While the Babcock & Brown circus continues in the Sydney Federal Court, business commentators seem to be missing the point. The majority of analysis of the relatively useless liquidator’s hearing has been devoted towards discussion of a timing issue regarding dividends paid by Babcock & Brown. This has been a focus because it is the aim of liquidators to return as much money to creditors (in this case, noteholders in BNB) as possible — rather than holding executives or directors personally culpable for their actions.

The dividend issue essentially revolved around the fact that the publicly listed Babcock & Brown was effectively a shell company. The entity that generated the income (or more aptly, the revenue, Babcock’s profits were ultimately an illusion) was another company, called Babcock and Brown International (BIPL). The ostensible reason for this structure was because the largely American owners of Babcock wanted to avoid crystallising a capital gain when BNB listed on the ASX in 2004.

This week, it was brought to light that this strange structure meant that on occasion, BNB had paid dividends before the money was actually earned. That was because BNB “earned” money when it received dividends from BIPL. This meant that BNB may well have paid $300 million in dividends from capital, rather than retained profits. Paying dividends from capital isn’t lawful and would generally constitute a “capital reduction”.

But the dividend issue was a mere sideshow. In reality, neither BNB or BIPL were earning sustainable profits — the company would eventually write of $5.6 billion from the value of its assets — easily eclipsing all the reported “profits” it had previously made. That BNB (whose audit committee included former PwC audit boss Michael Sharpe) and its auditor, Ernst & Young, failed to apply basic accounting principles is, in the scheme of things, relatively meaningless. It is relevant, however, for Deloitte, the liquidator, which is seeking to reclaim money from the (still trading) BIPL for noteholders in BNB. Those noteholders, who were owed $600 million by BNB, got a rude shock when they realised that they had no claims on the trading assets of the company (which were owned by an entirely different entity, being BIPL).

Compared with the dividend sideshow, shareholders, creditors and regulators would be interested in the conduct of Babcock’s directors and executives during its last few years of operation. First, the somewhat misleading profit forecasts being issues by Babcock. But possible more critically, the relationship between BNB, its chief, Phil Green, and Lance Rosenberg’s brokerage house, Tricom.

Tricom was BNB’s long-time house broker — it was the lead manager of the BNB float in 2004, and managed the float of various BNB satellites, including Babcock & Brown Power and Babcock & Brown Wind. Tricom also had a large stake in BNB satellite, Babcock & Brown Residential Land Partners. Tricom would also play roles in Babcock’s ill-fated acquisition of Alinta and BBI’s purchase New Zealand-based Powerco. (Tricom and Babcock would be accused of “acting in concert” over the Alinta acquisition but no action was taken by ASIC).

But the links between Tricom and Babcock ran all the way to the top. Green himself owned 800,000 Babcock shares (worth upwards of $15 million) which were held in Tricom accounts (in total, Babcock staff had $200 million in shares being held by Tricom). Green’s shares acted as security for another $22 million in margin loans over other investments.

Tricom itself ran into difficulties in 2007 when it was unable to settle trades relating to Allco Finance Group. Had Tricom stopped trading, Green would have become a mere unsecured creditor (similar to clients of Opes Prime). In a move that saved Tricom, Babcock decided to extend a $35 million life-line to the embattled broker

The loan was of nominal benefit to Babcock shareholders, other than Green and his fellow executives.

Then there were the hundreds of millions of dollars paid by Babcock to its favoured dozen top executives. Between listing in late 2004 and its March 2009 collapse, the company paid more than $280 million in cash to its senior managers. These managers were responsible for the loss of billions of dollars of capital.

The hearing continues.

Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, featuring the story of the collapse of the House of Babcock.