By Michael Evans
A BABCOCK & BROWN whistleblower accused the company of providing ''false models'' to ratings agencies in late 2007 that led to a secret internal investigation and disciplinary action against staff.
In evidence yesterday before a liquidators hearing into the $3 billion collapse last year of the investment group, Michael Sharpe, B&B's senior non-executive director and chairman of the audit and risk committee, confirmed he received the email on December 7 containing ''suggestions that ratings agencies were provided with false models''.
He said there was ''not a great deal of evidence of it'' but he nevertheless engaged PricewaterhouseCoopers in London to ''see if we had done all the correct work''. ''We took this very seriously and we took this to the full board.''
Shareholders were never told of the inquiry or the allegations.
Mr Sharpe is a former senior partner at PwC.
The details emerged yesterday on the sixth day of public hearings when Peter Wood, the counsel for the liquidator Deloitte, asked Mr Sharpe to respond to the allegations in the whistleblower's email. Mr Sharpe said disciplinary action was taken ''in respect to a couple of matters'' but he did not consider the issue posed a serious threat to the company. He said many of the assets referred to in the email had already been sold at a profit.
At the time the email was sent, in late 2007, the first wave of the global financial crisis was causing credit markets to tighten and the cost of funds to rise. Ratings agencies provide valuations on companies and those with higher ratings can access credit at cheaper rates.
In June 2008, when B&B was under attack from short-selling hedge funds on the rampage during the meltdown, Standard & Poor's downgraded its ratings on the B&B subsidiary B&B International which housed the head stock's assets. The ratings agency attributed the downgrade to the slide in the share price of B&B. The downgrade led to a rise in the group's cost of funding.
The whistleblower alleged that company ''appraisals and valuations were consistently on the aggressive side''. It was within days of an email from the B&B founder and executive chairman, Jim Babcock, to the chief executive, Phil Green, saying the world was on the brink of recession.
Mr Babcock warned Mr Green that the company needed a more conservative approach.
Asked how long the PwC investigation lasted, Mr Sharpe said: ''I can't recall. I suspect a few months.''
Mr Wood asked if ''until those investigations were concluded you had an open mind?'' ''Absolutely,'' Mr Sharpe said.