Bridgecorp's rotten heart

UPDATE 1:30pm: Bridgecorp's finance director Rob Roest, on trial at Auckland High Court, has denied he controlled the "locked box" Barcroft transaction.



Crown cross-examination of Mr Roest this morning focussed on Bridgecorp's related party lending, which grew substantially in the year leading up to the property financier's July 2007 collapse.



The Crown alleged the Barcroft transaction, Bridgecorp's largest loan which topped out at more than $100 million, grossly breached Bridgecorp's internal policies and commercial lending practices, because it was a related party.



Barcroft consolidated seven troubled loans Bridgecorp had advanced to hotel developments in Manukau, Paramatta, Brisbane and Fiji.

 



The seven loans, totalling $76,759,081, were to business interests associated with Bridgecorp director Gary Urwin - who has pleaded guilty to the same charges facing Mr Roest - that he misled investors in the company's 2006/2007 prospectus and associated financial statements.

 


Bridgecorp receivers PwC described Barcroft in blunt terms: "Barcroft was used solely as a conduit to provide financing to the seven entities associated with Gary Urwin."



Bridgecorp's former lawyer Francis Dawson, giving evidence for the Crown earlier in the trial, described the Barcroft transaction as a "locked box" for Bridgecorp.



Today, Mr Dickey alleged control of Barcroft rested with Messrs Roest and Urwin. He suggested the pair made all decisions related to the Barcroft facility, including charging fees of close to $9 million against the Barcroft account between June 2006 and May 2007, without reference to anyone else, including the trustee.

 



Mr Roest denied control and said he gave no direction to Barcroft.

 

Mr Dickey suggested that without control of Barcroft, and its seven underlying borrowers, Bridgecorp would have compromised its position and its ability to get money back from Fiji and Australia.

 



Mr Roest was asked why Barcroft's related party status was not disclosed in Bridgecorp's June 2006 accounts - when related party lending represented more than 30% of Bridgecorp's total lending book.

 



Had readers of the accounts been exposed to that information it would have "sent money running from Bridgecorp," Mr Dickey said.

 



Mr Roest said he had received a legal opinion and advice from auditors, that it did not have to be disclosed.

 



That advice was given verbally, and not documented.

 



Mr Dickey suggested Mr Roest had misled Bridgecorp's lending team, internal auditor Indra Kumar and former legal counsel Jo Wong (who gave evidence for the Crown earlier in the trial) on Barcroft's related party status when they had raised their concern with him.

 


"I propose to you the conversations had in the terms recalled by Mr Kumar, you actually mislead him to believe you held a legal opinion on this issue," said Mr Dickey. "I propose to you similarly that your conversation with Ms Wong meant to convey you held a discrete piece of advice on this issue of related parties, so you also overtly misled Ms Wong."

 


Mr Roest said: "The internal lending team were not mislead and I did not withold any documentation from them."

 



The trial, before Justice Geoff Venning alone, continues.

UPDATE: 9:30am: Bridgecorp’s finance director Rob Roest was accused of lying to the court yesterday when he said he believed the financier’s prospectus statements to be true.

Mr Roest faced a gruelling cross-examination from Crown lawyer Brian Dickey late yesterday afternoon, over evidence suggesting Bridgecorp did not have enough cash in the bank to make maturity payments of $206,000 to debenture holders on February 7, 2007 due date.

Mr Dickey said that amount should have been “pocket money” to a finance company that had about than $500 million of investor funds in its accounts at the time.

Five months later (July 2007) Bridgecorp collapsed, owing $459 million to 14,500 investors - an average of about $33,000 each.

Mr Roest told the court Bridgecorp was not in default and the payments were not missed because Bridgecorp could have written out cheques to meet them.

“Based on the forecasts we could have written out cheques and they would have been met.”

But he chose not to do that, because investors would have been disadvantaged in waiting for the cheques to clear. Instead, they were paid by direct debit, the next working day.

Bridgecorp’s offer documents set out that payments would be made by direct debit, not cheques.

Mr Roest told the court he did not tell anyone, including Bridgecorp’s trustee, about a potential change in the payment method.

Mr Dickey asked Mr Roest if he understood the laws of the time, that in every day in which Bridgecorp’s prospectus was in circulation it had to remain true.

Mr Roest said he believed the prospectus statements were true.

Mr Dickey suggested Mr Roest was not telling the truth when he said that.

Mr Roest said he believed he was aware of his obligations as a director of a company taking funds from the public.

The Crown’s cross-examination of Mr Roest continues this morning.

The trial, before Justice Geoff Venning, is expected to continue until late March.

Tuesday 4pm: Bridgecorp's finance director Rob Roest struggled to tell his prosecutor why the financier was struggling to pay investors on time, just months before it collapsed.

Rob Roest is giving evidence in his defence on Financial Markets Authority charges he misled investors in the company's 2006/2007 prospectus and associated financial statements.

When Bridgecorp managing director Rod Petricevic gave evidence in his own defence last week, he told the court he had an entrepreneurial role in the property financier and was not involved in the day-to-day operations, including finances.

But Mr Roest was the finance director, who gave his signature to financial statements and a due diligence checklist relating to the 2006 prospectus, under scrutiny of the court.

This afternoon he was cross-examined by Crown lawyer Brian Dickey, who moved swiftly to ask him about Crown evidence that Bridgecorp began missing payments from the February 7, 2007.

Five months later (July 2007) Bridgecorp collapsed, owing $459 million to 14,500 investors - an average of about $33,000 each.

Mr Dickey reminded Mr Roest of some of those investors, who were not paid interest payments totalling about $206,000 on February 7, 2007. At the time Bridgecorp had about than $500 million of investor funds in its accounts.

"You are the one person in the world who, with utter clarity, should have been able to explain how Bridgecorp was not able to pay its investors on time on February 7, 2007," said Mr Dickey.

"What I'm asking you is, why was that so?"

Mr Roest said he could not understand why investors were not paid, because he believed the money was in the bank.

Mr Dickey: "Are we back to the computer glitch story?"

Mr Roest: "No. The bank statement shows there was money there."

"Mr Dickey: "Would you agree it's staggering a finance company with more than $5 million investor funds in it can't find $206,000 to meet its obligations?"

Mr Roest: "No. We always relied on our financial forecasts."

Mr Roest said Bridgecorp had the ability to write cheques to investors that day but chose not to.

"We chose to give them clear funds within 24-hours, rather than make them wait two weeks [for cheque clearance] and lose interest on their funds."

Mr Dickey then asked if it was accepted Bridgecorp would pay its investors on the day it chose, rather than the maturity date.

The trial, before Justice Geoff Venning alone, continues.