MFS securities: R. v. Maywald, Lacy, White, and Anderson

Four Australian directors of finance company MFS Pacific Finance Ltd have been ordered to pay $A100,000 each and to carry out community work in New Zealand after pleading guilty to charges of false advertising and issuing a false prospectus.

MFS Pacific operated as the New Zealand arm of Queensland company MFS Ltd, now delisted and in liquidation.  MFS Pacific collapsed owing New Zealand investors some $325 million.  Jason Robert Duncan Maywald, Mark Lawrence Lacy, Craig White and David Mark Anderson were directors of MFS Pacific.  Company advertising touted directors’ expertise in commercial property and finance.  They were prosecuted for breaches of securities legislation following the collapse of companies in the MFS group.  Each director pleaded guilty to making untrue statements in a 2007 prospectus and advertisements aimed at members of the public asked to invest.

The public image presented was of a company in good financial health.  Evidence was given of untrue and misleading statements.  Reported increases in the company loan portfolio masked the fact lending had stopped because of poor liquidity; the loan growth reported resulted from the purchase of poorly performing loans from other companies in the MFS group.  Loans past due were recorded as repayable in six months.  Investor reinvestment rates were falling.  As a comfort for investors, the prospectus gave prominence to the fact MFS Pacific had a put option entitling its directors to force MFS to take over its loan portfolio.  MFS Pacific financial statements for the year ended March 2007 lists payment of a put option fee of $3.6 million: calculated at one per cent of MFS Pacific’s assets.  The court was told MFS Pacific directors never did exercise the put option when the need arose. 

Justice Andrews described Maywald and Lacy as being more than careless.  The 2007 prospectus and advertising presented an entirely untrue picture of how MFS Pacific’s business was operating.  She said if they were New Zealand residents she would have imposed sentences of home detention and community service, but since home detention is impracticable lengthy sentences of community work would be imposed.  The two directors said they would commute to New Zealand to undertake community service in blocks of five, eight hour days.  Each was ordered to serve 200 hours of community service, to be completed by mid-2016.

White was considered more culpable, sentenced to 250 hours community work. 

The heaviest sentence was imposed on Anderson, chief financial officer of the company and also a director: 300 hours community service.    

Each of the four directors was ordered to pay $A100,000 within a month to the receiver of MFS Pacific Finance (now known as OPI Pacific Finance Ltd).

R.v Maywald & Lacy – High Court (18.09.15), R. v. White – High Court (23.09.15) and R. v. Anderson – High Court (25.09.15)

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Deceit: Peng v. Li

Angered by a handshake deal that went sour, an Auckland property developer threatened his business associate with an axe.  Civil action in the courts is the better way to settle disputes said Justice Fogarty, awarding $507,000 damages against the business associate for deceit.

The High Court was told property developer Tom Peng flew into a rage after losing money advanced to associate Richard Li for a property development planned for the Auckland suburb of Epsom.  Mr Li claimed the payment was agreed compensation for his failed investment in a fitness centre.  Mr Peng denied there was any such deal for compensation. 

The two men had a history of business dealings having co-operated on a series of Auckland property developments between 2010 and 2012.  The projects turned a profit.  Deals were done on a handshake; there were no written agreements.  According to Mr Peng, another project was suggested by Mr Li in April 2012.  Mr Li’s Epsom neighbour was recently widowed and looking to sell.  If Mr Peng were to put up $507,000 cash to buy out the neighbour Mr Li said he would put his adjoining property into the pot and the two sites could be amalgamated and redeveloped.

Evidence was given that Mr Peng handed over $507,000 borrowed from Kookmin Bank, thinking this gave him a 35 per cent stake in the Epsom redevelopment.  Learning later that Mr Li had no intention of proceeding, Mr Peng armed himself with an axe purchased from the Warehouse and threatened his business associate in an attempt to get a written acknowledgement that the $507,000 paid was a debt due.  A brawl followed with Mr Li left bruised and bleeding.

In the High Court, Mr Li said the $507,000 payment had nothing to do with an Epsom property redevelopment; it was payment to buy out his interest in a business called Harbour Fitness.  Mr Li had put in $400,000 and was promised a 24 per cent return, the same as promised earlier to Mr Peng.  Mr Peng lost $900,000 when Harbour Fitness failed.  Mr Li alleged that Mr Peng had agreed to compensate him for his $400,000 lost.

It was to come out in evidence that Mr Li’s Harbour Fitness investment was funded in large part by his brother then living in China.  His brother emigrated to Canada during 2012 and the $507,000 received by Mr Li from Mr Peng was used to repay the brother and help pay the cost of setting up in Canada.

Justice Fogarty ruled there was an agreement to develop the Epsom properties and the $507,000 paid by Mr Peng was part of this project.  While Mr Li initially may have intended to proceed with the project, he was liable for deceit in later diverting the funds and denying any existence of the prior agreement, His Honour said.

Peng v. Li – High Court (24.09.15)

15.108

Counterfactual: Ministry of Social Welfare v. Morgan

Lawyers in anti-trust cases are fond of using hypothetical counterfactuals to cloud the issue: If the monopoly supplier were not in fact dominant in the market would the commercial behaviour in dispute still be questionable?  The Court of Appeal dismissed use of counterfactual arguments to support a claim for a social welfare housing benefit.

At issue was a temporary accommodation assistance benefit available to Christchurch residents displaced by earthquake damage.  The Morgan family were forced to move while their damaged home was repaired.  They moved into a house owned by their family trust.  It was previously tenanted.  The Morgans signed a tenancy agreement to cover their occupation of the family trust-owned home.  Initially their earthquake insurer met the rental costs.  They applied for an accommodation benefit when these payments stopped.  Social Welfare refused, saying they were occupying their “own” property.  The High Court decided they were entitled to a benefit, a decision reversed by the Court of Appeal.

The Court of Appeal was critical of the High Court’s acceptance of a counterfactual argument: If the Morgans had rented a property from a stranger, then would a benefit be payable?  Hypothetical scenarios should not be used to determine eligibility for benefits, it said.

Ministry of Social Development v. Morgan – Court of Appeal (22.09.15)

15.107

Probus name: Probus South Pacific v. Probus NZ

For Probus Club members it is an opportunity to further intellectual and cultural interests.  For competing Probus umbrella organisations it is a commercial battle over affiliation fees.  The High Court ruled Australian-based Probus South Pacific Ltd holds rights to the name Probus in relation to clubs incorporated in New Zealand.  Unaffiliated clubs in New Zealand have been ordered to change their names: Devonport, Fitzherbert, Milson, Whitianga, Waikanae, Wanaka and Wellington Ladies.

The Incorporated Societies Act governs names used by registered clubs and societies.  Changes can be forced if “undesireable”.  A name is undesireable if similar to a name already in use.  Probus NZ Inc and affiliated incorporated clubs were ordered to change their names to remove any link to the Probus name since it is currently in use by Probus South Pacific and its affiliated clubs.

The High Court was told Probus clubs were first formed in the United Kingdom in 1967.  The name is a combination of “professional” and “business”.  Introduced into New Zealand in the 1970s, the first local clubs were sponsored by the service organisation, Rotary.  What later became Probus South Pacific Ltd was set up to co-ordinate the operation of Probus clubs in Australasia and Pacific islands.  In March 2014, Probus NZ was set up by a breakaway group from Probus South Pacific affiliated clubs dissatisfied with the service provided.  They claim Probus South Pacific’s support services were inadequate, unnecessary and based on the wrong philosophical, conceptual and business model. 

They are free to establish rival organisations, but they cannot use the Probus name.

Probus South Pacific v. Probus New Zealand – High Court (17.09.15)

15.105

Fraud: R. v. Joshi

Auckland businessman Sanjay Kumar Joshi was sentenced to six years jail after defrauding over twenty victims of $1.9 million.  Most affected were relatives and acquaintances.  Worst affected was his business partner who lost nearly one million dollars.

With qualifications in marketing and accounting, Joshi worked for a motor vehicle parts supplier before starting his own business in 2010.  He conned a business partner into joining the venture with lies about exclusive distribution rights supposedly held.  Frauds against customers continued over a three year period.

The High Court was told Joshi promised defrauded customers he could source luxury cars cheaply from Japan.  Payment was made upfront, but the vehicles were either never delivered or arrived with loans secured against the vehicle; loans taken out by Joshi.  Amongst those defrauded were the father of a school friend, an acquaintance met at a mutual friend’s birthday party and his doctor.  He defrauded motor vehicle parts suppliers by falsely representing he was ordering as an authorised agent of one of their customers.  Two insurance claims were declined as fraudulent.  In the first, Joshi staged a break-in fraudulently claiming loss by theft having previously removed two motor vehicles and computer hardware from his business premises.  In the second, he claimed for damaged stock, allegedly following an accident with a forklift.  Staged photos were supplied for the claim after spreading oil on the warehouse floor and scattering empty stock containers as if they were stock damaged in an accident.

Joshi also defrauded his parents: using his mother’s credit card without authority and forging financial statements purporting to be those of his parents’ business as support for a loan application to finance companies.

R. v. Joshi – High Court (15.09.15)

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