Top Story • January 18 2004

Directors stashed thousands away as company collapsed

Julian Manduca, Kurt
Sansone, Matthew Vella reporting
It may have been conveniently forgotten. Today MaltaToday reveals a Court declaration by auditors PricewaterhouseCoopers which depicts how the owners of now-defunct supermarket chain Price Club managed to usurp massive funds from a company destined to face bankruptcy, diverting the funds into their own personal channels. Though the declaration is public none of the media have cared to report the contents of this damning report.
Despite sales of Lm22 million the Price Club owners drove the company into failure, leaving their suppliers short of Lm10 million, and 400 employees jobless.
Today, as the Price Club owners continue to enjoy the good life in their luxury homes, driving around in Mercedes cars and BMWs, many are the suppliers who have been left penniless, wallowing in their misery, with some of them even left without a home.
Wallace Fino of Sliema, Christopher Gauci of Gharghur, and Birkirkara FC president Victor Zammit of Attard, as well as Gauci’s parents Giorgina and Giosue, also of Gharghur, and Lawrence Fino, all benefited from Price Club’s millions, while many of those that sold to the company remain destitute.
Fino, Gauci and Zammit are the owners and directors of the Price Club supermarket chain which is currently in liquidation following its crash into insolvency, July 2002.
Arguably the foremost auditing authority on the island, John Zarb, in his report for Pricewaterhouse Coopers on the Price Club demise, revealed how the multimillion market leader had continued to buy goods from its suppliers when the directors knew the company would never be in a position to pay for the goods ordered.

Echoing many similarities with the Parmalat scandal and the Enron and Worldcom fiascos in the US, the saga may turn out to be one of relatively greater proportions in a company of Price Club’s size.
Reading like the best of Hollywood finance thrillers, Zarb said the owners fabricated accounts and figures that offered a misleading picture of Price Club and diverted funds from the operation into their personal accounts whilst the company, which ran six supermarket outlets, was left with creditors’ and bank loan debts.
Zarb describes how one particular transaction "benefited the Gauci family, who received the Lm1.4 million cash proceeds from the BOV bank loan," which had been borrowed by Price Club Operations and which was left with the burden of paying back the loan.
Perhaps even more damaging in Zarb’s testimony is the allegation that the company, which held millions of Liri in stock, never kept any stock records or carried out stock takes of any substantial nature to establish its stock value.
The deceit went even further as the stock figures were revealed to have been fabricated to accommodate the owners’ wishes, who, according to Zarb would enter fictitiously higher values for year-end stocks enough to show an operating profit at the end of the year. According to the company’s records, one accounting entry was listed as "being the estimated closing stock to give an operating profit before depreciation and inter-company rent of Lm160,000." The value of stocks at the end of the year determines how much profit or loss is to be made. Suppliers to Price Club could have looked at those accounts to decide on the company’s viability and whether continue supplying the supermarket chain with goods.
According to John Zarb’s rigorous investigation into the figures presented to him, there was an error in the stock figure which could have been as high as Lm1,427,000 and whilst the accounts for 1999 showed a pre-tax loss of Lm262,000, the correct result should have been a loss of Lm1,411,000.
The stock value was over-declared by Lm772,000 according to Zarb, but in another section of his affidavit he says the stock values were inaccurate by anything between Lm500,000 and Lm1 million, and possibly by more. Although that year the company’s accounts declare a trading profit before depreciation of Lm87,263, this was turned into a loss because of depreciation.
In those same accounts it is stated that the directors declared they were "confident that the operational performance of the company will improve in the foreseeable future, following a tightening in control over costs and operational processes."
At that time, the directors and shareholders should have been aware of the dire straits that the Price Club business found itself in, and whom according to Zarb should have ensured that "proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the company."
Zammit, Fino, Gauci and co created a company which according to Zarb was weak when it was created: "One can realistically argue that a position of insolvency existed from the outset," and was made weaker because the owners "failed to exercise proper control over the business, in that they were not even aware of the extent of the losses being incurred."
But Zarb makes it clear that the mismanagement was not a mere case of negligence. Speaking about the stock valuation he says: "they chose an approach which commences by measuring the results and then calculates closing stock by inference, rather than the other way round."
According to Zarb the owners of Price Club created a company which was destined to fail. Zarb indicates in black and white who stood to lose. When writing about how the owners mismanaged and took the wrong decisions to safeguard the company, diverting Lm794,000 into their personal businesses, Zarb says:
"The burden of all this was passed on in a calculated manner to creditors… the directors/shareholders should have realised at an early stage of the development of the business that they needed additional capital, possibly from new shareholders, but refused to share a ‘prize’ which they considered to be solely theirs. Instead they adopted the approach of continually squeezing more out of creditors, through delaying payments, missing various payment schedules and similar tactics."