Lendlease ‘smoke and mirrors’ corporate shenanigans have come home to roost but there is still at least one big hit to come. Michael West reports on the transformation of blue chip stock and ‘market darling’ into ASX horror story.
Californian fraudster Sam Bankman-Fried kicked off his ill-fated billion-dollar empire in April 2019 and soon shot to fame as America’s 41st richest person. SBF the “crypto poster boy” was arrested in the Bahamas in December 2022, extradited to the US and indicted on seven criminal charges. Just last month, he was convicted on all charges, sentenced to 25 years in prison and ordered to forfeit $US11B.
The wheels of justice had spun quickly for SBF. Not so, however, for the local legends of Lendlease. Just one month before Sam Bankman-Fried commenced his ill-fated FTX venture, Lendlease filed its 2018 tax return with the Australian Taxation Office and the ATO was put on notice of fake tax deductions.
That was March 2019. The once revered blue chip had understated the gain on the sale of a stake in its Retirement Living business. It had ‘double-dipped’ on tax deductions. Indeed, it might have taken them 4 years but the ATO issued a draft ruling proving just that, on double-dipping in 2022.
Meanwhile, Tony Watson, the tax adviser who had warned the Lendlease hierarchy about the illegality of the tax machinations, remains stranded and still awaiting action from regulators. Unable to talk sense into both the board and the executive of Lendlease, a frustrated Watson had turned whistleblower and approached the ATO with the double-dipping heads-up.
His house and his livelihood on the line ever since, duking Lendlease and PwC in the courts – for doing the right thing – Watson faced the Senate economics committee this week and spoke of the “daunting prospect of being left alone” as a whistleblower and how establishing a “whistleblower commissioner” could be an important reform. “Someone who will stand with the whistleblower,” he put it.
Before the crypto stitch-up was even a gleam in Sam Bankman-Fried’s eye, this journal had exposed the tax fraud by Lendlease in mid-2018. We have followed Tony Watson’s trials and tribulations ever since, while ATO officials have been having nice cups of tea with Lendlease, PwC and assorted lawyers trying to fend off the inevitable, a confession.
While the market has woken up to Lendlease’s accounting chicanery and its share price is in the doldrums, another hit to its once glorious corporate reputation would seem inevitable. That is – being outed as a big-league tax fraudster.
In its most recent financial statements, the property group finally fessed up in the minutiae of the notes to its accounts a ‘contingent liability’. That is, the ATO was auditing it. At stake is $260m of tax deductions, now probably $400m with interest, on the $1.7b in shonky tax deductions involved in the PwC structuring of the retirement village assets.
Naught to see here
Having previously, breezily, dismissed allegations of tax fraud as ‘speculative’ it now faces a conundrum. The same crew is still running the show, but if an amended assessment from the ATO is handed down, the crew may have to restate ten years of wrong financial statements and pay a large sum of money; shareholders’ money naturellement.
They will be meted out the fiercest punishment at the elite segment of Australian financial markets … embarrassment.
There is little doubt the impending press release will attribute a ‘misunderstanding’ after ‘fully cooperating to resolve the situation with tax authorities’ but to be blunt, it should be framed as ‘busted for the biggest tax fraud in Australian history’.
The wheels of justice grind almost imperceptibly slowly in corporate Australia if much at all, but the writing has been on the wall for many years. Lendlease, in this, is something of an ASX morality play.
From blue chip to blue movie
Back in the day it was one of the most blue chip offerings of all; it’s innovative staple-security structure, the brainchild of founder Dick Dusseldorf, drew global admiration, and enticed large investors, it’s savvy move into funds management and property trusts via the MLC and GPT acquisitions lent diversity, high earnings growth, sharemarket performance like few others, and a thumpingly good PE.
But then they got too smart for their pants, too fancy in ‘playing the market’, sucking investors into a disingenuous ‘reported earnings’ narrative that enriched the executives. For they’re riches were struck on ‘reported earnings’, fabricated earnings rather than cash in the door. Alas the market is finally onto it; the share price spliced by two-thirds in five years.
In an investigation of Lendlease’s financial statements here in July 2018, we revealed the smoke and mirrors which had made ‘reported earnings’ look so terrific but veiled the true picture of actual earnings.
We found that, over the preceding eight years, from 2010, the company had booked $2.5 billion in non-cash profits. And in another escapade of financial bravado, management had sold the company’s retirement village assets into a joint venture with a Dutch pension fund, then promptly borrowed $400 million from the joint venture and kicked off a $500 million share buy-back.
That day in July, the stock was changing hands at $19.99 a share. Six months later, Lendlease shares plummeted after an earnings downgrade to the construction division. They closed yesterday (mid 2018) at $12.55 a share. Today they are changing hands at $6.50.
Again, in March 2019, further investigation here established:
- Over-enthusiastic asset revaluations of up to 83 per cent enhancing profits.
- A large proportion of reported profits are due to revaluations and reclassifications (around $2.B in non-cash profits over eight years).
- Of the $426M profit announced at the last interim, some $274M came in the form of unrealised gains.
- Borrowings from joint ventures enhance headline debt figures.
Meanwhile, management under-investment banker turned Lendlease CEO Steve McCann was busy ripping out massive bonuses, tens of millions of dollars, based on ‘reported earnings’, and these, in turn, were based on the smoke and mirrors of asset juggling.
If ‘markets go up and markets go down’ is an immutable principle for investors, then surely the two which follow it – ‘if it looks too good to be true, it probably is’ and ‘if it’s too complicated to understand, milk it and bail’ should be equally regarded by wary investors.
We look forward to justice for Tony Watson meanwhile. It is no cakewalk fighting the Big End of Town.
- Michael West Media
https://www.michaelwest.com.au/
