Gisborne forestry investment that promised riches turns into ‘a massive failure’

Friday, 30 August 2024

A company told investors in 1993 that if they put $80,200 into a Gisborne forestry project they would get back $1.3m when harvested.

Instead, investors made a loss of about $55,000.

The company says the gap between projections and actual returns was “deeply regrettable” and due to “unforeseen circumstances”.

A Gisborne forestry venture touted as a “socially and environmentally responsible investment” that told investors they’d get a return of more than $1 million has turned out costing them more than $50,000.

When the Samnic Waingaromia Project was launched in 1993 it came with an impressive prospectus about “an exciting opportunity to join in a 940ha forest development on Waingaromia Station, Gisborne” with “high returns” and “a management team with tremendous experience in forestry complemented with a high level of management skills”.

The forest is on steep erosion-prone hills inland of Tolaga Bay, a small community that has been badly affected by flooding caused by slash and debris in recent years.

Investors in the scheme were to put in $80,200 between 1993 and 2012 and were projected to come away with $1.3m, the prospectus said.

Instead, they got a return of $26,800 after tax, and recently learned that the company had to pay a fine of $91,000 for offending that Gisborne District Council described as involving “a high degree of carelessness”.

The project was set up as a joint venture with 20 shareholder companies, a custodial trustee and Samnic Forest Management Ltd.

The shareholder companies included some 100 shareholders. One of those was retired investment advisor John Cliffe, who said it had been obvious for the past 15 years that returns would be nowhere near what had been promised.

“It’s been a massive failure,” Cliffe said

“As at right now shareholders have got around $26,800 net back. That’s a loss of about $55k and that’s in yesterday’s dollars, ie as at 1993-2012, so, yes, a massive loss,” he said.

Cliffe, who was a director of the management company from 1999 until 2015, described it as “a saga of how shareholders have been misled by so-called professionals who were supposed to support them but effectively didn’t”.

He wasn’t aware of other forestry ventures in the Gisborne area that had performed so poorly and said “this is likely to be at the extreme end”.

“It looked like a nice green scheme that promised a fantastic return and while I didn’t believe the promised return I thought a half or even a quarter of it would be a reasonable return over the time frame,” he said.

“You were investing in something that was a far more environmentally friendly thing to do than buying into an oil company or building properties.

“Back then, of course, it wasn’t realised that pine forests weren’t the ideal thing to be planting in that part of the country.

“Thank God I didn’t put all my money in these kinds of products.”

Cliffe said he and another couple of shareholders tried to sell the forest in 2015, and received an attractive offer from Summit Forests that would have allowed every shareholder to walk away with over $100,000 net.

He said 62.5% of shareholders voted to sell the forest after managers advocated they could make more by taking it to harvest.

Because the vote didn’t meet the 75% required to wind up the organisation, it wasn’t sold.

The forest was harvested between 2016 and 2022, over which time the company directors were issued two abatement notices, warned twice about non-compliance with resource consents, and prosecuted for building an illegal road and various failures that led to slash and debris to enter waterways.

Cliffe said shareholders hadn’t received financial statements or dividends for the past three years, and were not informed of the prosecution outcome until Cliffe sent it out to them.

Concerns about the company’s management in 2018 led to the company’s custodial trustee Prince & Partners Trustee Company Ltd commissioning an independent report that revealed a raft of concerns.

At that stage half the forest had been harvested. The report found that Samnic directors, which had been appointed as harvest managers, had “made a number of decisions and adopted a style of management that have contributed to the forest being harvested in a sub-optimal manner” and which had come at significant cost.

The report listed numerous concerns about conditions within the forest and noted “the amount of slash left behind following harvest is a significant issue, not only from an economic perspective, but also from an environmental and H&S perspective”.

The report recommended that the rest of the harvest be placed under new management - by someone who was a “suitably-qualified and professional forestry management consultant”.

These recommendations were rejected at a special general meeting.

A subsequent attempt by Prince & Partners in the High Court in 2018 to remove Samnic directors as harvest managers was unsuccessful.

Samnic director Scott Funnell, who was a founding director and promoter of the investment in 1993, said he wasn’t able to speak to Stuff and directed questions to chairman of the company Richard Hayes.

Hayes said “the significant gap between the 1993 projections and actual returns is deeply regrettable”.

“The projections, based on the best available information and substantial allowance for inflation, were impacted by unforeseen challenges such as market fluctuations, rising harvest and transport costs, Covid-19 impacts, and regulatory changes in health and safety and environment,” he said.

He noted that the prospectus included other projections that estimated returns of less than $1.3m.

“Given the 30-year timeframe, accurately predicting market conditions even 5 years out, let alone 30, presents unique challenges,” Hayes said.

He said he respected Cliffe’s perspective, and “the outcomes were far from anticipated, and we acknowledge the shortcomings”.

“We find it concerning that shareholders feel misled but deny we have done so. Our goal has always been to act in their best interests, based on the professional advice available.

“The professionals involved faced significant challenges and accusations, which we believe are unfounded. However, we acknowledge that communication and support may have fallen short in the minds of some shareholders, especially when shareholders, who previously supported decisions, later sought to re-litigate settled matters often months or years later,” he said.

Hayes said “in hindsight” the decision not to sell the forest in 2015 had “significant repercussions”.

He acknowledged the delay in delivering audited financial statements, but said “we have regularly updated shareholders on the matters that have led to the delays in publishing the audited accounts”.

“Recent threats of legal action against the auditors have further delayed the accounts. In the interim, consistent with resolutions of the shareholders and suggestion of the custodial trustee, draft management accounts have been provided,” he said.

Regarding the prosecution by Gisborne District Council, he said shareholders were updated as prudently as possible.

Hayes said it was difficult to say if shareholders would receive any further dividends.

“Unfortunately, ongoing disputes have incurred costs that continue to negatively impact the available funds. It’s important to note that dividends in this sector are also down, and returns for investments like these are notoriously unpredictable. The JV’s performance is not out of the ordinary in this context,” he said.

Hayes said the fine imposed by the Environment Court had been paid and “there will be no adverse effect on shareholders as provision was made some time ago”.

He did not respond to a question as to whether the fine had been covered by insurance.