Bridgecorp case in court

Bridgecorp's financial position was "pretty much shot" in September 2006 - three months before the company registered a prospectus seeking investments from the public, the Auckland District Court was told today.

Prosecutor Brian Dickey was outlining the case against five Bridgecorp directors - Rod Petricevic, Rob Roest, Bruce Davidson, Gary Urwin and Peter Steigrad - who each face 10 charges brought under the criminal provisions of the Securities Act.

The maximum penalty is five years' jail or a $300,000 fine on each charge.

Before its prospectus was registered on 21 December 2006, Bridgecorp was already "in a freefall of deteriorating circumstances", Dickey told the court.

As cash-flow tightened, the company had been casting desperately around the market for third party loans.

In September 2006 - three months before registering its prospectus -Bridgecorp was forced to borrow $8 million from another finance company, St Laurence Ltd. The interest rate was 23 percent and, when the loan was extended in December 2006, the rate increased to 30.5 percent.

This money was used to repay Bridgecorp's investors who were getting between 10 and 11 percent on their money.

"The model by this point was profoundly uneconomic," Dickey says.

It got worse.

By early 2007, Bridgecorp began defaulting on its principal and interest repayments to investors. But when the company applied to amend its prospectus on 30 March 2007, there was no mention of any defaults "which at this stage were significant", Dickey says.

Between 7 February and the end of June, the company defaulted on 44 separate occasions involving nearly $21m.

Cash flow had been a problem since at least September 2006. By October 2006, it was monitored hourly and by December 2006 had "substantially deteriorated" Dickey says. Expected receivables of $482m for the group from July to December 2006 produced only $95.2m. The impact on liquidity should have been obvious to directors, Dickey says, and should have been disclosed to prospective investors in the December 2006 offer documents.

In June 2006 Bridgecorp had $13.3m in the bank; by May 2007 - just weeks before receivership - the bank balance was only $16,000.

Because this week's court hearing is depositions, none of the five directors is required to call evidence although one, Peter Steigrad, has conceded there is a prima facie case to answer.

Pleas will be entered at the end of the depositions with a High Court trial unlikely until the second quarter of next year.

Bridgecorp collapsed into receivership in 2 July 2007 owing 14,500 investors about $459 million. Investors are likely to recover less than 10 cent in the dollar.

The charges against the five, brought by the Securities Commission, allege the five lied to prospective investors in a prospectus and investment statement registered on 21 December 2006.

Specifically, these "untrue statements" include claims that Bridgecorp would lend only in accordance with good commercial practice and its internal credit approval policies, and that its financial position did not deteriorate between its balance date of 30 June 2006 and 30 March 2007, when it sought to extend the life of its prospectus.

It was also misleading for Bridgecorp to claim it had never defaulted on payments of interest and principal, Dickey told the court.

While that might have been true when the prospectus was registered, it was not true after 7 February 2007 when Bridgecorp began defaulting on principal and interest payments to investors.

- © Fairfax NZ News