Price-fixing: Commerce Commission v. Visy Board

With packaging company Visy Board fined $36 million in Australia for market rigging, the Commerce Commission is pursuing the company alleging similar market manipulation in this country.  The Court of Appeal ruled there is jurisdiction to prosecute an Australian company for market manipulation in New Zealand.

The court was told Visy Board and competitor Amcor Australia secretly decided in 2000 to carve up between them the Australian market for corrugated packaging after a debilitating price war through the 1990s.  They agreed at a top level to fix prices and divide the market between themselves.  Each supposed competitor put in uncompetitive tenders for nominated supply contracts.   When the whistle was blown, Visy Board agreed to a fine of $36 million and one of its senior executives was fined $500,000 for breaches of the Australian equivalent of the Commerce Act.

In New Zealand, corrugated packaging is used for the bulk supply of commodities like fresh meat, fruit and vegetables.  It is also used in secondary packaging of manufactured goods like beverages and processed foods.

The Commerce Commission alleges market manipulation by Visy Board and Amcor Australia extended to New Zealand.  As an example, a bulk supply tender to Mainland Meats saw Amcor prices significantly below Visy Board’s tender, and the reverse in tenders for Tip Top packaging.  Fonterra contacted Amcor saying the tender pricing for Tip Top looked suspicious when Amcor prices came in at twenty per cent higher than Visy Board.

When sued by the Commerce Commission, Visy Board said it was an Australian company operating out of Australia and could not be sued in the New Zealand courts for any alleged breach of the Commerce Act.

Both Visy Board and Amcor operate New Zealand subsidiaries of their Australian businesses.

The Court of Appeal ruled that the High Court rules gave jurisdiction for New Zealand courts to consider wrongful conduct carried out in New Zealand and the Commerce Act specifically covers decisions made outside New Zealand to the extent that those decisions affect the New Zealand market.

Commerce Commission v. Visy Board – Court of Appeal (31.08.12)

12.032

Capital + Merchant: R.v.Douglas, Nicholls & Tallentire

Directors of failed finance company Capital + Merchant were described as being driven by self-interest and greed when sentenced to long terms of imprisonment following convictions for theft.  For the theft of $19.7 million, Wayne Leslie Douglas and Neal Medhurst Nicholls were sentenced to seven and a half years jail; Owen Francis Tallentire five years jail for the theft of $12.1 million.

Each found guilty of theft as a person in a special relationship, the three directors used Capital + Merchant funds to finance personal business projects.  When the finance company went into receivership six of the company’s outstanding loans were to interests linked to the three directors: in number this amounted to just over ten per cent of the company’s loan investments.  In total the three directors had borrowed some $37 million dollars from their company.  Evidence was given that only $200,000 has been recovered.

Capital + Merchant was funded by public investors.  At the date of receivership there were some 7000 investors, many of them elderly and solely dependent upon Capital + Merchant for investment income.  The company prospectus and debenture trust deed said related party lending, such as loans to directors, was very severely restricted.

Justice Wylie said the directors intentionally breached these restrictions to advance their own interests.  The offending was sophisticated, requiring significant planning and premeditation using convoluted legal structures.  Particularly cynical was the use of Capital + Merchant funds when directors could not raise personal loans from outside sources.

Each director said he was not in a position to offer any reparations.

Douglas said he has no personal assets.  The family home is held in a trust.  Nicholls said he is the part-owner of an investment property which has no equity since it is heavily mortgaged.  The family home is owned by a family trust established by his father-in-law.  Tallentire said he has no savings. 

R.v. Douglas, Nicholls & Tallentire – High Court (31.08.12)

12.026

Hanover: KA No.4 v. Financial Markets Authority

Assets held in family trusts set up by Hanover director, Mark Hotchin, remain frozen following a Court of Appeal ruling.  It is alleged that one trust is a sham with Mr Hotchin remaining in control of the assets and that a second trust holds assets on his behalf.

Legal action against Mr Hotchin is proposed by the Financial Markets Authority for alleged wrongdoing in his management of Hanover.  In the interim, it obtained High Court orders seizing control of assets held by two family trusts: KA3 Trust and KA4 Trust.  Asset preservation orders can be made under the Securities Act to seize assets held “on behalf of” any person (or an associated person of anyone) under investigation by the Financial Markets Authority.

Interests associated with Mr Hotchin complained that insufficient evidence was put before the High Court to justify any asset seizures.

KA3 Trust was set up in 1999 with Mr Hotchin and immediate family as discretionary beneficiaries.  It was argued that discretionary beneficiaries have no absolute entitlement to trust assets; trust assets could not be said to be held “on their behalf”.  The trustee decides which beneficiaries, if any, receive a benefit.  Since April 2010 the trustee of KA3 Trust has been under control of Mr Hotchin’s accountant: Mr Tony Thomas.

The Court of Appeal ruled that the purpose of Securities Act asset preservation orders is to cast a very wide net in taking control of assets prior to trial.  This caught assets held on behalf of discretionary beneficiaries.

The court was told that KA4 Trust was set up in May 2003 with Mr Hotchin’s children (but not Mr Hotchin himself) named as discretionary beneficiaries.  Initially, Mr Hotchin was the sole trustee.  Since May 2010 Mr Thomas exercised control as trustee.

The Financial Markets Authority alleges KA4 Trust is a sham with trust assets being treated as if they were owned by Mr Hotchin personally.  There are examples where the Trust appeared to act purely in Mr Hotchin’s interests, seemingly at his discretion: land transactions on Waiheke Island benefitting Mr Hotchin and the construction of an expensive residence on Auckland’s waterfront Paratai Drive.  Mr Hotchin put $12 million of his own money into the Paratai Drive construction.

While confirming the asset freeze on KA4 Trust assets, the Court of Appeal indicated that some KA4 assets currently frozen might later be released if it could not be established that the Trust did operate as a sham throughout its operation.

KA No.4 Trustee Ltd v. Financial Markets Authority – Court of Appeal (17.08.12)

12.031

Extradition: US v. Kim Dotcom

Extradition to the United States requires prima facie evidence that the suspect has committed a crime.  New Zealand judges are proving to be no pushover in attempts by US authorities to extradite entrepreneur Kim Dotcom for trial on charges of breach of copyright, conspiracy and money laundering.

US authorities allege Kim Dotcom and others illegally distributed copyrighted material through their Megaupload website.  In a screenplay worthy of a Hollywood production, helicopters and armed police swooped on Mr Dotcom at his rented Coatesville mansion, bringing him before the courts for extradition to the United States.

Procedures on extradition differ depending on the country seeking extradition.  The simplest procedure is for extradition to Australia and the United Kingdom.  A fast-track abbreviated procedure is justified given the shared legal tradition in these countries.  For countries such as the United States, it is necessary to establish that the accused is “eligible” for surrender: this means proof that the accused would have faced trial in New Zealand if the conduct in question had occurred in New Zealand.  An extradition hearing proceeds as if it were a committal hearing before trial in New Zealand.   It is not for the New Zealand court to decide guilt; merely that there is enough evidence to proceed to a trial.

US authorities seeking extradition are required to produce a “record of the case”: a summary of the evidence against the accused.  Kim Dotcom complained that the “record of the case” against him was too brief.  It was not clear how he may have transgressed.  US authorities told the court: “trust us”; Kim Dotcom will get a fair trial in the US with all the safeguards of the US legal system and in any event US legal procedure does not allow us to release all the file without court approval.

In the High Court, Justice Winkelmann emphasised that New Zealand courts and New Zealand lawyers have their own legal rules which they are bound to follow.  At issue was the extent of disclosure required by the Extradition Act before extradition to the United States.  She ruled that Kim Dotcom was entitled to all the benefits of the Bill of Rights that a New Zealand accused would have to ensure a fair trial if facing a committal hearing in New Zealand.

US authorities were ordered to disclose all evidence held to support the charges of breach of copyright and money laundering.  The amount to be disclosed might be substantial, but as Justice Winkelmann observed, that reflected the complexity of the case.

United States v. Kim Dotcom – High Court (16.08.12)

12.030

Blue Chip: Hickman v. Turner & Waverley Ltd

In a ruling with implications for proportionate sales of commercial property, a substance-over-form approach has been adopted by the Supreme Court in the interpretation of Blue Chip investment contracts.  Blue Chip’s financing construction of inner city apartments were in the form of contracts for the sale of land which are exempt from securities law but were held to be in substance debt securities unenforceable because Blue Chip did not issue a prospectus.

It has been a long battle for Blue Chip investors who signed up for over-priced apartments to be constructed in Auckland’s central business districts.  Led to believe they were lending money to finance the construction of apartment blocks, they later discovered they were committed to buying a finished apartment and at risk of losing their own debt-free homes to meet their commitment.

Newspaper reports have indicated that deals have been struck by some investors allowing them to stay in their own homes with Blue Chip apartment debts deferred until their death, to be paid out of their estate.

Blue Chip sought money from public investors to finance the construction of three Auckland inner city projects.   The primary funder in each case was Westpac Bank.  A specified level of pre-sales was a condition of bank funding being released.  Blue Chip agreed to underwrite the pre-sales.  Sales levels were achieved by making sales to short-term investors with the intention that second purchasers would take out the original buyer when each development was completed over the next eight to nine months.  When the market collapsed, these short-term investors were left as the only “buyer” and committed to paying the purchase price.

Both the High Court and the Court of Appeal dismissed investor arguments that their contracts were securities governed by the Securities Act, being void and unenforceable because Blue Chip did not issue a prospectus for the securities offered to the public.

Each investor had signed up to a web of contracts which included a sale and purchase agreement for a specified apartment.  Both Courts ruled the sale and purchase agreement was the primary contract and exempt from Securities Act requirements because contracts for the sale of land do not require a prospectus.

The Supreme Court took a different view.

In substance, each of the web of transactions put in front of an intending investor amounted to a debt security offered to the public.  Blue Chip was offering to pay money to investors who signed contracts and stumped up with the deposit for an apartment.  Investors were offered reimbursement for the deposit paid and promised a return for the money invested.  This created a debt payable by Blue Chip.  The sale and purchase agreements were secondary to the creditor/debtor relationship.  Rights of repayment were the primary feature of the web of transactions.  This was not an ordinary apartment purchase with the buyer intended to take ownership and possession.

The Supreme Court ruled that sales of real estate become securities governed by the Securities Act when accompanied by collateral arrangements intended to provide a return to investors based on the efforts of others.  Examples can arise in proportionate sales of agricultural and commercial properties where shares in a property-based business are offered to the public for investment.

In the case of Blue Chip contracts, the Supreme Court ruled that each Blue Chip investor needed to return to the High Court to prove the circumstances of their individual case before their contract was invalidated.  Those investors signing agreements for sale and purchase at the same time or after signing up to a Blue Chip financing package will have their agreements ruled unenforceable as being in breach of the Securities Act.  But those investors who signed an agreement for sale and purchase before being introduced to Blue Chip must prove in their individual case that the transactions were linked in such a way as to be an issue of debt securities in breach of the Act.

Hickman v. Turner & Waverley Ltd – Supreme Court (9.08.12)

12.020

Chrisco Hamper: Symons v. Wiltshire Investments

Investors backing the Chrisco Hamper business looked to have fallen out with allegations of secret side deals surfacing in litigation between investors.  One investor being sued claims he was fired as director of an associated company to keep hidden from him details of an out of court settlement which might affect how much he owes.

Chrisco Hamper attracted adverse publicity in February 2012 with fines of $175,000 for breaches of the Fair Trading Act after misleading customers about their cancellation rights when paying for Christmas hampers on layby.

Behind the scenes there has been a long-running dispute between investors over the operation of Chrisco’s finance company: Hopscotch Money Ltd.  This reached boiling point in April 2008 when ASB Bank pulled funding to Hopscotch investors Opus Fintek Ltd and Fibroin Initiatives Ltd; funding guaranteed in part by a Gregory and Robert Symons on one side and an Alan Wiltshire on the other.

The court was told that interests associated with Mr Wiltshire repaid ASB and in return took over all the bank’s rights under its security documents and guarantees.

When Mr Wiltshire gave notice that the Symons owed some $3.5 million as their share of the ASB debt, the Symons demanded details as to how this figure was calculated.  There was evidence that interests associated with Mr Wiltshire had extracted funds exceeding one million dollars from a Chrisco subsidiary in an out of court settlement.  The Symons demanded to see the settlement terms arguing it could affect how much they would have owed to ASB.  They were told it was confidential.  To ensure he did not learn of the details, Gregory Symons was removed as director of an Opus Fintek subsidiary prior its board agreeing to the settlement.

Wiltshire interests used rights assigned from ASB to sue the Symons, claiming some $1.9 million in High Court summary judgment proceedings.  The beauty of summary judgment proceedings is that there is no contested court hearing provided the claim is for a fixed amount and the defendant has no possible defence.

The Symons stated they might have a defence to all or part of the money claimed; they needed to see details of the secret out of court settlement.  They said Wiltshire may not have disclosed all the money received.

Wiltshire interests said terms of the out of court settlement were not relevant to the amount owed by the Symons and need not be disclosed.

The Supreme Court expressed disquiet about the haphazard way in which Wiltshire interests had progressively reduced how much they claimed from the Symons and agreed that excessive secrecy about the out of court settlement and benefits received under it raised suspicions.  The court said this shadowy impression might be unfair to the Wiltshire interests, but they had only themselves to blame.  In the circumstances, they should have disclosed the agreement.  Summary judgment was refused.  It was for Wiltshire interests to prove the Symons had no arguable defence and they had failed to do so by not disclosing the agreement.

Symons v. Wiltshire Investments – Supreme Court (9.08.12)

12.027

Matrimonial property: Burgess v. Beaven

Property values in relationship disputes are to be fixed as at the date of the first court hearing.  Long-running litigation following a twelve month marriage saw a court order for the woman to pay her former husband a total of some $30,000.

Married in May 2002 and separated in May 2003, it was not until 2012 that some finality was reached in a relationship property dispute between Mr Burgess and Ms Beaven.

Plans to develop a vineyard and homestay business on a rural property at Medbury in North Canterbury had come to nothing.  Each had sold their house in Christchurch to fund the proposed business.

Initially, the Family Court had taken the view that Ms Beaven’s contribution had been “clearly disproportionately greater” ordering a 65:35 split in her favour later amended to 62:38.  Ms Beaven was held entitled to $36,250 which Mr Burgess paid.

A series of appeals reached the Court of Appeal which ruled that an uneven split was not correct, ordering instead the standard 50:50 split of relationship property.  Both parties brought roughly the same equity to the marriage and there had been no material difference between their financial contributions to the date of separation.  Property values were assessed as at the date of separation in 2003.

The Supreme Court ruled that this valuation date was incorrect.  Where there is a dispute, the Property (Relationships) Act requires property to be valued as at the date of the first court hearing.  This was the Family Court hearing in 2007, some four years following separation.  Adjustments can be made for work done increasing the value of relationship property between the date of separation and the first court hearing.

From date of separation up to the Family Court hearing, Mr Burgess was adjudged to have increased the value of Medbury property assets by some $35,100 by keeping up maintenance and paying mortgage, rates and insurance costs after separation.  Medbury was subsequently sold in a mortgagee sale.

Reworking the valuation figures and including a refund of the $36,250 previously paid by Mr Burgess resulted in a court order that Ms Beaven pay Mr Burgess $30,046 in satisfaction of his share of the relationship assets.

Burgess v. Beaven – Supreme Court (9.08.12)

12.024

Redundancy: Service & Food Workers Union v. OCS Ltd

Business restructuring can result in a new employer taking over existing employment contracts.  Transferring employees might negotiate new terms but the new employer is not obliged to depart from their pre-existing employment contract.

Cleaners at Massey University who are members of the Service and Food Workers Union failed in their attempt to get redundancy provisions from their new employer when their pre-existing employment contract specifically excluded any right to redundancy.

The problem arose after Massey University put its cleaning contracts out to tender in early 2010.  OCS Ltd won the new contract and a number of cleaners transferred to OCS as their new employer.  These transfers were treated as continuous employment with the cleaners joining a new employer on their pre-existing contract terms.

The court was told OCS then told transferring staff they would no longer be employed unless they agreed to a new contract less favourable than their pre-existing contract.  For those not willing to accept the new terms, questions of redundancy arose.

The Supreme Court ruled that provisions of the Employment Relations Act dealing with redundancy in this case are clear: the pre-existing contract dictates what is due.  If the pre-existing contract expressly excludes redundancy (as it did in this case) then there is no entitlement to redundancy.  The employees’ position gets no better on transfer to the new employer.

Service & Food Workers Union v. OCS Ltd – Supreme Court (9.08.12)

12.029

Crafar Frams: Tiroa E Trust v. Land Information

Government encouragement for inwards capital investment has been boosted by a broad Court of Appeal interpretation of what amounts to appropriate business experience when seeking official approval.  Proven general business experience will suffice; it is not necessary that intending investors have detailed experience in the business activity to be purchased.

The Overseas Investment Act requires political consent for foreign purchases of New Zealand farmland.  A consortium backed by businessmen Sir Michael Fay and David Richwhite sought to block the sale of sixteen dairy farms to a Hong Kong registered company, Milk NZ, which had bid for the farms put up for sale by receivers of Crafar Farms.

The Fay consortium, having bid a lower price for the Crafar assets, argued owners of Milk NZ did not have the necessary farming experience to manage the farms.  The Act requires intending purchasers to have “business experience and acumen relevant to” the business.

The Court of Appeal ruled that it is sufficient in this case for the foreign investor to have experience in managing large investments as an on-going business enterprise.

Mr Jiang, the successful Chinese investor and entrepreneur backing Milk NZ, has experience in agribusiness generally.  It is proposed that day to day management of the farms will be contracted out to New Zealand based operators with industry specific experience, such as government-owned Landcorp.

Tiroa E & Te Hape B Trusts v. Land Information – Court of Appeal (7.08.12)

12.023

Perpetual Trust: Trustees Executors v. Perpetual Trust

Pyne Gould Corporation is winding down its public borrowing through Perpetual Trustee after getting its hand smacked following allegations that funds were being siphoned off to further the private interests of Pyne Gould’s majority owner, George Kerr.

In July 2012, the High Court appointed two individuals from accounting firm WHK to the board of Perpetual Trust as minders to oversee promised repayments by interests associated with George Kerr.

This followed evidence that Perpetual Trust funds had been used to refinance the Torchlight fund, another investment vehicle controlled by Kerr.  Some $28.6 million had been siphoned off to Torchlight.  It was to later come out in court that a Mr Tinkler, also a senior executive at Pyne Gould, had received $3.3 million from Perpetual; supposedly a loan but there was no written application for the loan and no security had been given for the advance.

Any continued need for observers on the Perpetual board was reviewed by the High Court in August 2012. 

The court was told the advances both to Torchlight and Mr Tinkler had been repaid.  Further evidence was given that the public arms of Perpetual Trust’s business were to be wound up.

Perpetual’s Cash Management Fund is to stop making any further loans and to stop borrowing from the public.  It is intended that existing public investors will be paid on maturity from new funds borrowed by Perpetual from private sources.  Investor repayments will be dependent upon timely realisation of Cash Management assets and Perpetual’s ability to refinance from private sources. 

Another investment vehicle, the Perpetual Mortgage Fund, is to be liquidated.  Repayments to investors have been frozen since early July.

High Court orders were made to have the two observers remain at Perpetual Trust to oversee the wind down of Perpetual Cash Management.  

Trustees Executors v. Perpetual Trust – High Court (3.08.12)

12.022

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