Consulting » Maxwell report – All the publisher’s men

LAWRENCE GUEST, FD, Mirror Group Newspapers; director, Mirror Group Pension Trustees Ltd and Maxwell Communication Pension Trustees (Works Scheme) Ltd. Salary: #75,000

Lawrence Guest, a chartered accountant, had been finance director of MGN since 1977, seven years before Maxwell acquired the group from Reed International. He had been in the newspaper business since 1962.

From the day that Maxwell took over, however, Mirror Group’s finances were controlled by two separate units. Day-to-day operational activities were handled by the finance department based in Orbit House, for which Guest, based in an office across the road in the Mirror Building, was responsible.

The more interesting department was the central treasury, located (from 1987 onwards) in a third nearby building, Maxwell House. This was initially part of the finance function of Maxwell Communication Corporation, under the direction of FD Richard Baker. In 1984, it took on the treasury function for all of Robert Maxwell’s companies, including MGN.

Hence, the MGN finance department’s treasury role was confined to collating daily information on bank balances, issuing low-value cheques and getting Maxwell’s signature for high-value cheques. The DTI report on Mirror Group Newspapers says: “Consequently, it was the central treasury that controlled the major movement of cash from MGN’s bank accounts” to other Maxwell companies or third parties. Often, when funds were transferred to other Maxwell companies, no documentation was given to the MGN finance department to enable it to keep proper records.

Of course, Maxwell had sole signatory authority for unlimited amounts in respect of all bank accounts. The MCC board agreed to Maxwell’s request for such powers in 1981 while the MGN board approved this request the day that Maxwell took over the company, at a board meeting called at midnight and held at 2.45am and reconvened at 2.45pm.

But, while a decision had been made prior to the flotation of MGN that it have its own treasury, it in fact remained under the direct control of Maxwell himself – “nothing was done by the directors or anyone else to address the problem of MGN’s finance department obtaining documentation for transfers in and out of MGN’s bank accounts carried out by the central treasury without adequate explanation or to prevent such transfers,” says the report. Guest was criticised by the DTI inspectors for not informing the board or Samuel Montagu, the merchant bank sponsoring the MGN flotation, that the split had not taken place.

Guest was directly involved in two key transactions involving Mirror Group pension funds. In February 1986, the pension fund bought Strand House – adjacent to the Mirror Building and later renamed Maxwell House – for #17.1m, then leased it to Maxwell’s Pergamon Press which bought the building outright for #17.8m just nine months later. Guest was on the pension fund investment committee that approved the deal. There was no independent valuation for this related-party transaction but, six months later, the building was valued by Savills at #36m when it was offered as part of the collateral for a #105m loan. “The pension fund was used to purchase the building for the ultimate benefit of RM’s private companies which … did not have the resources available to pay for it in February 1986,” says the report.

Guest was also the signatory to an agreement to “unscramble” a complicated deal whereby shares in Reuters were sold by MGN to the pension fund, but then bought back some time later at an artificially low price using backdated documentation. Again Maxwell’s private company benefited.

These were the only two of Maxwell’s tricks with which Guest was directly involved, the DTI report concluded. But while he was not aware of more serious abuses of the pension funds, the report said that Guest ought to have appreciated that key documents were back-dated and he ought to have advised Samuel Montagu (and the trustees) that Maxwell had “exercised control over the assets” and that the investment committee “was not being provided with proper information”.

Guest – who had no involvement in the central treasury – was cut further out of the loop by the appointment of Michael Stoney as a director. The DTI report says Stoney “had taken on a significant role in MGN’s finances and Mr Guest was not going to fulfil the usual role of a finance director”.

But as someone who knew Robert Maxwell’s style of management, Guest shared with other directors “a limited measure of responsibility”. Guest (along with others) was aware that Maxwell was sole signatory to company bank accounts, and both he and Stoney knew of Maxwell’s “direct personal control … over MGN’s finances and the deficiencies in the documentation provided to the MGN finance department.” He and the other directors ought to have raised these issues with Samuel Montagu or Coopers & Lybrand Deloitte.

MICHAEL STONEY, Director, Mirror Group Newspapers. Salary: #160,000

A number of the criticisms levelled at Mirror Group Newspapers FD Lawrence Guest were also directed at Michael Stoney, who was in effect a higher-ranking FD than Guest. Stoney certainly had control over the finances of MGN in a way that Guest did not.

Kevin Maxwell had in fact wanted Stoney to be the FD of MGN in place of Lawrence Guest, arguing that Stoney was a very competent accountant, got on well with the auditors, and was good at presenting to analysts and financial institutions. In contrast, Guest had had virtually no dealings with the banks, as all financing had been done through the central treasury; his experience had been limited to “the financial aspects of the operational side of MGN’s business”, not the treasury side. In November 1990, five months before MGN’s flotation, Kevin argued with Samuel Montagu that Stoney should be made the senior FD, leaving Guest in the operational role. But the merchant bank rejected the idea, preferring Guest, who had newspaper experience. Though Stoney was subsequently introduced to analysts as a “commercial director”, he had, in effect, the role that Kevin wanted him to have.

In May 1991, shortly after the MGN flotation, it was decided that Stoney would be answerable to Maxwell himself and solely responsible for bank relations, the treasury function, investor relations and relations with the auditors, “including accounting policies”. Guest, also answerable to Maxwell, would be responsible for the MGN finance function, preparation of the monthly management accounts and “compliance with group internal control systems”. The effect was to confirm the “curtailment” of Guest’s role to that of chief accountant, the report found.

But it left Stoney – who was also a director of some private-side companies – in charge of the treasury function, and hence “in a position of conflict of interest”. The report identifies Stoney as giving co-authority (with any one of the Maxwells) to two dozen “unusual transactions” involving MGN and other Maxwell private companies. “Stoney bears responsibility for the payments (from MGN) to the private side which he authorised,” the report says.

Stoney was charged with conspiracy to defraud and false accounting in relation to a loan from Bankers Trust to MGN. However, the case never came to court in the wake of Kevin Maxwell’s acquittal at an earlier trial.

He was, however, expelled from the ICAEW and censured for “conduct falling below that which was to be expected of a chartered accountant in relation to a loan of #50m by Bankers Trust to MGN in October 1991”.

ALAN CLEMENTS, Non-executive director, Mirror Group Newspapers; Trustee, Mirror Group Pension Scheme. Salary: #30,000

In March 1991, shortly after his retirement as finance director of ICI, Clements was approached about becoming a non-executive director of Mirror Group as it prepared for flotation. As someone with experience in the running of a major public company, Clements, says the report, was appointed to use his skill, experience and independent judgement in the board’s control over the management of the company and as such bears “the major responsibility” among the directors for failing to ensure that the board was in a position to control the running of the company and to control Maxwell himself – though Clements told the inspectors that he was never advised by Samuel Montagu that this was his duty.

He is criticised for not finding out much more about MGN before the flotation, for relying on Samuel Montagu to put to put proper systems in place “without (himself) making due enquiry”, and for relying on the executive directors to bring matters to his attention. He is also criticised for failing to “get to know” the executive directors of MGN: he “did not attend any meetings concerned with the ordinary business of MGN until after the flotation”.

The report gives details of particular board meetings in 1991 at which Maxwell ran the meetings without having given the directors time to read the board papers. The papers were then only presented as the meeting started, as a result of which the directors “inadvertently” gave Robert Maxwell sole signatory authority on a new bank account.

They also allowed Maxwell to delegate matters to a committee of two, consisting of Maxwell plus one other. They also approved the interim results (hurriedly) without asking what the views of the audit committee were.

Clements, says the report, ought to have “stood up” to Maxwell and made clear that he could not run board meetings in this fashion. “(Clements’s and Sir Robert Clark’s) presence on the board was used to convey the impression that MGN was a properly run listed company subject to the control of the board and not RM, whereas this was not the case.”

ROBERT BUNN, FD, Maxwell “private side” companies; director of Mirror Group Newspapers. Salary: n/a (plus #110,000 for MGN directorship)

As FD of Maxwell’s “private side” businesses, Bunn was in a very powerful position. The report concludes that he knew of most of the purchases of Maxwell Communication Corporation shares – designed solely to prop up the price of the shares which were used as collateral for loans for the private-side businesses – and assisted in the execution of some of them: “a responsibility attaches to him”. Likewise, Bunn bears “a significant responsibility” relating to similar purchases of Mirror Group shares made by Maxwell “in breach of the undertakings in the (MGN) prospectus”.

Bunn, along with Kevin Maxwell, also bears “the major responsibility … for the deficiencies in the information provided to Coopers & Lybrand Deloitte”. One example mentioned in the report appears in a set of MAPs – Matters for the Attention of Partners – drawn up by Coopers audit staff: it was noted that paired transactions – before and after the balance sheet date – removed and then reinstated an MGN liability to the pension fund.

“We understand from Robert Bunn that the reasoning is ‘political’,” said the notes. Bunn also urged Coopers not to push for disclosure of loans from the funds to MGN which, during the financial year, exceeded 5% of the fund’s net assets, provided the loans fell back below the threshold by the fund’s balance sheet date.

A letter drafted by Coopers & Lybrand Deloitte in June 1991 and addressed to Robert Bunn warned that the accounting systems, management information and statutory accounts were “well below the levels we would consider adequate.” Various companies had changed their year ends, but many were still “non-coterminous”, making it difficult to audit inter-company balances. In fact, many private side companies had their books written up many months – or even more than a year – after some transactions took place. The general quality of audit information provided was “lamentably poor”. Kevin Maxwell admitted he had probably seen this letter and that he had discussed with Robert Maxwell “the fact that Mr Bunn was not adequately supported.”

While Bunn knew that Maxwell paid particular attention to balance sheet dates, Kevin Maxwell told inspectors this wasn’t because there was anything wrong with the loans, but “to avoid journalists writing about it”. The DTI concluded that Bunn was not “an originator” of the abuses that took place, but that he gave “substantial assistance” to Maxwell and, as a result, “bears a significant responsibility”.

However, the DTI inspectors were only able to interview him once before he was sent to trial on a charge of conspiracy to defraud (in relation to a pension fund transaction which took place after Maxwell’s death), during which he took ill and the prosecution dropped its case against him. The DTI inspectors sent relevant extracts of their report to Bunn’s lawyers for his comments but he was not well enough to receive them. “In consequence,” the report says, “we have not been able to ascertain from him what facts, he says, were within his knowledge or whether he accepts those facts to be correct nor whether he has any explanation or defence for his conduct …”

RICHARD BAKER, Finance director of Maxwell Communications Corporation until November 1990

Baker had been at Maxwell Communication Corporation’s (MCC’s) treasury operation – which ultimately encompassed MGN’s treasury function (see Guest) – since 1970, a decade before Maxwell took control at what was then called British Printing Corporation (and later BPCC, before it was renamed MCC in 1987). Described by the DTI report as “considered by many a very influential adviser of RM and an original thinker. He played a central role in many decisions until November 1990 (a year before Maxwell’s death).”

Baker took “early retirement” after disagreeing with Maxwell’s unsuccessful attempt a few months previously to “improve” a set of interim results that had already been approved by the board. Maxwell demanded that he resign or take early retirement.

ALAN STEPHENS, FD, Robert Maxwell & Co Ltd; company secretary to hundreds of Maxwell companies including MGN and MCC

One of the lowest profile players in the whole saga, Stephens was the company secretary to hundreds of Maxwell’s private side companies, including MCC, and, from 1984, MGN. As the report says, a company secretary has a “key role in ensuring that board procedures are followed”. He was also a director of Bishopsgate Investment Management, which was involved in the administration of the pension funds.

At the insistence of Peter Walker, who was to have become chairman of MCC, the decision was made to split the secretarial function with Stephens being hived off to MGN, another secretary being appointed to MCC. Walker was displeased that board meetings were called without proper notice or proper papers: documents were often given to the board just half an hour before the meeting – though Stephens claimed that he hadn’t withheld them, Maxwell had. But, as Walker ultimately declined the chairmanship, the decision to split the roles was never implemented.

Stephens is criticised in the DTI report for not protesting at Maxwell’s management of the pension funds, and for not ensuring that proper reports were made to trustees. He also signed documentation related to the transaction in Reuters shares which he ought to have realised was backdated. One witness told the inspectors that Stephens said, “If the old man tells you to do something you do it” – though Stephens denies ever saying such a thing.

Stephens has an intriguing history, however: what no one seems to have noticed is that he was not only a pivotal colleague of every director at MGN, MCC and all the companies involved in pension administration: he is probably the only direct link between the 2001 DTI report on Mirror Group and the 1973 DTI report on Pergamon Press, other than Robert Maxwell himself. In 1965, Stephens was named as company secretary of the private-side business Robert Maxwell & Co, which was deeply entangled in the affairs of Pergamon, particularly via unusual related-party transactions at anything other than arm’s length prices. He became FD a year later.

The Pergamon DTI inspectors were extremely concerned at the pattern of trade between the publicly quoted Pergamon and the family-owned companies, and the fact that Pergamon could not fully recover its debts from the Maxwell companies.

Yet, 20 years later, alongside Guest, Stoney, Bunn and the others, Stephens was the one FD who could have said exactly how Maxwell liked to do business – if they’d asked.