Dominion Finance & North South Finance: R. Cropp

Paul William Cropp, formerly chief executive officer of the Dominion Finance Group, has been sentenced to two years seven months imprisonment for failing properly to handle investors’ money.  Loans made to related parties in breach of company prospectuses resulted in further losses to investors in Dominion Finance of $700,000 (out of total losses of $233 million) and to investors in North South Finance of $8.4 million (out of total losses of $46 million).

Convicted of theft by a person in a special relationship, Mr Cropp was party to desperate attempts by Dominion Finance executives to fend off a liquidity crisis in March-April 2008. This involved four separate transactions: restructuring loans to a struggling Auckland property development and shifting funds from related finance company North South to an illiquid Dominion Finance.  Each of the four transactions required consent from trustees for debenture holders; they were otherwise prohibited as transactions between related parties.

The High Court was told no prior consents were obtained and in one case Mr Cropp actively tried to disguise the deal as not being a related party transaction.  Justice Lang said failure to get the required trustee consent breached an important investor safeguard.  It did not allow the trustee to exercise any oversight on investors’ behalf.

Justice Lang ruled that the starting point for this offence should be three years four months jail.  A nine month reduction was allowed to reflect evidence of Mr Cropp’s previous good character and expressions of remorse.

R. v. Cropp – High Court (23.05.13)

13.026

Hanover: Hotchin v. Sheppard

Two Hanover directors who allege they have been defamed by shareholder activist Bruce Sheppard obtained a High Court order that the trial be heard before a judge alone, rather then a jury.  Mark Hotchin and Eric Watson allege comments made by Sheppard in 2009 and 2010 were defamatory by painting them as businessmen who had dishonestly misled investors in Hanover, as “crooks” who should be imprisoned, as having participated in a GST fraud and as having misappropriated cash belonging to Hanover.

In his defence, Sheppard says his comments are honest opinion and were made under qualified privilege. 

Justice Cooper ruled that a judge-alone hearing was more appropriate because the trial would require consideration of complex financial transactions entered into over a three or four year period involving a number of businesses.  Complex legal, accounting, insolvency, property, tax and finance issues will arise.

The defamation action has its origins in a debt restructuring proposal put to Hanover investors in December 2008 and the sale by Hanover of its interests in a Queenstown property development.  Hanover froze investor repayments the previous July, affecting more than 16,000 investors owed more than $550 million.  Investors subsequently agreed to a debt restructuring which promised for secured investors 100 per cent repayment spread over five years and for unsecured investors fifty cents in the dollar after four years.

Outcomes have been less satisfactory than investors hoped.

Hotchin and Watson responded to Sheppard’s public criticism by suing for defamation. 

Damages can be reduced, even if comments are found to be defamatory, if it is established that the person defamed has a reputation of little value.

Justice Cooper refused an application by Hotchin and Watson to remove from the court record past instances where they had been separately censured for market irregularities in securities trading:

·         in December 1998, Watson was censured by the Securities Commission for buying more than two million shares in McCollam Print while negotiating its takeover by Watson’s Blue Star Group;

·         in 1998, the US Securities Exchange Commission found Watson had breached US securities law when buying and selling McCollam shares at the same time as negotiating the purchase of McCollam for Blue Star;

·         in 1999, Hotchin breached Securities Commission guidelines on insider trading in relation to the purchase and sale of shares in Pacific Retail Group; and

·         on 17 August 2000, Pacific Retail Group (majority owned by Watson) publically admitted Hotchin had breached Securities Commission guidelines.

 Sheppard says these are specific instances of misconduct relevant to Hotchin’s and Watson’s business reputations and are relevant to any question of damages if defamation is proved.

Hotchin v. Sheppard – High Court (3.05.13)

13.011