Of the four Lombard directors convicted of Securities Act offences only two were ordered to pay reparations totalling $200,000: one director refused to make an offer of reparations and the other could not afford any contribution.
After an eight week trial, four Lombard directors were convicted of criminal offences following inadequate disclosures to investors about the finance company’s liquidity prior to its collapse. A total of $12.8 million in either new money or rolled over investments was placed with Lombard subsequent to these inadequate disclosures.
Lombard Finance went into receivership in April 2008. Unsecured creditors will receive nothing. Secured creditors face projected returns of 24 cents in the dollar.
There was no evidence of dishonesty by the directors but securities law regards the truth of statements made in a prospectus seeking funds from the public to be a question of “strict liability”. It is not enough that directors do not lie; they must have evidence to support statements made in a prospectus.
The court was told that delays in loan repayments to Lombard prior to its receivership were affecting the company’s cash position and these impairments together with the subsequent tightening liquidity were reported regularly to the board.
Particularly damning was an intra-company email sent by director Sir Douglas Graham in which he said the company was “sailing very close to the wind now [as regards liquidity] and the next two or three months will be critical”. While this pending liquidity crisis was known to board members, a far more optimistic picture was presented in public documents inviting investors to put money on deposit with Lombard.
In its prospectus, Lombard presented the management team as one of unparalleled probity. Directors convicted were Sir Douglas Graham (a former Minister of Justice, Attorney General and minister in charge of the Serious Fraud Office), William Patrick Jeffries (also a former politician who held the Justice and Transport portfolios), Lawrence Roland Valpy Bryant (with senior experience in a number of private and listed companies), plus Michael Howard Reeves as CEO and a member of the Lombard board. It was to come out in evidence that Reeves has a conviction back in 2000 for a breach of the same prospectus provisions of the Securities Act. He was fined $1000 on that conviction.
Lombard operated as a second-tier lender, financing property developments with funding secured predominately as second mortgages ranking after first mortgage financiers. It was very vulnerable: property developments needed to be finished on time and on budget with sales following rapidly before Lombard could be sure of getting its cash back.
But evidence before the court showed Lombard got its fingers burnt, repeatedly. It had a high concentration of loans with some 77% of loans outstanding tied up in just five major developments.
Its largest exposure started with six million dollars advanced on the Brooklyn residential subdivision in Wellington, later reaching twenty million dollars. The original developer failed to get the project off the ground. Rather than bailing out and taking its losses then, Lombard assisted a new developer into taking over the project – to no commercial advantage.
Lombard also provided working capital for the Blue Chip group of companies, property developers concentrating on inner city apartments. $15.3 million was outstanding at the time Lombard went into receivership.
Losses of just under $12 million followed the forced sale of a retirement village complex at Bayswater in Auckland. The developers initially borrowed eight million dollars to convert a private hospital into a retirement home. When they defaulted on this loan, an $18.5 million credit facility was granted to help complete the project. It failed.
The Bayswater developer also borrowed from Lombard to finance a residential subdivision at Mahia in the Hawkes Bay. An initial advance of $9.75 million eventually ballooned out to $12.45 million. Evidence was given that Lombard’s receivers best estimate is that only four million dollars is recoverable.
Loans to a different developer secured over a proposed residential subdivision in Raglan saw Lombard eventually lending close to 90 per cent of the land’s value. A total of $9.6 million was outstanding by the time Lombard went into receivership.
On conviction, Justice Dobson sentenced the four directors to various periods of community service: Sir Douglas Graham to 300 hours, Mr Jeffries 400 hours, Mr Bryant 300 hours and Mr Reeves 400 hours.
Two of the directors offered reparations. Reparations are seen as an acknowledgement of the harm caused investors.
Sir Douglas Graham offered reparation and was ordered to pay $100,000; Mr Bryant $100,000. Sir Douglas described his payment of $100,000 as “pretty well cleaning me out”. This conviction will wipe out any ability to earn a substantial income for now on, he said.
Mr Jeffries refused to make any offer of reparations. He said he couldn’t afford any reparations and was philosophically opposed to payment in any event. It imposed differing standards of justice depending upon a person’s net worth.
The prosecution argued for more severe penalties against Mr Reeves since he was in charge of day-to-day operations of the company as its CEO.
The court took into account his poor health (cancer has been diagnosed and he has been undergoing chemotherapy) and hardship faced by his dependent children (the details of which were supressed). Payment of any reparations was not feasible. Mr Reeves was described as living in reduced circumstances following two matrimonial property settlements and having invested his free funds in Lombard.
The court ordered that the $200,000 in reparations be held in trust in an interest bearing account pending any appeals.
After any appeals, reparations are to be paid to the receivers and distributed pro rata between those investors who put $12.8 million with Lombard over the period in which the misleading prospectus was in operation.
R. v. Graham – High Court (24.2.12) & (29.3.12)
12.007