Allan Hubbard to blame for South Canterbury collapse, court judgment says
South Canterbury Finance's corporate governance practices, insisted on by its late chairman Allan Hubbard, directly contributed to the failure of what was once New Zealand's largest finance company, said Justice Paul Heath in his decision on charges faced by its former chief executive and two former directors.
Although the judge found the Crown failed to prove there had been an underlying culture of concealment from 2004 to 2010 at the Timaru-based finance company, he criticised Allan Hubbard's business practices and attitude to related party lending, and his fellow directors for failing to rein him in.
In today's decision on the 18 charges laid by the Serious Fraud Office, former chief executive Lachie McLeod and former director Robert White were cleared of any wrong-doing while former director Edward Sullivan was remanded on bail after being found guilty of five of the nine charges brought against him. He is due to be sentenced on Dec. 12. Most of the charges he was found guilty on involved making false statements in prospectuses. (see the documents attached)
The Crown case was primarily based on a consistent failure to disclose the true extent of related party lending between 2004 and 2010. The judge said the Crown's case relating to concealment didn't withstand scrutiny, and there were two market phenomena that exposed the fragile capital structure on which South Canterbury operated and drove the directors to respond in a knee-jerk fashion.
These two factors were its rapid growth from $750 million in assets in June 2004 to almost $2 billion by June 2008 and the property downturn and global finance crisis that caused many borrowers to default on their loans in the late 2000's.
Although the late chairman died in a car crash well before the case came to court last year, Hubbard's role and business practices were referred to many times during the five-month trial.
Justice Heath said while he was conscious Hubbard had died before charges were laid and had not had the opportunity to answer allegations made against him, the evidence painted a consistent picture of his business practices.
He didn't believe Hubbard, or any of the accused, set out to defraud investors.
"But, unfortunately, the corporate governance practices that Mr Hubbard insisted on maintaining, Mr Hubbard's view of the greater security of related party lending, the lack of transparency in publicly available documents about the extent and nature of such lending, and the inability of his co-directors to influence a change in his attitude directly contributed to the failure of the company and the losses suffered."
South Canterbury began taking deposits from the public in 1976, raising capital through making offers of debt securities using prospectuses and investment statements until February 2010. It was put into receivership in August 2011 with investors owed $1.6 billion. The Crown later bailed it out through the retail guarantee scheme, of which only $800 million has been recovered.
The corporate governance procedures South Canterbury adopted were more like that of a closely held company than one which solicited funds from the public, due to Hubbard's historical influence over the company's affairs, the judgement said. South Canterbury's parent company, Southbury, was owned and controlled by interests associated with Hubbard.
It was common practice for Southbury to acquire problem loans from South Canterbury shortly before balance date. "As one witness confirmed, Mr Hubbard regarded related-party lending as the safest of all because he had more control over them." The upshot though was investors had no idea of the true state of the company's accounts.
"Despite attempts from other directors to change his ways, Mr Hubbard was unable or unwilling to grasp the need to adapt existing governance and management procedures to the contemporary business environment in which South Canterbury was operating," the judge said.
Hubbard insisted on antiquated bookkeeping processes that were used along with computers. "In the context of a company that, as at 30 June 2006, boasted total assets of over $1 billion, I found it astounding that one month before the balance date a cheque was drawn by Mr Hubbard and Mr Sullivan in the sum of $25 million, entered in a handwritten outwards cash book, and posted to physical ledger cards, on which entries were typed through an electric typewriter," Justice Heath said.
Another former director, Stuart Nattrass, gave evidence during the trial and as the case progressed it became clear that he regarded Hubbard as "ungovernable", the judgement said.
Justice Heath said he was satisfied that, over time, the three directors Sullivan, White and Nattrass had tried to convince Hubbard to change his ways, but were unsuccessful.
"By allowing Mr Hubbard to continue to operate as he had historically done, they contributed to South Canterbury's downfall, as the existing governance structures were unable to cope with the problems that surfaced when the market turned against South Canterbury in mid to late 2008."
The Serious Fraud Office's investigation was also criticised by the judge for what he called "deficiencies" in failing to produce documents that recorded the terms on which South Canterbury lent money to its parent.
Serious Fraud office director Julie Read said the case was a difficult and complex one to bring to court but she was satisfied that the case was investigated thoroughly. While the SFO was unsuccessful in part, given the scale of the collapse and the impact it had on investors, it was clearly in the public interest to put all the matters before the court, she said.