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detention imposed by the Court of Appeal on former directors of Lombard Finance
has been set aside by the Supreme Court.
Sentences of community service imposed by the High Court now stand.
Former politicians Sir
Douglas Graham and Mr William Jeffries together with Mr Michael Reeves and Mr
Lawrence Bryant stood trial for breaches of the Securities Act following the
2008 collapse of Lombard Finance. Lombard was left insolvent with debts of some
$125 million. Debenture holders are
unlikely to receive back more than fifteen to twenty cents in the dollar.
Lombard financed
property developers. Limited
diversification in its loan book contributed to Lombard’s demise. Six major loans to five developers
represented 68% of its loan book.
Lombard was borrowing short-term from the public to finance these longer-term
loans and was required to regularly update its prospectus, setting out the
company’s position.
The High Court said
prospectus statements as to future liquidity were misleading. The Court of Appeal ruled that the
misstatements were of sufficient gravity to justify imprisonment, to be served
as home detention in this instance.
Supreme Court judges
considered the Court of Appeal had taken an unnecessarily harsh view of the
directors’ culpability. The Supreme
Court said evidence at trial in the High Court painted a picture of directors
acting honestly. The directors had not
acted dishonestly, despite media reporting implying the contrary. The directors were guilty of misjudgement at
a time when Lombard was under financial pressure. They had taken professional advice on wording
in the prospectus. Warnings about the
potential fragility of future liquidity had been highlighted in bold type in the
prospectus.
The Supreme Court said
that disproportionately severe punishment would deter competent people from
taking on company directorships.
The Lombard directors
stand convicted of Securities Act offences with Mr Jeffries and Mr Reeves each sentenced
to 400 hours community work and Sir Douglas Graham and Mr Bryant each sentenced
to 300 hours community work and ordered to pay reparations of $100,000.
Graham,
Reeves, Jeffries & Bryant v. R. – Supreme Court (7.05.14)
14.019