11.
Sometimes you’ve got to do things to survive that you would have preferred not to do.
—RODNEY ADLER
From the moment Forrest burst back on to the scene in 2003, the nation’s corporate cops began to keep an abnormally close eye on him. The regulators at the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) – the two bodies tasked with protecting investors – were wary of Forrest, who was intent on winning publicity for his new venture. They also knew investors had lost plenty of money at Anaconda Nickel when Forrest had promised the world but failed to deliver. And besides, they had a long-standing mistrust of big-talking mining entrepreneurs from Perth.
Ultimately, these suspicions would lead to an eight-year legal battle over Forrest’s conduct that would jeopardise his ability to remain in charge of Fortescue, cast a pall over his reputation and cause untold stress to him and his family.
The regulators’ scrutiny of Forrest’s grand vision for Fortescue began within days of his election as chairman in July 2003. Perhaps the ASX was uneasy that Fortescue’s share price had risen rapidly from 10 cents in April to 26.5 cents on the day of the July shareholders’ meeting, even though there had been no official announcements about Forrest’s planned takeover of the company.
At the meeting at the Celtic Club in West Perth, Forrest could hardly have been accused of talking down his prospects of success in building an iron ore mine in record time. He announced he was seeking a partnership with mining heiress Gina Rinehart’s planned Hope Downs iron ore project in a bid to establish new rail and port facilities in the Pilbara. But a Hope Downs source was quoted in the West Australian three days later as saying Forrest’s infrastructure plan was “not something we are spending a lot of time thinking about at this stage”.
Fortescue quickly released what it termed an “explanatory statement” to Forrest’s speech in an attempt “to ensure there is no confusion in the market”. The statement confirmed Fortescue had no agreement with Rinehart’s Hope Downs project. It went on to “clarify” to the ASX that Fortescue’s proposed iron ore project had no definitive reserves, no definitive budget, no definitive timetable and no definitive funding strategy.
On the same day, the ASX sent Fortescue a “please explain” letter over another report, which said the company was in talks to form an iron ore joint venture with fellow Perth company Consolidated Minerals, a move that would boost Fortescue’s chances of being able to raise the money it needed for a railway line and a port. The ASX clearly wasn’t happy that it was reading about the talks in a newspaper before the market had been informed. Later that day, Fortescue confirmed the joint venture with Consolidated Minerals had been finalised.
These early misunderstandings would seem trivial compared to the stoushes that followed. In December 2003, a team of Fortescue executives, including Forrest, Graeme Rowley, Alan Watling, Chris Catlow, Barry Knight and Philip Kirchlechner, embarked on a crucial trip to the Chinese industrial city of Maanshan to spruik their vision to thirty of the country’s steel mills. As a result of the trip, Fortescue announced on 9 December it had secured “memoranda of intent” with steel mills to buy 25 million tonnes a year of iron ore, declaring it was confident it had established a market for its product. But the ASX put a dampener on the news when it asked Fortescue why its share price had suddenly run up from 48.5 cents to 66 cents in the four trading days before the announcement of the MOIs.
Among the buyers during that period was Graeme Rowley, the Fortescue executive director who was also Forrest’s right-hand man. On 3 December, before the Maanshan trip, Rowley had paid $170,000 to buy 350,000 Fortescue shares at 48.5 cents each. By 9 December, when the Maanshan deals were announced to the market, Rowley’s $170,000 outlay was suddenly worth $230,000. ASIC wanted answers and summoned all of the Fortescue executives who went to Maanshan in an attempt to discover what Rowley had known about the status of the MOIs when he bought his shares.
ASIC told Fortescue it was investigating Rowley under section 1043A of the Corporations Act, otherwise known as the insider trading provision. The Fortescue executives, including Forrest, gave sworn evidence at ASIC’s Perth office and were told to hand over all relevant documents. “Graeme was stupid to buy shares at that time,” says a former Fortescue executive. “I think it was an honest mistake, but I still thought it was stupid.”
ASIC dropped its insider trading investigation into Rowley several months later and the probe was never made public, but the episode illustrated that the corporate regulator had Fortescue firmly in its sights from the early days. Later, ASIC also questioned Fortescue over the nature of some of the “binding” sales contracts it had signed with Chinese steel mills in late 2004 and early 2005. In the end, that investigation was also dropped.
But the regulators stayed on Forrest’s case. In April, the ASX sent an extraordinary four-page letter to Fortescue, demanding answers to a series of questions about the company’s project cost estimates, its timelines and the extent and quality of the mineral resources it had announced to investors. This was a rare kind of rebuke, and it proved that Fortescue was being scrutinised more closely than just about any other stock on the market.
The questioning led Fortescue to admit that its project was indeed facing a significant cost blowout beyond the budget of $1.85 billion and a six-month delay until the second quarter of 2007. It was also forced to back down on the bullish way it had been describing its resources to the market over the previous eight months. The ASX said Fortescue’s reporting did not comply with the Joint Ore Reserves Committee (JORC) code, which is the official measure by which miners must evaluate their deposits. It pointed out that Fortescue should not be using the term “ore” to describe its mineral resources because that implied it had a “reserve” that was viable for mining. The company’s response shocked the geologists at other mining companies, who viewed the industry’s JORC code as sacred. “It was not Fortescue’s intention to use the term ‘ore’ in the context of suggesting that it was at ‘reserve’ grade status,” Fortescue said, “but rather the term was being used in its colloquial or natural meaning within the ‘iron ore’ industry.”
Within a few days, there was more to come. The perennially bullish Forrest, his popularity in mining circles clearly rising, gave a sold-out address to the Sydney Mining Club in May 2005, in which he said Fortescue would be able to sell its lower-quality ore for 95 per cent of the prices being obtained by BHP Billiton and Rio Tinto for their premium products – a claim that raised eyebrows when reported in the Sydney Morning Herald the next day. Forrest also told his audience that the capital cost of the project “would start with a two, not a one” but he would be working hard to ensure it did not blow out to anywhere near $3 billion.
The ASX jumped on the statements, demanding the company explain what Forrest had meant. Fortescue responded that everything Forrest had said was correct. This may have been true, but to many observers it appeared as if Fortescue had a real problem in complying with Australia’s system of continuous disclosure, which requires companies to announce all price-sensitive information to the market in a timely manner.
It was in March 2006, however, that Forrest felt the full weight of the nation’s regulators. After a twelve-month investigation that arose from an ASX referral, ASIC’s then chairman, Jeff Lucy, announced the watchdog was suing Forrest and Fortescue in the Federal Court. ASIC alleged Forrest had breached his duties as a director by referring to a series of construction deals with Chinese companies as “binding contracts” when they were, in fact, merely loose framework agreements. It also claimed Forrest had failed to correct his misleading statements even when it became obvious that the deals were not binding. In essence, ASIC was saying Forrest had exaggerated the nature of the deals and then deliberately kept the market misinformed while Fortescue’s share price soared. It wanted Forrest to be fined $4 million and, more importantly, disqualified from serving as a director over what it regarded as a serious breach of the Corporations Act. Experts said the ban would likely last for between three and five years if he were found guilty.
For Forrest, the stakes had never been higher. To his critics, the civil charges were confirmation of what they believed all along: the Forrest spin machine had finally gone too far and he would be brought to account by a judicial system that had already found him to be dishonest several times in the past. But to Forrest’s growing band of supporters, ASIC’s pursuit was evidence of Australia’s “tall poppy syndrome” and the regulator’s desperate need to claim the scalp of a high-profile businessman. Forrest himself responded by saying he had done nothing wrong, the contracts were indeed “binding” and he was confident the courts would find in his favour.
Another school of thought contended that even if Forrest had overstated the nature of the deals to generate some excitement and boost his share price, a protracted courtroom brawl involving arcane legal argument over the precise definition of a “binding contract” might not be the best way to remedy the breach.
Forrest suspected that the ASIC charges had arisen as a result of lobbying by his enemies at BHP and Rio. There was no direct evidence to support this. But the damage to Forrest’s reputation was immediate and it allowed his rivals in the industry to privately gloat over the whole affair. In the Australian, business columnist Matthew Stevens called on Forrest to resign from Fortescue, arguing that the charges could jeopardise the company’s ability to secure contracts with financiers and customers.
The trouble had begun in August 2004, when Fortescue had told the market it had entered into a “binding contract” with the state-owned China Railway Engineering Corporation (CREC) to finance and build its railway line in the Pilbara. At a press conference, a journalist had asked Forrest: “You talk about a $1.85 billion project, how much of that is the railway line?” Forrest had replied: “The price of the railway line and the rolling stock is confidential but we are pleased to say it’s competitive.” To the average investor, it sounded as if Fortescue had already negotiated a price for the works. But Forrest was too busy celebrating to worry about such semantics; that evening he was marking the deal by downing cocktails at a lavish party at the Australian Embassy in Beijing, surrounded by a throng of senior Chinese government officials and businessmen. Ten weeks later, Forrest had even more good news to trumpet: Fortescue had signed “binding contracts” with two other Chinese state-owned entities, China Harbour Engineering Company (CHEC) and China Metallurgical Construction Corporation (MCC), to finance and build its port and mine.
The mining industry had gasped in astonishment at these announcements. It seemed as if Forrest might really have a viable project. Forrest claimed the deals had removed the risk of the project. “These commitments by Chinese interests now cover the financing and construction risk for the total project,” he said after a signing ceremony with CHEC and MCC in Beijing. “Our approach has been to ensure the construction risk is carried by the contractors and that project payment by Fortescue Metals only follows practical completion.” In the Weekend Australian, resources writer Robin Bromby had summed up the mood among observers by declaring: “Andrew Forrest has pulled off what must be one of the most breathtaking deals in our mining history – he has talked the Chinese government into almost fully financing his $1.85 billion Pilbara iron ore dream. And he has done it without giving away a single share in his Fortescue Metals Group.”
Investors clearly thought the same thing. Fortescue shares were trading at just 55 cents when the CREC announcement was made on 23 August. By the time the latter two “binding contracts” were announced in November, the share price had risen to $1.66. From there, the shares continued to soar, rising above $5 in February 2006 and catapulting the company into the ASX top 300. Fortescue had arrived as a glamour stock.
But as investors rushed to get behind Forrest’s vision, his so-called binding contracts were beginning to unravel behind the scenes. In the early weeks of 2005, the Chinese companies began to demand a big equity stake in the project as a condition of going ahead with the financing deals. But Forrest was not prepared to give away majority control of his company or the project.
According to evidence given in the Federal Court, Forrest embarked on a desperate campaign during early 2005 to get the Chinese to commit to the contracts. “We have no money. We might have to think about a joint venture,” Forrest was claimed to have said. He was even apparently prepared to invoke his friendship with prime minister John Howard in an attempt to force the Chinese to honour the contracts.
In mid January, Forrest met MCC vice chairman Ma Yanli, who told him he was reluctant to commit to the project before Fortescue had proven it had sufficient iron ore reserves. A Fortescue translator and executive assistant, Wei Fisher, told the court that Forrest had said to Ma during the meeting: “This is a very important project and MCC is a large company. I have been to see the prime minister, and he knows that there is a signed agreement. If MCC pulls out now, the ability of the Chinese to carry out international work will be doubtful and it would damage our relationship.”
On 3 February, as his net worth soared on the back of the Fortescue share price frenzy, Forrest was handed a fax that had just arrived from Ma. According to evidence given in court (but which was ultimately rejected by the judge), the fax said the deal MCC had signed three months earlier to build Fortescue’s mine was off. Wei Fisher, who was standing near the fax machine at the time, told the Federal Court: “I recall that when Andrew Forrest saw this fax, I heard him say words to the effect that ‘This is ridiculous. If anyone tells the press, we have had it.’ I recall seeing Forrest walking about the office waving the fax, and raising his voice, he was very upset.”
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.
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.”