Friday, May 20, 2005

PACIFIC WAR: In spin-off bid, PPI did not inform SEC of cash problems

By Alcuin Papa
Inquirer News Service

Published on page A1 of the May 15, 2005 issue of the Philippine Daily Inquirer

(First of three parts)

THE SECURITIES and Exchange Commission is set to intervene in the rehabilitation hearings of Pacific Plans Inc. at the Makati Regional Trial Court and has prepared an initial comment saying the pre-need firm did not disclose its liquidity problems when it went to the SEC last year for approval of the transfer of its assets to a subsidiary, the Inquirer has learned.

On June 9, 2004, the PPI board approved the creation of a subsidiary, Lifetime Plans Inc., to "spin off" the operations of the company's pension, memorial and a portion of its educational plans businesses.

Less than two months later, on Aug. 12, 2004, the SEC approved the spin-off, after which 70 percent of PPI's assets and liabilities were transferred to Lifetime Plans in exchange for one million shares of stock of Lifetime with a total par value of P100 million.

According to SEC records, the directors of PPI and Lifetime Plans were identical: Helen Yuchengco Dee (chair),Suzanne Yuchengco Santos, Rizalino S. Navarro, Margarito B. Teves and Armando M. Medina.

On Aug. 20, 2004, the PPI board authorized the sale of Lifetime Plans to a company called GPL (Great Pacific Life) Holdings.

On Sept. 9, 2004, Exemplar Holdings was organized as a wholly owned subsidiary of GPL Holdings with an initial paid-up capital of P100,000.

Later that month, PPI would enter into a service agreement with Lifetime Plans under which the latter would operate for PPI its education plans business.

On Jan. 25, 2005, Exemplar Holdings bought into Lifetime Plans.

On the same day, GPL Assurance, which owned PPI, transferred ownership of PPI to GPL Holdings.

All of these companies are under the Yuchengco Group.

Legalizing fraud?

In its initial comment, a copy of which was obtained by the Inquirer, the SEC said the "sequence of actions undertaken by PPI prior to the filing of its petition for rehabilitation with the Regional Trial Court may serve as bases for the commission to make a determination of possible 'bad faith' on the part of PPI in using their 'applications' with the Commission as a way to legalize an otherwise fraudulent scheme to evade its obligations under its existing plan contracts."

The SEC said that when PPI came to it in June 2004 for approval of its transfer of assets to Lifetime Plans Inc., it "did not disclose that the company was in serious liquidity condition."

Neither did it inform the commission of its intention to file the petition for rehabilitation now before the courts.

The Inquirer has also learned that as early as 2000, PPI had approached the Abello Concepcion Regala and Cruz (ACCRA) law office asking the firm to evaluate a plan for rehabilitation.

At the time, a group of plan holders were asking PPI to honor plans that they had bought from the secondary market and had in fact initiated a conciliation action before the SEC, documents of the firm showed.

In its comment, the SEC said a thorough study should be made of the transfer of PPI's assets to Lifetime Plans "to determine if the same were made to prejudice its plan holders."


It also said PPI's use of high tuition rates as the reason for its liquidity problems was "an exaggeration."

It noted that tuition rate increases, based on the presentations of PPI in its petition, "[had] tapered off from the previous years to the present."

Therefore, its effects on the company's present financial condition, as PPI has claimed, were an exaggeration, the SEC comment said.

It noted that before and after the spin-off, the financial statements of PPI "did not reflect any trust fund deficiency. Nor did PPI disclose any financial problem."

"The Commission was made to believe that PPI was financially stable and capable to meet its obligations under its contracts," the SEC said in its initial comment.

ACCRA's misgivings

In the evaluation it gave PPI, ACCRA expressed its misgivings about the firm's plan to petition for rehabilitation.

In a March 9, 2000, letter to Benigno Zialcita III, PPI executive vice president and chief operating officer at the time, ACCRA said it would be hard to cite the increase of tuition rates as a reason for asking to be placed under rehabilitation.

"Even assuming that the increases in education costs were beyond your control, the fact that your business is precisely the assumption of risks will preclude the availability of this defense. Moreover, such increases were foreseeable, even expected," said the ACCRA opinion written by lawyer Teresita Herbosa.

Herbosa said the rise in the inflation rate was also not sufficient justification.

"It has been held in one case that while there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered 'extraordinary' but simply a universal trend that has not spared the country," Herbosa said.

Herbosa also said that the kind of contract that PPI had with plan holders fell under the theory of "contract of adhesion," meaning the contract would be interpreted against PPI as it was the one that drafted it.

Back in 2000, Herbosa had told PPI that the arguments of the claimants tended to outweigh those of the company.

"It would be difficult to refute the claimants' anticipated arguments. Worse, between individual claimants whose only interest is the education of their children, and a company which is part of a big conglomerate like you, a judge will likely find in favor of the former due to the perception that they are the underdog," she said.

Villaraza law firm

In any event, PPI did not take the advice and apparently found a more compliant counsel, which press reports had identified as the influential Villaraza and Angangco law firm.

In the first week of April, PPI went to the Makati court asking it to order a suspension of payments and approve its plan for rehabilitation, saying the deregulation of tuition rates and the unfavorable business climate had caused liquidity problems for the firm.

PPI said it would not be able to meet its tuition obligations to plan holders estimated to reach P350 million for the May to June 2005 enrollment period alone, and it did not have enough funds to pay for future obligations, either.

This expected difficulty in meeting future obligations forced it to file the petition for rehabilitation, it said.

Judge from The Firm

On April 13, Makati Judge Romeo Barza issued a stay order that effectively froze all PPI payments to its creditors, suppliers and plan holders until the company was rehabilitated, that is, restored to good health.

Barza was a founding partner of the Villaraza law firm but left in the early 1980s to put up his own practice.

PPI plan holders, organized under the Parents Enabling Parents Coalition (PEP Coalition) last Friday filed with the court its opposition to the rehabilitation plan, saying the liquidity problem of the company, the ostensible reason for the rehab petition, had been "fraudulently self-engineered and artificially contrived."

They said the assets, which should have been used to pay their claims, had been "spirited out" of the company just before it filed for rehabilitation to hide them from the claims of creditors -- the plan holders.

As the government watchdog body that oversees pre-need companies, the SEC has come in for much criticism over the troubles besetting the pre-need industry.

Industry insiders say the commission tends to be liberal in its interpretation of the rules, "even if there was already suspicion they don't do anything."

But even if an SEC examiner has strong suspicions, for instance, of padding of assets or lapses in shareholders' management of a firm's affairs, he or she is not likely to do anything "if there was pressure and influence at work," an industry source said.
A SEC official, speaking on condition of anonymity, said the commission was actually taken by surprise by PPI's going to court for suspension of payments and rehabilitation.

SEC surprised

"We were surprised. We didn't expect this. The company's officials had been dealing with us almost on a daily basis. Little did we know they had these plans," the official said.

The official said they knew there was trouble brewing at PPI, "but we saw they were doing something about it ... (that's why) we approved the reorganization and the spin-off."

SEC secretary Gerard Lukban said that from PPI's presentation, "we saw that the spin-off [of assets] was for the protection of the plan holders and it did not violate any rules. We saw that it was a fair segregation based on the ratio of contributors."

As of December 2003, according to financial statements it submitted to the SEC, PPI was in reasonable financial health. It had trust fund assets of P11.2 billion, consisting mostly of dollar-denominated government bonds maturing in 2010.

Against this was an actuarial reserve liability (ARL) of P10.2 billion.

By December 2004, after the assets transfer, PPI's trust fund assets were P3.3 billion, and ARL stood at P2.6 billion.

A pre-need firm is required to maintain a trust fund, an asset account in which it makes deposits from the payments of plan holders and investments to provide sufficient funds to pay for future obligations.

The ARL is a liability account that approximates the value of all obligations of a pre-need company to its plan holders. It is computed using assumptions on interest, tuition and inflation rates, and the anticipated earnings of investments.

The SEC requires that the trust fund should not be less than the ARL.

(Part 2: PPI problems stem from pre-need industry's inherent weaknesses)