Twiggy (18 page)

According to Fisher, Forrest then went into a meeting with Graeme Rowley, Fortescue’s chief financial officer Chris Catlow and legal adviser Peter Huston. “After lunch I was called into Graeme Rowley’s office at about 3pm,” she said in her witness statement.
“He said words to the effect: ‘You are no longer needed by FMG. You haven’t done the job that you were expected to do. You did not do well in the negotiations with the Chinese.” Fisher said she was upset at being sacked and tried to raise the issue with Forrest, who simply said: “This is Graeme’s decision.”

Forrest perhaps should not have been shocked that the Chinese were attempting to
back out of the deal, because a similar thing had happened to him two years earlier. On that occasion, Forrest had signed a memorandum of understanding in Perth with another state-owned company, China Railway Materials, which had agreed to inject $20 million into Fortescue. Forrest, his senior executives and the management of the Beijing company, including vice president Liu Guoping, gathered to drink
endless rounds of the Chinese hard liquor
baiju
to celebrate the deal at the Jade Court restaurant in Cottesloe. But Liu was forced to abandon the deal – which was never made public – just a few weeks later, when his masters in Beijing refused to endorse it. It was a warning of the potential hazards of doing business with China.

In March 2005, a reporter with the
Australian Financial Review
in Shanghai, Stephen Wyatt, interviewed MCC’s president, Shen Heting, about the company’s agreement to build Fortescue’s mine in the Pilbara. Shen told Wyatt that he did not believe that MCC, which was leading the negotiations on behalf of the Chinese, had a binding contract and that none of the construction companies was prepared to finance the project unless they had a better idea of the extent
of Fortescue’s iron ore resources. He added that the Chinese groups would not pursue the project unless they could acquire a majority equity interest in it. Wyatt knew he had a big news story on his hands and moved to publish it before the upcoming Easter long weekend.

Wyatt’s explosive story, published on Thursday 24 March, the day before Good Friday, was accompanied by an analysis by the
paper’s resources editor, Ian Howarth, who pointed out what BHP, Rio Tinto and Forrest’s other enemies had been saying for a long time:

The ability of Mr Forrest, a persuasive marketer, to charm investors with the company’s “story” has helped propel the stock more than 700 per cent over the past twelve months alone. But in reality Fortescue amounts to nothing more than a $1 billion
concept stock. Despite peppering the Australian Stock Exchange on an almost daily basis with announcements about the company’s progress, there are no mines, no railway lines, no ports and not one piece of iron ore has been sent to Asian customers.

Predictably, once the story was published, the ASX demanded immediate answers from Fortescue about the nature of its contracts. The company
responded after the Easter break by releasing copies of the three deals to the market. But the documents showed that the “binding contracts” were all headed “framework agreements” and contained no reference to cost, the scope of the works, scheduling or any other details that would normally be included in a contract enforceable under Australian law. Each of the agreements ran to only four pages.
In spite of this, Fortescue insisted the deals still obliged the Chinese companies to build the infrastructure. To ASIC, however, there was nothing legally binding about them. The regulator believed they were little more than loose agreements between the parties to keep talking in the hope of working out all the critical details at a later date.

The market responded to the release of the
contracts by sending Fortescue’s share price down a colossal 25 per cent in a single day. It would be nine months before the shares would trade at the level they had been when the
AFR
article was published. Investors clearly did not agree with Forrest’s assertion that he had binding contracts with the Chinese to build the infrastructure.

Forrest was facing the prospect of being banned as
a company director, but for many anxious weeks he faced something even more serious: the prospect that ASIC would also pursue a criminal prosecution against him for alleged insider trading in Fortescue shares. When ASIC filed its original statement of claim with the Federal Court in 2006, it dropped in the salacious detail that Forrest had sold $13.5 million worth of shares in February 2005 at the
very time the market was allegedly misinformed about the nature of the Chinese deals. Forrest had sold the stock on Valentine’s Day at a time when the share price was rising rapidly, thanks to the so-called binding contracts. The
Australian
and the
Age
reported that ASIC was weighing up whether to lay charges against Forrest and would make a decision by the time its main case reached court for
a directions hearing. But ASIC never pursued a criminal prosecution.

Another uncomfortable revelation was that Forrest’s friend, and Fortescue deputy chairman, Herb Elliott had also sold more than $500,000 worth of shares just days before the price plummeted in late March over the revelations about the China deals. Documents lodged with the ASX showed that Elliott had sold 100,000 of his
900,000 Fortescue shares on 18 March 2005 – six days before the
AFR
article was published. Elliott told the
West Australian
he had no idea about the emerging doubts over the Chinese contracts at the time he sold the shares. “Nobody knew anything about it,” he said. “Nobody in the world did. Apart from the Chinese bloke who made the statement.”

By the time ASIC’s case against Fortescue and
Forrest reached the Federal Court for a full hearing in 2009, Fortescue had become an established iron ore exporter and Forrest was a billionaire with the means to hire the best lawyers in the land. Four years earlier, when the investigation was launched, Fortescue was just a speculative company with a market value of less than $100 million and Forrest was anything but a household name. Still, neither
side wanted the expense of a protracted courtroom brawl. ASIC and Fortescue negotiated with the aim of settling the case before it reached trial, but could not reach an agreement. At one stage, Fortescue had offered to make a payment as long as no admission of wrongdoing was recorded. But that wasn’t enough for ASIC, which was convinced it had an open-and-shut case.

On the seventh floor
of Perth’s grey Federal Court building, a gaggle of lawyers lined up before Justice John Gilmour to begin an epic battle that would take years to resolve. In Forrest’s corner was the brilliant Melbourne lawyer Allan Myers QC, himself one of Australia’s richest people with a fortune in the hundreds of millions of dollars, thanks to a canny investment in the Polish brewing industry. Myers charges $20,000
a day, but few of the wealthy business figures he has represented over the years have doubted the worth of his services.

Representing Fortescue at the hearing was another Melbourne barrister, John Karkar QC, whose success in a number of high-profile cases allowed him to charge almost as much as Myers. ASIC was represented by a former Federal Court judge, Neil Young QC, who as a barrister
had nailed several big-name defendants, including Steve Vizard and John Elliott. Forrest did not turn up to court to listen to any of the evidence, and he chose not to enter the witness box himself. He was, however, interviewed under oath by ASIC and chose not to claim the privilege against self-incrimination.

In his opening address, Karkar attempted to paint the dispute over the contracts
as a simple clash between Australian and Chinese business cultures. He described the
Australian Financial Review
story as “a pack of lies” that had been sparked by Beijing’s anger at being refused a controlling equity stake in Fortescue. “It was, to use neutral language, a negotiating ploy,” he said. “For the
Australian Financial Review
to take it up was misjudged.” Karkar said the key middleman
in the deal between Fortescue and China, government official He Lianzhong, had promised to “teach them [Fortescue] a lesson” after Forrest had refused to let MCC take a stake. (At the time of the trial, He, who was in charge of outward foreign investment at the powerful National Development and Reform Commission, had actually just been sentenced to twelve years’ jail for receiving more than 1
million yuan in bribes; the conviction was unrelated to his dealings with Fortescue.)

When it was Allan Myers’ turn to speak, he didn’t mince words. He said investors in Fortescue would be “weeping tears of joy” even if they had been misled. No investor had complained about Forrest’s behaviour and none had suffered any loss. “ASIC’s case is an attack on my client, who … took a company that,
shortly before these events, was conducted from his living room to the ASX 300 by March 2005,” Myers said. “This whole pleading is like a big soufflé. There’s a little bit of egg white and a little bit of batter and it’s whipped up a with a lot of hot air to make it bigger than it is.” Myers said Forrest had not breached his duties as a director and he was entitled to use the “business judgment
rule” of the Corporations Act as a defence, which gives protection to a director if a decision is made in good faith.

Neil Young, for ASIC, pointed out that the regulator was not obliged to show that investors had suffered any loss to prove its case that the statements were misleading. He also argued that Forrest must have known that the agreements with the Chinese could not be legally binding
until the equity issue had been sorted out.

When ASIC began to present evidence of Forrest’s alleged misdemeanours, its case quickly began to fall apart. The regulator’s star witness was Ed Heyting, the disgruntled former Fortescue executive who had drafted the contracts. ASIC had expected Heyting to confirm in forthright language that the contracts he drafted were never intended to be legally
binding. But under fiery cross-examination from Karkar, he was forced to back down on key elements of his witness statement. His stint in the witness box ended up working against ASIC, leading Justice Gilmour to find his evidence “far from persuasive”. Other ASIC witnesses also didn’t measure up. The judge rejected chunks of evidence given by Wei Fisher, the translator who claimed she was sacked
after MCC said it was pulling out of the deal.

After deliberating for several months, Gilmour handed down his decision two days before Christmas 2009. It was a monumental victory for Forrest. Over the course of 226 pages, the judge found Forrest had not put a foot wrong in the way he described the agreements to the market. According to Gilmour, Forrest honestly believed at all times that
he had binding contracts. He added that the Chinese parties had approved the terms of Fortescue’s media releases before they were announced to the market.

Gilmour also found the
AFR
article was engineered by He Lianzhong of the NDRC as a “blunt commercial tactic in an attempt to wrest majority control of the project from FMG”. Few observers were surprised by this particular finding. China’s
top business magazine,
Caijing
, had already published an article which implied strongly that MCC made the allegation against Fortescue in retaliation for Forrest’s decision to reject China’s overtures about equity in the project. According to the
Caijing
article, China’s aim was to drive down the Fortescue share price to make it easier for a state-owned company to buy it.

Gilmour said he
did not need to reach a view on whether the framework agreements were, in fact, legally binding, as claimed by Fortescue. “I have concluded that FMG’s and Forrest’s opinion, which underpinned the disclosures, in each case was honestly and reasonably held at the times of the disclosures and thereafter,” he said. “This is sufficient for present purposes.” A crucial part of the judge’s reasoning was
his finding that lawyer Peter Huston had been available to advise Fortescue on the nature of the contracts.

Forrest, who was on holiday with his family when the verdict came down, said he was relieved the “distraction” was over. “I’d like to take this opportunity to thank God, the Australian judicial system and my family and friends for their unswerving support throughout the proceedings,”
he said.

But ASIC soon appealed the decision and the case went before the full bench of the Federal Court for several days of hearings in November 2010. The panel of three judges comprised the chief justice, Patrick Keane, and Arthur Emmett and Ray Finkelstein. On this occasion, Young told the bench that their colleague, Justice Gilmour, had gone “entirely off the rails” by focusing on whether
Fortescue and Forrest honestly held the opinion that the agreements were binding when they were clearly not. “We say the question is how would the announcements be understood by a reasonable member of the public,” he said. Young also questioned Gilmour’s key finding that Fortescue had received legal advice on the statements before they were released.

The result this time was very different.
All three judges found against Forrest and Fortescue, overturning Gilmour’s earlier ruling. They found the contracts were not binding and Forrest’s statements were indeed misleading. They also found Gilmour was wrong to have characterised the announcements as statements of opinion that were honestly held. In his judgment, Keane noted that Forrest had been unable to show any steps he took to ensure
that the framework agreements were binding. There was no evidence that lawyer Peter Huston was consulted, he said, and Forrest could therefore not claim the business judgment rule as a defence.

Yet despite finding in ASIC’s favour, both Keane and Emmett questioned why the regulator had pursued the case so vigorously when it had not presented evidence to show that anyone had lost money from
the misleading statements. “This circumstance may be said to raise a question as to whether the prosecution of this case by ASIC was a game worth the candle,” Keane said. Finkelstein, however, could understand why ASIC had brought the case. He was the only judge, in fact, who challenged Forrest’s claim that the case was absurd because shareholders had all made money. Finkelstein pointed out what
should have been obvious: that anyone who bought shares on the strength of Fortescue’s announcements but sold them before they returned to the purchase price many months later had lost money. “More likely than not, many traders lost money and substantial sums of money at that,” he said. Finkelstein said that if Fortescue’s arguments were accepted, the continuous disclosure laws could be sidestepped
by any company whose share price happened to climb after investors discovered that they had been misled. “That is not what Parliament had in mind,” he said.