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(generated from captions) shattered investor confidence profits and earnings downgrades A string of disappointing company was pummeled this week. The US share market with the business news headlines. But first, here's Kate Tozer bottling halls, warehouses... bulk stock, bottlings, are vineyards, wineries, What's not on our balance sheet and it's all about pruning assets. it's a virtual vineyard And in First Person - This program is captioned live. hit the skids. as the world's markets We take a look at hedge funds And villain or refuge? Pat Grier from Ramsay Health Care. biggest deal maker, We also catch up with this week's and its implications. about the case ASIC's Jeffrey Lucy, We talk to the top corporate cop, Adler and Ray Williams are jailed. This week, HIH pair Rodney to the program. G'day and welcome Thanks, Barrie. and 'Inside Business'. Coming up next, Alan Kohler for this week. has been using. That is the program for joining Insiders. Thank you once again for this

and Qantas the share prices of both Virgin of higher fuel surcharges, Despite the imposition gained control at a $1.90 per share. since Patrick Corporation which has fallen sharply Virgin Blue share price, however, Reality has returned to the for National Foods shareholders. A great outcome likely to gain control. with San Miguel also seems to have ended for National Foods between San Miguel and Fonterra The protracted bidding war at the company. currently having a look interested parties that there were no other during the week when he stated confirmed as much CEO Andrew Michelmore will be successful. takeover bid for WMC Resources that BHP's $7.85 per share a likelihood, however, The downturn has increased to the decline in commodity prices. which are heavily exposed like BHP and Rio including major blue-chips have been hit hard in the past week, many stocks in the ASX Whichever way you look at it, is when I lose money. while a market crash is when you lose money, that a market correction There's an old joke that says from MM & D Capital. here is Tom Elliott sharemarket news, But for more local as shown in this graph. trading above the long-term trend, that Australian shares are actually But it's interesting to note was stripped from the local market. and a staggering $40 billion Japan's Nikkei index tumbled in Germany. and it was a similar story biggest weekly fall for 18 months Shares in Britain sealed their lost more than 3%. Over the week, the US market were also hit hard. The SNP 500 and the Nasdaq biggest one-day drop in two years. the Dow Jones recorded its On the close, to industry slowing use of energy. but some have linked the decline which should be good news, to US$51.60 a barrel, As well, crude oil fell only made matters worse. for February and a $61 billion trade deficit and weak consumer sentiment figures Ford Motors and Harley Davidson sank Shares in IBM, Apple Computers, has barely begun. and the reporting season

to ask the right questions but that he is accused of failing personally from them, and that he didn't benefit he's accused of of any of the offences was not actually the architect as the judgement says, What about the fact, Ray Williams, being honest. at the end of the day, And, of course, just simply, to shareholders. open and reliable communications the importance of clear, of prospectus documents, the importance the importance of annual reports, ..for example, from the judiciary as to... some really clear insight really does provide of both judgements I think that a careful reading take notice of in the sentences? and what directors should in terms of the law Is there any real significance for such long times. individuals going to jail such high-profile of the sentences - of the symbolism is making the most Now obviously ASIC Jeffrey Lucy. and Investments Commission, of the Australian Securities I spoke to the Chairman and what is left to be done? from this sorry tale So what lessons have been learnt company's $5.3 billion collapse. four years after the insurance to prison this week Ray Williams and Rodney Adler, finally dispatched HIH principals, of corporate justice The slow and costly process from Consolidated Minerals. on speculation of a takeover bid which rose more than 16% was Titan Resources, The winner, however, the falling oil price. which was dragged down by was Arc Energy, and there were plenty of them - Finally, the loser of the week - a fair bit harder. floating competitor Tattersalls This might also make the job of on poker machines. unexpectedly doubled its annual levy when the Victorian government which was sold off to fall was Tabcorp, And another usually rock-solid stock to fend off Foster's advances. they don't work too hard need to make sure Southcorp's directors from McGuigan Simeon Wines But given the recent profit warning to meet the other's turns. with neither board yet willing remains at an impasse Foster's bid for Southcorp In the wine sector, fell during the week.

some very salutatory lessons. Rodney Adler has gone to jail, in part, for telling lies to a journalist. Could you reflect a bit on what that means? Well, journalists have a unique role to the extent that they are essentially a communication piece to the wider community. So therefore, the dialogue with the journalist was very definitely with an expectation that the journalist would pass on such comments to the wider audience. That's what happened. Now, we're all human - we all make mistakes. It's a question of whether or not one acknowledges a mistake and seeks to redress it immediately. In the case of Rodney Adler, he chose not to do so. Now, what Rodney Adler did was on the record. Does it mean anything, do you think, for off-the-record briefings? I think it does. At the end of the day, you can't deliberately attempt to mislead, and I don't believe that whether or not I think there are I think it will. to start asking more questions? will cause directors and the Ray Williams' sentence Do you think that the judgement counsel. and, indeed, taking appropriate receiving reliable information, is asking searching questions, one needs to make sure that one and indeed, at the end of the day, a director has met their obligations The criteria is whether or not isn't necessarily the main criteria. one benefits personally whether or not I think that firstly, for other company directors? What does that mean, do you think, or enough questions. it's on the record or off the record, such an approach can be satisfactory. Were you surprised that Ray Williams got a slightly higher non-parole sentence than Rodney Adler? No, I wasn't. I anticipated that Mr Williams would receive ultimately a higher sentence. Indeed, the head sentence for both was identical, but Mr Williams has to serve two years, nine months, whereas Mr Adler has to serve two years, six months. What's the distinction between the two? It's hard to gauge. I expect it's to do with the fact that Mr Williams was more intrinsically involved in the running of the business. Have other briefs been sent to the DPP for prosecution? Yes, they have. Can you tell me how many individuals they refer to? I'd rather not, but I can say that there are about six in number. Six briefs? Yes. But not necessarily six individuals? I'll choose not to answer that. Can you tell me whether the briefs cover the full range of directors, executives and advisors to HIH? No. I think that for us to complete our investigation will take longer than where we are the moment. Indeed, I expect it to take, perhaps, a few more months. I certainly expect that we will fully conclude our investigations this year, but it's not right to say that we've completed, and therefore referred all matters to the DPP at this time. We will vigorously investigate all matters which are before us - to the extent that they ultimately include external advisors well, then, that will be the case. Is ASIC lucky that Adler and Williams pleaded guilty? I don't think that ASIC is lucky, I think that very much the public interest is served, which the courts acknowledge. The courts acknowledged the difficulty of proving white-collar crime. It is complex, particularly when one is dealing with a jury faced with tens of thousands of documents and frequently, well paid lawyers acting on the other side. I think the court is right to recognise that a guilty plea does save cost, saves time and allows all of us, particularly we the regulator and the courts to move on. Is such a flurry of guilty pleas unprecedented? Yes, it is. I must say that it reflects a number of things. On the one hand, I think, the courts are now very clear as to offering discounts for guilty pleas, which we believe is appropriate. I think that it also reflects the work which we did in the investigation. We were very thorough, very business-like, painstaking and we believe that the briefs we submitted to the DPP almost provided no alternative. Have you set a bit of standard for yourself for the future? Yes, we have and the bar is there and I don't intend to reduce it. So, in fact, we should be seeing more guilty pleas in future? One would like to think that, indeed, the conduct of directors and others would be such that we would almost be wondering what to do next. that won't be the case. Realistically, we do have matters before us. But we are working very hard to process all of our issues expediently, work closely with the DPP and come up with good outcomes. There has been some criticism or some sense that it took a long time. now I know that you've said today that that is not the case. In terms of the time taken, you're always referring to the time since the royal commission finished... Yes. Which is less than two years ago - tomorrow it's two years, but today it's two years. ..but the fact that there was a royal commission in this case, did that delay justice? Look, I don't think so. I think that inevitably there are swings and roundabouts. Was the government correct in introducing a royal commission in the first place? Clearly, because the are two outcomes with a royal commission. One is law reform and, of course, we've been funded to undertake our activities. And while we've gone broader than the remit of the royal commission, nevertheless, their references have been absolutely invaluable to us. So, in general then, is corporate justice in Australia - corporate law - slow or not? I don't think it's slow. By any measure, to be where we are within two years, albeit on two years, I think is a great achievement. If one was to compare the outcomes of HIH with other royal commissions, frankly, our record stands for itself. ASIC has had a very good conviction rate over the last couple of years - they've had 93-94% - but is that because you've been taking on soft cases? No, that's clearly not the case. Indeed, the suggestion is that because we're getting a 94% record we should be starting to delve down and be a bit more reckless with our matters that we take on. We're funded by the public and when we, as a commonwealth law enforcer engaged in a party, it's a very serious issue. It's particularly serious for those of which we engage. So we mustn't do it frivolously. Our actions must be soundly based - we must be sure of the likelihood of an outcome and, in which case, we then proceed. Where the commission receives advice that we don't have good prospects, in my view, it's absolutely inappropriate to use taxpayers money to take on such action. We'll leave it there. Thanks very much, Jeff Lucy. Thank you, Alan. Stockmarkets have slumped 6% from their 2005 peak and commodity prices 8%, which has once again focused attention on the role of hedge funds. In the past few weeks speculative funds have been heavy sellers of commodities as well as shares in the resource companies that sell commodities, hitting the local sharemarket with a double whammy. Most people think hedge funds are dangerous operators that make the markets more volatile, but they see themselves as safe havens. So are hedge funds part of the disease or the cure? Andrew Geoghegan reports. Five, four, three, two, one. Congratulations, the opening price was $4.95. While most sharemarket investors will be asking how long this bull market has to run, it's not a question likely to bother investors in the newly-listed Everest Babcock and Brown alternative investments. There've been 246,000 stapled securities traded, congrats. APPLAUSE Their money's exposed to the world of hedge funds. We'd prefer to be someone who's just looking to show consistently double digit returns regardless of what's happening in the market. An investment that delivers in both rising and falling markets, this, as the name suggests, is the objective of the absolute return fund, otherwise known as the hedge fund. Sent you the updated risk report... At just 28, Jeremy Reid represents the next generation of fund managers, who are showing investors they don't have to be slaves to an index, relying on relative returns. So, we should be getting a good spread of risk... He chooses to invest the $850 million dollars of his clients' money in a select group of international hedge funds. These funds use a variety of investment tools to hedge or mitigate risk. A popular investment technique is short-selling where a manager, believing a security will fall in value, borrows it to sell with an obligation to buy it back later, presumably at a lower price. You do find some of more sophisticated super funds around town are now putting in 1% or 5%, or talking about even 10% weights within standard superannuation fund towards the hedge fund category and that in itself will drive growth and has been driving growth. AMP capital investors opened their first hedge fund almost two years ago. Such is demand that Michael Anderson is building a range of hedge fund products as AMP looks to expand its asset exposure to absolute return funds from 1% to 5%. In some ways, because the mandates are a bit less restrictive, they sometimes pick up some of the outperformers that falls between the chairs of traditional mandates and that can only be a good thing for investors, if they can get access to that. Close to $1 trillion are invested in 9,000 hedge funds worldwide. Jeremy Reid believes as many as 95% of them will be poor performers. I'd say a certian percentage of them are not viable long-term. You've got two or three people who have a Bloomberg terminal and are trading $1-$5million and calling themselves a hedge fund or an investment manager. Those people aren't viable. What happens in the finance world, when lose your job, you can either become a consultant or hedge fund operator because there's no barrier to entry, you just put your shingle up. Economic consultant Paul Cheever has watched hedge funds rise and fall, with some even threatening global financial stability along the way. The hedge funds are actually quite useful because they are there, they are willing to make markets, in a sense, or participate in the markets as buyers and sellers, so they do add market liquidity. Do they add the volatility? Well, that's an interesting question. They can't survive without volatility. What happens is you see them where there is volatility but a lot of the times they are following that volatility rather than creating it. In 1992, George Soros used his hedge fund to take on the Bank of England ultimately breaking its exchange rate mechanism. While his fund won, there've been some spectacular losses, none more so than long-term capital management. Despite being guided by two Nobel prize winners in risk valuation, in 1998 it required one of the largest bail-outs in history. Little surprise, then, that hedge funds have become synonomous with risk. But today's hedge fund is a very different animal. There's, sort of, three income streams... We use hedgeing to reduce risk. We want to have our trades have one variable that we have a view on and not a number of variables where get a mixed result. So all the variables that we don't have a view on, whether they be currencies or interest rates, we hedge those variables, so we have very pure trading stategy. Richard Wallace runs a listed multi-strategy absolute return fund with assets of around $300 million. Tino, what are our bank rankings at the moment? We're either using arbitrage strategies, which are basically present value in cashflows. We're also using fundamental research where we visit companies and assess management and we're also using a quantative database, where we collect a lot data from different sources and rank stocks. Wallace Absolute Return Fund appeals to the conservative investor running a market neutral portfolio of predominately Australian equities aiming for annual returns of 10%-12%. But it comes at a price. Our fees are consistent with other hedge funds. We have 1.2% management fee per annum and we have performance fee which is 20% of our outperformance above the cash rate over any 12 month period. At one stage the definition of hedge fund was someone who charged a performance fee. The fees and the flow of capital into these funds are generating greater competition which may mean lean times ahead for the hedge fund. We believe absolute return funds as a whole will disappoint investors. It's like any industry where you have increased competition, margins get squeezed. But increased competition from a larger number of funds will perhaps pose the biggest challenge to market regulators. While hedge funds were the preserve of wholesale investors, that wasn't too bad. But as they head towards the retail market, the problems is they are new, there are very known metrics for mananging risk. How do you manage risk in a hedge fund? 18 months is obviously a long time in the health business. In late 2003, Ramsay Health Care wouldn't pay around $800 million for the Mayne Group hospitals. Now they're called Affinity Health and Ramsay is delighted to be paying $1.4 billion for them. I asked Ramsay Managing Director Pat Grier, how come? Well, Pat Grier, it seems like you either missed a bargain 18 months ago when you rejected buying Affinity Health, or you're paying too much now - so which is it? I think we're getting a very good acquisition here. Two years ago, the scene was very different. First of all, we were part of a consortium and the consortium was very restrictive. There were a number of risk rewards factors we had to take into account, the biggest one was malpractice insurance. There was huge risks at the time and we couldn't quantify them. So we were very concerned as to what we were taking on; and thirdly, the information we had wasn't as good as the information we've got today. Is there some lack of confidence in your own management to have been able to turn to do what Robert Cook and the team at Affinity have done over the past couple of years? No. We've got absolute confidence in what we can do with this group. We've always put a lot of store by our management. No, it wasn't the problem of management. It was what we were seeing as far as the risk was concerned and we believe now they've gone quite a long way from what they were, but our management, our staff and our management will be able to have a sizeable uplift, even on what they have already done. I just what to - in terms of your management - whether perhaps there is a touch of arrogance about it, you to be very much at arms length. We have actually spoken to the executive as much as we can, but we are taking their instructions very seriously and allowing the hospital to run as is. We will be going out next week to talk to the hospital management, but once again we are very restricted in taking what the ACCC wants us to do very seriously. What about the hospital directors and management - are you planning many changes at the hospital level? with the health funds. This is not about getting more power on economies of scale and so on. to the combined group, what we believe we are bringing No, this is all about and the health funds? in the balance of power between you a decisive shift is that because it produces a transforming takeover of Ramsay - You've also described this as the Mayne's hospitals. that actually had left and he's brought in other people he put people back into the hospital He's de-centralised, and centralised. they took a lot of management out Under the Mayne's regime, is exactly what we would have done. In fact, what Robert Cook has done No, not at all. and they have really said we want for possible consumer problems the divested hospitals told them what we thought should be with the ACCC, We've been very upfront separate arrangement. We've got a hold from ACCC. We are taking our line and when do you plan to do that? So have you spoken to them yet the hospital directors. and also crucially, I guess, at Affinity spoken to the executives yet as I understand it, you haven't you hadn't spoken to - but as of last night so it became your company yesterday, and paid for Affinity yesterday, because you actually bought

thing in the wine game Finding the next big Thank you very much, Alan. Thanks very much, Pat Grier. We'll have to leave it there. that we are telling. And that's the key message 10% less than our multiple. we are about 10% - we paid about pre-synergies and after divestment - and at the end of the day - and what multiple we had to pay what our multiple is and we always kept in mind was not to overpay in this whole thing But our number one priority a bit of give and take. Obviously, there was with the way it's worked out. And now we are very happy to solve that problem. with the vendors of Affinity. It looks a bit of a cosy deal to satisfy the ACCC. Now you are divesting 14 hospitals to this industry. and that is absolutely key and also working with our staff as our partners is working with the doctors for 40 years in this industry - and don't forget we've been here over the years - that we have really focused on and I think there's two areas our partners The doctors are basically We do a lot. to keep them happy? Will you be doing anything will be a bit disappointed? Are you concerned that the doctors looking forward to that. This is all about what our management can bring to the Affinity group and the combination of the two being - really bringing together some of the best hospitals in Australia. One of the things that Affinity and Robert Cook were going to do with the IPO, that is now not going to happen, was to provide some discounted shares for doctors - $15 million dollars worth, as I understand it. I imagine the doctors were Did you sound out Healthscope, the other big hospital company, to see whether they'd be interested in buying that? I've got to say I was very surprised and pleased to see the number of people knocking on the door. As time went with our talkings to the vendor, one of the biggest risks was how are we going to divest the hospitals to satisfy the ACCC and as time went with our talks, it became obvious that a back-to-back divestment would be the best and certain way

has always been a risky business, particularly so when looking for an entirely new, grape-free patch of ground to take a punt. Welcome to the nation's newest appellation - St Kilda Rd - better known for the prodigious consumption, rather than production, of quality wines. Nestled in amongst the advertising houses is the virtual vineyard, Cheviot Bridge. GENTLE GUITAR MUSIC Virtual, I suppose, comes from having no hard assets. what's not our balance sheet some of that culture started to change so people were looking to go back to that old culture and that's why 90% of the employees of Cheviot Bridge today are ex-Mildara Blass. But the old culture needed a major pruning. That meant contracting out the grape-growing and industrial side of the business. When we started Cheviot Bridge, we thought, "We had a clean sheet of paper. "How would you set up wine business that has a higher return on investment at less than $1 invested Cheviot Bridge aims to keep it for every dollar of sales. $1.50 and $4 invested there's somewhere between In the typical wine business high returns on investment. and that makes it difficult to make its high capital intensity but it's downfall is business - great growth, The wine industry is a great than other wine business." bigger organisation, Once Mildara went into that was the catalyst for Cheviot Bridge. almost a decade ago Mildara Blass business The Fosterisation of the successful he ended up running the company. of the next 27 years, and during the course at the old Mildara winery as a lab assistant His first job was nearby block in Mildura. He grew up on a small fruit growing vineyards all his life. Maurice Dean has been living around and intangibles for brand purchases. is a little bit of packaged stock What we do have on our balance sheet warehouses. bulk stock, bottling halls, are vineyards, wineries,

in market capital we should be $50-$100 million To be really successful, of around $20 million. in companies with a capitalisation interested Institutions don't seem to be the big investors to have a tipple. it's been difficult getting late last year, with a $16 million float successfully And while Cheviot Bridge listed At home, the business is tough too. but very, very low margin. to still high growth, and high growth The market went from high margin completely the US market dynamics. the Yellowtail phenomenon changed In the meantime, they were on the Toronto plane. on the Los Angeles plane, Fortunately, they weren't on September 11. flew out of Boston at 8:30am our sales and marketing people, and Peter Perrin, Because Hugh Cuthbertson to September 11. We were very close for about two years. all went into shutdown mode and the American distributors and the American consumers Good flavour, to those specifications. and craft production to ask the market what it wants Cheviot Bridge strategy is into the market each vintage, of plonking a lake of wine Rather than the traditional model for a dollar's sales. nice length of flavour... MAURICE DEAN: We look for what consumers are looking for and work backwards and we can take products to market within six weeks - that's the difference in timing. The focus is on developing brands and distribution with an eye on the export dollar. So far the company has struggled to recover from its first foray into the giant United States market. It didn't go all that well. We literally launched on September 11, 2001 The wine glut combined with the market dominance of the big supermarket chains is putting the squeeze on prices. If you've got a low capital-intensive model, we can actually make out model work with a 30% gross margin. Whereas a traditional wine business needs a 50% gross margin to make it work. So being more nimble with our balance sheet, make it easier to work with the strategic changes in wine business at the moment.

in winter. (Laughs) GENTLE GUITAR MUSIC Stephen Letts reporting. Coming up next, '7 Days' with Felicity Davey. Thanks for your company. See you next week. Captions by Captioning and Subtitling International. it's a good time to buy straw hats but it's like the old cliche, for the wine industry, so it is difficult times and their strength is increasing, retailers are consolidating Wine prices are low, our own brands. and we'll get there by developing