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Money Capital Market M G Rover Scandal Submitted to: Sir Adnan Bashir Submitted by:

Anum Riaz Naghmana Afzal Saqib Nawaz Akeel Hussain 11022720-012 11022720-013 11022720-118 11022720-130

Program: MBA 3rd (Finance) Section: B



M.G.Rover group scandal

History of M G Rover Groups:
The early history of the MG Rover Group reflects the way the British motor industry in developed in the early 1900s. As many people tried their hands at manufacturing vehicles at that time, a wide range of independent vehicle manufacturers emerged. The majority of these lasted only a few years or was quickly taken over by other companies. The Rover Company developed through the grouping, regrouping, merger and take-over of many famous names in British motoring. These changes started almost from the moment the first British built vehicle appeared on the roads (credited to Dr Frederick Lanchester who built a four wheel petrol driven car in 1895). In 1968, the Leyland Motor Corporation and British Motor Holdings merged to form one large car and commercial vehicle organization (British Leyland Motor Corporation). And in 1975 the company became British Leyland and in 1978 it was known as BL. In the same year that the Rover 800 was introduced to the market In 1986 Sir Graham Day was appointed as chairman of British Leyland. He quickly named the company Rover Group and began a programmer of moving the company and its products up market and away from mass produced cars. In his role Sir Graham set about completing a privatization programmer which saw many of British Leylands subsidiaries being sold. In 1988 the Rover Group was sold to British Aerospace. In early 1994 the Rover Group was taken over by the German car maker BMW. Following six years with BMW on 16th March 2000. BMW announced fundamental reorganization plans that split the company apart and resulted in the sale of the key constituent parts of the group. The new company MG Rover Group Limited is now an independent, medium sized, British company that produces cars under the Rover and MG brands from the Longbridge Birmingham plant. The company started life with a debt free balance sheet and a strong revenue stream, which included car sales, parts, accessories and vehicle financing. It also benefited from over 3 billion of investment by the previous owners. MG Rover was formed from the parts of the former Rover Group volume car production business which BMW sold off in 2000 due to constant losses and a declining market share. BMW had acquired the Rover Group from British Aerospace in 1994 and had since sold the Land Rover business to Ford and split off the MINI business as a new BMW subsidiary based in Cowley. MG Rover took control of the remainder of the former Rover Group volume car business which was consolidated at the Long bridge plant.


Product of M G Rover Groups:

The MG Rover range initially consisted of five cars: the Mini, Rover 25, Rover 45, Rover 75 and MG F along with car derived van derivatives of the 25. The Mini was only built under temporary license during the first five months of MG Rover's existence, and since the 1980s had only been built in limited numbers. After production finished previous owner BMW regained the rights to use the brand and did so on all new car that was launched in 2001: MINI.

Reason of collapse:
"Evidence Eliminator" computer software a tax avoidance plot called "Project Slag" six figure bribes and an office affair were just some of the more outlandish ingredients revealed today by the long awaited investigation into the MG Rover scandal. The 850 pages report lays bare the breath taking lengths to which its former owners the so called Phoenix Four, went to enrich themselves before the company Britain's last large car manufacturer collapsed in April 2005 with the loss of 6500 jobs. The four local businessmen and former MG Rover chief executive Kevin Howe paid themselves a total of 42m during their five year ownership of the company which they bought for a token 10 and left with more than

1bn in debts. The report concluded their financial rewards were "excessively large" despite the fact that the businessmen invested no money in the group after they bought it and took risks which were "relatively insubstantial". The most extraordinary behavior comes from Peter Beale, one of the Phoenix Four. According to the report at 10.05am the day after the government appointed inspectors in June 2005 to investigate Rover's collapse, Beale purchased "Evidence Eliminator" software enabling him to wipe the hard drive of his computer. According to its website, the software "quickly and professionally deep cleans your computer of 'sensitive material', leaving you with a clean PC, a clean conscience and instant peace of mind". The company also promised users the program would enable them to "purge [their] PC of hidden computer data which could later be recovered with Forensic Software to be used as evidence against [them]". At 12.20pm that same day, Beale installed the program on his computer. When investigators examined the computer about a week after Beale ran the program they discovered that he had deleted a sub folder called "MG Rover" from his hard disk. They later found that one of these files contained details of the income and benefits received by John Towers one of the four businessmen from MG Rover. When Beale was questioned by inspectors he changed his story several times originally saying that he could not remember whether he had downloaded the software and that he frequently used similar programs despite inspectors finding no evidence to support this claim. Later he claimed that he only wanted to delete personal documents. The names given to some of the businessmen's tax benefit schemes are equally bizarre. "Project Slag" short for "stock lending agreement" was one such scheme cooked up by Techtronic (MG Rover's holding company) Deloitte (MG Rover's auditors and advisers) and Barclays in the summer of 2000. The scheme would have earned 60m for MG Rover and 42m for Barclays but was blocked by the Inland Revenue despite the best efforts of Towers to persuade them not to. In recording Towers is heard promising officials that "Barclays would commit to never doing this again" and says we are asking you not to challenge and then you can change the law according to the report. Auditor Negligence: The UK Government commissioned reports into the collapse of the company. The National Audit Office reported in March 2006 on the financial support provided to the company. It commended the DTI's contingency planning in 2004 but questioned whether the loan made in April 2005 achieved value for money. The DTI commissioned accountants BDO Stoy Hayward to report on the collapse of the company this took four years to complete at a cost of 14.8 million. The firm issued its report to business minister Peter Mandelson in July 2009 and it was published on 11 September 2009. The report revealed that five executives took 42m in pay and pensions from the troubled firm as it collapsed. The report focused its criticism on the Phoenix Four and chief executive Kevin Howe who oversaw its collapse. Other findings included evidence of a personal relationship between Nick Stephenson and a consultant who he paid more than 1.6m in the 15 month period up to April 2005. Meanwhile "Evidence Eliminator" software installed by Mr. Beale deleted documents which were likely to have been relevant to the investigation. The investigators further accused Mr. Beale of giving "untruthful" evidence during interviews. Conservative business spokesman Kenneth Clarke said it was right the report criticized the Phoenix Four whose behavior was

"disgraceful". Lord Mandelson said the Phoenix group had not shown ounce of humility" about the firm's demise and them owed an apology to the firm's employees and creditors. The Serious Fraud Office declined to mount an investigation but Mandelson instructed lawyers to prepare a case to disqualify the key figures at Phoenix from future company directorships. Action of State: HOW much did the British government contribute to the downfall of the British owned motor industry? In this article each governments performance in dealing with BMC Rover will be analyzed to see how much of a contribution it made to its downfall. Ability and competence seems to be of secondary importance in political leaders compared to those who posse good public speaking skills. I do not believe any politician deliberately set out to destroy the British motor industry and often they meant well. The British government appoints an inspector who examines the reason of fraud in the M G Rover Groups. The inspectors also criticized how one or more members of the Phoenix Four made business decisions on an adhoc basis with no board meeting being held or minutes produced. They also criticized them for employing Dr Li, who received 1.6m in consultancy services over 15 months before MG Rover collapsed, even though one of the Phoenix Four Nick Stephenson had a "personal relationship" with her. Inspectors said that her fees were "excessive" and that apart from translation she "didn't seem to add much". The inspectors said that Phoenix had used its income to support Edwards Cars which was owned by John Edwards the final member of the Four and his wife without which they said it would probably have had to stop trading. The level of financial support to the dealership was "not commercially justified" they said. The Phoenix Four started out with plans to pocket a total of 75m over five years. They still own 11.6m of assets. A statement from the Phoenix Four dismissed the report which has cost taxpayers more than 16m and taken over four years to complete as a "witch hunt against them and a whitewash for the government". It drips with the hallmarks of this government spin smear and point blank refusal to take any responsibility for their own actions." Yesterday business secretary Lord Mandelson said he wanted the company's directors to refer themselves to Companies House to be voluntarily barred. If they choose not to a government source was pessimistic about how quickly the directors could have their positions forcibly reviewed. He suggested a judicial review would be the next step. He said "It could be some time." The business secretary had also written to the body administering the funds held for the workers but again conceding the funds were administered by an independent body government sources were quite sanguine about the prospects of workers seeing the money any time soon. The report also raised a broader point about the role played by special advisers and said that the behavior of one "spad" working in the then Department of Trade and Industry Jim Godfrey had been "irresponsible". However though the report criticized Godfrey it concluded his briefings had not affected MG Rover's collapse but suggested confused lines of command by concluding that Patricia Hewitt then trade and industry secretary had not been party to those briefings. The prime minister's official spokesman said the "key point" was that the report said MG Rover would have gone into administration with or without the briefings.

Effect on Law: After the firm went into administration the Govt appointed insolvency law experts Guy Newey QC and forensic accountant Gervase Macgregor a partner at BDO Stoy Hayward to lead an inquiry into the collapse. They were expected to report later that year but the investigation lasted 4 years. News that the official government report will not be made public in case it prejudices the SFO investigation, will anger local MPs and means former employees will have to wait even longer for payouts from the workers' trust fund. The Phoenix Four have stated in the past that no money pledged to former employees from the MG Rover Trust Fund raised through the sale of dealerships and other property will be paid out until the inquiry report has been published.

From Where Fraud comes: The reason of the collapse of the MG rover groups comes from both sides accountant as well as companys secretary negligence. 1. Accountant Negligence: "Evidence Eliminator" computer software, a tax avoidance plot called "Project Slag" six figure bribes and an office affair were just some of the more outlandish ingredients revealed today by the long awaited investigation into the MG Rover scandal. The 850 page report lays bare the breathtaking lengths to which its former owners, the so called Phoenix Four went to enrich themselves before the company Britain's last large car manufacturer collapsed in April 2005 with the loss of 6500 jobs. 2. Business Secretary Negligence: MG rover was also liable for his own negligence. There is no proper check and balance on the accountant by the directors of the company. The secretary said that there has been a comprehensive and thorough investigation into the events which lead to the company falling, workers losing their jobs and creditors not getting paid. The SFO must now see if there are grounds for prosecution. The failure of the MG rover was an intense embarrassment to the Govt as it had backed phoenix venture holding at the start of the decade when it bought the businesses built from another once great midlands vehicle manufacturer Briitish Leylands from BMW the German car companies had lacked up losses of more than 2.85 bn during its 6 years ownership of Rover. Impact of Scandal on the Market: The following are the impacts on the market due to the MG rover scandal. There had been hopes that MG Rover's creditors might receive as much as 5 billion in the pound from the collapse. However this figure was based on the company having assets worth 81m on its

books. Speaking after a meeting of creditors at a hotel in Birmingham Mr. Lomas said the value of the remaining assets had declined dramatically since MG Roves collapse in early April. He said there will not be enough funds to carry on funding a going concern sale for very much longer. We have contacted our agents to begin to prepare for a sale on a piece meal basis. There are many people unemployed by the collapse of MG Rovers that ultimately create many crises in economy of Britain.

From the study of the whole scandal of the MG Rover company we concluded that collapse of the company occurred due to the negligence of the auditor as well as companys own negligence. If the companys director take proper check and balance on working of the accountant and the auditor can be perform his responsibilities properly company cannot be collapsed. the the the the