From Matangi Tonga Magazine, Vol. 16, no. 2, September 2001.

By Pesi Fonua.

One of the Tongan government’s most adventurous money-making projects, the Tonga Trust Fund is in deep trouble.

In 1999 the TTF  bought a  US$20 million Promissory Note from a Nevada based corporation, Millennium Capital Management, with the expectation of a return of US$26 million within two years, but now these hopes have been shattered.

Millennium defaulted on the payment of US$26 million that was due on June 6, 2001. After news of a problem was leaked to the The Tonga Star newspaper,  Tongans were left wondering if the Kingdom had lost its  investments, and arguing bitterly about who was responsible and how much might be still recoverable.

Matangi Tonga interviewed some of the trustees and their financial adviser in an attempt to find out what happened.

In May this year the TTF was informed by its financial adviser, J. D. Bogdonoff, an American investment broker, that when life insurance policies, held as security for the Promissory Note, were evaluated in preparation for payment to be made to TTF on June 6 this year, they discovered invalid policies among those bought by Millennium from a Utah attorney, a Mr Mansfield.  

In addition the Trustees of the Tonga Trust Fund were also informed that the US Viatical Industry had unilaterally extended the life expectancies of these policies, and therefore the genuine policies that were still being held by Millennium Assets Management Service (part of the Millennium group) had also dropped in value.

The revaluation of the policies means that policies  that the TTF were told had a value of $55 million were now worth only $12 million.

Supposing that Tonga can recover the $12 million the TTF losses will still be around US$ 14.9 million (being $8.9 million in capital securities, and $6 million in interest), through this and other investments that went bad.

A recovery effort is underway and at the end of September the trustees had still to make a decision on options to recover what they can and to try to regrow the fund over the next five years or so.

Plunge

According to Matangi Tonga’s own calculation from a report released by the fund’s technical advisor, J. D. Bogdonoff, in September, the real value of the TTF today is about US$17.6 million, compared to US$27.7 million in July 1999.

The TTF got into trouble when the board of trustees decided in July 1999 to withdraw all its cash deposits that, at first, had been earning 2.7% to 3% interest in the Bank of America, and later, 7.75% in US Government Treasury Notes, and to venture out to invest US$26.5 million in businesses that were offering spectacular interest rates.

The move was prompted by the realisation that Tonga was drawing off the profits of the fund faster than it could replace them, and therefore higher earnings were needed to protect the fund from rapid depletion. The trustees were warned by their technical advisor that the TTF would be completely depleted in 16 years at 2012 at the current rate of government spending given the current rate of growth at the time.

J. D. Bogdonoff advised the TTF to invest in businesses such as an electrical manufacturer, internet companies, and later to put most of their money into the life insurance “Viatical Industry”. The interest rate offered by some of these businesses ranged from 10% to 30% per annum.

Eggs

The temptation was just too much for the TTF board of trustees. Although the offer of 30% interest over two years to buy the life insurance policies of people who were terminally ill, sounded too good to be true, the TTF, put most of its eggs in one basket, and decided to invest in a US $20 million Trustee Note made by Millennium. According to J. D. Bogdonoff, the note was backed by “$55 million in US Life Insurance contracts held in trust for the

TTF  by the National City Bank in Minneapolis, Minnesota”. The insurance policy was supposed to mature within 24 months, and they were promised that by 6 June 2001 that TTF was to be repaid its US$20 million, plus US$6 million of accrued interest.

Then, came the grim news when prior to June 6 this year, J. D. Bogdonoff informed the TTF Board that the Millennium Asset Management Inc. would not be able to make the repayment. This was because, “the legal counsel of MCM in 1999 deliberately misled the management of MCM regarding the true values of several of the insurance contracts purchased to back the TTF investment,” he said.

Secondly, the industry’s method of pricing of the insurance contracts for resale during the term of the investment had been changed, and “quality contracts remaining in the portfolio depreciated”. J. D. Bogdonoff said that the present market value of the contracts securing the TTF investment at the end of June were now worth only $12 million.