Wilful Blindness Series Part 1: Maxwell
It is nearly three decades since the Maxwell scandal shocked Britain to its foundations. Looking back, it is obvious that Robert Maxwell was the mastermind behind the fraud, he was even the inspiration behind a James Bond villain. The question we should ask is not what he did, but what others could have done? How could so many people have been wilfully blind to his web of deception? Were there warning signs to which people turned a blind eye? What could have been done to prevent this from happening?Margaret Thatcher Conservative Prime Minister with Robert Maxwell of Mirror Group Newspapers 1985 On 5 November 1991, Robert Maxwell’s body was found floating in the Atlantic just off the Canary Islands. He had been aboard his 58 metre yacht, the Lady Ghislaine, a vessel named after his youngest daughter. The sudden death of 68-year old Maxwell would set in motion one of the biggest corporate scandals in Britain’s history, unravelling a web of deceit, lies and intrigue and the biggest raid of UK pension funds in history.
Larger than lifeThe story of Robert Maxwell is a remarkable tale of the ascendance – and ultimate downfall – of an immigrant underdog. Born in Czechoslovakia in 1923, he came from humble beginnings. After Hungary reclaimed Czechoslovakia in 1939, Maxwell escaped to France and eventually joined the British Army, while the Nazi occupation of Hungary from 1944 claimed the lives of many of his family. Maxwell’s heroism on the field earned him the Military Cross, presented by Field Marshal Montgomery, and he became a British citizen in 1946. Maxwell the war hero became Maxwell the successful businessman, who also served as a Labour MP between 1964 and 1970. In the 80s he became a newspaper mogul, entertained by and entertaining leading politicians and world statesmen from both the Communist Bloc and the Free World. Maxwell was flamboyant, dominant and ambitious. He was economical with the truth and litigious against those who dared to speak or write against him. But he could also be a charming, warm and generous person. A man who always got what he wanted with few scruples as to how to get it.
The rise…Maxwell’s career in publishing and the media started when he became the British and US distributor for Springer Verlag. In 1951 he bought 75 percent of Butterworth-Springer, changed its name to Pergamon Press and quickly transformed it to a major publishing house specialising in academic journals. Pergamon Press was listed in 1964 and in 1969, trading was suspended at the London Stock Exchange after Maxwell was accused of lying to increase the sales price in negotiations to sell the company to Leasco. Maxwell subsequently lost control of the company and was expelled from the board. In 1971, the Department of Trade and Industry (DTI) concluded:
"We regret having to conclude that, notwithstanding Mr Maxwell's acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company."Despite this public reprimand, Maxwell re-acquired Pergamon Press in 1974 and went on to make the business highly profitable. From there he pursued and executed a series of acquisitions and built his profile as a media mogul. In 1980 he obtained a controlling interest in British Printing Corporation plc - rescuing it from the brink of insolvency - and renamed it Maxwell Communication Corporation plc; in 1984, he acquired the Mirror Group Newspaper, ending expensive labour practices and introduced new technology. In 1986, Maxwell Corporation became a FTSE 100 company. Maxwell had reached the pinnacle, putting Maxwell Corp on a par with Rupert Murdoch’s media empire by announcing his ambition to take the company global and generating revenues of £3-5 billion by the end of 1990. On the surface, things looked solid and Maxwell Communication Corporation and the Mirror Group Newspaper seemed to be performing strongly. But there were clear warning signs that Maxwell had not changed his spots. Maxwell was running his empire as a dictator; he was the only one with oversight of operations across the entire empire with more than 400 entities and was the sole payment authoriser for the whole group, including the publicly listed companies. He viewed all the assets in the empire as his own, including the pension funds, blurring the lines with a constant stream of transactions between the private and public companies in his empire. Maxwell had created complex corporate structures alongside inconsistent and incomparable financial reporting. With a string of audits at different dates, Maxwell moved money around, “window dressed” the financials and built out his web of deception.
…and fall of his empireIn 1985, Maxwell began to borrow large sums from the pension funds of both Maxwell Communication Corporation and Mirror Group Newspapers, on an unsecured basis and without informing the pension funds' trustees. Through the aggressive expansion phase that followed, capital was also drawn from the pension funds to support the group’s corporate strategy by providing cash in exchange for group investments. Over time, he also had the pension funds make substantial investments in Maxwell Communication Corporation shares, as a means to increase the share price. These transactions should have raised some eyebrows among scheme trustees, auditors and supervisors. In 1988, Maxwell Communication Corporation raised $3bn from banks in order to fund the acquisition of MacMillan, the book publisher, and OAG, the air travel intelligence provider – both at objectively high valuations. The principal collateral for the loans posted by Maxwell was shares in Maxwell Communication Corporation – providing the rationale for his apparent obsession with the share price. From May 1989, Maxwell manipulated the market by buying shares secretly through overseas entities, including several based in Liechtenstein with confusingly similar names. In the financial crisis in the summer of 1990, Robert Maxwell’s companies faced their own financial crisis as repayment of part of his $3 billion borrowings fell due. Assets on the private side were sold and Maxwell planned to float Mirror Group Newspapers on the London Stock Exchange to raise additional capital. In April 1991, the Mirror Group Newspaper was partially floated, but Maxwell continued his abuse of the company and the pension funds’ capital confirming that his spots had not changed. The DTI’s 2001 report investigating the Maxwell fraud concluded that:
…, Mirror Group Newspapers was not suitable for listing and the prospectus was materially inaccurate and misleading."At the end of October 1991, the private side had made significant disposals and Maxwell’s only remaining assets of any substantial value were the shares in Maxwell Communication Corporation and Mirror Group Newspapers. These shares had been provided as collateral for Maxwell’s significant loans and when he could no longer inflate the share price, creditors required immediate repayment and the collapse of the empire was imminent, occurring shortly after Robert Maxwell’s death on November 5th 1991. The Maxwell implosion left behind employees without jobs to go to and retirees without pensions. Over the years, £460m had been wrongfully taken from the pension funds. Even after a settlement funded by the government and investment banks involved was paid, members received only some of their pension promise.
Wilful blindnessIn retrospect, it seems that there were clear signals. The DTI investigation of Maxwell’s shadowy dealings at Pergamon Press in the 1970s was publicly available. The highly reputable advisors behind the partial floating of Mirror Group Newspapers must have had some oversight – if not inkling – of what was going on. Goldman Sachs was Maxwell’s main financer, assisting with trading, raising capital and structuring a series of complex transactions. The series of transactions between the pension funds and Maxwell’s private side were known by the auditor, Coopers & Lybrand Deloitte. The trustees of the Pension Funds should have been able to see that something was going on. It is clear that Robert Maxwell was the mastermind villain behind the fraud. The clues were there for most to see, and some people saw it. But the question remains, how could so many be wilfully blind to fraud and financial crime at such scale? This mystery is answered in part by human nature: we tend to see what we want to see. Wealth, confidence and non-challenged success tends to change our assessment of a person. All too often, these traits make it easier for us to look the other way. Maxwell kept his friends close and stakeholders closer, building and maintaining a too close relationship with key investment banks and auditors. With deft skills, he manipulated those around him to create and sustain a successful façade. There were dire consequences for many involved, but the blame fell at the feet of Maxwell’s corporate advisors. The DTI’s 2001 report deemed Coopers & Lybrand Deloitte and Goldman Sachs to be ‘responsible’. Three and a half year after Maxwell’s death, Goldman Sachs paid a $254 million civil settlement to the liquidators representing the pension funds, rather than having their involvement tested in court.
Modern Corporate and Pension fund governanceAt the time when Maxwell built his empire, corporate governance in Britain was to a large extent based on Gentlemen’s agreements. This is exemplified by old maritime brokers’ motto “My word is my bond”, which has been the motto of the London Stock Exchange since 1801. It is fair to say that British corporate governance was not sufficient to withstand the financial deregulation that started in the early 1970s: Maxwell was able to take advantage of the system’s shortcomings. The Maxwell fraud catalysed a modernisation of British corporate governance. The radical overhaul that followed included additional rules for the process of listing companies on the stock market; new regulation preventing the auditing and accounting of companies being undertaken by the same firm; and clear separation of the role of the Chairman and CEO to ensure that power is distributed beyond a single figure. The 1992 Cadbury Report outlined a new corporate governance code and its recommendations are also reflected in the more recent G20/OECD Principles of Corporate Governance. The fraud also brought the failings of DB scheme governance into sharp relief. It was recommended that OPRA, the predecessor to the Pensions Regulator, should be placed under statutory duty to provide guidance to trustees and that it should be given the power to prohibit individuals to act as trustees if they do not meet the ‘fit and proper’ standard. These recommendations paved the way for the Pensions Act 1995. An unintended consequence of stricter regulation around member protections was the closure of many DB schemes to new members and, over time, to future accrual.
How to overcome wilful blindness?In schemes today, we undoubtedly have better corporate governance, transparency and division of tasks. This helps, but we must be aware that fraud and conflicts of interest cannot be eliminated 100%. We must exercise a certain amount of critical thinking, both as investors in companies and as pension fund trustees in our assessment of the credit quality of corporate sponsors. As always, an important indicator is the personality of the corporate leader. A charismatic leader with aggressive growth plans, who does not want to be challenged should raise concerns. It is likely that such a person will paint a rosy picture of the future, without fully acknowledging material structural or business specific risks that may lie ahead. A complex corporate structure with intra-company connections is another warning signal, since it may be a deliberate attempt to reduce transparency. As trustees, it is important to gain a deeper understanding of the long-term profitability of the sponsors underlying business and the extent to which financial engineering may be used to compensate for declining profitability. This includes examining footnotes in the annual report and clear judgement of the legal accounting practices that can be used to create an illusion of stable revenues. In other words, performing a long-term credit assessment of the scheme sponsor. Today’s trustees must consider their ability to withstand wilful blindness and to what extent the current governance structure of their pension scheme facilitates this. This particular topic will be covered in the panel discussion at the Imagine Conference on Wednesday 12 February 2020.
Authors and Contributors
Stefan, Director of Cardano Imagine, is the author of this piece. He regularly speaks at conferences and writes pieces about the pensions industry.Read Stefan’s profile
Adam, Associate Director at Lincoln Pensions co-authored this article.Read Adam’s profile