Pursuit of the ”quick buck”, ”ginning up rosy projections” on deals, making ”absurdly optimistic assumptions” in business models, ignoring the slog of asset management and ”a culture of greed and personal greed and personal enrichment”.

These and other claims were made by a disenchanted executive of Babcock & Brown and resulted in an investigation by the firm into the activities of some of its leading executives. No wrong-doing was found. No further action was taken.

BusinessDay has obtained a copy of a memo written by an executive in Babcock & Brown’s European business.

The executive wrote to the firm’s management last year calling for an inquiry into ”serious violations of corporate standards and inappropriate conduct on the part of three senior individuals: Martin Rey, Christian Terberger and Artus Pourroy”.

Rey is an executive director of B&B and the head of the group’s operations in Europe, the Middle East and Africa.

The email, dated April 18, 2007 and sent from Munich in Germany, contains trenchant criticism of the company’s corporate culture but does not detail the alleged violations.

B&B’s general counsel Margaret Cole told BusinessDay this week that an internal investigation had been conducted as a result of the allegations. The investigation by two internal auditors from London reported to the chairman of the audit and risk management committee, Michael Sharpe, and the B&B board and was concluded last September.

”The outcome of the internal audit review is that the allegations could not be substantiated, and the outcome of the external review affirmed the appropriateness of the internal review process,” said Ms Cole.

The European division is B&B’s biggest business, accounting for revenues last year of $1.3 billion (up from $761 million in 2006) and assets of $5.1 billion (up from $4.5 billion in the previous year) and run out of Germany where there are more than 40 employees. The Munich office was established in 2003, the year before the firm floated.

The memo asked for internal audit resources to be committed to an investigation and for support from the head of internal audit Michael Sharpe.

‘Culture of greed’

It also detailed a number of criticisms of the group’s corporate culture. These included greed, focus on bonuses and short-term rewards at the expense of asset management, lack of leadership, churning of assets and lack of risk control.

”Criticism is something which happens behind closed doors with people being clearly afraid to talk openly about potential issues (running the risk of getting punished around bonus time, etc.),” said the memo.

”There is also a mentality to the effect that as long as you make certain senior people look good and play along, they look after you and you get rewarded accordingly come bonus time. Those people who do not agree or support a project quite often have to face negative consequences and unfair criticism. It is an environment where more than often you hear “….don’t mention this to Sydney/or to such and such person…..”; or “…..otherwise you will be in trouble”.

There was particular mention of the renewable energy sector in Munich which was suffering a lack of leadership and defecting staff.

As long as employees were making money for the company they could get away with ”outrageous and inappropriate behaviour towards colleagues or subordinates. People have left the company for that reason only.”

This gap was filled, wrote the author, by a “culture of greed and personal enrichment” where money had been spent to optimise bonuses for senior employees and ”schemes were discussed and pushed which were even from a layman’s perspective “illegal”.”

In the segment headed, ”Focus on bonus and short term rewards,” the executive alleges that ”actual situations” had been overstated in board papers and ”bad situations” had been understated.

“There is hardly any financial incentive to follow through on a deal just completed. In other companies the acquired projects are actually required to generate a certain benchmark return before bonus pay outs take place. “You do not get paid until the project is working well for the company”, that should be the standard. Instead we have created an environment where senior people are rewarded for building and ginning up rosy projections to justify their rewards.”

Real estate risks

Unless the real estate market had been booming, said the memo, the firm would be sitting on a troubled real estate portfolio in Munich. “It is widely acknowledged that both the facts and the numbers in board papers have been consistently on the optimistic side of things (in some instances you might call manipulated).”

B&B has booked $1.1 billion of gross assets in property in Germany, excluding the GPT joint venture. Its equity proportion is $203 million. It also has property in France, Italy and Spain across residential, industrial and commercial sectors.

Since the sub-prime meltdown last year European property values have declined. The group is now in the process of selling European retail property, German office and French office and light industrial assets representing some 23% of its portfolio.

In its $6.9 billion GPT joint venture, assets under management are geared at almost 70%. Some $300 million in asset sales were realised last year, sales which B&B has said were struck “at aggregate” in excess of book value.

There is also a Public Private Partnerships (PPP) business run out of Germany which focuses on transport, education and health assets.

The memo had warned that there was ”a long-term risk waiting to materialise once the markets go down”.

”Why bonus pay-outs are not fully aligned to the actual/sustainable profits of the company is an open question”.

Retail and residential real estate portfolios were sold within very short time frames, the memo went on, which meant the company had become more involved in a brokering business instead of focusing on asset management and building up a long-term profitable asset base.

These problems would become visible to the market if the asset base was reduced, said the memo.

Financial engineers out of favour

Since B&B shares collapsed in May, plunging from more than $12 to below $6, triggering market capitalisation review clauses with the firm’s bankers, the stock price has recovered only partially to $6.50. Concern persists about high debt levels and the sustainability of earnings in the adverse trading climate for financial engineers.

The memo noted that evidence of the group’s attitude to asset management – after it had struck a deal and achieved a ”quick buck” – was reflected in the promotion of a receptionist to the role of asset manager.

Although the attitude to asset management had improved it was still perceived to be ”a pure support function and not a profit centre…once the deal is signed…it is simply dropped in asset management’s lap”.

”The fact that GPT has been partially taking over asset management functions not only is a big warning (and means we gotta (sic) share our precious fee income). It is a vote of non-confidence. It shows the lack of quality we provide, and it will come to haunt us. Once the market goes down it’ll become evident whether we have used the entrepreneurial opportunities contained in the portfolios or just chased the “quick buck”.”

‘Never say no’

Risk management capabilities, alleges the memo, had been called a “burden” by one senior employee. “And it is business wisdom that some of the best deals are the deals you do not do. But our corporate culture is such that you never say no to a deal (at least once the approval process has started)”.

It was for this lack of risk control that deal makers ”(including their favourites who cannot do any wrong) are often allowed to set absurdly optimistic assumptions for models (or not disclose material facts)”.

The disaffected executive then asked for Martin Rey, Christian Terberger and Artus Pourroy to be investigated ”in the context of the above issues” without detailing specific allegations, allegations for which the author noted there was ”back up detail”.

”I fully realize that this process will not only be painful (as it involves also a board member) but also require resources from internal audit and support from Michael Sharpe”. The author asked to speak with Michael Sharpe personally as the allegations were ”sensitive”.

B&B review

A statement from B&B authorised by general counsel Margaret Cole said the author had identified a number of areas of concern, including remuneration and bonuses, asset control, earnings profile and risk management “and made allegations that the named persons had in the context of these issues engaged in “serious violation of corporate standards and inappropriate conduct”.

”We took and continue to take allegations such as those expressed in the email extremely seriously. A review of those allegations was conducted by our internal audit department last year, and we commissioned an external review of that internal audit to confirm the appropriateness of that review.”