South Canterbury Finance: Out of time

TRIAL STARTS: Arraigned in the dock at the start of the $1.58b South Canterbury Finance fraud case, from left, are Edward Sullivan, Robert White and Lachie McLeod.
TRIAL STARTS: Arraigned in the dock at the start of the $1.58b South Canterbury Finance fraud case, from left, are Edward Sullivan, Robert White and Lachie McLeod.

While South Canterbury Finance directors and executives rearranged deck-chairs on their Titanic back in 2009, Southland Rugby was promoting the Timaru firm with a near-perfect example of finance company marketing.

During Southland Stags home games the South Canterbury Finance moneybox was wheeled out. The telephone box-sized clear perspex container was home-built by an Invercargill engineer and kitted out with a fan, a mail slot, and corporate green dragon logos.

For half-time entertainment one lucky spectator was given the chance to enter and score themselves a small fortune.

Roger Clark, the then-chief executive of Southland Rugby, says the moneybox wouldn't have been a big expense for South Canterbury Finance, who provided the $1500 in $5 notes thrown into the device each week.

"It's pretty hard when it's all blowing around in there to grab it," he says.

While perhaps cost-effective, hindsight questions the wisdom of promoting a floundering finance company by facilitating the frantic grasping of notes shoved through a slot before a clock ran out.

Time ran out and the the clock stopped for South Canterbury Finance on August 31, 2010 when receivers Kerryn Downey and William Black of McGrathNicol were called in, flagging New Zealand's largest corporate failure.

The resulting bailout of investors through the Crown Retail Deposits Guarantee Scheme was equivalent to one per cent of GDP, putting this meltdown on par with the giant insurer AIG, recipient of the biggest US government bailout during the global financial crisis.

South Canterbury Finance had modest roots in 1925, but had rapidly grown during the last decade and at its peak - when it collapsed - held $1.58 billion in investors' deposits and debentures. By some margin it was the New Zealand's largest locally-owned finance company.

Its influence spread from Invercargill, where South Canterbury was a shirt sponsor for Southland Rugby, to Auckland, where $39.3 million of South Canterbury money bought and refurbished the Hyatt hotel next to Auckland's busy High Court.

In the High Court at Timaru on Wednesday the last chapter in the sorry tale of South Canterbury Finance began with the opening of the trial of two of the company's former directors - lawyer Ed Sullivan and accountant Bob White - and former chief executive Lachie McLeod.

The three are broadly accused by the Serious Fraud Office of lying to investors in prospectuses, lying to the government to get into the crown guarantee scheme, and making false accounts to cover up these lies.

The trio have yet to present their defence - having to wait their turn as 41 witnesses for the Crown marshalled by Colin Carruthers, QC, testify for more than two months - but are expected to mount a vigorous refutation of the charges.

All three have employed Queen's Counsel to represent them in the four-month trial, which could still be delayed by years if a challenge against the partiality of Justice Paul Heath is successful tomorrow.

In the dock Sullivan, clearly familiar with courtrooms from his practicing days, boomed out his plea of "not guilty".

White's voice, that of an archetypal accountant, was relatively meek when pleading the same.

McLeod, the banker ,was businesslike when stating his own innocence of the charges, despite supportive relatives crying in the public gallery behind him.

Not present physically in the dock, but the key figure haunting proceedings so far, has been the man who employed all three: Allan James Hubbard.

The elderly patriarch had nurtured South Canterbury Finance into a heavyweight South Island business that led to his personal wealth ballooning to $600 million. He was known as a philanthropic miser, a rich lister who lived modestly and drove a 1971 Volkswagen Beetle but gave millions to charities.

Aged 81 when South Canterbury Finance collapsed, Hubbard was also known for archaic business practices - including reliance on hand-written ledgers and handshakes - developed during the post-war era.

Reserve Bank officials who visited the finance company in May 2009 as part of the monitoring of institutions covered by the Crown Guarantee were flummoxed.

"SCF is an idiosyncratic institution by virtue of its wealthy backer and his peculiar approach to business," they wrote.

When Hubbard died in a car crash in September 2011 he was in statutory management and facing 50 fraud charges relating to private investment vehicles Aorangi and Hubbard Management Funds.

Adam Feeley, the SFO director at the time, described the South Canterbury Finance owner and chairman as a "person of interest" to his broader investigation into the finance company.

The Timaru High Court heard last week that in the years leading up to its collapse South Canterbury Finance was coming under increasing pressure from auditors and trustees over the eccentric shuffling of assets between the finance company and Hubbard's Southbury parent companies.

White, in contrast to his quiet voice in the dock, is shown in internal SCF correspondence as having considerable rhetorical flair when trying to fit Hubbard's antiquated business practices into increasingly restrictive boxes.

In a March 2007 email White said: "The auditors are on the warpath re: related party loans, and are clearly unwilling to to any longer put up with the half-truths re loan status that they have endured in the past."

In late 2008 when the Crown Guarantee scheme was set up, debate intensified over how South Canterbury Finance could squeeze under yet another layer of compliance that demanded yet more stringent limits on related- party lending.

The court was shown a letter by the Crown prosecutors where Sullivan described requirements under the guarantee scheme for such transactions to be conducted at arms-length as "most troubling".

In another memo presented to court, on how the company should proceed with a request by Hubbard to shuffle yet more bad loans in and out of Southbury, White said Hubbard seemed to lack an understanding of the consequences of related-party lending.

"The root problem is the on- going need of our parent company for income," White said.

South Canterbury Finance was in a bind over Hubbard's requests, White said in the October 2008 memo.

"In today's climate I cannot see how we could tell the market that we are going it alone without the Crown Guarantee. We would be dead in the water in no time flat. Equally, any suggestion that we should contemplate backdating any of Allan's proposals would see the lot of us in jail before lunch time," White wrote.

In the margins of Hubbard's asset-shuffling proposal White noted in a hand-written annotation: "Titanic deck-chairs stuff."

This memo, scribbles and all, gives an insight as to the cornucopia of troubled investments, spanning from local scotch to Hollywood elves, Hubbard had entered into by the close of the business.

There were proposals to impair loans to a Queenstown whiskey start-up by $1 million. (Receivers reports for The New Zealand Malt Whiskey Company show final losses for South Canterbury, the only secured creditor, eventually totalled $2.4m.)

Hubbard's $30m investment, using South Canterbury Finance funds, to help fund The Lord of the Rings trilogy in return for a share of profits, also casts light on the messy collision of old and new.

The memo said losses of $8m were expected, but Hubbard was seeking to avoid crystalising these until after June 30, 2009. The significance of this date would see the impairments bumped into a new financial year, albeit one more than seven years after the final film of the trilogy had arrived in cinemas.

In Virginia Green's biography A Man Out of Time, Hubbard - admitted he was baffled by his Hollywood peers in The Lord of the Rings transaction.

"New Line produced accounts for us that showed the films never made a profit - in fact they made horrendous losses! We found it surprising because it was one of the biggest box office successes of all time," Hubbard said.

Sunday Star Times