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Foundations Program plc - in liquidation
FPA Limited - in liquidation

Update - November 2012

This update covers matters arising since the end of July 2012.

Participant obligations

In the last report the liquidators commented on the unsatisfactory state of the records in relation to participant points. It is important that Participants understand the impact of the concern that the liquidators have in this matter.

The following illustration will show the effect of incorrect valuations:

During each month of the Program, points were allocated based on the value of the Participants life policy investments1 on the following model:

For an investment unit value of $100,000

Asset type Monthly points value
Cash 100
AA rated corporate or sovereign debt 90
Endowment with profit policies 80
Quoted securities or funds 70
Others discretionary

If it is assumed for the purposes of this illustration that the Program only consists of 2 participants who each made a single investment into the Program as follows:

Participant A invested in the Program 5 years ago with cash of $100,000 will have accumulated 6,000 points (60 months x 100 points).

Participant B invested in the Program for 3 years with $100,000 in quoted equities (as the underlying life policy investment) will have accumulated 2,520 points (36 months x 70 points)2 . In this illustration the total number of points will be 8,520 (6,000 + 2,520 points).

If the Foundations Program loss were $50,000, Participant A will be "responsible" for $35,000 of such loss (50k x 6000/8520) of loss and Participant B will be responsible for the remaining $15,000 (50k x 2000/8520).

If the value of Participant B's quoted equities was actually $75,0003, the points and therefore participation of B in the program reduces to 1,890 and B's true "share of loss" would in those circumstances be $12,000 (50k x 1890/7890). There would be a corresponding increase in Participant A's liability to $38,000.

In summary, if the Liquidators relied on the underlying and inaccurate current system records of the Program, Participant B would have been asked to pay 25% more of the loss than they should properly be asked to contribute in accordance with the program rules.

We reported previously that steps were being taken to assess the possibility of adjusting participant points based on the value of their policies at a single end date namely 23 November 20114. To date the life companies have provided details for 180 of the 207 relevant policies.

In assessing the likelihood of achieving a fair result using this type of single end date approximation we obtained the following results against certain thresholds of accuracy:

Valuation range % of all policies
No more than 5% higher or lower than actual 21
Up to 20% higher or lower than actual 47
More than 20% higher or lower than actual 32

As a result of the significant differences between the actual and estimated single end date results the liquidators have concluded that this is not a basis upon which fair allocations of losses can be made.

To follow the Foundations Program operational rules, a complete re-working of the valuations would be necessary. However, the liquidators have already established from the life companies that it will not be possible to obtain electronic data to facilitate such a re-working exercise. To undertake such an exercise would involve approaching 100,000 transactions which could only be processed manually at a very significant time/cost.

The liquidators have concluded that it will be necessary to propose a formal compromise of the process and that this will require the approval of the Court. In the first instance, the liquidators propose in due course to seek the views of the Participants - in isolation these views cannot give rise to definitive approval or rejection of the liquidators' proposals, but will enable them to judge the likely level of support for the proposed solution.

It is proposed that the participation points be recalculated for all relevant policies1 on a quarterly basis for the life of the Program. It is estimated that this will result in approximately 3,200 valuation transactions. This remains a significant exercise but is more manageable and will provide relative values (and therefore points) between the Participants that are properly based and significantly more accurate that the current position or a single end date approximation.

Loan Notes

Since the last report, the liquidators have examined the detailed records of the company, including several thousand emails which were produced by the company's officers.

The liquidators were mandated to investigate the circumstances giving rise to the alleged fraudulent Loan Note issue in the United States - this in turn falls as part of the establishment or otherwise of the Loan Note holders status as creditors of FPA.

There are certain matters of fact that appear to be undisputed. Mr Brewer (the alleged fraudster) was a validly appointed director of FPP and FPA at the material times. FPP and Brewer (together with the Brewer Investment Group ("BIG")) were in advanced discussions relating to the raising of new sources of finance through BIG including the issue of Loan Notes.

The liquidators have identified sufficient correspondence and other documentation that, taken with the documentation issued by BIG in procuring Loan Note investors, show grounds for admittance of their proofs of debt against FPA Limited. Any proofs that are in the future admitted will also be subject to reconsideration in the event that the loan note holders recover from BIG/Brewer

The liquidators have also sought appropriate advice from the US to ensure that there are not other grounds for rejecting the claims and continue to reserve their final position. At this time, both Loan Note holders and Participants should be aware that the liquidators are currently proceeding on the basis that the claims of the Loan Note holders will not be rejected at this time.

Participants' assigned assets

In the light of the stance currently taken in respect of the Loan Note holders, the position of the Assigned Assets must be considered. The Offering Document, its Notes and the Assignment documents (both from policy holders to FPA and from FPA to the bank) are silent in several circumstances that are now live issues - namely that they do not consider what should happen when Assigned Assets are released in circumstances where there are losses either within the Program or within FPA; nor do they state what should happen if part of the population of Assigned Assets is realised in full in settlement of the obligations of the Program whilst other Assigned Assets remain intact.

This is a not a commercial decision, but a matter of legal interpretation of the documents. The liquidators have taken Counsel's Opinion. In summary, and without waiving the legal privilege of FPP, his Opinion is that the Assigned Assets, when returned by the bank to FPA are legally and beneficially owned assets of FPA and therefore available to all creditors of FPA.

The alternative would be that the assets are held on some form of trust relationship for the benefit of the Participants or possibly for the benefit of those whose Assigned Assets remain "intact". Counsel confirms that the matters are arguable, but retains the view that the success of such an argument is not assisted by any established law.

It is highly probable that the liquidators will seek the Court's directions on this matter. However, at this point the precise mechanism for doing so, in order to allow both constituencies the opportunity for legal arguments to be properly put, has not been determined. This will be the subject of further communication.

1 Note some Participants provided assigned assets other than by way of life policies
2 This calculation would also be subject to further discounts in the opening months of investment which have not been reflected in this example to avoid further complication
3 For ease of explanation this is effectively assuming that every monthly valuation of equities was $75k
4 This was to examine the possibility of creating a fair but relatively straightforward approach to recalculating the correct program participation.