Twiggy (19 page)

Forrest reacted angrily to the verdict, vowing to remain at the helm of Fortescue and describing ASIC as “mean and vengeful”. He promised to appeal the case to the High Court and said the ruling, if upheld, would set a dangerous precedent
for the nation. “It’s on the record that no shareholder lost money [from Fortescue’s actions],” he said. Forrest said he had received “hundreds” of messages of support, both from people he didn’t know as well as from leading business people and even members of the judiciary. “Let’s just say people are looking at this decision and saying, ‘Well, what’s really good for Australia?’” he said.

For the first time, however, Forrest admitted that he could have better handled the announcements back in 2004. “When you look at Fortescue, which [at the time] was probably myself and a dog … we could have done so much better,” he said. “We should have had lawyers and we should have had legal teams and whole departments, but we didn’t. We were a start-up company. We had none of those resources and
did the best we could, but we certainly believed a deal was a deal.” Forrest’s point had some validity, but he was stretching the truth in arguing that in 2004 he was working with little help. The Federal Court was told that Fortescue employed fifty-seven people at the time.

Finally, the case came before the nation’s top court. At 10.15am on Tuesday 2 October 2012 – eight years after the
ASX announcements had been made – five judges of the High Court delivered their verdict in Canberra. The result was a triumph for Forrest, who was still dusting himself off after the sudden collapse in the iron ore price a few weeks earlier that had threatened to ruin Fortescue. Forrest, who by that time had stood down as Fortescue chief executive, was now free to remain as chairman without the threat
of a banning order. He could also continue to serve on other boards, including those of his various charities.

Yet again, the mercurial entrepreneur had gone to the brink of devastation and managed to survive. He had beaten the system that tried to destroy him and had the last laugh over the establishment, which had despised him for so long.

Forrest was holidaying with his family in
the bush when a call came through on his mobile phone from Peter Huston. The Fortescue lawyer was just as nervous as Forrest about the outcome; he had advised his boss early in the legal battle that he should fight the charges because he had a good chance of winning. Huston recalled the joyous phone call: “I said, ‘We won, Andrew.’ He said, ‘What? Nicola, come and listen, come and listen!’ I said,
‘We won, Andrew, we’ve won. Won everything, everything. Five nil, everything.’” He added: “I knew how much it meant [to Forrest]. There’s not been a more important day in my life as a lawyer than that one.”

The High Court’s reasons for finding in favour of Forrest were very different to those used by Gilmour three years earlier. In fact, its logic in dismissing ASIC’s case was a source of
deep puzzlement to many observers. The court found that those investors reading Fortescue’s statements in 2004 had not been misled because they were savvy enough to have realised that the parties had entered into agreements that would not ever be enforceable in an Australian court. The agreements, which were made with Chinese state-owned companies and signed in Beijing, were more likely governed
by Chinese law, the judges found. This was an argument even Fortescue’s battery of highly remunerated lawyers hadn’t pursued. The court also ruled that Fortescue’s statements were not misleading because they were agreements between the parties about what they intended to do in the future.

One of the court’s more conservative judges, Dyson Heydon, pointed out that Fortescue’s statements were
made to a sophisticated audience of investors who knew the perils of doing business with China and understood the risks inherent in promises made by WA mining companies:

Fortescue’s remarks were not directed to the public as a whole. They were directed to a section of the public. It comprised superannuation funds, other large institutions, other wealthy investors, stock brokers and
other financial advisers, specialised financial journalists, as well as smaller investors reliant on advice. This was not a naïve audience. It was not an audience in whom the adjectives “Western Australian”, “mining” and “Chinese” would excite a sudden certainty about the imminent creation of wealth beyond the dreams of avarice. It was an audience conscious of the difficulties of creating infrastructure
for mining projects in the harsh conditions of Western Australia. It was an audience conscious of their vast expense. It was an audience conscious of the problems of doing so in cooperation with a Chinese group described in the ASX announcement as China’s largest construction group.

Melbourne fund manager John Robertson described elements of the High Court’s judgment as “absurd” and
said it placed a fresh burden on investors to second-guess the veracity of company announcements. “They are saying that everyone who is contemplating an investment in the Australian equity market has the skill to differentiate between a measured statement and a company’s intentions – that is patently absurd,” he said. “If that is now the law, it has been radically rewritten.”

A leading corporate
lawyer, Bob Baxt, said any suggestion that investors should have realised the contracts were not legally binding did not take into account that continuous disclosure laws apply to all investors, not only those with sophisticated knowledge. “If remarks are made to the ASX they are made to the investing public as a whole,” he said. But John Keeves, a partner at Johnson Winter & Slattery, said
the High Court had interpreted the market announcement in a realistic way. “The majority decision shows some keen commercial insight from the High Court as to how the announcements would have been understood by investors,” he said. “The possible alternative of an overly legalistic approach to disclosure by listed companies could have had disastrous implications for Australia’s financial markets.”

Whether ASIC’s almost eight-year legal pursuit of Forrest was worth the anguish and huge expense – as much as $30 million in legal costs – is debatable. The corporate regulator emerged bloodied and bruised from the encounter, particularly because the High Court in its ruling found ASIC had pleaded its case atrociously – a finding that also reflected poorly on Mallesons, the law firm that
ran its prosecution. After the judgment, ASIC warned that its entire disclosure regime would have to be reviewed. “Compliance with continuous disclosure goes to the heart of ASIC’s strategic priority of fair and efficient financial markets. We will now assess what impact the High Court’s decision has on disclosure requirements,” ASIC said.

Living under a serious legal cloud for so many years
took a personal toll on Forrest and his family. According to family friends, his youngest daughter, Sophia, was bullied at school after the full bench of the Federal Court found against him in 2011. Forrest and his lawyers came to believe that ASIC had pursued the case with a fanaticism that did not reflect well on its status as a model litigant. “Everyone saw straight through those Chinese playing
hard ball in order to get control of an Australian project,” Forrest said after the judgment. “But only ASIC saw that I was a high-profile person, someone which they could really pin a scalp to the top of the door if they were successful. Only ASIC wanted to believe that somehow this was some grand conspiracy.”

A day after the High Court verdict, Forrest picked up the phone and called ASIC’s
acting chairman, Belinda Gibson, who was doubtless surprised to find herself chatting to the man she had tried to bring down for the previous seven and a half years. In typically brazen style, Forrest offered to help ASIC learn from its mistakes and to help “create an environment where globally people want to invest and people want to work with ASIC”. He told the
Sydney Morning Herald
that he
was now “just another Australian concerned that there be an efficient and effective regulator”. He would make himself available for workshops to analyse where ASIC went wrong. A cynic might argue that Forrest’s gesture was part of a deliberate strategy of keeping his friends close but his enemies closer. Or perhaps he was simply rubbing ASIC’s nose in the fact that he was the winner. It should come
as no surprise that ASIC has never taken up the offer.

Two weeks later, in mid October, Forrest threw a party at his Cottesloe home to celebrate the victory. Among the guests were Forrest’s most trusted legal personnel: his barrister, Allan Myers, and his long-time solicitor, Gadens partner James Scovell. Others present included long-time Fortescue loyalists Peter Huston, Graeme Rowley, Chris
Catlow, Mark Thomas and Russell Scrimshaw. Fortescue chief executive Nev Power and chief financial officer Stephen Pearce were also there, representing the miner’s new breed of executives.

The biggest shock of the night was the presence of the recently sacked Julian Tapp, Rod Campbell and Ann Marie Lowry, who had all paid the price at Fortescue for the collapsing iron ore price in September.
It was Forrest’s attempt at an olive branch. The three former executives might have had good reason to stay away, but they put aside their anger to congratulate their old boss on his triumph.

During the party, Forrest’s two teenage daughters, Grace and Sophia, spoke about the impact of the legal battle on the family. His son, Sydney, entertained the guests by playing the saxophone. The lawyers
regaled guests with stories from the courtroom and there were plenty of laughs. Forrest concluded by thanking everyone there for supporting him, but he saved his biggest praise for God
,
who he said had helped him win the case. The many unbelievers in the audience shifted uncomfortably at the suggestion Twiggy had the Lord on his side.

In the end, the victory over ASIC was comprehensive. But
it still failed to eliminate the doubts many people had about Forrest’s truthfulness – doubts that have been reinforced over the years by a series of separate court rulings. One old friend describes the ASIC case as a product of Forrest’s inability to tell a story without exaggerating. “Andrew gilds the lily, but in the whole scheme of Andrew gilding the lily that [the ASIC case] was a minor thing,”
he says. A former Fortescue executive who worked closely with Forrest for several years says: “Seventy per cent of what he says is correct, the other 30 per cent is froth.”

Forrest’s old stockbroking colleague Jeff Braysich has a similar explanation: “Once he says something the second time, he truly believes it, and that’s why he is such a good salesman. The second time he says it, he thinks,
‘I’ve heard that before,’ but he forgets it was he himself who said it.” Former colleague David Mendelawitz believes Forrest’s ability to embellish a story has been integral to his success. “He’s such a good salesman – you just don’t know what’s fact and fiction,” he says.

Rodney Adler, who went to jail for corporate fraud, is one old friend prepared to assert that Forrest is an honest person.
“I know what a lot of people have said about Andrew – I’ve met a lot of them and I’ve had to mediate arguments between people and Andrew over the years,” Adler says. “To me, Andrew has never once broken his word. To me, you could not get a more honest person with more integrity.” Adler concedes, however, that Forrest would probably do things differently if given the chance again. “When you
start with nothing and you build one of the greatest mining empires in the world, are there things you would do differently in hindsight if you had more time, more money and more experience?” Adler says. “Yes, there are. But sometimes you’ve got to do things to survive that you would have preferred not to do.”

I’m very happy to pay tax. In fact I’m honoured to be one of Australia’s major taxpayers.

—ANDREW FORREST

Being crowned Australia’s wealthiest man in 2008 did wonders for Forrest’s public profile, even though he insisted he’d prefer to remain anonymous. “I really don’t enjoy the spotlight,” he said after topping the
BRW
Rich List with
a fortune approaching $10 billion. “And I particularly don’t enjoy the attention which the accident of my wealth creates. I may have become Australia’s richest man, but to me that is an incredibly uninteresting title.” Without a hint of irony, the billionaire who had accumulated the nation’s fastest fortune thanks to his gift of the gab declared he was reluctant to talk about his achievement. “I
don’t want to look as if I am out there trying to beat the drum because that is not what I am trying to do.”

But Forrest was soon to discover one of the great benefits of his newfound wealth and success: from the prime minister down, people tended to listen to what he had to say. When he needed to “beat the drum”, an art form in which he was particularly skilled, the national media responded
by lapping up every word uttered by this maverick entrepreneur who had emerged from the west. It wasn’t until 2010, however, that Forrest abandoned his efforts to keep a low profile – assuming he had ever tried in the first place – and thrust himself into the middle of the most high-stakes clash in recent Australian political and corporate history.

On 2 May 2010, prime minister Kevin Rudd
and his treasurer, Wayne Swan, strode into a heaving media conference in Canberra to announce the creation of the resource super-profits tax (RSPT). From now on, they declared, mining companies reaping astronomical earnings from the greatest resources boom in history would have their “super profits” – defined as anything above the government bond rate – taxed at 40 per cent. The miners would still
also pay the normal rate of company tax on their profits, although they would have the royalties they paid to the states refunded under the new regime.

To many, slapping a new tax on the industry seemed reasonable: the miners were growing rich beyond their dreams, thanks to the soaring value of the finite resources they were digging up and shipping out. By 2010, the value of Australia’s iron
ore exports alone had reached an astonishing $50 billion – a tenfold increase in just a decade. In theory, a resource rent tax recognises that a mining company’s profits are partly the result of its own efforts and partly the result of the value of the natural resource it has a licence to exploit. Even the big miners had conceded before 2010 that they could pay more tax; their peak body, the Minerals
Council of Australia, had previously backed the concept of a resource rent tax as a replacement for state mining royalties.

Rudd and Swan promised the RSPT would raise $12 billion in its first two years from July 2012 – the sort of revenue bonanza that would leave any political leader licking their lips. The money would be used to increase the superannuation guaranteed rate for all workers
from 9 per cent to 12 per cent of their salaries, lowering the company tax rate and boosting infrastructure spending in the mining states of Western Australia and Queensland. As treasurer, Swan had allocated all of the funds before he had even collected them.

Rudd and Swan also endorsed Treasury secretary Ken Henry’s hypothesis that a resource rent tax would help Australia avoid the phenomenon
of “Dutch disease”, in which a strong resources sector drives up the local currency, leading to a decline in manufacturing and other trade-exposed industries. Australia was awash at the time with anecdotes about the negative impact of the “two-speed economy” as Western Australia and Queensland powered ahead of the other states. Rudd and Swan had another reason to put their faith in Henry: the
powerful bureaucrat had proved invaluable in advising them in 2009 to stimulate the economy during the global financial crisis, a move which had helped Australia to emerge from the turmoil relatively unscathed.

When the mining companies began to look more closely at the Labor government’s RSPT proposal, they were shocked by what they saw. For a start, they claimed, the headline rate of 40
per cent was simply too high and would kill marginal projects and deter future investment. They also believed it was unfair that the tax would be applied retrospectively on projects in which they had invested decades earlier. And there was another deep flaw. The keystone of the RSPT was that the government would take a 40 per cent equity interest in all mine projects, and any so-called super profits
made on that 40 per cent would flow to Canberra. But even more radically, the government was also proposing to refund 40 per cent of any losses that a project might suffer.

To Forrest, this amounted to nationalisation of the mining industry by stealth. He suggested the guarantee to refund losses was worthless
,
as banks would never finance projects based on the promise that 40 per cent of
losses might one day be reclaimed through the tax system. Worse, he argued, it could lead to “mums and dads” forking out billions of dollars to bail out unprofitable projects. Forrest believed the tax had been designed by officials in Canberra with little knowledge of project financing or the realities of the mining industry. The Treasury boffins had come up with a tax that was theoretically elegant
but practically useless.

It took only a few hours before the three heavyweights of the Australian resources industry – BHP Billiton, Rio Tinto and Swiss miner Xstrata – decided the RSPT had to be killed. Bizarrely, none of the multinationals had been consulted over the detail of the proposed new tax even though they would be paying the bulk of it. Worse, they had been led to believe by Swan
in the days before the 2 May announcement that the RSPT had not been finalised and no revenue had been booked in the federal budget to be handed down on 10 May. Both of these assurances turned out to be false, which left the miners feeling betrayed. Almost from day one, it was obvious – even to senior members of the government – that the RSPT could not survive.

In her 2012 book
Tales from
the Political Trenches
, former Labor MP and Rudd ally Maxine McKew described Swan’s “flawed execution” of the RSPT and said the big miners “felt blindsided by an uncompromising treasurer”. Rudd was another who felt betrayed by Swan, who had led him to believe the miners were onside and that the premiers of the two big mining states – Colin Barnett in Western Australia and Anna Bligh in Queensland
– had agreed to the proposals. “Swan had not delivered and Rudd had come to believe he had been sold a pup,” McKew wrote.

Swan had also overseen the design of the new tax without consulting any of his ministerial colleagues, several of whom would have been able to point out its flaws. One of them, resources minister Martin Ferguson, was so irate when told about the RPST three days before
it was announced that he considered resigning. Ferguson had spent the previous few months promising the industry that it would be fully consulted over the detail of any tax changes. He felt as if he had been hung out to dry.

As McKew wrote, Swan should have spoken to Ferguson as well as Gary Gray, who had close contacts in the resources sector in Western Australia, and Craig Emerson, an economist
who wrote his doctoral thesis on the Hawke government’s successful introduction of a resource rent tax on petroleum projects in the 1980s. “The combined expertise of Gray, Ferguson and Emerson could have been harnessed earlier by Swan to work with industry, get the detail right and arrive at a sensible, middle-ground position – one that industry could live with, and one that achieved the
primary purpose of an appropriate return for the community from the right to mine the country’s non-renewable resources,” McKew wrote.

In the days after 2 May, BHP and Rio went on the warpath, claiming that the RSPT represented the biggest political risk they faced anywhere in the world. BHP chief executive Marius Kloppers, an idiosyncratic South African who was based in Melbourne, estimated
BHP’s effective tax rate would climb from 43 per cent to 57 per cent under the RSPT, compared to a rate of 23 per cent in Canada and between 27 and 38 per cent in Brazil. Under this sort of tax regime, Kloppers argued, BHP was unlikely to invest much in Australia in the future. To some, this sounded like scaremongering on a grand scale. To others, the companies were expressing legitimate concerns
about a tax that appeared overly punitive and badly designed.

When Forrest and his bookish chief financial officer, Stephen Pearce, began digesting the complex detail of the RSPT, they soon realised the impost posed an even bigger threat to Fortescue than it did to their bigger rivals. Forrest had been tipped off by trade union leaders several weeks earlier that the government was planning
a new resources tax. The industry had also been alerted on 24 April by a front-page article about the planned tax by the
Australian
’s political editor, Dennis Shanahan. Forrest sought assurances from Swan in the days before 2 May. “I rang the treasurer three times,” Forrest said, “and each time he assured me the tax would be benign, that it would be no problem for Fortescue. Frankly, I was not
reassured.”

Fortescue was acutely exposed to the RSPT because it was built almost entirely on debt and had yet to repay its billions of dollars in loans. The company’s business model was vastly different to those of BHP and Rio, which could fund their fresh investments from their cash flows. The money Fortescue needed to repay its bankers would effectively be eaten up in RSPT payments. Pearce
set about modelling the impact of the RSPT and presented his findings to Forrest, who was horrified. “It showed we would have a negative cash flow after paying interest,” Forrest said. “It would lead Fortescue to a default situation. Our company would not exist under the RSPT. My understanding is that the requirement in the US capital markets is that once you face difficulty in meeting any interest
payment you have an obligation to inform bondholders and that triggers a potential default event.”

For Forrest, the RSPT represented the single biggest threat to the profitability of the company he had founded seven years earlier. He began describing it as “the worst economic policy in Australian history”. In the days after 2 May, Fortescue’s share price was hit harder than that of any other
miner as about $20 billion was wiped off the value of the Australian sharemarket. Analysts at JP Morgan estimated that Fortescue’s net present value – an assessment of long-term profitability – would suffer a hit of 20 per cent under the RSPT, compared to only 10 per cent for BHP and Rio. A research note published by Macquarie Bank downgraded the value of Fortescue’s Solomon and Chichester expansion
projects by 20 per cent and 35 per cent respectively.

Forrest’s friendship with Rudd was the first casualty of the mining tax uproar. The pair had got on well since meeting years earlier at the Perth dinner organised by Brian Burke to introduce Rudd to local business leaders as a future ALP leader. In 2008, when Rudd was prime minister, the friendship was cemented when he backed Forrest’s
plan to create 50,000 jobs for indigenous Australians through the Australian Employment Covenant. That year, the pair also caught up at the Olympic Games in Beijing and at Rudd’s 2020 Summit in Canberra. Forrest, a natural political conservative, had been close to John Howard, but he had become even closer to Howard’s Labor successor.

By sheer coincidence, Rudd had long been scheduled to
meet a group of WA’s senior business leaders, including Forrest, at a dinner in Perth on Tuesday 4 May – two days after the RSPT was unveiled in Canberra. What was originally planned as a polite conversation turned into an ambush. Forrest led the charge, presenting Rudd with a set of red boxing gloves with the words “Fair suck of the sauce bottle” scrawled across them. It was an attempt at humour
– Rudd had been ridiculed for using the phrase in public statements – but the gesture was also deadly serious. As Forrest and the thirty other guests dined on Red Emperor fillets and quaffed bottles of 2004 Voyager Estate cabernet sauvignon, Rudd was forced to listen for hours to the miners telling him bluntly that the RSPT would kill their industry and cost jobs. But Rudd was unmoved, telling
the miners that some of the finer details could be tweaked during consultations, but the 40 per cent tax rate and other key elements of the RSPT were non-negotiable.

Forrest decided to go on the attack. Sitting at his desk in front of the national flag, he appeared on the ABC’s
Inside Business
program to claim financiers were “fleeing” Australia and that Fortescue had shelved its planned
expansion projects in the Pilbara, putting 30,000 jobs at risk. These were claims that were difficult to disprove, and they made good headlines. Forrest also claimed he had been reluctantly drafted to the debate. “I’m out there employing thousands of people, building billions of dollars’ worth of projects as we speak, loving my job,” he said. “I don’t want anything to do with this political process.
I’ve always thought it was well managed by people who understood, but unfortunately these people do not understand what it takes to build industries and we are suffering as a result.”

One week after the RSPT announcement, the Minerals Council of Australia launched an astonishingly effective advertising campaign against the tax. Rudd and Swan attempted to retaliate with some government-funded
ads, outlining why Australia needed an RSPT, but they were no match for the industry’s $22-million prime-time blitz. Forrest, who had refused to join the MCA because it was dominated by his enemies at BHP and Rio, formed a loose alliance with smaller miners and explorers in Perth to lobby against the tax. This campaign was run through the Perth-based Association of Mining and Exploration Companies,
which had hundreds of members. But Forrest emerged as the self-appointed flag-bearer of the “small” miners’ revolt against the tax, even though Fortescue had grown to become a major iron ore exporter. He made himself available for interview after interview, generating free media coverage for the cause. He even seemed to be enjoying it.