article from the australian

Rebecca Urban | August 03, 2009
Article from: The Australian
ADVERTISING guru Siimon Reynolds was the secret recipient of shares and options issued by troubled technology group TZ Limited in June -- a month before investors were due to vote on a plan to axe the board.

The company issued Mr Reynolds' Moon Corporation 1 million shares and 1 million options, carrying a heavily discounted strike price of 75c, to fund "working capital", according to a leaked email from the company's lawyers.

But the legality of the $1 million placement, which was completed on June 16, is now in doubt given that TZ had just two directors on its board at the time. The Corporations Act requires public companies to have at least three serving directors.

Shares in the once-lauded company, which has developed a revolutionary fastening technology, have been suspended for more than a month as a new board of directors, led by Wizard Home Loans founder Mark Bouris, investigates alleged discrepancies in the financial accounts discovered following its appointment on June 18.

The board is also trying to broker a deal with TZ's main financier, US-based hedge fund QVT, after discovering that the company had defaulted on the terms of a $24m convertible note agreement.

Recipients of the company's recent share placement had not previously been disclosed. However, a June 16 email from legal firm Kemp Strang, which has been obtained by The Australian, refers to Moon Corporation providing funds to the company on June 11 -- the same day that TZ chairman Paul Casey tendered his resignation, leaving John Falconer and Michael Otten the only remaining board members.

Mr Casey, a Hawaii-based merchant banker, had only joined the board 10 days earlier.

The email also refers to the placement of 1.28 million shares and 1.28 million free options to Mr Casey's predecessor Andrew Sigalla "in lieu of cash to satisfy termination payment ... under a deed of release".

Mr Sigalla resigned as TZ's chairman on June 2, amid mounting pressure from a major shareholder who had requisitioned a meeting to consider a vote on the board's removal.

His resignation came the day after QVT apparently demanded the repayment of its $24m loan, after the company allegedly missed an interest payment.

According to the Kemp Strang email, the placements to Moon Corporation and Mr Sigalla's ZMS Investments had been authorised by Mr Falconer.

However, subsequent statements released by TZ to the Australian Securities Exchange raise the question as to whether the shares to Mr Sigalla were actually issued. A notice dated June 16 refers to the issue of 2.28 fully paid shares and options. However, an amended notice on June 17 refers to the issue of just 1 million shares and options.

Mr Falconer and Mr Otten resigned the following day to make way for three new directors, including Mr Bouris.

Mr Sigalla, who is now based in the US, declined to speak to The Australian personally, but his lawyer Damian Ward said the shares were never issued.

Mr Ward said his client had no role in the coinciding placement of the shares to Mr Reynolds.

It is believed that Mr Reynolds, who rose to prominence in the 1980s for his Grim Reaper AIDS awareness campaign, is an old school friend of Mr Sigalla. The pair and Mr Falconer served together on the board of Betcorp.

Sources close to the company claim that Mr Reynolds has yet to contact the new board to discuss TZ's tenuous financial situation. He did not return calls yesterday and attempts to contact Mr Falconer were unsuccessful.

Mr Sigalla is now suing the company to honour his termination agreement. He has claimed $1.16 million cash as well as costs associated with healthcare and his US visa.

In an statement to the securities exchange last week, TZ denied any knowledge of the deed of release. It has asked to see a copy of the document.

However, Mr Ward, a partner at HWL Ebsworth Lawyers, said the company had been in possession of the deed since it was executed. "Mr Sigalla understands the deed was executed by the company pursuant to a resolution of the board at the time," he said. Asked about the alleged discrepancies in TZ's accounts, Mr Ward said the question was "unfairly broad".

"Mr Sigalla is extremely concerned about allegations that seem to have been made about him by the new board and those connected to the new board," he said. "Mr Sigalla will respond precisely to any allegation should any matter be put to him."

Mr Bouris has so far declined to comment publicly on the probe, which was being conducted by a forensic accountant. However, it is understood that inquiries were focused on the authenticity of some entries in TZ's cashflow statements, including a $2.4m payment for "interest and other costs" that appeared on the most recent quarterly statement released in April. Investors had assumed that the item referred to the annual interest payment owed to QVT.

Shareholders, who have plunged more than $80m into TZ in recent years, have complained to the Australian Securities & Investments Commission about the conduct of the former board. One group of shareholders has hired high-profile corporate lawyer Jan Redfern, a former ASIC executive, to consider mounting legal action.

ASIC did not respond to requests to comment on TZ.