Analysing Dick Smith’s demise

dicksmithWas Dick Smith’s demise due to its executives effectively running a ponzi scheme?

To think of all that wasted time and money that was spent on my university education learning commerce – and particularly strategies for making a profit. All the while it was staring me in the face. Buy (a lot) of stock, get big supplier rebates and post these to profit. You don’t even have to sell anything. Does this perhaps smack of a Ponzi scheme?

So, who were the directors? Bill Wavish I met many years ago and I recall he was CFO of Woolworths at that time, a veteran in the world of finance and retail. He is quoted as saying that you avoid maximising rebates at your peril. And so Dick Smith went on a buying spree – buying inter alia 12 years stock of batteries. Now, if you Google battery shelf, life you will learn that it is anywhere between five years and 12 years and obviously they deteriorate slowly over time.

So Bill, is that what you are talking about? Buying 12 years of stock that is going to deteriorate, before it even has a chance of being sold, in order to get rebates. But aside from the rebate issue, any retail cadet will tell you that Retail 101 teaches that as a retailer you never ever ‘invest’ in stock.

It can’t all be blamed on Bill. There were other Silly Billys too. David Cook – the company secretary; former CEO, Nick Abboud; Jamie Tomlinson – a non-executive director; Lorna Raine; Michael Potts – CFO; Robert Ishak; Robert Murray – managing director/chairman. Who have I forgotten?

Let’s take a closer look at the definition of a Ponzi scheme.

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organisation, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.

Sounds ominously close to the scheme the Dick Smith directors were running.

So, what are the duties of a director and how do the Dick Smith ex-directors fare? The general duties include the following:

  • The duty to exercise your powers and duties with the care and diligence that a reasonable person would have, which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent = FAIL.
  • The duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose = FAIL.
  • The duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company, and = FAIL.
  • The duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company = FAIL.

And the consequences for being found guilty of failing to perform your duties as a director? Well, they include:

  • Guilty of a criminal offence with a penalty of up to a maximum of $200,000, or imprisonment for up to five years, or both;
  • Have contravened a civil penalty provision (the court may order you to pay to the Commonwealth up to $200,000);
  • Be personally liable to compensate the company, or others, for any loss or damage they suffer;
  • Be prohibited from managing a company.

Time will tell, but if this is as bad as it looks, the Silly Billys could be doing time.

Stuart Bennie is a retail consultant at Impact Retailing www.impactretailing.com.au and can be contacted at stuart@impactretailing.com.au or 0414 631 702.

Comments

4 comments

  1. Peter Buckingham posted on September 9, 2016

    Hi Stuart, I love the way you call a spade a spade - well done. If we managed to lose multiple millions in a scheme like this, I would be expecting to be sitting next to the Young brothers (Kleenmaid) in a jail somewhere. Will be interesting to see if ASIC and take this on seriously as far as jail time is concerned.

  2. Luke R posted on September 9, 2016

    I have little confidence any of the directors of this trainwreck will be called to account. White collar crime is rarely prosecuted in Australia, it's built into our culture to protect the top class (that's the historical basis of our anti-defamation law). If an ordinary person wreaked this much economic damage they be thrown in the slammer pronto. These guys are just going to go off to their next directorship appointments. Even the Metcash guy will not get a slap on the wrist.

  3. Stuart Bennie posted on September 10, 2016

    Thanks for the comments Peter and Luke. I agree that it is unlikely they'll do time but you never know. I can't see them getting directorships easily.

  4. Evan posted on September 13, 2016

    You seem to want to pick this place to pieces, though I highly doubt you could have done any better than any one of the former Directors or CEO'S , it's all nice and easy to throw stones from your desk and to criticise the place.

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