Dominion Finance & North South Finance: R. v. Butler & Whale

Two directors of finance companies Dominion Finance and North South received sentences of home detention after pleading guilty to charges of issuing a false prospectus and false advertisement: nine months home detention for Ann Kathleen Butler and twelve months home detention for Robert Barry Whale.

At issue were separate prospectuses issued by each company in 2007 (inviting deposits in each finance company) and a follow up letter to investors the following year (which was untrue in that it mis-stated the level of reinvestment by investors and misleading in its description of company liquidity at a time when major shareholders had been forced to inject $300,000 working capital to bridge a liquidity crisis).

Both companies are now insolvent.  To date, Dominion Finance investors have recovered some twelve cents in the dollar, North South investors 65 cents.

Offer documents issued to potential investors in 2007 and 2008 were described as being misleading.  Dominion Finance offer documents failed to disclose related party lending of some $25 million, did not disclose the company’s failure to comply with its own internal lending standards and did not clearly identify the level of loan impairments.  For North South, there was a similar failure to disclose both related party lending and a material deterioration in the company’s overall financial position.

Neither director personally prepared the offer documents but Justice Dobson said securities legislation required them to check the accuracy of the information provided before it was released to the public.  Their failure to do this job properly amounted to gross negligence.  Deliberate dishonesty does not have to be proved.

In mitigation, Robert Barry Whale provided numerous testimonials as to his previous good character and his being a valuable member of the Auckland legal community and wider city community.  Justice Dobson said he was troubled by one clear instance of apparent dishonesty where Mr Whale had lied to company auditors about the existence of one of the related party transactions.

Mr Whale was sentenced to twelve months home detention together with 250 hours community work and required to pay $75,000 reparations.  Justice Dobson said Mr Whale’s offer of $75,000 reparations appears “underwhelming”.

Ann Kathleen Butler said she was absent from New Zealand for two months in mid-2008 and was then not in a position to exercise the oversight properly required of a director.  She had been the companies’ chief financial officer for some years but in 2005 stood down from her day-to-day role in company operations, retaining an involvement as non-executive director.  During 2008 she was caring for her late husband who was then receiving treatment for cancer.  She offered reparations of $300,000 but said her future financial position was dependent upon trustees of a family trust making provision for her.  The court was told that she and her late husband had previously transferred assets totalling some $10.5 million into family trusts.

Mrs Butler was sentenced to nine months home detention (with provision for visits to her elderly mother), 80 hours community work and payment of $300,000 reparations.

R. v. Butler & Whale – High Court (14.06.13)

13.014

Pricefixing: Commerce Commission v. Air NZ

After long denying complicity in price-fixing for air cargo rates, Air New Zealand capitulated pleading guilty to Commerce Commission charges.   The High Court fined Air New Zealand $7.5 million and ordered it pay $560,000 towards the Commission’s investigation and legal costs.

The court was told Air NZ collected extra revenue totalling $4.2 million over various cargo routes during the period 2000-2006 for fuel and security surcharges considered anti-competitive because they were the result of secret agreements with competitors on the same cargo routes.

In mitigation, Air NZ said these anticompetitive arrangements were not struck in New Zealand: they were the work of an independent sales agent in Malaysia and regional company managers in Australia and Japan.  Air NZ’s board and senior executives were not aware of what had been done in the company’s name until after the event.  In Japan and Malaysia, local transport authorities had approved the surcharges.  Air NZ said it was not aware that its failure to get similar approval in New Zealand would amount to a breach of the price-fixing provisions in the Commerce Act.

Air NZ emphasised its previous clean record, not previously being found in breach of the Act.

Commerce Commission v. Air NZ – High Court (13.06.13)

13.015

Belgrave Finance: R. v. Smith

Stephen Charles William Smith was sentenced to four years imprisonment after pleading guilty to charges under the Crimes Act and Securities Act for his actions as director of failed finance company: Belgrave Finance.

Belgrave went into receivership in May 2008 with debenture holders likely to lose 90% of their investment.  Mr Smith, formerly a senior bank manager, was a director of Belgrave for the three years prior to its collapse.

The court was told Mr Smith colluded with two others to buy into Belgrave in 2005 and they then dishonestly misrepresented the company’s proposed lending policies to attract investment from the public, used the funds procured for a series of related party dealings in breach of the limits set out its prospectus and then lied to the trustee for these debenture holders about the level of related party dealings.

Of the company’s losses totalling some $18.4 million, $13.2 million arose from dishonest related party lending.

Justice Toogood said the pattern of dishonesty was set from Mr Smith’s first introduction to the company.  With two others, Mr Smith was party to an arrangement which saw $3.175 million borrowed from Australian finance companies to complete the purchase of Belgrave shares.  Belgrave guaranteed repayment of the loan with directors keeping the fact of the guarantee hidden.  This had the economic effect of passing the risk of the acquisition across to Belgrave’s debenture holders.

In mitigation, Mr Smith said he poured about $400,000 of his own money into the company over the six months prior to receivership in an attempt to keep it afloat.  Justice Toogood said these steps were hardly altruistic.  They were motivated less by a concern for debenture holders than a desperate attempt to prevent a financial collapse which would expose his prior criminal behaviour.

Following an August 2012 guilty plea in a separate prosecution, fellow director Shane Buckley was sentenced to three years imprisonment.  Justice Toogood said Mr Buckley was entitled to a lesser penalty because he acknowledged his responsibility when first interviewed by the Serious Fraud Office and pleaded guilty at the first opportunity.

Also involved in Belgrave Finance was a Mr Raymond Schofield.  He was described by Justice Toogood as a man with a significant degree of control over the company’s operations: a shadow director though not actually appointed as director.  A family trust associated with Mr Schofield has an 80% interest in Belgrave.  The court was told criminal proceedings against Mr Schofield were on hold because of his terminal illness.

R. v. Smith – High Court (07.06.13)

13.016

Insurance: NZ Local Authority Disaster Fund v. New India Assurance

The High Court ordered reinsurer New India to pay $17.5 million on claims for earthquake damage to infrastructure assets suffered by Waimakariri Council and Christchurch City in the 2010 & 2011 earthquakes.  The court dismissed New India’s argument that insurance cover was voided because of non-disclosure.

Council claims were made through the Local Authority Protection Programme Disaster Fund.  Since the 1990s, central government has agreed to carry 60% of repair costs for infrastructure assets following natural disasters.  Individual local authorities are responsible for the rest.  The Fund is an umbrella scheme providing insurance cover to participating local authorities for their 40% balance of repair costs.  It covers “horizontal” infrastructure: water mains and sewers; not roads and bridges.

The court was told New India Assurance Company was one of the reinsurers contracted to the Fund when the Canterbury earthquakes hit.  Faced with claims for $17.5 million, New India denied liability on grounds of non-disclosure.

Insurance law allows an insurer to void a policy and refuse to pay out if there was a failure to disclose any material facts at the time the insurance policy was taken out or cover was renewed.  Insurers say they cannot assess the risk unless they have all the material information and if they were misled as to the level of risk they can back out.

For customers, unaware of what facts might be considered material, this rule bears similarities to an internet scam: fees are paid in advance for promises which are never honoured.

New India said a re-writing of the Fund’s trust deed in 2007 was a material event and should have been disclosed.  The trust deed sets out the relationship between the Fund and participating local authorities and describes what claims will be accepted. New India said the re-writing potentially increased the amounts any reinsurer would be required to pay.  The Fund said there was no material difference between the old and the new trust deed.  Associate Judge Doogue agreed.  Under both deeds, the trustees had a discretion in determining what claims were covered.  Replicating this discretionary power in the re-written deed did not expose insurers to any greater risk.

All up, the Fund made earthquake related claims totalling $180 million on behalf of Waimakariri Council and Christchurch City.

NZ Local Authority Disaster Fund v. New India Assurance – High Court (6.06.13)

13.027

Dominion Finance & North South Finance: R. Cropp

Paul William Cropp, formerly chief executive officer of the Dominion Finance Group, has been sentenced to two years seven months imprisonment for failing properly to handle investors’ money.  Loans made to related parties in breach of company prospectuses resulted in further losses to investors in Dominion Finance of $700,000 (out of total losses of $233 million) and to investors in North South Finance of $8.4 million (out of total losses of $46 million).

Convicted of theft by a person in a special relationship, Mr Cropp was party to desperate attempts by Dominion Finance executives to fend off a liquidity crisis in March-April 2008. This involved four separate transactions: restructuring loans to a struggling Auckland property development and shifting funds from related finance company North South to an illiquid Dominion Finance.  Each of the four transactions required consent from trustees for debenture holders; they were otherwise prohibited as transactions between related parties.

The High Court was told no prior consents were obtained and in one case Mr Cropp actively tried to disguise the deal as not being a related party transaction.  Justice Lang said failure to get the required trustee consent breached an important investor safeguard.  It did not allow the trustee to exercise any oversight on investors’ behalf.

Justice Lang ruled that the starting point for this offence should be three years four months jail.  A nine month reduction was allowed to reflect evidence of Mr Cropp’s previous good character and expressions of remorse.

R. v. Cropp – High Court (23.05.13)

13.026

Hanover: Hotchin v. Sheppard

Two Hanover directors who allege they have been defamed by shareholder activist Bruce Sheppard obtained a High Court order that the trial be heard before a judge alone, rather then a jury.  Mark Hotchin and Eric Watson allege comments made by Sheppard in 2009 and 2010 were defamatory by painting them as businessmen who had dishonestly misled investors in Hanover, as “crooks” who should be imprisoned, as having participated in a GST fraud and as having misappropriated cash belonging to Hanover.

In his defence, Sheppard says his comments are honest opinion and were made under qualified privilege. 

Justice Cooper ruled that a judge-alone hearing was more appropriate because the trial would require consideration of complex financial transactions entered into over a three or four year period involving a number of businesses.  Complex legal, accounting, insolvency, property, tax and finance issues will arise.

The defamation action has its origins in a debt restructuring proposal put to Hanover investors in December 2008 and the sale by Hanover of its interests in a Queenstown property development.  Hanover froze investor repayments the previous July, affecting more than 16,000 investors owed more than $550 million.  Investors subsequently agreed to a debt restructuring which promised for secured investors 100 per cent repayment spread over five years and for unsecured investors fifty cents in the dollar after four years.

Outcomes have been less satisfactory than investors hoped.

Hotchin and Watson responded to Sheppard’s public criticism by suing for defamation. 

Damages can be reduced, even if comments are found to be defamatory, if it is established that the person defamed has a reputation of little value.

Justice Cooper refused an application by Hotchin and Watson to remove from the court record past instances where they had been separately censured for market irregularities in securities trading:

·         in December 1998, Watson was censured by the Securities Commission for buying more than two million shares in McCollam Print while negotiating its takeover by Watson’s Blue Star Group;

·         in 1998, the US Securities Exchange Commission found Watson had breached US securities law when buying and selling McCollam shares at the same time as negotiating the purchase of McCollam for Blue Star;

·         in 1999, Hotchin breached Securities Commission guidelines on insider trading in relation to the purchase and sale of shares in Pacific Retail Group; and

·         on 17 August 2000, Pacific Retail Group (majority owned by Watson) publically admitted Hotchin had breached Securities Commission guidelines.

 Sheppard says these are specific instances of misconduct relevant to Hotchin’s and Watson’s business reputations and are relevant to any question of damages if defamation is proved.

Hotchin v. Sheppard – High Court (3.05.13)

13.011