No evidence of a culture of concealment at South Canterbury Finance, judge said
The Serious Fraud Office failed to prove its suggestion of an underlying culture of concealment between 2004 and 2010 in now collapsed South Canterbury Finance, says Justice Paul Heath in his decision on charges against two directors and its former chief executive, which resulted in prosecutions against only one former director.
Former SCF chief executive Lachie McLeod and former director and accountant Robert White were cleared of all charges while former director Edward Sullivan was found guilty on five of the nine charges he faced. He had faced all but one of the charges he was found guilty on alone and those charges mainly involved making false statements in prospectuses. In each case it was not so much what he said as what material information investors were not told.
The verdicts, for what had been billed by the prosecution as "the biggest fraud in New Zealand's history" were handed down this morning by Justice Heath in the High Court at Timaru. The five-month trial concluded in August.
Sullivan has been remanded on bail and will be sentenced on Dec. 12. Justice Heath said he would call for home detention reports but told Sullivan that was not an indication he would avoid jail.
In his written judgement, Justice Heath said while the Crown's case relating to concealment didn't "withstand scrutiny", 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."
As a result, South Canterbury was put into receivership in August 2010 owing around $1.6 billion. It was later put into the Crown Retail Guarantee Scheme, with only $800 million recovered so far.
The first phenomenon was its rapid growth, with South Canterbury's total assets increasing from about $750 million in June 2004 to almost $2 billion by June 2008. "The absence of a robust loan authorisation process and a less than orthodox approach to debt impairment were contributing factors to the problems that South Canterbury faced when a major financial downturn occurred in mid to late 2008," the judge said.
It was common practice for South Canterbury's parent company Southbury, to acquire "problem loans" from it shortly before balance date. 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 the late Allan Hubbard's historical influence over the company's affairs, the judgement said.
"As one witness confirmed, Mr Hubbard regarded related-party lending as the safest of all because he had more control over them."
The other market impact was the property downturn around mid-June 2008 and the global financial crisis the same year, which adversely affected the value of securities taken for particular loans and caused a number of borrowers to be unable to meet their principal and interest payments.
The Serious Fraud Office laid charges against the three accused in December 2011 after a 14-month investigation. Most of these charges related to seven specific transactions South Canterbury entered into involving allegedly undisclosed, related party lending. Justice Heath said he didn't consider that an examination of the seven transactions over a period of a little over five years provided a safe foundation for an allegation of continuous concealment from the public.
All three accused were also cleared of the most serious charge alleging they unlawfully obtained the benefit of the guarantee scheme by failing to disclose to the Crown that the company had entered into related party lending. Justice Heath said he couldn't exclude that the Crown would have entered into the guarantee deed anyway in November 2008 even if the Crown was right about the alleged omissions.
One of the five charges Sullivan was found guilty on related to deceptive conduct while the other four concerned false statements made in prospectuses issued by South Canterbury.
The deceptive conduct charge involved Sullivan falsely representing to Hellaby Holdings that the purchaser of shares in Wool Services International was an unrelated party. It was in fact bought by Woolpak, which was related to another company controlled by Hubbard. Justice Heath said Sullivan was aware of potential problems that could arise from the purchase under the Takeovers Code and stock exchange regulations, and deliberately gave a false assurance to Hellaby to ensure the deal went ahead.
He was found guilty of two charges relating to knowingly making false statements in respect of two 2007 prospectuses by not disclosing Woolpak had borrowed about $7 million from South Canterbury in order to buy the shares from Hellaby Holdings.
Both former directors were charged with knowingly making false and material statements in another prospectus issued between Oct. 2008 and Oct. 2009. The focus again was on the Woolpak deal, along with a $25 million payment made by South Canterbury to Southbury, relating to the purchase of the Hyatt Hotel in Auckland, and a $150 million committed bank facility.
While Justice Heath found Sullivan guilty on this charge, he said Robert White was in a different position because he had specifically raised the beneficial ownership issue of the Woolpak shares at a April 2008 board meeting and been assured that Hubbard's interests were not the beneficial owners.
The fourth charge relating to making false statements as a promoter involved a prospectus issued in October 2009 by which time White had resigned as a director. Justice Heath agreed Sullivan was guilty of omission relating to three of the four transactions raised by the Crown, including the Woolpak one in which more than $6 million of debt was still owed at that time. There was also no mention of $40 million owed by a related party, Quadrant Holdings, although Sullivan had helped arrange the transaction designed to give SCF control over the sale of the Hyatt.
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