 1999".

The fourth and fifth items of business dealt with budget matters for year 2000 and theOrganisational Structure and Staff Ceiling.

The final two substantive matters dealt with concerned the refinancing of motor vehiclesand employment contracts for Marcus Cullinan and Michael Tulake.

The discussion on motor vehicles was sidetracked by the Board resolving to forward arequest to DFRB Management "to progress the matter for payment immediately" and to"take the matter to the DFRB Board to resolve this matter in their capacity as DFRBdirectors".

Messrs Cullinan and Tulake were excused while their employment contracts werediscussed. The question was disposed of by resolutions that the contracts "be referred tomanagement to seek legal advice and carry out the necessary due diligence and reportback to the Board for endorsement" and that "General Managers contract be progressedfor the Board's consideration as it still remains outstanding".

The questions of refinancing the vehicles and of these contracts were thus unresolved.

28.4 DFRBF Board Meeting 4/99 – 14 January 2000

(a) The Minutes of this meeting – a copy of which taken from Commission Document DCD 24 will beTendered Documents SM 906 to SM 913 – show it was held at Ballroom One at Park Royal HotelPort Moresby on 14th January 2000.

(b) Though the Minutes include items in respect of a delegation to Indonesia to identify a DefenceAdvisor's Residence in Jakarta (Item 5.6) and the purchase of furniture and white goods to a cost ofAUD$30,000.00 for the house in Canberra (seconded by Colonel Playah who had even then notdisclosed his interest) there is no mention at all of the Sandaun Motel according to the Minutes of thismeeting.

28.5 Excessive Interim Dividend paid

(a) Mr. Marcus Cullinan had clearly brought with him to Port Moresby for the Board meeting of BanoraTrading Limited a letter dated 15th October 1999 (sic) covering the dividend payment which herecommended of K78,040.00 and attached to it a Sandaun Motel cheque payable to the DFRB Boardfor that sum.

Copies of the letter and cheque taken from Commission Documents SM 914 and SM915.

(b) Mr. Kila, who was not at the Board Meeting acknowledged receipt of this cheque by a letter dated17th January, 2000 and sent it to KSL for banking.

A copy of this letter from Commission Document DCD 23 will be Tendered DocumentSM 916.

(c) Plainly none of Mr. Cullinan, Mr. Tulake or Mr. Kila took cognisance of the fact that the amount ofthe interim dividend approved by the Board of Banora Trading Limited was not the recommendedK78,040.00 but only K75,000.00.

28.6 Board Decisions conveyed to Mr. Cullinan

On 26th January 2000 Mr. Kila wrote to Mr. Marcus Cullinan on the vehicle loan and employmentcontracts concluding "In brief the outstanding vehicle loan will be settled expediently as soon as finalconsultations with the Fund Managers on this issue is amicably settled. Secondly due to the reasonsgiven in respect to your employment the employment contracts has been delayed. However they arenow with our lawyers and we anticipate a legal opinion in due course".

A copy of this letter taken from Commission Document DCD 23 will be Tendered Documents SM917 and SM 918.

28.7 Demands made by Fleet Limited

Through February 2000 there was on going correspondence between Fleet Limited, Mr. MarcusCullinan and Mr. Kila regarding the moneys paid by Fleet Limited for the motor vehicles, which had notbeen reimbursed.

That correspondence includes the following documents copies of which all taken from CommissionDocument DCD 23 will be Tendered with the respective numbers namely:­

(a) Demand of Fleet Limited dated 14th February, 2000 for payment of K356,780.39 (including interestat 8.5%) ­ Tendered Document SM 919.

(b) Demand of Fleet Limited dated 19th February 2000 for payment of K372,313.51 (including interestat 20.75%) ­ Tendered Document SM 920.

(c) Letter Mr. Kila to Mr. Marcus Cullinan dated 21st February 2000 stating the DFRB Board directedManagement to ascertain the whereabouts of the four motor vehicles purchased in 1997 as shown inthe 1998 audited financial statements before funds are released – Tendered Document SM 921.

(d) Letter Mr. Marcus Cullinan to Mr. Kila dated 23rd February, 2000 stating he did not know of theBoard decision and advising that only one vehicle was included in the sale and not the other three –Tendered Documents SM 922 and SM 923.

(e) Letter Mr. Kila to Mr. Marcus Cullinan dated 25th February explaining his position and suggesting"a possible breach of business practice" – Tendered Document SM 924.

The employment contracts for Messrs Marcus Cullinan and Michael Tulake and repayment of theloans for the motor vehicles were thus still outstanding as at the close of February, 2000.

29. RELEVANT SUBSEQUENT EVENTS

29.1 DFRBF Management obtains legal advice

(a) In April, 2000 advice was sought by the DFRBF Management from Fiocco Posman & Kua on thespecific issue as to whether the DFRB Board had a claim against the Vendors for breach ofrepresentation or breach of warranty in relation to motor vehicles. For the purposes advising on thatquestion Fiocco Posman & Kua sought and were provided with various documents relating to theSandaun Motel purchase.

(b) Initial advice was given by Fiocco Posman & Kua in a letter dated 2nd May 2000 to Mr. MataguKidu the Executive Manager, Investments of DFRBF.

A copy of which taken from Commission Document DCD 23 will be TenderedDocuments SM 925 to SM 930.

In short the advice given was that DFRBF would be unlikely to succeed in a breach ofwarranty claim in respect of the vehicles under the Agreement itself.

Further investigation was recommended to ascertain whether there was a breach ofwarranty claim in relation to the poker machines.

Finally the Accounts, the Agreement, the Power of Attorney and the Carter Newell reportletter of 6th September, 1999 were examined and a series of comments and observationsmade as a result of which advice was given as to steps which should be taken to enableFiocco Posman & Kua to advise "whether or not you may be able to make a successfulclaim against your lawyers for professional negligence in the event that you cannotsucceed in any claim against the Vendors".

The letter merits reading in full by the Commission as it makes a number of the points wehave earlier made in this opening.

(c) Some further information was provided by DFRBF Management to Fiocco Posman & Kua and as aresult a further letter was written by those lawyers to Mr. Kidu on 9th June 2000.

A copy of this letter taken from Commission Document DCD 23 will be TenderedDocuments SM 931 to SM 933.

In short the advice given was that the DFRB Board may well have rights against the

Vendors in relation to the motor vehicles as a result of the misrepresentations made in theoriginal "letter of offer" and the 1998 financial statements.

Fiocco Posman & Kua also sought instructions to carry out a title search of Allotment 11Section 6 Vanimo and to ascertain whether land rates had been paid up to date.

(d) After yet further information was provided Fiocco Posman & Kua wrote again to Mr. Kidu on 18thJuly 2000 giving further advice as to the motor vehicles and poker machines and advising that legalproceedings against the Vendors should be instituted.

A copy of this letter taken from Commission Document DCD 23 will be TenderedDocuments SM 934 and SM 935.

29.2 Further Questions raised in the National Parliament

It is plain from press clippings and notes in the DFRBF file (Commission Document DCD 23) thatHon. Jacob Wama raised questions about the Sandaun Motel purchase during question time in theNational Parliament on 7th June 2000.

The press reports indicate that Taurama, Goldie and Murray Barracks soldiers were asking questionsand had convened a meeting during the preceding week at Murray Barracks, which "turned nasty…when the board chairman failed to turn up".

29.3 Alterations to the DFRB Board

By a notice published in National Gazette No G77 of 23rd June 2001 the appointments of all DFRBBoard members save Colonel Renagi, were revoked and the following new members were appointedto the Board:­

Chris Alu – ChairmanColonel David Takendu – Deputy ChairmanVari Fore – MemberSimon Ketan – Member

A copy of the gazette notice is Tendered Document DS8.

29.4 Chairman Alu seeks a brief from KSL

(a) In September 2000 the new DFRB Board Chairman Mr. Chris Alu wrote to the KSL BoardChairman Mr. Wayne Golding requesting an urgent brief on the Sandaun Motel.

A copy of the letter taken from Commission Document DCD13 will be TenderedDocument SM936.

(b) On 21st September 2000 Mr. Yates of KSL responded to Mr. Alu with a two­page brief, which wasin essence, a revamp of the brief of 17th October 1999 to the Prime Minister and which as we haveearlier shown, met a bureaucratic death in the Department of Finance.

A copy of the letter and brief to Mr. Alu taken from Commission Document DCD14 will beTendered Documents SM937 to SM939.

29.5 Banora Trading Limited Board meeting – 28th August 2000

(a) On 28th August 2000 a meeting of the Board of Banora Trading Limited was held at the DFRBFBoard conference room in Port Moresby.

(b) According to the minutes of the meeting – a copy of which was taken from CommissionDocument DCD55 will be Tendered Documents SM940 to SM942 – present were Colonel Renagiand Mr. Kila, absent were Mr. Naru and Colonel Playah, in attendance were Messrs Matagu, Kidu andRichard Sinamoi, the meeting opened at 3:30pm and was closed at 4:35pm.

As a first item of business the Board of the company was discussed to the result that it wasdecided it should be recommended to the DFRB Board that Colonel Takendu should beappointed a director to replace Colonel Playah and be appointed Chairman, ColonelRenagi should become Deputy Chairman, Mr. Kidu should be appointed a director toreplace Mr. Naru, Mr. George Uware should be appointed an additional director and Mr.Kila should remain a director.

As the second item of business the motor vehicle loan of K364,000 was discussedresulting in resolutions to instruct Fiocco Possman & Kua to commence legal proceedingsagainst the Vendors and to suspend Mr. Marcus Cullinan and appoint someone to act asGeneral Manager of Sandaun Motel in the interim.

Finally, it was decided DFRBF management should arrange independent accountants forthe Sandaun Motel and call closed tenders for the management of it.

29.6 DFRBF Special Board meeting 2/2000 – 27th September 2000

(a) Though the DFRB Board minutes (Commission Document DCD24) indicate the new Boardchaired by Mr. Alu met on 6th July 2000 and 1st September 2000 it was not until this meeting of 27thSeptember 2000 that the Sandaun Motel is mentioned in the minutes.

(b) The minutes indicate this meeting was held on 27th September 2000 at the DFRB Boardconference room; that Messrs Alu and Ketan and Colonels Takendu and Renagi were present and Mr.Vari Fore absent, that Mess Darby Kila and Richard Sinamoi were in attendance; that the meetingopened at 2:30pm and that it was closed at 7:20pm.

A copy of the minutes taken from Commission Document DCD24 will be TenderedDocuments SM943 to SM948.

(c) The minutes show the Sandaun Motel or Banora Trading Limited were mentioned twice.

The short mention (Item 2.1) involved endorsement of the recommended changes to theBoard of Banora Trading Limited as detailed in 29.5(b) above.

The other mention (Item 1.2) derived from a Board paper – of which a copy has not beensupplied and which will need to be obtained by the Commission – where the Boardunanimously resolved to note and accept what was recommended in the report and to addto it:­

"(i) Management to seek legal advice on possible action to sue Carter Newell Lawyers forprofessional negligence;

(ii) Refer the law firm to the Law Society for professional misconduct".

It could be reasonably inferred that this item related to the second item of business at theBanora Trading Limited Board meeting as described at 26.5(b) above.

29.7 Business Valuation sought from Deloittes

(a) On 23rd October 2000 Mr. Richard Sinamoi wrote to Deloitte Touche Tohmatsu following up anearlier contact by telephone seeking a business evaluation.

A copy of this letter taken from Commission Document DCD12B will be TenderedDocument SM949.

(b) This contact resulted in a letter of engagement dated 14th November 2000, which was accepted byMr. Sinamoi – with the authority we shall shortly come to ­ on 23rd November 2000.

A copy of the letter of engagement and acceptance taken from Commission DocumentDCD 12B will be Tendered Documents SM 950 to SM 954.

29.8 Banora Trading Board meetings

(a) By the time the next Board meeting of Banora Trading Limited was held on 1st November 2000there were two sets of proceedings on foot and in which Fiocco Posman & Kua were acting for theDFRB Board. The first was defence of proceedings by Fleet Limited (WS No. 1176 of 2000) againstBanora Trading Limited for the moneys paid for the vehicles and the second was prosecution ofproceedings by the DFRB Board (WS No. 1772 of 2000) against the Vendors for failure to provide titleto the poker machines listed in the Asset Register.

The Fiocco Possman & Kua files are Commission Documents DCD66 and DCD68respectively.

It is plain that repayment of the K364,000 paid by Fleet Limited for the new vehicles washeld in abeyance because of this litigation.

(b) The meeting held on 1st November 2000 was attended by Colonel Renagi and Messrs Kila, Kiduand Uware with Mr. Richard Sinamoi in attendance.

A copy of the minutes will be Tendered Documents SM955 to SM957 taken fromCommission Document DCD55.

As it is the first item of business, the Board approved the engagement of Deloitte ToucheTohmatsu to conduct a non­statutory audit and business valuation of Sandaun Motel.

Mr. Sinamoi accordingly had Board authority to sign the letter of engagement with Deloittesas earlier stated.

The other items of business concerned arrangements of account signatories (in view of theproposed suspension of Mr. Marcus Cullinan and the litigation) and a proposedManagement visit to Vanimo to serve the notice of suspension, accompany Deloittes andprogress the appointment of an acting General Manager of Sandaun Motel.

Again it is quite plain that the question of employment contracts for Marcus Cullinan andMichael Tulake were also held in abeyance because the Board was planning to terminatethe employment of both but not at the same time.

(c) The proposed visit apparently took place and was reported on at a further Board meeting of BanoraTrading Limited held on 20th November 2000 at the DFRB Board conference room.

This meeting was attended by all Board members and Mr. Sinamoi was in attendance.

A copy of the minutes taken from Commission Document DCD55 will be TenderedDocuments SM958 to SM960.

The minutes bear reading in full as they contain a number of resolutions including thetermination of the employment of Messrs Marcus Cullinan and Michael Tulake, theinstitution of legal action against the Vendors, Mr. Naru and Carter Newell Lawyers and theappointment of Mr. George Uware to act as Caretaker Manager of Sandaun Motel.

29.9 Property Valuation obtained from The Professionals

(a) In November 2000 Mr. Richard Sinamoi sought and obtained a quotation for a property valuation ofSandaun Motel from Mr. Paul Ikupu of The Professionals in Port Moresby such quote being forK5,246.00 inclusive of tax and travel costs.

Mr. Sinamoi accepted that quote by a facsimile of 24th November, 2000.

Copies of the quote and acceptance from Commission Document DCD17 will beTendered Documents SM961 and SM962.

(b) The requested valuation was in fact conducted by Mr. Kaluwin Potuan and forwarded with theinvoice to Mr. Sinamoi under cover of a letter dated 5th December, 2000.

Copies of the letter and invoice taken from Commission Document DCD17 will beTendered Documents SM963 and SM964.

A copy of the valuation report taken from the same Commission Document will beTendered Documents SM965 to SM978.

The valuation was of land and buildings and permanent improvements and was thusclearly prepared by utilising the summation method.

The value assessed by Mr. Potuan was K1,241,000.00.

This was less than one quarter of the value attributed by Mr. Iori Veraga which we haveearlier criticised.

29.10 Deloittes Complete the Business Valuation

(a) Though a draft report had earlier been prepared by Deloitte Touche Tohmatsu Mr. Sinamoirequested by a letter dated 27th November 2000 that Deloittes defer finalising the report until theproperty valuation from The Professionals was complete.

A copy of Mr. Sinamoi's letter taken from Commission Document DCD12B will be TenderedDocument SM979.

The reason for this is quite clear from the Deloittes file and was that Deloittes did not have a currentproperty valuation, which would enable an assessment on a net tangible assets basis to be made.

(b) With the valuation of Mr. Potuan completed and received Deloittes finalised their report andforwarded it to Mr. Sinamoi under cover of their letter of 18th December 2000.

Copies of the letter and report taken from Commission Document DCD12B will be TenderedDocuments SM980 and SM981 to SM1001 respectively.

(c) Deloittes were requested to perform two tasks, which were a non­statutory audit and a businessevaluation.

(i) The Executive Summary from their report indicates the shortfalls and results.

It reads (SM983) as follows:­

"1. EXECUTIVE SUMMARY

On 2 November 2000 Deloitte Touche Tohmatsu (DTT) was engaged by the Defence ForceRetirement Board (DFRB) to undertake the following tasks:­

I. Conduct an audit of the financial statements for the year ended 31 December 1999.II. Conduct an audit of the financial statements for the nine months ended 30 September 2000.III. Conduct a valuation of the company as at 31 August 1999.IV. Conduct a valuation of the company as at 30 September 2000.

In August 1999 the DFRB purchased Banora Trading Ltd t/a Sandaun Motel Ltd from Fleet Ltd for anamount of K5.3m.

We commenced the above tasks during the week commencing 12 November 2000 when our staffattended the company premises in Vanimo. During the early stages of our assignment it becameapparent that we would be unable to complete the above tasks. A sample of our concerns follows:­

I. Failure to provide sufficient working papers to support balances in financial statementsII. Company was unable to provide a listing of fixed assets or depreciation schedules III. Company has not conducted a stock take at the balance datesIV. Failure of company to lodge annual returns since 1996V. Inability of company to provide statutory records as required under the Companies Act 1997VI. Failure of the company to provide copies of income tax returns required to be lodged under theIncome Tax Act and accordingly failure to reflect liability correctly in the financial statements

The accounting records and financial controls of Banora Trading Ltd are considered inadequate tofacilitate an accurate expression of an audit opinion in relation to the accounts, and as such we wouldneed to issue a disclaimer on the accounts for the reasons mentioned in this report.

We have been unable to perform a formal valuation for the same reasons indicated above.

We have however performed a limited exercise to provide an indicative value of the investment basedon the future earnings and net assets value of the business. Our review indicates the followingvaluations:­

Future maintainable earnings ­ K700,000 to K1.2 million Net Assets ­ K1.10 million.

We have provided further details of our findings in the body of this report".

(ii) The balance sheet prepared by Mr. Tulake (Management Accounts) had as we haveearlier said carried forward figures from the false balance sheet in the 1998 financialstatements prepared by Mr. Tulake.

An estimated balance sheet as at 30th September, 2000 was prepared by Deloittesconfirming what was shown in the Balance sheet at that date (Management Accounts) withDeloittes estimates of realisable value.

That appendix to the report (SM998) is as follows:­"4. APPENDICES (continued)

2. Estimated Balance SheetESTIMATED BALANCE SHEETAT 30 SEPTEMBER 2000

Management EstimatedAccounts Realisable ValueNote K KCurrent AssetsCash on hand 4,104 4,104Cash at bank 1 108,751 108,838Term deposits 2 150,000 150,000Trade debtors 3 57,523 28,762Prepayments 4 24,890 ­Deposits paid 2,000 2,000Stock on hand ­ 5Food 33,860 16,930Beverages 44,132 22,066Other 3,494 1,747428,754 334,447

Fixed Assets (written down value)Land 6 10,000 368,000Buildings & improvements 7 3,454,451 873,000Bed linen & towels 8 218,772 43,754Motor vehicles 9 349,365 244,556Office equipment 8 182,599 36,520Furniture & fixtures 8 327,667 65,533Goodwill 10 1,056,812 ­5,599,666 1,631,363TOTAL ASSETS 6,028,420 1,965,810

Current LiabilitiesTrade creditors 11 50,229 50,229PAYE tax payable 1,278 1,278Customer deposits 3,859 3,859Provision for taxation 12 436,000Other 11,872 11,87267,238 503,238Non Current Liabilities

Loan ­ Fleet Limited 13 357,327 357,327TOTAL LIABILITIES 424,565 860,565NET ASSETS 5,603,855 1,105,245

Contingent Liabilities

We are not aware of any contingent liabilities other than the matters referred to in thisreport".

The notes to this estimated balance sheet follow (SM999) and include Note 12, which reads:

"12. Provision for Taxation

Financial statements do not reflect liability1997 & 1998 reflect income tax payable of K436,552It is imperative the Company determine its income tax liability"

The estimated balance sheet accordingly took up a liability of K436,552 for income tax.

(iii) The limited exercise conducted by Deloittes only enable them to provide an indicative value of theSandaun Motel based on future maintainable earnings of K700,000.00 to K1.2 million.

29.11 What do these valuations tell us

(a) The land and buildings valuation of The Professionals tells us that those assets had a value ofK1,241,000.00

(b) The report of Deloittes tells us that the business conducted by Sandaun Motel evaluated on afuture maintainable earnings basis had an indicative value of K700,000 to K1.2 million.

(c) It is plain, as we have already shown, that the valuation's carried out by Messrs Iori Veraga andRupa Siba were worthless and overstated the value of what they were valuing by a factor of at leastfour.

(d) It is plain, as we have already again shown, that the balance sheets prepared by Mr. MichaelTulake contained massive overstatements of the value of assets and understatements as well as non­disclosures of material liabilities (such as income tax and sales tax) to the result that the value of theshareholders funds was overstated by at least a factor of five.

(e) It is also plain as we have already again indicated that a fraudulent Auditor's Report was obtainedin relation to the 1998 accounts because a proper audit would have disclosed the falsity of thoseaccounts.

(f) It is plain, as we have seen, that Mr. Kelly Naru went to great lengths to avoid the obtaining ofbusiness evaluation of Sandaun Motel despite the advice of Mr. Ruimb, Mr. Kila, the Department ofFinance and KSL as such an evaluation would have disclosed the true value on the only properlyrelevant basis of what the DFRB Board was purchasing – future maintainable earnings.

(g) It is plain, as we have seen, that Mr. Naru went to great lengths to avoid any of the DFRBmanagement and in particular Mr. Ruimb and Mr. Kila before Completion and Mr. George Uware afterCompletion having access to the financial records of Sandaun Motel.

(h) It is plain that the interests of the DFRB Board were not protected:­

I. in the terms of the Agreement which was signedII. in what little due diligence was undertaken even under the AgreementIII. in the shortfalls of Carter Newell and Mr. Naru providing appropriate legal advice to the DFRBBoardIV. in Carter Newell failing to carry it out prior to and at Completion what was properly required of them(largely because Mr. Naru had given the cheque for the K4.77 million balance purchase moneys to theVendors four days before Completion).V. in what was done or failed to be done by Carter Newell even after Completion.

When all these things are put together the only logical conclusion, which can be reached isthat the DFRB Board paid for the Sandaun Motel in the order of four to five times what itwas in fact worth, that at least Mr. Naru, Mr. Brian Cullinan, Mr. Marcus Cullinan and Mr.Michael Tulake knew that and that all of them cooperated to produce and present to theDFRB Board and the Minister for Finance (to obtain Section 61 approvals) knowingly falsefinancial statements for the 1996, 1997 and 1998 financial years and a knowingly falseAuditors Report to induce the Board and its advisors to believe that they were obtainingproper value for the K5.3 million which they were being asked to pay. It is further clear thataccess to records, which would have exposed this clear fraud was denied to avoiddetection; that primary financial records prior to 1999 were also removed to avoid thatdetection and that Messrs Marcus Cullinan and Michael Tulake were engaged as GeneralManager and Financial Controller at Sandaun Motel to further avoid that detection.

It was only after Mr. Naru's appointment to the DFRB Board as its Chairman wasterminated that steps were taken to obtain proper evaluations which exposed what wouldseem clearly to have been a transaction designed to cheat and defraud the DFRB Board ofin the order of K4.0 million.

The financial effect for the DFRB Board is in fact greater than these figures indicated, foras we have seen the company of which it had acquired the issued capital – Banora TradingLimited – did in fact have contingent liabilities for State Lease rent and Provincial Sales Taxwhich were not disclosed to and taken account of by Deloittes and had a far greater liabilityfor income tax than the K436.000.00 for which Deloittes had made provision.

29.12 What happened to the litigation

(a) The Claim by Fleet Limited against Banora Trading Limited (WS 1176/2000) came to an end inearly 2001 with the filing of a Notice of Discontinuance by the Lawyers for Fleet Limited.

This came about because:­

(i) on 17th October 2000, Mr. Michael Tulake and Mr. Marcus Cullinan signed a cheque onthe Sandaun Motel account for K137,255.00 and forwarded it to Fleet Limited under coverof Mr. Tulake's letter of 17th October 2000.

Copies of the letter and cheque taken from Commission Document DCD68 will beTendered Documents SM1002 & SM1003.

(ii) On 20th October 2000 Mr. Michael Tulake and Mr. Marcus Cullinan signed a furthercheque on the Sandaun Motel account for K140,000.00 and forwarded it to Fleet Limitedunder cover of Mr. Tulake's letter of 20th October 2000.

Copies of the further letter and cheque taken from Commission Document DCD68 will beTendered Documents SM1004 & SM1005.

(iii) On 7th November 2000 Mr. Kila wrote to Fiocco Possman & Kua outlining the history ofthe vehicle purchase and saying:­

"I understand they also pleaded that they were entitled to be paid a commercial rateof interest of 20.27% per annum on both loans. In addition to the repayment ofK68,749.00 Fleet Limited admits receiving payment of K23,829.27 and K28,765.20but pleads monies were accrued interest on the loan debt. I confirm this to correct(sic) of which a letter accepting interest at commercial relates is attached for yourperusal.

Furthermore, the board of both Banora Trading Ltd and DFRB Board have notapproved such an arrangement, however intentions of the Boards where (sic) toacquire this loan.

This statement is my understanding of the event in which I acted based on adviceand for the best interest of the company shareholders".

A copy of this letter taken from Commission Document DCD68 will be TenderedDocuments SM1006 & SM1007.

In our view it will be necessary to ask Mr. Kila to explain how the other payments ofK68,749.00, K23,892.27 and K28,765.20 were made; how he allowed those payments tobe made as well as how these two payments aggregating K277,255.00 were allowed to bemade in October 2000 without the approval of either the DFRB Board or the Board ofBanora Trading Limited; how he approved the interest rate of 20.27% without the approvalof either Board and whether he reported such agreement and these payments to either orboth Boards and if so, when.

(b) The Claim by the DFRB Board against the Vendors in respect of the poker machines (WS 1772 of2000) had reached the stage where a Writ of Summons had been issued and service on theDefendants was to be effected but where Fiocco Possman & Kua had received a Notice of Intention todefend from Mr. Marcus Cullinan.

This was the position as advised in a letter from Possman Kua Aisi (successors to FioccoPossman & Kua) to DFRBF dated 7th June 2001, a copy of which taken from CommissionDocument DCD71 will be Tendered Documents SM1008 & SM1009.

The Commission will need to ascertain the status of these proceeding in order to avoiddealing with issues which are pending before the National Court.

(c) The same letter indicates that Possman Kua Aisi were in process of obtaining copies of CarterNewell files from Pacific Legal Group prior to this Commission of Inquiry being established in order toadvise the DFRB Board whether it had legal rights against Mr. Naru and Carter Newell Lawyers.

Possman Kua Aisi wrote to Pacific Legal Group on 15th March 2001 requesting productionof the Carter Newell file and stating in that letter:­

"We understand your Mr. Kelly Naru had the overall supervision of the matter but theconveyance was conducted by your Mr. Paul Toua …"

Mr. David Lightfoot of Pacific Legal Group responded by a letter of 28th March 2001advising, as is understandable, that with the prospect of this Commission of Inquiry whichhad been publicised, Pacific Legal Group was not prepared to release is file but thatinspection of the file and copying documents from it would be allowed.

Mr. Lightfoot said in response to the paragraph above quoted:­

"Mr. Naru did not have any input into the matter as it was handled by Mr. Martin McEnieryand at the latter stage, by Mr. Seno Wekina and Mr. Paul Toua".

Copies of these letters taken from the Carter Newell file (Commission Document DCD3A)will be Tendered Documents SM1010 & SM1011.

We do not consider that any comment is necessary.

29.13 Final DFRB Board Action

(a) The minutes of the DFRB Board meeting held 20th December 2000 contain at Item 7.1, thefollowing:­

"7.1 Banora Trading Limited

Colonel D. Takendu presented a verbal brief on the company. The Board noted thefollowing:­

I. The resignation of both the General Manager and Financial Controller of Sandaun MotelII. The caretaker manager as appointedIII. The community reaction and support of the Board's actionIV. The procedures now in place to rectify the problem

­ The final report by the Auditors and Valuers are concluded and have been furnished tothe Auditor Generals office.

The Board noted this and the Chairman thanked the Deputy Chairman".

Copies of the first, fifth and sixth pages of the minutes will be Tendered DocumentSM1012 to SM1014 taken from Commission Document DCD24.

(b) The inevitable was finally accepted at the DFRB Board meeting on 8th March 2001 where theminutes record Item 2.1:­

"2.1 Sandaun Motel – Deloitte Touche Tohmatsu – Audit & Business Valuation

Noted:

Col. D. Takendu advised that the Banora Trading Limited Board has accepted the writedown in value of the company from K5.3 million to K1.1 million.

Chairman advised that this is a concern and such information will be very damaging for theBoard and the Fund.

The Board noted the report from Deloittes Touche Tohmatsu and accepted the write downin the value of the company from K5.3 million to K1.1 million".

Copies of the first two pages of these minutes taken from Commission Document DCD24will be Tendered Documents SM1015 & SM1016.

29.14 An aggravating consequence – KSL Fees

(a) As we have seen in the topic regarding Management Fees which was opened earlier, KSL wereentitled to a fee equal to 1% of the value of the investments of the DFRB Board paid quarterlyaccording to the KSL valuations of the investment portfolio.

(b) As we have there seen KSL brought the DFRB Board investment in Sandaun Motel to account inthe September 1999 Investment Report at cost which was K5.3 million at 30th September 1999 (seeTendered Document M139) and K5,415,338 at 31st December 1999 (see Tendered DocumentM140)

The increase was due to payments of stamp duty and legal fees being brought to account.It is likely, due to no fault on the part of KSL, that the value of the Sandaun Motelinvestment in the KSL Investment Reports would have remained at about K5.4 million (oreven higher if the motor vehicle loan repayments to Fleet Limited were taken up) until theDFRB Board decision of 8th March 2001 to write that value down to K1.1 million wascommunicated, if it ever was, to KSL.

The Commission may wish to check on what occurred in this regard as it would mean thatthe fraud which had been perpetrated had an additional and aggravating consequence ofcosting the DFRB Board at least K40,000.00 per year in management fees paid to KSLfrom September 1999 until the time KSL was able to reflect the true value of SandaunMotel in its Management Reports.

30. THE ROLE OF THE AUDITOR GENERAL

(a) As the Commission has earlier been informed in the subject "Structure" the audits of the DFRBBoard for which the Auditor General has statutory responsibility under the Audit Act 1989 have beenconducted by the Auditor General's own staff "in­house" and have not been assigned to other auditorsby the Auditor General.

Even as at August/September 2000, as the Commission has also heard the AuditorGeneral was unable to commence the audit of the DFRB Board for the 1999 year becauseDFRBF had failed to submit even a set of draft financial statements let­alone signedfinancial statements for 1999.

These facts are noted in a memo from the Audit Director Mr. Joe Dadson to the Assistant

Auditor General (Statutory Bodies) dated 16th August 2000 and a letter from the AssistantAuditor General (Statutory Bodies) to the DFRB Board Chairman Mr. Chris Alu dated 20thSeptember 2000.

Copies of these letters taken from Commission Document DCD18 will be TenderedDocuments SM1017 and SM1018.

(b) The Auditor General was able to commence audit field work from late 2000 and the Audit WorkingPapers disclose how the Sandaun Motel transaction was examined and what audit observations weremade.

The Working Paper dated 14th March 2001 reads as follows:­

"AUDIT WORKING PAPERS

"SUBJECT: INVESTMENT ­ SANDAUN MOTEL

OBJECTIVES: To ensure

(i) The Fund has invested in a viable investment which provides adequate returns to theFund.

(ii) The investment is within the investment guidelines stipulated by the State.

(iii) Proper approval being sought before embarking on the investment

(iv) The Board has decided unanimously to purchase the hotel after taking into (account) allfactors affecting the purchase of the hotel

(v) Professional advice/s have been sought before making investments

(vi) No conflict of interest was present by any interested and/or potentially interestedparties (i.e. members of the Board).

The Board at its meeting no 1/99 (1 March, 1999) on was presented an offer to purchaseSandaun Motel at K5.3 m (approx 2.5mUS$) on walk in walk out basis. The above propertywould be purchased subject to

(a) property and business valuation(b) at a negotiated price after obtaining property and business valuation.

As per the above requirements two valuations were carried out by Veraga Valuation andPom First National Real Estate Ltd. The results of the findings were:­

Agent Date ValueVeraga Valuation 12/3/99 K5,542,000Pom First National 12/3/99 K5,500,000

The Board at its special meeting (2/99) on 29 March 1999 requested that a businessvaluation be conducted as in support to the above property valuation. One member (MrRenagi) stressed the need for proper due diligent to facilitate an informed decision.

The chairman advised that owners have been offered the purchase by external parties andowners ill health and his travel to Australia may delay the acquisition process.

Since it would take 2­4 weeks to carry out a business valuation and Board considered thisas a viable proposition Board unanimously resolved to purchase the motel for K5­K5.3mand assign one of the lawyers to arrange for transfer of title. The chairman declared hisinterest as he was also a partner in one of the legal firms which assist the Fund (CarterNewell Lawyers).

However, no mention was made in the board minutes that his firm or he is also acting onbehalf of the sellers.

In acquiring the motel following financial information were obtained.

(a) cashflow forecast

(b) financial statements for 1998.

A cashflow statement was prepared for 12 years (to) illustrate that the project generate netincome of K1,057,836 for the whole period and its income and expenditure remainsconstant. Further from net cash flows it pays dividend of 600,000 to 900,000 dividendsfrom year two. The cash flow also assumed 30% of the revenue generated from pokermachines.

From the above forecast it is difficult to establish that how revenue and expenditure couldremain unchanged over a long period of time (12 years).

It is also difficult to establish that substantive portion of its earnings (30%) derived frompoker machine which also remains constant over 12 years.

Draft financial statements (unsigned) for the years 1996 and 1997 were provided but thesefinancial statements were note audited by any auditors. 1998 financial statements weresubsequently audited before closing the deal on the purchase of the motel.

The Minister for Treasury and Planning on 26 May 1999 approved the purchase of thismotel for K5.3 million under PFMA S(61). The approval was based on chairmansrecommendation of the following estimates.

Income 1,891,836Expense 834,0001,057,836Tax 28% 296,196Net profit K761,642

From our discussion and correspondence it was revealed that no input was sought fromKina Securities Ltd as Fund Mangers and Investment Managers under the contractagreement. As consultants Kina Securities should give advice and inform on the bestmethod of investment and management of the portfolio for and on behalf of the Fund inaccordance with this agreement.

Kina Securities expressed its disappointment and entered into Deed of Indemnity to protectthemselves from any involvement in this investment decision.

Sale and Purchase agreement was signed on 1st June 1999 which also containedconditions precedent to agreement / completion. Agreement also contained a list ofinventories of assets that were to be transferred as part of the deal. It is now revealed thatpoker machines (20) those have been classified under assets belonged to the supplier ofthe machines although, it has been itemised as part of the motels assets.

Our discussions also revealed that on completion of the transfer 3 motor vehicles weretaken away by the previous owners of the motel but audit was unable to independentlyverify these. Further only one vehicle namely Toyota double cab Reg H1489 was includedin the list of inventory.

Audit also noted that in the Agreement signed by the parties balance payment ofK4,700,000 was to be paid to Fleet Ltd. Review of correspondence revealed that BanoraLtd and Fleet Ltd were connected in some way (parent company).

Clause 7.3(a)However, it was noted that all payments were made to Trust Funds of Carter NewellLawyers.

Stamp duty of K was paid to Internal Revenue Commission.

The final payment of K4,770,000 was released on 19 August 1999 and audit was unable toascertain why between March 1999 and August 1999 an independent business valuationwas not carried out to ascertain the actual value of the investment.

TEST PROGRAMME:

(i) Ensured that investment is within the investment guidelines.

(ii) checked that investment proposals have been verified and compiled by using reliabledata and information.

(iii) checked to ensure whether independent professional opinion was obtained.

(iv) ensured that Board of Trustees have approved the purchase of the motel.

(v) checked that Ministerial approval was obtained before investment was made.

(vi) checked how investment will benefit the Fund.

(vii) perused though the contract of sale and purchase agreement to ascertain that they arein compliance with the Funds requirements

(viii) ensured that proper business valuation has been carried out

(ix) checked that inventories are duty transferred to the entity and held by the entity asagreed.

(x) agreed to the amount showed in the financial statements.

AUDIT FINDINGS

(i) The above investment was purchased at a value of K5.3m without carrying out a duediligence exercise as requested by the Board members. The owners ill health and hisurgency to go to Australia was given as reasons to expedite the process.

(ii) The cash flow statement prepared to support the investment indicated that project couldgenerate net income of K1,057,836 by assuming that income and expenditure will remainconstant over the period of 12 years which is not a valid assumption.

(iii) Earnings from poker machines represented 30% of the income and remainedunchanged for next 11 years possible legislative changes which may affect the income wasnot considered.

(iv) Kina Securities Ltd, the Fund Managers distanced them self in this investment decision.No contribution was made by them. This is also resulted in requesting for a deed ofindemnity.

(v) The Board had about 3 ½ months since decided to buy the property to carry out thebusiness valuation, but no business valuation was carried out. But property valuation thatwas carried out placed the value at approx K5.3m. No basis of valuation provided to audit.

(vi) The law firm which acted on behalf of the Fund also acted on behalf of the seller. Thechairman of the Fund at the time purchase was a senior partner of this law firm. Therecould have been possible conflict of interest, but audit was unable to independently verifythis.

(vii) The stock take was carried out by the Chairman himself. No other personnel wereinvolved in the asset transfer. The poker machines which belonged to the supplier of themachines have been taken as part of stock and valued at approx K400,000.

(ix) Subsequent business and property valuation carried out by valuers put the value of themotel at K1.5m (approx). This valuation was carried out in December 2000. As a result ofthis latest valuation, it has now become apparent that the Fund has overpaid by K3.8m.This could have been avoided it proper care would have been taken to carry out a businessvaluation."

A copy of the Working Paper taken from Commission Document DCD35 will beTendered Document SM1019 to SM1021.

(c) With the extensive Field Work completed and copies of the Professionals valuation and Deloittesreport to hand the Auditor General completed compilation of his management letter to the DFRBBoard on 19th March 2001.

A copy of the letter taken from Commission Document DCD19 will be TenderedDocument SM1028 to SM1034.

Item 5 of that letter deals with the Sandaun Motel and reads as follows:­

"5.1 Purchase of Sandaun Motel (Banora Trading Ltd)

The Fund invested about K5.4 million during the year in purchasing Banora Trading Ltd(Trading as Sandaun Motel). The Motel was purchased by the Fund without obtaining anybusiness valuation or without carrying out any due diligence exercise. However, twoproperty valuations were also carried out by professional valuers before the purchase. Thevalue placed on the motel were as follows:

Valuation by Veraga Valuation Ltd K5,542,000Valuation by First National Real Estate K5,500,000

Audit was provided with only a two (2) page valuation report from the above valuers for theproperty. The report did not indicate how the valuation was arrived at, what data was usedin arriving at the asset base and the income base valuation. Please provide us with a fullcopy of the report.

5.2 The Board approved of the purchase of the Motel in principle on 25 March 1999 subjectto a business valuation being carried out on the property. But the initial deposit of K530,000was made on 16 June 1999 without carrying out a business valuation and the finalsettlement was made on 19 August 1999, The Fund had about five (5) months to carry outa business valuation.

Why was this not carried out? Please explain.

5.3 It was revealed that the law firm that was engaged to act on behalf of the buyer (FleetLtd) also acted on behalf of the seller of Sandaun Motel. The former chairman of the Fundis an employee and senior partner of this firm. Audit was unable to obtain satisfactoryevidence that no conflict of interest existed between the seller and the law firm when thesenior partner of the law firm (in his capacity as the then chairman of the Board of theFund) acted on behalf of the buyer (the Fund).

Please explain why an alternative law firm was not engaged to act on behalf of the Fund.

5.4 It was revealed that a former chairman of the Fund carried out the physical inventorychecks of the Motel single­handedly. Audit noted that poker machines which belonged tothe supplier of the machines, were also included as part of the assets of the Motel. Thetotal number of machines included was fourteen (14). As a result, the value of the assetswas overstated by the value of the machines.

a) Please explain why the machines owned by the suppliers were included in the asset listof Sandaun Motel.

b) Please explain why ownership checks were not carried out before the final payment wasmade.

5.5 The recent property valuation and business valuation carried out by the consultantsresulted in the restatement of (based on the information provided to them) the value of thebusiness within the vicinity of K1.1 million to K1..6 million. As a result of the substantialreduction in the value of the business, audit is of the view that the payment of K5.4 millionto acquire this business was well in excess of the market value. Consequently, the Fundhas sustained a loss of approximately K4 million. Audit also was unable to ascertain howthe property valuation on could differ by a material amount within a period of twelve (12)months.

Audit requires your comments in this regard and an explanation of how this loss will bemitigated.

5.6 Also advise why the Fund Managers' advices were not sought before making theinvestments in Sandaun Motel and why the Fund Managers disassociated themselves fromthis proposal.

5.7 The Funds investments of K5.4 million in Sandaun Motel yielded only K70,000 asdividend income during the year 2000. The average interest rate on treasury bill was 22%for investment funds during 1999 which would have yielded an interest income of K1.17million on an annual basis. As a result of this investment in Sandaun Motel, the Fund lostapproximately 1 million on interest income:

Please comment".

(d) The response to the management letter was not received until after this Commission of Inquiry wasconstituted and thus, this Commission was established and its Terms of Reference framed on thebasis of the issues raised in this management letter which were at the time unanswered.

(e) The Commission is in consequence indebted to the Auditor General and his officers for thefoundation information upon which we have been able to build in this opening.

31. FUTURE DIRECTION OF OPENING

(a) When Part 1 of this Opening was presented we said that the first three parts of it, of which this isthe third, would detail the evidence and what we had to say on the evidence adduced to this point.

As will be seen from the later parts of this Part 3 we have in some respects gone past theevidence so adduced and endeavoured to point out areas where further evidence will berequired.

(b) Two further aspects remain to be completed.

(c) The first involves four tasks being:­

(i) the obtaining of signed financial statements for Banora Trading Limited for the years1997, 1998 and 1999 as prepared by KPMG.(ii) the audit of those financial statements(iii) obtaining of a business evaluation from KPMG(iv) obtaining a revised business evaluation from Deloitte Touche Tohmatsu.

All of these tasks have been commissioned by the DFRB Board and we anticipate being ina position to call evidence as to what has been achieved without delay.

(d) The second involves tracing the proceeds of sale of K5.3 million less legal fees of K66,000.00 paidto Carter Newell in an endeavour to ascertain the identify of all the participants in what we say is aclear fraud and to further identify all of the persons who benefited from the proceeds of that fraud.

The work involved is well progressed and we shall begin calling evidence on that aspectshortly.

(e) The final task will involve a short supplement to the three Parts of this Opening presented to dateas further necessary or relevant information is received or as we detect material, which has beeninadvertently omitted.

Persons adversely affected by what has been presented to this point will be notified of theirright to be heard in the next day or so and asked to indicate promptly whether they wish toexercise that right.

MR REEVE: Finally chairman I hand to the commission the tender documents that are referred to inthe opening on Sandaun Motel on the basis that whilst accepted by the commission for the momentthose documents will not be admitted into evidence until the persons affected by the opening have areasonable opportunity to object to their tender and any such objections are ruled upon.

THE CHAIRMAN: The documents are accepted and will not be accepted into evidence until thepersons that are affected by the materials are given ample opportunity to put their case before thecommission.

MR REEVE: As the commission pleases. Chairman that is all we have for the commission thismorning. I have indicated in my opening remarks that ­ sorry in the opening that we will now proceedto notify persons who are affected by the three parts of the opening over the next few days of theirright to be heard and will be requesting a prompt response from them as to whether they wish to beheard so that we can then program the hearing of those persons who do wish to have their say.

[10:21 am] THE CHAIRMAN: Okay.

COMMISSIONER BARNETT: So they have not been notified after the first and second­ ­ ­

MR REEVE: No they have not on the basis chairman that it probably would not have been, sorrycommissioner, that it would not have been fair to do so because they did not know what else wascoming. Chairman that is all I have for the commission this morning. Having regard to ourcommitments for the balance of this week and early next week, I ask that the commission adjourn until9.30 next Wednesday which I think will be the 12th of June.

THE CHAIRMAN: We will adjourn until 12th June 2002, that is on Wednesday at 9.30 am.

MR REEVE: As the commission pleases.

AT 10:22 AM THE INQUIRY WAS ADJOURNED UNTIL WEDNESDAY 12 JUNE 2002 AT 9.30 AM

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