SFO begins finance company probe

The Serious Fraud Office (SFO) is investigating Capital + Merchant Finance more than two years after the finance company failed, owing investors about $165 million.

The SFO investigation is into related-party transactions.

Last year, Capital + Merchant's receivers Grant Thornton said they had found $90m in related-party loans, although only about $10m of that had been earlier disclosed. Only $10m of the related-party loans were recovered.

Capital + Merchant's 7000 debenture holders have not been paid anything during the receivership and were not expected to get anything in the final wash-up. Sources said the SFO investigation was unlikely to lead to a recovery of any more money.

The SFO investigation began after a referral from Grant Thornton, the receivers of companies within the Capital + Merchant Group.

SFO chief executive Adam Feeley said the investigation was into "specific transactions which, on current information, appeared to have benefited certain related parties through the use of Capital + Merchant funds in contrived structures and with questionable supporting documentation".

"The investigation is in its early stages. The immediate focus of our work is to gather, analyse and evaluate all the relevant documentation around these transactions, and form a view as quickly as reasonably possible as to the merits of these matters," Mr Feeley said.

The SFO would also speak with people involved, including those who may have benefited from them he said. He did not identify those people.

"We have received excellent co-operation from Grant Thornton, and from other parties, including the second receivers Korda Mentha. We will liaise further with them, and continue to collaborate with other regulatory agencies as appropriate," Mr Feeley said.

Grant Thornton partner and joint receiver for Capital + Merchant Richard Simpson said they had reviewed a number of transactions during the receivership that they were "uncomfortable about". They passed over detailed material about the transactions to the SFO, which then decided to investigate further.

Meanwhile, the receivers were still sorting through Capital + Merchant's insurance policy with Lloyds of London.

That policy was being reviewed "but there certainly wasn't the (insurance) coverage we might have expected", Mr Simpson said.

When Capital + Merchant failed, some debenture holders said they had been encouraged to invest because their financial advisers told them their investments were guaranteed by Lloyds of London.

Mr Simpson said no payments had been made to debenture holders, because of the standard of Capital + Merchant's loan book.

The loans were mainly to smaller scale property investments nationwide.

Asked why it had taken so long before the related-party transaction issues were passed over to the SFO, Mr Simpson said the "matters needed a fair bit of review".

"Things do take time," he said.

Shareholders' Association chairman Bruce Sheppard said that in New Zealand market watchdogs like the Securities Commission and the SFO acted only on complaints or referrals, and did not take action themselves. By contrast, United States market regulators started their own investigations, which meant they happened more quickly.

But Mr Sheppard said that even if investors lost all their money, it did not mean someone had stolen it. The SFO would not investigate till there was a clear indication there was evidence to act on he said.

The New Zealand directors of Capital + Merchant, Neal Nicholls and Owen Tallentire of Auckland, could not be reached for comment yesterday. The other directors are Colin Gregory Ryan and Robert Gordon Sutherland of Australia.

- © Fairfax NZ News