SCF trial to focus on key transactions

02:43, Mar 12 2014
SCF High Court trial
CASE STARTS: From left, Edward Sullivan, Robert White and Lachie McLeod at the Timaru District Courthouse this morning.

Internal South Canterbury Finance emails show a "culture of obfuscation" by the three men accused of more than $1 billion of fraud, the High Court at Timaru has heard.

Colin Carruthers QC, continuing the opening of the Crown in the South Canterbury Finance fraud trial this afternoon, presented a number of internal SCF documents he said showed the accused were intentionally withholding information from investors and auditors.

SCF collapsed on August 31, 2010 owing $1.58b, which the Government paid out to investors under the retail deposit guarantee scheme. 

Former SCF chief executive Lachie McLeod and two former directors - Timaru lawyer Edward Sullivan and accountant Robert White - pleaded not guilty this morning to the 18 individual and combined charges they face.

"Much of this case arises out of related-party transactions. SCF took an unusual, and it is submitted an improper, approach to that," Carruthers said this afternoon.

Former director White, Carruthers said, had a "colourful" turn of phrase.


Emails from White described financing agreements with the late SCF founder and chairman Allan Hubbard as "more about continue to hide a pea under the thimble than anything".

White also conceded in a letter to Sullivan in January 2009 that he was having much difficulty in understanding Hubbard's accounts for SCF ownership vehicle Southbury Group, the recipient of hundreds of millions of dollars of SCF loans.

"I spent all afternoon trying to get rid of the smoke and mirrors in order to try and understand what the shape of the transaction was, and have now thrown in the towel!" White said in the letter.

Carruthers said the emails and letters showed a "culture of obfuscation and dissembling at SCF".

The trial chas been set down for three to four months before a judge alone, Justice Paul Heath.

The Crown will call 41 witnesses to give evidence in the trial in the High Court at Timaru, including two relatives of an accused director.

Carruthers said the witnesses would canvass nine key transactions undertaken by the company, including deals to finance farming empire Dairy Holdings and the buying and selling of Auckland's Hyatt Hotel.

The witnesses include Geoffrey Sullivan and Peter Symes, respectively the brother-in-law and nephew of defendant and former SCF director Edward Sullivan.

There will also be written evidence from Symes, who died in August last year, relating to his role as director of Quadrant Holdings and Shark Wholesalers.

Carruthers said Symes acted as a proxy of Sullivan in these companies.

"He had no financial interest in or control of those companies and received only a nominal fee," Carruthers said.

Geoffrey Sullivan was the general manager of Specialised Sales and Marketing (SSM), who noticed the company faced funding issues, Carruthers said.

"[Ed] Sullivan proposed a solution to the funding issue, where Shark could purchase stock from SSM which SSM would gradually purchase back. He will say that is exactly what occurred," Carruthers said.

Ed Sullivan's PA, Florence Smith, and RSM Law practice manager Greg O'Brien, will also be called.

Stuart Nattrass, a former director of SCF, is the first witness to be called and is expected to occupy the stand for all of next week.

Other witnesses to appear during the four-month trial include developer Neville Mahon, who was involved in an abandoned bid to purchase and renovate the Hyatt Hotel, and SCF receiver William Black.

Treasury's manager of the Crown Retail Guarantee Scheme, John Park, was said by Carruthers to be a key witness in establishing the Government was misled when SCF was allowed into the government scheme.


"The Crown case is directors evaded or ignored controls of how the company should operate," Carruthers said this morning.

"They moved beyond [being] cavalier and contributed directly to the collapse.

"The hallmark was related-party lending highly structured to hide it."

As an example he read out an email between McLeod and accountant Hutton on February 21, 2008.

"Obviously trying to hide my loan as a related party and now need to flesh out fully," the email said.

"This will avoid my name being directly on the prospectus which will be wise in this environment."

Earlier, lawyers for the three accused made a bid for Justice Paul Heath to stand down following comments made last week at a conference.

Justice Heath said he chaired last week's INSOL conference in Auckland, during which Serious Fraud Office director Julie Read was scheduled to give a presentation.

The SFO is prosecuting the SCF case, and Heath said he had not met Read before this event but warned her not to discuss the merits of the case.

"Read did not appear to know I was to be the trial judge, or may have forgotten," Heath said.

Read's presentation dealt with how the SFO and Financial Markets Authority worked their cases.

"At that stage a comment was made [by Read] to the effect that 'we are very fortunate to have Justice Heath as our trial Judge'."

Lawyers for Sullivan, White and McLeod said the comments represented perceived partiality by Justice Heath and requested he stand down.

Justice Heath declined the application, but granted leave for defence counsel, if desired, to gather more evidence and formally revisit the matter next week once the Crown had finished its opening submissions.

"The clear impression I formed was the comment indicated no more that Read was pleased that a person with some experience in the area was presiding over the trial. I did not consider anyone present would consider that I was biased in the SFO's favour," Heath said.

After a failed recapitalisation bid, SCF was placed in receivership in August 2010 owing $1.58b, which triggered a payout under the Crown deposit guarantee scheme, costing a net $805m after all assets were realised.

The collapse resulted in 21 charges being laid by the SFO in December 2011 against five men.

However, Timaru chartered accountant Terry Hutton and former SCF chief financial officer Graeme Brown had charges against them withdrawn last year.


Sullivan, 72, faces nine charges, the most of the three defendants.

Five charges are for failing to declare related party transactions in SCF prospectuses; for $220 million to Southbury Group and $34m to Woolpak, $64m to Woolpak, $65m to Woolpak, and $19.1m to Shark Wholesalers.

One charge is for transferring $6.8m worth of shares from Hellaby Holdings to Woolpak; one of inaccurately reporting impairment qlevels of $56.6m and $77.9m in a SCF prospectus; one of breaching the SCF debenture trust deed and one of entering the Crown deposit guarantee scheme by deception.

Sullivan retired in 2011 after 43 years at Timaru legal firm RSM Law. He was on SCF's board from 1990 to 2010.
McLeod, 50, faces five charges. He is jointly charged with entering the Crown guarantee scheme by deception, and breaching the crown guarantee with an advance from SCF of $39m to Hilltop Hotels.

He faces one charge of false accounting and transferring a loan from SCF of $10m to Kelt Finance, which was then advanced to Southbury; a charge of creating a false entry after an advance of $25m from SCF to Hilltop Hotels; and a charge of theft by a person in a special relationship in relation to a loan of $12m from SCF to Dairy Holdings.

He was the SCF chief executive between 2003 and November 2009.

White, 70, faces four charges; one of entering the government guarantee scheme, by deception, and three of failing to declare related party lending in a prospectus of $64m to Southbury and Woolpak, $19.1m to Shark Wholesalers, and $39m to Hilltop Hotels.

He was a SCF board member and director from 1993 to 2009.

Allan Hubbard, SCFs owner and chairman, died in car crash September 2011, and at the time faced 50 fraud charges in relation to his private investment entities Aorangi and Hubbard Management Funds.

At the time of his death the SFO confirmed he was a "person of interest" in their investigation into SCF.

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