Tax fraud: R. v. Rowley & Skinner

Fraudulent GST invoices totalling $9.5 million which generated personal benefits exceeding $2.3 million for two Wellington tax agents resulted in convictions for Barrie James Skinner and David Ingram Rowley, trading as Tax Planning Services Ltd.

This followed a raid on Tax Planning’s offices in April 2010 by a dozen Inland Revenue officers.  They spent twelve hours searching through the company’s records and took copies of computer hard drives.

Inland Revenue suffered an initial loss of $3.1 million because of the scam, but recovered most of these losses after reversing the deductions and GST input credits claimed by Tax Planning clients.  Skinner and Rowley were convicted of multiple offences for dishonest use of documents to obtain a pecuniary advantage, perverting the course of justice and knowingly providing false information to Inland Revenue.

The High Court in Wellington was told Mr Shaan Stevens, a former chartered accountant with Guinness Gallagher Accounting Ltd, was jointly charged with Skinner and Rowley in respect of 13 charges of dishonest use of a document for which he received kickbacks totalling $8500.  Stevens pleaded guilty before trial to these 13 offences, together with others, and was sentenced in November 2011 to ten months home detention, 150 hours community work and ordered to pay reparations of $121,850.

Evidence was given that the tax fraud was engineered by Skinner and Rowley using tax clients who were looking to minimise tax payable.  Clients typically had a large tax bill to pay but no cash to meet the liability.  Over a five year period, Skinner and Rowley issued false invoices to 27 tax clients for fictitious “consultancy” or “sub-contracting” work supposedly done at the client’s request.  These false invoices inflated taxable expenses for clients, driving down taxable income and also supported a GST refund.  Tax clients were assured that the transactions were a legitimate method of tax reduction.  Most clients had no understanding of tax accounting and went along with what Tax Planning was recommending.  Those clients seeking some explanation of what was happening were usually told that they had purchased a tax loss business or third party debts as part of a scheme to reduce their taxable income.

In a typical transaction, the client received a tax invoice for services (which were never to be provided) and then paid the face value of the invoice, usually into Tax Planning’s trust account.  Within a couple of days, about two-thirds of this payment was rebated back to the client.  The remaining one-third went to Skinner and Rowley or interests associated with them.

Tax Planning then adjusted the tax client’s tax returns to claim the full value of the invoice for income tax and GST purposes.  The scheme benefitted Tax Planning clients because the combined economic effect of the income tax deduction and the GST input credit exceeded the amount of cash Skinner and Rowley retained.

Skinner and Rowley were convicted for dishonest use of documents arising from the false invoice scam.

When Skinner and Rowley became aware that Inland Revenue was approaching clients investigating tax irregularities they set about trying to convert the false invoices into legitimate transactions: clients were approached and told the invoices related to work done on the client’s behalf for the purchase of apartments or car park licences.  Dummy contracts, held unsigned, were generated to support a story that there was a concrete transaction behind each consultancy invoice.  Forensic analysis of Tax Planning computers identified that the dummy contracts were created years after the date of the supposed transaction – this despite attempts by Rowley to manipulate the computer’s master clock tracking transactions.  Tax Planning clients expressed surprise and bemusement when learning they had supposedly purchased interests in Wellington apartments or car park licences.

These attempts to concoct legitimate consulting transactions led to convictions for perverting the course of justice.

Skinner and Rowley were also convicted of knowingly providing false information when filing their personal tax returns. 

The court was told that Rowley under-declared his income by some $296,000 for the five year period 2006-10; Skinner by some $1.06 million for the same period.  At a time when Skinner had declared income of only $390,000 he had spent just over two million dollars on his credit cards, including nearly $725,000 on overseas travel and over $550,000 on food and accommodation whilst overseas.

R. v. Rowley & Skinner – High Court (20.07.12)

12.017

Capital + Merchant: R. v. Douglas & Nicholls

Two directors of Capital + Merchant Finance, Wayne Leslie Douglas and Neal Medhurst Nicholls, have been acquitted of criminal charges laid in respect of loans to a Palmerston North development known as The Hub.  It was alleged they had a close personal involvement in the development which was kept hidden from investors.   Capital + Merchant went into liquidation in 2009.  Some 7500 investors are unlikely to see any return on their $167 million invested.

Douglas and Nicholls were jointly charged with theft of $14.4 million of investors’ funds and with deceit by issuing a false prospectus.  The High Court was told the charges arose from loans made by Capital + Merchant during the period 2002-05.  The two directors owned Capital + Merchant through a chain of other companies and trusts.

The court was told that in 2002 a financier called National Mortgage Nominee Co Ltd had taken possession of a seven storey building in central Palmerston North, later to become part of The Hub.  The building owner had “done a runner” owing about three million dollars.  Messrs Douglas and Nicholls were directors of National Mortgage, a contributory mortgage company which pooled investors funds into property loans.  The two directors were keen to sell the building and recover the money due.  There was some suggestion that they had personally guaranteed repayment.  A partner in Stace Hammond, the law firm acting for Capital + Merchant, introduced them to a Mr Stokes as a man with some business experience in rural and commercial real estate who might be able to assist.

In a series of transactions over the next few months, interests associated with Mr Stokes purchased the seven storey building in question plus an adjoining property – all with funding provided by Capital + Merchant.  The purchases were entirely debt-funded.  The intent was that both properties would be redeveloped into accommodation, then sold to repay Capital + Merchant.

Evidence was given that Capital + Merchant funded costs of the redevelopment.  There were delays and substantial cost overruns.  As the development neared completion rooms were let to tenants.  Demand was poor. The buildings are old.  The cost of heating and maintenance were high, meaning revenue was insufficient to pay interest on the Capital + Merchant debt let alone contribute towards repayment of the loans advanced.  In the end, Capital + Merchant purchased the development and sold to another buyer.

Justice Wylie ruled that Douglas and Nicholls were not guilty of theft because while they did control Capital + Merchant, loans made to The Hub were not in breach of the company’s lending obligations set out in the trust deed required of all companies borrowing from the public.  It was argued that loans to The Hub were “related party loans” with Mr Stokes merely being the “front man” for the “real” borrowers: Douglas and Nicholls.  Related party loans by Capital + Merchant were prohibited by its trust deed.  While there are grounds for suspicion that Douglas and Nicholls were the real borrowers, this was not established beyond reasonable doubt, Justice Wylie said.

Criminal convictions for deceit in relation to Capital + Merchant’s issue of a prospectus also depended on The Hub loans being non-disclosed related party transactions.  Justice Wylie said prospectus disclosure rules at the time of the loans were governed by regulations under the Securities Act.  Douglas and Nicholls had no legal or beneficial interest in the companies and trusts fronted by Mr Stokes when the loans were made.  There was no obligation to separately disclose The Hub loans as Douglas and Nicholls were not related parties.

R. v. Douglas & Nicholls – High Court (19.07.12)

12.019

Perpetual Trust: Trustees Executors v. Perpetual Trustees

Perpetual Trustee has been forced to accept independent minders monitoring its board.  This after allegations that interests associated with George Kerr, who ultimately controls Perpetual Trustee, were siphoning off investment funds to support their own private business interests.

Perpetual is the financing arm of listed company Pyne Gould Corporation.  It raises funds from the public and like all public borrowers has a trustee corporation appointed to act on behalf of these investors.  Trustees Executors as appointed trustee expressed concern that investor interests were at “significant risk” because of alleged related party dealings between Perpetual Trustee and the Torchlight Fund, a further fund involving interests associated with George Kerr. 

Concerns centred on a $21.6 million loan made to Torchlight in February 2012.  Perpetual board approval was not given until after the funds had been advanced with the necessary paperwork to follow.  Funds advanced ballooned beyond the total approved to reach $28.2 million.

After learning of the transaction, Trustees Executors reported its concerns to the Financial Markets Authority.   Fearing damage to Perpetual Trustees’ reputation with the investing public, Pyne Gould commenced closed door negotiations with the Financial Markets Authority, promising to refinance Torchlight’s borrowings and repay Perpetual.  

Concerns about both financial management within Pyne Gould and the liquidity of Perpetual Trustees became public in May 2012 with the resignation of Pyne Gould’s auditor KPMG.

Subsequently the High Court appointed Ms Vivian Fatupaito and Mr Christopher Duffy as observers to attend meetings of the Perpetual Trustee investment fund board meetings with authority to see all information available to the board and to ask questions relevant to the funds advanced to Torchlight.

Pyne Gould has said that it “expected” to repay the Torchlight advances by the end of July 2012.

Perpetual Trust v. Financial Markets Authority – High Court (26.6.12) & Trustees Executors v. Perpetual Trust – High Court (12.7.12)

12.021

Maori: Paki v. Attorney-General

Water rights for generating hydroelectric power will become an issue following a landmark Supreme Court decision on the ownership of river beds.  With thousands of riverside landowners now becoming the surprised owners of adjoining riverbeds, expect moves to negotiate a share of the economic benefits reaped from water passing over their riverbed land.

An obscure Maori Treaty of Waitangi claim has opened up to Maori and Pakeha alike the possibility of claiming economic rents for water flowing over their land and into hydroelectric plants.

This Treaty issue arose in litigation by the Pouakanui hapu over ownership of a 32 kilometre stretch of the Waikato River near Mangakino.  The hapu claims that they did not understand and that the Crown did not tell them that sales of hapu land to the Crown in 1887 and 1899 also included sale of the riverbed adjoining the land sold.  There is a strong cultural attachment within Maoridom to rivers and streams within tribal areas.  The Pouakanui hapu argues loss of 32 kilometres of riverbed resulted in a serious loss of mana.

Lower courts ruled that any claim by Pouakanui was defeated by 1903 legislation which nationalised the riverbeds of all navigable rivers.  Ownership rights were lost to all riverside landowners, not just Pouakanui.

These lower court rulings assumed that the Waikato River at Mangakino is navigable.  The Supreme Court overturned the traditional legal view of “navigable”.

Legal argument centred on a “whole of river” approach compared with a “part of river” argument.  The traditional legal view in New Zealand has been that if any part of a river is of sufficient width and depth for use in trade and commerce then the whole of the river is to be treated as navigable for purposes of the 1903 legislation, whether in fact it is or is not navigable on any particular stretch of river.  The Supreme Court ruled instead in favour of a “part of the river” approach.  Questions of riverbed ownership depend upon whether a particular stretch of river is in fact navigable, or not.

Construction of hydroelectric dams along the length of the Waikato River has changed the river’s topography markedly since the 1890s.  The Supreme Court said questions of navigability for the Pouakanui claim depended on the state of the river as at 1903, the date of legislation nationalising navigable riverbeds.

Evidence was given that the river adjoining Pouakanui lands then had little smooth water being a succession of turbulent rapids together with the high cliffs and steep canyons of the Whakamaru and Maraetai Gorges.  Through this area, the river fell through one of its steepest gradients at approximately 1:200; exceeded only by a steeper gradient at Aratiatia Rapids and Huka Falls near Taupo.  Historical evidence indicated there was little transport on the Waikato River above rapids near modern day Cambridge.  What water transport there was above Cambridge tended to be family excursions and picnics together with some rudimentary ferry crossings, privately operated.

Where different landowners own land on opposite banks of a “non-navigable” river, each owns that part of the riverbed from their land to the centre of the river.

Sales of Maori customary land to the Crown in the nineteenth century have been the subject of much complaint.  Yet to be finalised in this case is whether Pouakanui’s land sales to the Crown in 1887 and 1889 also transferred ownership to the Crown of the riverbed to the centre of the river, and, if so, is Pouakanui entitled to any compensation for its claimed loss of mana.

 Paki v. Attorney-General – Supreme Court (27.06.12)

12.016

Telecoms: Telecom v. Commerce Commission

Telecom used its network dominance to inflate prices charged to data transmission wholesalers over a four year period ending late 2004 the Court of Appeal has ruled.  Telecom is disputing the $12 million penalty imposed.

Commerce Commission action started when rival wholesalers complained Telecom was discriminating in the price charged for “data tails” in the retail market for end-to-end high speed data transmission services.  

Telecommunications service providers (TSPs) like Telstra Saturn have spent millions constructing fibre optic and wireless backbones for their own networks but need to use Telecom’s data tail: the final section (fibre optic and copper) from the retail customer to the TSPs point of access to the Telecom network.  

TSPs complained that Telecom pricing for wholesale access to data tails was so high that it squeezed their profits.  Telecom pricing became a barrier to entry.  As wholesalers offering high speed data transmission for retail customers, TSPs alleged they were being treated as retail customers themselves by Telecom.  The price charged by Telecom for access to customer data tails was so high that individual TSPs struggled to compete with the data transmission prices offered by Telecom to its own retail customers.

The Telecom network has since been hived into a separate business, Chorus, leaving Telecom as a stand alone TSP.

Section 36 of the Commerce Act prohibits any business holding a substantial degree of market power from using that power for an anti-competitive purpose.  Prior to the creation of Chorus, Telecom was dominant in the telecommunications market.

Evidence was given that the telecommunications revolution of the late twentieth century dramatically changed the volume of and speed at which data could be transmitted between retail customers, but pricing anomalies developed: slower less commercially valuable services were being charged at a higher rate than faster services.

TSPs complained that when Telecom adjusted its retail pricing structure to correct these anomalies it failed to adjust its wholesale prices as well.  There was evidence of data carrier pricing where the wholesale price charged TSPs by Telecom exceeded Telecom’s own retail prices: retail prices which included Telecom’s own wholesale carrier charges.

Competition law allows a dominant firm to charge what a non-dominant firm in a hypothetical competitive market would charge.  Monopolists are allowed to compete but monopolists are not allowed to impose charges in excess of what would be charged in a competitive market.  It can be difficult to determine what would be a competitive market charge when there is no competitive market in fact.

In this case, the Court of Appeal ruled that prior to 2004 Telecom had used its network dominance to prejudice competition for end-to-end high speed transmission services.

Telecom v. Commerce Commission – Court of Appeal (27.06.12)

12.018

Nathans Finance: R.v. Moses, Doolan & Young

Reparations totalling $1.08 million paid by convicted Nathans Finance directors will not be paid directly to investors but can be used by Nathans’ receivers to fund further litigation against the directors following a High Court ruling.  There is a prime facie case for receivers to sue Nathans’ directors for trading whilst insolvent, the High Court said.

After being convicted of securities offences for issuing a misleading prospectus, four directors of Nathans Finance were required to pay reparations totalling $1.08 million to reflect their remorse for the damage caused investors.

Payments were ordered against  Kenneth Roger Moses ($425,000), Mervyn Ian Doolan ($150,000), Donald Menzies Young ($310,000) and John Lawrence Hotchin ($200,000).

The High Court was asked to rule on how this money should be divided.

Investors said it should be divided between those who put money into the company after the misleading prospectus was published.  The court was told that out of the $174 million dollars owed by Nathan Finance when it went into receivership a total of $68.9 million was invested or reinvested after the misleading prospectus was in the market place.  Of that $68.9 million, the largest single investor is owed $484, 200.

Nathans Finance receivers argued that all investors and the company itself should be considered “victims” of the offending.

Justice Heath ruled that the reparation payments would be best used for the benefit of all who had suffered loss by being paid to the receivers.  It provides a fund from which the receivers could pursue other means of recovery, he said.  There was evidence that company indebtedness increased by about twenty million dollars when under control of the directors in the eight months prior to receivership.

R. v. Moses, Doolan & Young – High Court (27 June 2012)

12.015

Sth Canterbury: re Hubbard Churcher Trust

Some twenty-one investors in a personalised investment fund managed by South Canterbury Finance director Allan Hubbard have been overpaid about $1.6 million in an interim distribution made by government appointed receivers.  They will be required to make repayment after a High Court order on how the fund should be wound up.

In June 2010, government appointed statutory managers to numerous Hubbard investment vehicles.  The Timaru-based chartered accountant operated a mix of finance companies and investment vehicles.  Statutory managers have spent considerable time and energy unravelling the investment fund’s finances, not helped by Mr Hubbard’s idiosyncratic manner of business relying on paper based records and making frequent post-balance date adjustments to reflect his assessment of where specific revenue should be placed.

Mr Hubbard died after a road accident in 2011.

The High Court was asked to rule on distributions between some 300 investors claiming an interest in Hubbard Churcher Trust Management Ltd.  Values for this share-based investment fund vary daily since it invested primarily in listed shares with some further investments in venture capital and private equity funds.  At the time of the court hearing $35.9 million dollars remained to be distributed with an interim distribution of nine million dollars having been made earlier.

Evidence was given that Mr Hubbard established the fund at some unknown date in the late 1990s, offering a bespoke personalised investment service to clients.  Most clients gave no specific investment instructions, relying on Mr Hubbard’s financial acumen to make investment decisions on their behalf.   Clients paid money in through one-off payments or made regular payments by bank automatic payment.   

While assets were initially registered in the name of specific clients, Mr Hubbard later shifted all assets into one umbrella holding company and kept secondary records identifying each client’s individual portfolio.  Each year he provided individual investors with a statement of their current holdings and previous year’s income.

The court was told Mr Hubbard generally bought investments in bulk and retrospectively allocated investments to specific investors.

The existence of this investment fund did not come to the statutory managers’ attention until some months after their investigations started into South Canterbury.  By then, the investment fund paper trail was becoming even more confused. 

The High Court was asked to rule on how the fund should be wound up, given that previously asset allocation was at the sole whim of the late Mr Hubbard based on his perception of each individual’s acceptance of risk.  Reconciliations by the statutory managers found the total value of investments as reported to investors did not match the value of the assets held by the fund and that the individual portfolios as reported to some investors probably did not represent their individual holdings.  What purported to be a bespoke personalised service at times operated more like a pooled investment fund.

Justice Chisholm said a court-ordered distribution involved finding the “least unfair result for the investors” bearing in mind that no method of distribution would result in “perfect justice for all”.  Further accounting work would be required, he said.

His Honour ruled that the statutory managers were to use the 2000 year as their starting point, paying back investors their capital invested as at that date.  Additions to the fund after that year from capital gains and revenue are to be pooled with investors paid pro rata after an allowance for interest to reflect the length of time individual investors had an interest in the fund.

Preliminary calculations before the court indicate that use of this method means that some 80 investors have already received their full entitlements, or have been overpaid, leaving about 220 investors to share in the pooled “surplus”.

Re Hubbard Churcher Trust Management –High Court (1.6.12)

12.011

F&I Finance: Eaton & Marshall v. LDC Finance

The High Court has ordered that $7.8 million dollars held by LDC Finance supposedly as a secured creditor of failed Nelson finance company Finance & Investments (F&I) be returned to F&I and refunded to depositors owed some $15.9 million.  F&I had been borrowing from the public without issuing a prospectus. 

The 2008 recession affected many finance companies operating like banks, borrowing short and lending long.  A liquidity crunch propelled them into liquidation when investors demanded repayment.

LDC Finance along with F&I both went into receivership in 2008 after runs by depositors.  LDC Finance claimed security over F&I assets: 706 loans outstanding with a total face value of $13.3 million.  LDC had provided working capital finance to F&I.

Evidence was given that F&I was established in the 1960s by two car salesmen: Andrew Harding and Murray Schofield.  It operated like a small informal bank with transactions washing through the company’s cheque account.  F&I operated as a partnership.  In the 1960s, this did not require formal registration of a prospectus when soliciting working capital from the public.  Investors placed money with F&I on call, or for short term six months periods.

The rules changed in 1983 when securities legislation required partnerships like F&I to issue a prospectus when borrowing from the public.  F&I did not catch up with the new rules.  One of the penalties for trading without a prospectus is that the transaction is void: the money received has to be repaid in full, immediately.  A trust exists in relation to the unpaid money. 

After F&I went into receivership, unpaid investors sued claiming LDC as a secured creditor had no right to seize assets which represented “their” money.  In the normal course of events these investors would need to point to physical assets funded by their money.  But in this case, their funds had been banked in F&I’s bank account which had been overdrawn at various times.  Detailed investigations by forensic accountants established that individual investor’s deposits could not be tracked through F&I’s bank account into specific assets: individual F&I loans.

Justice Fogarty ruled that securities law created a trust over F&I’s assets in favour of the unpaid investors.  He further ruled that LDC was aware that F&I was trading without a registered prospectus at the time it took security over F&I assets.  This came to LDC’s knowledge when negotiating terms with F&I over the injection of further working capital after a seven million dollar F&I loan went sour in 2006. 

This knowledge meant assets covered by LDC’s claimed security were subject to a trust in favour of unpaid F&I investors.  LDC could have what was left over only after F&I investors were repaid out of F&I assets.

The owners of F&I will be personally liable to make up any shortfall in payments due to F&I investors.

Eaton & Marshall v. LDC Finance Ltd – High Court (23.05.12)

12.014

Bridgecorp: R. v. Roest

Two further Bridgecorp directors convicted of making false statements have been sentenced: Cornelis Robert Roest sentenced to six years six months imprisonment and Peter David Steigrad sentenced to nine months home detention together with 200 hours community work and ordered to pay $350,000 reparation.

False statements were made when Bridgecorp presented a misleading picture of its liquidity while raising funds from the public in early 2007.  The 14,500 investors who had placed $459 million with Bridgecorp are expected to recover less than ten cents in the dollar.

Mr Roest was an executive director of Bridgecorp.  Justice Venning said Roest was heavily involved in the company’s daily operations and was responsible for its financial management including preparation of expected cash flows.  Roest was found to have acted dishonestly with intent to deceive investors.

The court was told there was no prospect of reparations being paid.  Mr Roest was described as having no assets and being bankrupt.

Justice Venning said Roest appeared to have no insight into his offending, regarding himself as innocent despite the verdicts and unable to accept the harm caused investors.

Mr Steigrad was a non-executive director.  He has commercial experience in marketing and advertising.  As a non-executive director of Bridgecorp he had no day-to-day responsibilities within the company, but attended monthly board meetings.

Justice Venning said while Steigrad failed to properly carry out his duties as a director to an extent that imprisonment would be an appropriate penalty, he was the least culpable of the five Bridgecorp directors.   It was to his credit that he demonstrated genuine remorse and acceptance for his wrongdoing.  He was assisting in making reparations to investors.

Justice Venning indicated that home detention should not be seen as a soft option.  Steigrad is an Australian resident, but would be detained in New Zealand.  He was permitted a five day window to travel to Australia prior to commencing his sentence.  The court did not disclose the address in New Zealand where the home detention was to be served.

R. v. Roest & Steigrad – High Court (18.5.12)

12.012

medical negligence: Allenby v. H

The medical profession continues to enjoy statutory protection from negligence claims now that a Middlemore hospital surgeon has been held not personally liable for the consequences of a failed sterilisation operation.

The Supreme Court was asked to rule whether a woman who became pregnant after a failed sterilisation operation had suffered “personal injury” caused by medical misadventure.   By answering “yes” the Accident Compensation Corporation became liable to pick up the claimed damages.

The court was told that a woman named only as “H” suffered mental illness after giving birth in 2005 following a failed sterilisation.  As a general rule, accident compensation does not cover adverse consequences of any medical treatment, unless it was the direct result of medical misadventure: a failure to exercise the skill and care reasonably to be expected in the circumstances.  In this case, a clip was not correctly attached to one of her fallopian tubes.

Evidence was given that on average there are only six to seven compensation claims in any one year for personal injury caused by medical misadventure.

Over three decades, various amendments to accident compensation legislation have led to confused results for claims arising from pregnancy following a botched sterilisation.  Some judges have ruled it is for the Corporation to pay, others have ruled that the woman must sue the doctor personally for negligence.

The Supreme Court has had the final say: it is for the Corporation to pay.

Allenby v. H – Supreme Court (9.05.12)

12.013

NZF Money: NZF Money v. O'Connor

A court-ordered freeze imposed on finance company NZF Money Ltd has been extended to protect investors.  But NZF Money is still allowed to continue payments for legal expenses and ordinary business expenses.  The freeze was first imposed in April 2012 when receivers indicated they are taking legal action following allegations that company assets were sold at an undervalue, reducing assets available for investors.  This litigation is still pending.

NZF Money went into receivership in July 2011, after management announcements that company liabilities exceeded assets by some four million dollars.  At the date of receivership, NZF Money owed retail investors about $16.4 million.  Provisional estimates indicate a return of between 25 cents and 42 cents in the dollar.

The receivers allege funds available to repay investors were dissipated when assets were shuffled between companies in the group by the directors in October 2010.  At issue are a bundle of mortgages transferred from a NZF Money subsidiary to NZF Money’s holding company.  The subsidiary was paid $1000 dollars for the assets transferred.  Eleven months later, the holding company sold on these same assets for just over three million dollars.  The receivers argue this three million dollars rightly belongs in the NZF Money subsidiary where it can be used to repay investors.  NZF Money directors are arguing that the deal was a legitimate business transaction designed to package up company assets for an onward sale which benefitted all companies in the group, including NZF Money.

NZF Money Ltd v. O’Connor – High Court (27.04.12)

(12.009)

Bridgecorp: R. v. Petricevic

Rodney Michael Petricevic has been sentenced to six and half years jail for making false statements to Bridgecorp investors.  The High Court did not accept protestations that he was unaware of severe liquidity problems until just before Bridgecorp went into receivership. 

Bridgecorp used money from public investors to finance property developments.  About 14,500 investors were left out of pocket when in July 2007 Bridgecorp went first into receivership and then quickly into liquidation.  Investors are owed some $459 million.  Those holding secured debentures can expect to recover less than ten cents in the dollar.  Holders of capital notes (about $29 million) or redeemable preference shares ($30 million) will not recover anything.

Some investors lost very heavily.  The court was told one 69 year old retired professional man had placed nearly two million dollars with the finance company.  He has been forced back into working long hours and his wife suffered a nervous breakdown following their loss.  Another investor, a retired couple in their seventies, lost their retirement capital, totalling $250,000.

Central to the prosecution was an allegation of untrue statements in the prospectus that Bridgecorp had never missed any interest payments to investors or returns of principal on maturity.  Statements highlighting excellent liquidity could be expected to give comfort to intending investors in a finance company.

Mr Petricevic told the court he was completely unaware of any late payments until just weeks prior to receivership.  His evidence was not believed.  Witnesses told of Mr Petricevic being present at meetings months before receivership when the problem of missed payments was discussed and another occasion when strategies to hoodwink investors were canvassed, including manufactured excuses about “computer glitches” to justify delays.  By April 2007, Bridgecorp staff were refusing to answer the phones and be party to lies told to investors.

The court was told that Mr Petricevic himself was providing short-term bridging finance to Bridgecorp through April and May 2007 to meet company payments.  Amounts ranging from $500,000 to $100,000 were advanced, being repaid within a few days on each occasion.

In general terms, Bridgecorp directors had failed to properly disclose its deteriorating trading position in offer documents available to the public: impaired loans and non-performing assets had increased; liquidity had worsened since June 2006.  And despite its stated policy, Bridgecorp did not hold a specific reserve in bank deposits to meet investor maturities.

Mr Petricevic was managing director of Bridgecorp and described himself as having thirty years experience in the finance industry.

R. v. Petricevic – High Court (5.04.12 & 26.04.12)

(12.008)

Company: Stilwell v. Ice Group

Minority shareholders in a closely-held company won the battle but lost the war in their attempt to gain a share of business profits generated by a large Defence Force contract after they dropped out of the company.  A contract to lay data cabling was picked up by the company while on-again off-again negotiations to buy out the minority shareholders drifted on.

Maurice George Stilwell and Noel Busschau Swan claimed they were entitled to between $400,000 and $600,000 as their half share in a company called Ice Group (NZ) Ltd.  The Court of Appeal ruled that they had been wronged but the effect of the court judgement is that they will get little if any after payment of their costs.

The court was told that Ice Group was established in 2001 to act as the New Zealand representative of an Australian electronics supplier.  The Australian supplier went bust two years later.  Ice Group was restructured leaving a Mr Thompson with a 50 per cent interest and Messrs Stilwell and Swan holding the other 50 per cent.  Ice Group specialised in commercial installations: CCTV systems for shops and satellite receivers for apartment blocks.  Sales were slow.  By September 2004, both Mr Stilwell and Mr Swan wanted out of the company.

Evidence was given that no firm deal was struck between Mr Thompson and the two minority shareholders about a buy-out figure.  Both sides thought about $5000 each was an appropriate figure with payment to be spread over ten months.  Mr Stilwell was left “to do the calculations”.   Nothing happened.

Then in 2006, Ice Group (through Mr Thompson’s connections) picked up a large Defence Force cabling contract.  By this time, Messrs Stilwell and Swan were still shareholders but had no continuing involvement in the company.  Mr Thompson ran the company as if he were the sole owner.

The Court of Appeal ruled that Mr Thompson’s actions in ignoring his other shareholders and running the company as if it were his own amounted to “minority oppression” in breach of the Companies Act.  In these cases, the court usually orders that the majority shareholder buy out the minority.

Messrs Stilwell and Swan argued they should be bought out with their shares valued as at the date of the trial – which would include profits from the Defence Force contract in the share valuation.  The Court of Appeal ruled that the appropriate valuation date was March 2005 – before the Defence Force contract and being balance date following the minority shareholders decision to leave the company.  This figure could be as low as $5000 each.  There was evidence that Mr Stilwell still personally owed the company $12,000 on his shareholder current account.

Stilwell v. Ice Group – Court of Appeal (4.04.12)

(12.010)

Lombard: R v. Graham

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

Milk: Fonterra v. Grate Kiwi Cheese

Breaking into the lucrative value-added dairy market does not require ownership of a processing plant. New entrants can demand Fonterra provide raw milk to be processed by a third party processor in a “tolling operation”.

Fonterra dominates the raw milk market in New Zealand. To encourage competition after Fonterra was established, dairy industry regulations specified that raw milk was to be provided to competitors at a default price fixed by regulation. Currently, Goodman Fielder is entitled to 250 million litres per season. Any other applicants can get up to 50 million litres each with this supply capped at a total of 600 million litres.

Fonterra argued that this concession applied only to applicants with their own processing plant. The suggestion was that Fonterra considered the default price for selling raw milk was too low, leaving it at a commercial disadvantage to competitors producing dairy products. Limiting the field of applicants to only those with processing facilities would have the effect of lessening competition.

The Supreme Court ruled that dairy industry regulations should not be read narrowly.

It was open to any business to apply for an allocation of up to 50 million litres and this applicant was free to use any spare capacity offered by third parties to process the raw milk into dairy products. Third party processors would be charging a “tolling fee” for processing raw milk through their plant.

Requiring new entrants to establish their own processing plant would create a significant barrier to entry, the court said.

The court emphasised that this ruling did not force Fonterra to supply raw milk to applicants who would simply on sell the raw milk unprocessed.

Fonterra v. Grate Kiwi Cheese – Supreme Court (15.03.12)

12.006

Extradition: USA v. Dotcom

Bail conditions creating an personal electronic prison will suffice for individuals held in New Zealand pending extradition.

Internet entrepreneur, Kim Dotcom, is wanted by US authorities who allege criminal use of the internet for commercial gain. In particular, it is alleged Mr Dotcom facilitated illegal downloads of copyright material. His net worth has been speculatively put in the hundreds of millions of dollars.

In January 2012, he was arrested in New Zealand at the request of US authorities. An extradition hearing is scheduled for August 2012. US authorities strenuously objected to Mr Dotcom being released on bail. They said he had the resources and ability to flee New Zealand. It was proving difficult to track down his bank accounts: $US 17.8 million had been found in bank accounts under his name or under aliases; up to $US 68 million had passed through these accounts over a four year period. Assets to the value of $NZ 20 million had been seized in New Zealand.

The court was told Mr Dotcom held valid passports for both Germany and Finland. The US has extradition treaties with both those countries.

Justice Brewer said there was no certainty that Mr Dotcom would not attempt to flee New Zealand. Bail conditions required use of an electronic tag.

“It essentially puts a perimeter around Mr Dotcom’s home and if he breaches the perimeter then the authorities will know about it very shortly. That is a significant impediment to a person as recognisable as Mr Dotcom who seeks to flee the country clandestinely.”

USA v. Dotcom – High Court (29.02.12)

12.004

Company: Wilson v. Blanchett

Any failure to properly document drawings from a closely-held company can result in court orders for repayment. Liquidators of an Auckland company chased after drawings from one company totalling more than one million dollars.

APG Holdings Ltd was wound up in 2007. Liquidators, Messrs Blanchett & Burns, found a total of $1,081,000 had been paid to a Rita Wilson in the three years prior to liquidation. She had no identifiable role within the company. Enquiries showed she was the daughter of a former director and the wife of Terry Wilson who was a director at the time the company went into liquidation.

Rita Wilson did not respond to the liquidators’ specific enquiries about the payments. They sued.

She first argued that the various payments were received into her bank account without her knowledge and that they were in the main instalments of a company salary due to her husband.

This argument was dismissed in the High Court. There was no employment contract between Mr Wilson and the company, no PAYE was deducted from the payments and the company’s accounting records made no mention of the payments as salary.

In the Court of Appeal, Rita Wilson argued that the payments were loans made by the company to her husband. This argument was also dismissed. There was no documentary evidence of the terms of any loan or of any obligation to repay.

The payments received of $1,081,000 were in the nature of gifts to Mr and Mrs Wilson and had to be repaid by Mrs Wilson. The court was told that Mr Wilson was bankrupt.

The Wilsons said Terry Wilson had lent some $750,000 to APG when the company was operating and this amount should be set-off against the one million required to be repaid. A further court hearing is required to establish the validity of this claimed set-off. Meanwhile, the court ordered that $249,000 be handed over to the liquidators immediately.

Wilson v. Blanchett & Burns – High Court (15.07.11), Court of Appeal (15.12.11) & Supreme Court (24.02.12)

12.005

Crafar Farms: Tiroa E v. Land Information

Interests associated with Sir Michael Fay and David Richwhite are running a canny strategy of disruption against Chinese interests looking to buy the Crafar farms. Using rules governing overseas investment in New Zealand farmland, they challenged the Chinese purchase at a time when they had no firm offer on the table themselves.

By having the Chinese purchase referred back to government for further consideration, Fay Richwhite interests bought themselves more time and left Chinese investors pondering whether the whole deal was worth pursuing.

The Crafar family had borrowed heavily to assemble a portfolio of sixteen North Island dairy farms and drystock units. This debt burden proved unsustainable. The farms went into receivership in 2009 with Messrs Gibson and Stiassney appointed receivers.

Receivers advertised the properties widely, with top bid from Milk New Zealand Holdings Ltd, a subsidiary of Chinese company Shanghai Pengxin. The ultimate owner of Shanghai Pengxin is successful Chinese businessman, Zhaobai Jiang.

Fay Richwhite interests challenged this sale using the Overseas Investment Act 2005. Sales of farmland to foreign interests require government approval.

The court was told that Fay Richwhite had no firm offer on the table at this point, having only nominated an indicative price well below the Shanghai Pengxin offer.

In the High Court, Justice Miller ruled it was not enough by itself that Shanghai Pengxin was offering the highest price, an overseas buyer must provide economic benefits over and above any on offer from a New Zealand purchaser.

Benefits could include increased economic output, more on-shore processing which add economic value to goods produced, creation of new job opportunities or the retention of jobs otherwise lost, and consumer benefits arising from increased competition.

Justice Miller said these benefits count only if they will not, or might not, arise without the overseas buyer completing its investment. The likely investment behaviour of any alternative New Zealand purchaser must be taken into account.

He referred Shanghai Pengxin’s offer back to government for further consideration.

Tiroa E & Te Hape B Trusts v. Land Information – High Court (15.02.12)

12.003