Fraud: Mayer v. R

Six years imprisonment for real estate fraudster Malcolm Duncan Mayer has been upheld by the Court of Appeal while dismissing calls for a retrial based on allegations the prosecutor deliberately misled the trial judge over the whereabouts of a co-accused who had fled the country.

Mayer was convicted in 2013 on 16 counts of dishonesty and ten counts of forgery following frauds perpetrated on financier Trustees Executors Ltd.  Mayer, either on his own or jointly with co-accused Simon Turnbull, borrowed $47.8 million from Trustees Executors.  It suffered net losses of  $19.1 million.

A Serious Fraud Office investigation identified false loan applications made by Mayer using what was called “price hydraulicing” to circumvent Trustees Executors lending limits.  Company policy was to lend a maximum of 80 per cent of a property’s registered value.  Evidence was given that Mayer would agree to purchase a property from a genuine vendor and then create a bogus second contract to immediately onsell the property to a fictitious buyer at an inflated price.  The second bogus contract was used to get loan finance from Trustees Executors.  By getting 80 per cent of inflated bogus prices Mayer was able to secure 100 per cent financing for a string of properties.  Other similar deals were carried through with Turnbull.  The two also created bogus lease agreements under which no rentals were ever paid, creating a false picture of rental income supposedly available to support mortgage borrowing.

The court was told Turnbull, an immigrant from South Africa, left New Zealand some three months before a Serious Fraud Office investigation started.  In the period prior to Mayer’s trial, Serious Fraud received three tip-offs as to Turnbull’s possible overseas locations.  He was placed variously in Singapore, London and Texas.  The three separate informants did not identify themselves.

Mayer argued he did not get a fair trial because the trial judge was misled.  The judge was told the prosecution did not know Turnbull’s whereabouts when it did have information about where he might be.  Mayer said he would have elected trial by jury, rather than by judge alone, if information about the tip-offs had been disclosed.

The Court of Appeal ruled this failure to disclose was not grounds for a retrial.  Having unverified information that Turnbull was “somewhere in Texas” just prior to Mayer’s trial would not give sufficient time to find and extradite Turnbull before the trial.  Even if there were a joint trial, said the Court, Turnbull could exercise his right to stay silent and if he were to give evidence the prospect of him exonerating Mayer and accepting sole responsibility for much of the fraud was unlikely.  There was sufficient evidence for the trial judge to convict Mayer alone for his part in the fraud.  With a lengthy trial involving over 40 witnesses and thousands of pages of documents any joint trial would have had to proceed before a judge alone, the Court of Appeal said.

Mayer v. R. – Court of Appeal (29.05.15)

15.053

Interest rate swaps: Commerce Commission v. ANZ Bank

ANZ Bank’s breach of the Fair Trading Act through 2005 -2009 in its misleading promotion of interest rate swaps to the rural sector has been formally recorded on the judicial record.  This follows ANZ agreeing to pay a $19 million negotiated settlement.

The Commerce Commission responded to borrowers concerns back in August 2012 after complaints from the farming sector that they had been sold a pup: some farmers seeking to borrow on fixed rate term loans had been steered into loans tied to interest rate swaps.  ANZ is a major player in rural banking, holding a market share of about 40 per cent.  The Commission alleged ANZ marketing documents and sales presentations were misleading.  The benefits of interest rate swaps were overstated and the risks understated.  Interest rate swaps are financial derivatives used to manage or hedge interest rate risks.  ANZ customers were offered term loans with floating interest rates coupled with separate interest rate swaps.  Swaps could fix the interest rate but not the margin which ANZ could and did vary at its discretion.  It was misleading for ANZ to tell customers swap arrangements fixed the all-up costs of borrowing.

ANZ agreed to the High Court declaring its actions breached section 9 of the Fair Trading Act and further agreed to contribute $500,000 to the Commission’s investigation costs and to establish a $18.5 million compensation fund.  The fund is to compensate affected ANZ customers with any remainder going to rural support trusts.

Commerce Commission v. ANZ Bank – High Court (28.05.15)

15.058

Arrest: Robinson v. Whangarei Heads

A Whangarei businessman was ordered to pay $10,000 damages for unlawful arrest after having his business partner arrested at Auckland Airport prior to departure for Vanuatu. 

The High Court was told Mr Robinson and Mr Freakley had run Whangarei Heads Enterprises Ltd as a joint venture company selling roading metal, hiring out equipment and undertaking landscaping.  Difficulties arose when Mr Robinson’s other business interests got into financial difficulty through 2011.  These problems spilled over into Whangarei Heads.  It culminated with Mr Robinson issuing a trespass notice against Mr Freakley and Mr Robinson hiding four items of company machinery: a tractor, a front-end loader, a digger and a logsplitter.  He claimed to be holding this equipment as security for money allegedly owed him by Mr Freakley.

Evidence was given that Mr Freakley had a writ of arrest issued by the High Court when he heard Mr Robinson was booked to fly to Vanuatu.  Arrests may be ordered under the Judicature Act where a person is about to leave New Zealand and this absence will materially prejudice the success of a civil court action.  The High Court later ruled this arrest was unlawful.  There were no proper grounds for the arrest.  Mr Robinson’s departure did not prejudice any legal claim Mr Freakley might have.  Mr Freakley already had a signed letter from Mr Robinson stating that he had seized the four items of company equipment.  This was sufficient evidence to sue.  Justice Gilbert indicated the arrest was used for a collateral purpose: to force Mr Robinson to disclose where the equipment was hidden.  The arrest warrant would not have been issued if the full circumstances of the dispute between the two had been properly disclosed, he said.

Mr Robinson was held in prison for 20 hours.  Justice Gilbert awarded him $10,000 damages as compensation for his unlawful arrest and detention.  His Honour said Mr Freakley had not acted with malice.  He had acted on legal advice in what he thought was the best interests of Whangarei Heads.

Robinson v. Whangarei Heads Enterprises – High Court (27.05.15)

15.057

Inside Information: Cooper-Davies Trustees No.6 v. Cooper Trustee No. 11

The director of a Christchurch property company was ordered to pay $574,000 damages to a former shareholder after using inside information to buy shares at a bargain price.  Her advantage was inside knowledge that Zurich insurance was likely to pay out on their $5.1 million Madras Street earthquake-damaged property, rather than repair.

The Companies Act requires directors buying their company’s shares to buy only at fair value.  Property developer James Davies alleged his sister in law took advantage when taking full control of their joint venture company Madras Street 323 Ltd in 2011.

The Court of Appeal was told Madras 323 was owned jointly by Cooper-Davies Trustees No.6 Ltd (a company controlled by Mr Davies) and Cooper Trustee No.11 Ltd (controlled by his sister in law Lilly Jessica Cooper).  The two families had co-operated on a number of Christchurch property developments.  The commercial building owned by Madras 323 was badly damaged by earthquakes in 2010 and 2011.  It was the company’s only asset.  Evidence was given that the two families fell out.  Mr Davies and his wife decided to quit their fifty per cent investment in Madras 323, selling to Ms Cooper.  In May 2011, Ms Cooper took full control of Madras 323 after paying $150,000, half the assessed net value of the property.  Negotiations had proceeded on the basis that the the building would be repaired once discussions with insurer Zurich New Zealand were finalised.

Six months later, Zurich paid out $6.3 million: compensation for the building as a total loss plus compensation for lost rental income insured separately under a business interruption policy. A further five months on, Ms Cooper sold the bare land for $900,000.  Mr Davies and his wife complained that Ms Cooper had made a windfall profit at their expense, saying they would never have sold out for only $150,000 if they had known the building would be demolished rather than repaired.  They sued, alleging she was in breach of her statutory duty as a director to buy at a fair price.

The High Court ruled Ms Cooper was aware before the share purchase was concluded that Zurich was unlikely to repair.  Cash in hand from the insurance recovery and sale of the bare land, after repayment of mortgages, totalled $1.7 million.  The Court of Appeal ruled Mr Davies’ company was not entitled to half this amount; the figure should be discounted by 15 per cent to $1.45 million to reflect uncertainties at the time the shares were sold.  At that time, the value of any bare land could not be reliably assessed because Madras Street lay within the Christchurch red zone.  Future zoning and building code requirements were not known.  Mr Davies’ company was awarded damages of $574,600: $724,600 less the $150,000 already paid.

Cooper-Davies Trustees No.6 v. Cooper Trustee No.11 – Court of Appeal (26.05.15)

15.056

Receivership: Body Corporate 162791 v. Gilbert

Tactical use of a receivership to avoid payment of body corporate levies at the troubled Mid-City complex in Auckland CBD backfired when the receiver was held personally liable for ongoing payments.

Spread across three levels in downtown Auckland, the Mid-City complex has a chequered history.  A movie theatre complex on the upper floors was not a commercial success.  There have been subsequent proposals to revamp the building first as a parking facility and latterly as residential apartments.

The Court of Appeal was told a Mr Copeland and a Mr Finnigan established 239 Queen Street Trust Ltd in 2010 to carry out the redevelopment.  Mid-City is divided into 44 individually owned units, all governed by the Unit Titles Act.  Queen St Trust purchased two units intending to redevelop them together with the airspace above.  These two units carried unpaid levies of some $939,000 when purchased.  Queen St offered a deal: the levies would be written off, Queen St Trust would be given the right to redevelop the top floor area and it would replace the roof on completion.  Nothing came of the proposed project.  Mid-City sued for the levies, still unpaid.  In September 2012 it sought to put Queen St Trust into liquidation.

Evidence was given that the two units were transferred to a new company, QSM Trustee Ltd, days before Queen St Trust went into liquidation.  With the transfer, QSM took on liability for two mortgages  registered against the units.  Mr Finnigan as sole director of second mortgagee Gartmore Nominees Ltd appointed Mr John Gilbert as receiver of QSM in July 2013.  QSM immediately went into liquidation.  Body corporate levies payable by QSM were running at a cost of $39,200 per month.  Matters reached a head when Mr Gilbert fenced off part of an arcade on level one of Mid-City claiming to exercise rights enjoyed by QSM.  Mid-City took court action to remove the fence.  Action for ongoing unpaid levies followed.

Mr Gilbert said as receiver he is not liable for the levies.  As a general rule, a receiver is not personally liable on contracts entered into by a company prior to receivership.  Payment of monthly levies was QSM’s responsibility, he said, not his.  There was evidence that Mr Gilbert as receiver was collecting rents paid by tenants renting space owned by QSM.

When a receiver continues to occupy or make use of space owned or rented by a company in receivership, the Receiverships Act requires a receiver to keep up payments due under any prior “agreement”.  This is to ensure the receiver doesn’t enjoy benefits without payment.  Mr Gilbert argued body corporate levies do not arise from an “agreement” and he didn’t have to pay.  The Court of Appeal ruled that buying into a unit title development amounts to joining a contract on common terms with all other unit owners in a development.  Unit title ownership brings with it the obligation to pay body corporate levies.  The Court of Appeal ruled Mr Gilbert, as receiver using QSM’s property, was personally liable for the levies while QSM was in receivership; the receiver was benefitting from QSM’s rights of ownership and had to meet QSM’s related obligation to pay monthly body corporate levies.  The Court further ruled he was liable to pay interest at ten per cent per annum on arrears since 14 days after the receivership started.  In August 2012, Mid-City’s body corporate rules were changed to impose penalty interest on late payments.  Receivers have two weeks grace from the start of a receivership to review the company’s financial position and consider their options.   

Body Corporate 162791 v. Gilbert – High Court (21.05.15)

15.055