Former MFS Pacific CFO’s testimony may pose ‘real difficulties’ for receiver’s claim, says judge
Testimony by former MFS Pacific Finance chief financial officer Nigel Lane could frustrate a bid by the failed lender's receiver to sue auditor Sherwin, Chan & Walshe, though not before the case reaches a formal hearing.
Justice Robert Dobson dismissed Sherwin, Chan & Walshe's application for a partial strike out of the receiver's claim that the auditor breached its obligations in relation to the lender's 2007 financial statements, according to a March 12 judgment in the High Court in Wellington. Still, Justice Dobson said Lane's "evidence may well create some real difficulties for the plaintiff's claims" if it isn't discounted after cross-examination.
The former executive for MFS, now known as OPI Pacific Finance, disputed the events as advanced by receiver Colin McLoy of PwC, claiming "the company's directors were well aware of the extent of non-performing loans in the company's loan book, and their deterioration over time," the judgment said.
"Mr Lane described MFS Pacific as being '... increasingly utilised as a depositary for non-performing loans from another fund under the MFS umbrella ...'," the judge said.
Lane considered the directors' view on whether to exercise a put option, where the Australian parent Octaviar would pay the face value of loans in arrears for more than three months, "were conflicted by their position as either executives and/or directors of Octaviar or other entities linked with the parent."
Even if the auditor had sought a different accounting treatment for the loans and the impact of the put option, "this would not have altered the course of conduct pursued by the directors," the judgment said.
The receiver claims that if the audit had been completed competently, the lender would have stopped trading earlier, which would have prompted directors to exercise a put option requiring Octaviar to pay MFS the $61.6 million face value of loans in arrears rather than the $23.1 million payment made under the option.
Sherwin, Chan & Walshe sought to strike out the application, saying "there is no tenable basis on which the plaintiff could make out that any of the errors or omissions alleged against SCW could have been causative of certain components of the losses that have been claimed," the judgment said.
The auditor pursued the partial strike out on the basis the finance company's directors' extension of a prospectus in December 2007 overtook the audited financial statements several months earlier.
In seeking to strike out the put option claim, counsel for Sherwin, Chan & Walshe said the majority of the MFS directors were either executives or directors of Octaviar, and inferred there was a conflict of interest, the judgment said.
On both counts, the receiver's counsel argued that until the evidence was tested at trial it couldn't be discounted as untenable.
"I cannot be satisfied that there is no tenable prospect for MFS Pacific to make out a sufficient causative link between any alleged negligence in the auditors' approval of the treatment of the valuation of loans, and the deferral of a decision to exercise the put option in relation to the major loans that were then in arrears," Justice Dobson said.
"The argument has identified difficulties for this part of the plaintiff's claim, but none of them can be determined in the context of a strike out application as existing to the level that renders the pleaded causative link to be untenable," he said.
The decision was recently published on the Justice Ministry's website.
Last November, the Financial Markets Authority charged former OPI Pacific directors Mark Lacy, Jason Maywald, David Anderson and Craig White under the Securities Act with making untrue statements in the 2007 offer document. They appeared in December and are scheduled to appear in the Auckland District Court next month.
OPI Pacific went into receivership in September 2009 after a 16-month moratorium and was put into liquidation in November 2011. At the time of the receivership it owed almost 11,000 investors about $256 million, of which 3.25 cents in the dollar has been repaid, on top of the 22.2 cents investors received during the moratorium.