SCF defendants wait - and wonder
A ghost has been lurking in the High Court at Timaru.
Five months have passed in the South Canterbury Finance (SCF) trial, with the spectre of late chairman Allan Hubbard gaining in presence by the day.
In the dock are former SCF chief executive Lachie McLeod, and former directors Edward Sullivan and Robert White, facing 18 charges laid by the Serious Fraud Office following the $1.58 billion collapse of the finance company in 2010.
The trial came to an end this week, making it one of the longest and most expensive fraud cases in New Zealand. Justice Paul Heath is expected to deliver his verdict in October.
Over the last five months all were aware of the phantom elephant in the courtroom, with one witness noting dryly when a thunderclap was heard outside the court: "the chairman returns".
The finance company collapsed on August 31, 2010 and $1.58b was paid out under the Government guarantee scheme. Of that, $800 million has been recovered.
Referring to that payout, the Crown started off by calling it the biggest fraud trial in New Zealand's history, however in its closing, this was watered down to claims of the finance company gaining entry to the scheme earlier than it should have through prospectuses that included incorrect information.
The late chairman Hubbard died in a car crash on September 31, 2011. At the time he faced charges from the SFO in relation to his personal investment entities and also remained a person of interest in the SCF case. Three months after his death five others were charged by the SFO in relation to SCF but charges were withdrawn against two. Timaru chartered accountant Terry Hutton and former SCF chief financial officer Graeme Brown had charges against them withdrawn last year.
In South and Mid Canterbury, Hubbard was known for backing farmers wanting to get a start, providing the necessary millions to get a dairy farm running. There was even talk of him getting a knighthood, but by the time this came to light his practices were being questioned by Treasury.
He and wife Jean lived a modest life and gave millions to charity, particularly the Presbyterian Church and scouts.
His frugal nature extended to business, illustrated in evidence from Auckland property developer Neville Mahon. He said when Hubbard stayed at Auckland's Hyatt Hotel - then owned by SCF - Hubbard spent the night turning off lights in the hallways. White, Sullivan, Hubbard and McLeod approached Mahon to buy the hotel.
"Allan Hubbard had a towel hanging out of his briefcase because he didn't see the need to dirty a hotel towel. He said he had been up all night turning off all the lightbulbs at the hotel."
Hubbard's supporters had elevated him to near-sainthood, and when he and his wife were put into statutory management in early 2010, hundreds marched in support of the couple on the main street of Timaru.
The belief was that Hubbard might have had an old-school way of accounting and relied only on a handshake, but was not a fraudster.
This belief still has some traction with a few, regardless of the considerable evidence given of his complicated transactions, likened to a bowl of spaghetti; getting to the end of the piece of spaghetti without it snapping off in the middle near impossible.
Since the collapse, rumours have swirled of farmers avoiding repaying million dollar loans because no paperwork existed.
THE COURT CASE
As the company has been unwound in the cold light of the court room, Hubbard has been described by Crown lead counsel Colin Carruthers QC as a man who evaded and detested regulations.
"The major shareholder and chairman had little interest in the various accounting and legal regulations upon him. Mr Hubbard's attitude was memorably described in evidence as ‘trust me, I know what I'm doing'."
Hubbard was described as "window-dressing" the accounts.
However, the Crown said the defendants enabled this.
"On July 25, 2007, the directors even went so far as to write to Mr Hubbard expressing their concerns. That is an extraordinary document, setting out a long list of issues directly relevant to these charges, from related-party advances, the single-entity exposures limit, advances made without security, loan and draw-down authorisation and so on.
"But critically nothing changed. And, more importantly, these defendants did not just turn a blind eye. This case is about the affirmative statements they made and affirmative actions they took.
"These three men affirmatively facilitated the improper way the company was run ... In doing so, the Crown says they broke the law."
Hubbard was known to sanitise the accounts and had a practice of "cheque-swapping" to conceal related party loans, the High Court has been told.
Former SCF group accountant Terrance Hutton gave evidence that Hubbard had an aversion to disclosing related party loans.
"It was common practice for him to pay down any related party loans at reporting date then draw the loan down again. At reporting date the loan would be recorded as zero. The draw down could be as early as the next business day.
"It was not uncommon for Mr Hubbard to acquire loans not performing and put them into Southbury [parent company of SCF] or a personal entity so SCF was not at risk. His interest was to protect the investors."
Hutton sent Hubbard a memo on June 25, 2008, explaining that the trustees would need to be told SCF exposure to its parent company Southbury exceeded 20 per cent of shareholder funds.
A maximum of 35 per cent of shareholder funds could be lent to one entity before the trust deed was breached.
Hutton drafted a letter to the trustees explaining the exposure and asked for Hubbard to sign. Instead Hubbard sent back a memo explaining the loans should not be treated as loans and listed a variety of other methods of recording them, including treating them as dividends.
"He [Hubbard] would expect the loan balances to be nil at reporting date."
Correspondence obtained showed the frustration board members and executives felt about Hubbard's actions, with director Stuart Nattrass quitting the board after he failed to get Hubbard to resign.
However, Carruthers said the three did well out of Hubbard.
"Mr Sullivan and Mr White had been long-term beneficiaries of Mr Hubbard's success, not just as directors at SCF, but as a partner at [Timaru law firm] RSM Law and [Timaru accounting firm] Hubbard Churcher, respectively. Mr McLeod was a chief executive who, on his own evidence, was somewhat plucked from obscurity."
The defence has come out swinging at the SFO investigation, calling it inept, with those charged never given the chance to explain, defence counsel Marc Corlett said.
"In December 2011 the SFO announced it as the biggest fraud in New Zealand's history of $1.6b. After gleefully seizing on that, the media has taken every opportunity to focus on the $1.6b.
"What we now know is that these people were never questioned by the SFO about their entrance into the Crown Deed of Guarantee, they were never given the opportunity to explain. That people can be charged with the biggest fraud and not be given the chance to explain is an affront to the Kiwi fair go."
He was highly critical of the SFO's investigation.
"What emerged during the course of their [three SFO witnesses] cross-examination was an inept SFO investigation, undertaken by inexperienced investigators with precious little leadership or internal testing.
"The most alarming example of the deficiency of the SFO's investigation concerns the charge concerning the Crown Deed of Guarantee."
The charge had not been investigated by the SFO, Corlett submitted, and instead it was, "crafted on the cutting floor".
Now, after 61 days of evidence and more than 40 witnesses called, all three defendants are left in limbo, waiting until October to know their fate, asking themselves perhaps, if the ghost was still alive, would they be facing charges?
The Timaru Herald