Treasury 'considered pulling SCF from scheme'

Last updated 05:00 09/08/2014

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Treasury thought South Canterbury Finance (SCF) was likely to fail and considered pulling it from the New Zealand Deposit Guarantee Scheme the year before its $1.58 billion collapse.

Colin Carruthers, QC, made the claim as he wound up the Crown case in the country's largest fraud trial in the High Court in Timaru yesterday.

Former SCF directors Ed Sullivan and Robert White, and former chief executive Lachie McLeod, face a total of 18 charges brought by the Serious Fraud Office. The trial is being heard by Justice Paul Heath alone.

Carruthers outlined count 10, which alleges all three defendants relied on prospectuses containing false statements to enter into the guarantee scheme.

Carruthers said the defence was likely to argue SCF was "too big to fail" and would have been entered into the scheme regardless.

He said that was "hard to square with South Canterbury being only a part of a sector constituting a mere 2 per cent of the financial system".

Treasury became nervous in April 2009, Carruthers said.

"The Reserve Bank alerted Treasury to a possible breach of the guarantee deed for two related-party transactions. South Canterbury explained the issue as an oversight but nonetheless the Treasury investigated.

"It appointed an inspector and carefully looked into South Canterbury affairs, coming to the conclusion it was likely to fail.

"Serious thought was given to pulling the guarantee, but it was recognised that would cause the failure of the company and of course the Crown was already exposed because breach of the guarantee did not obviate the need to pay all existing depositors."

SCF collapsed on August 31, 2010, with the Government paying out $1.58b.

Receivers have recovered close to $800 million.

Count 8 covered a loan of $12m to Dairy Holdings chairman Colin Armer, which the Crown said was to avoid breaching the trust deed, Carruthers said.

If the loan was to DHL directly it would have taken SCF exposure to over 35 per cent, a breach of the deed. So instead a loan was advanced to Armer personally for $12m, Carruthers said.

As a result McLeod faces a charge of theft by a person in a special relationship.

The trial resumes on Tuesday with the start of the defence closing.

Fairfax NZ

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