The Hubbard halo is more than dented

CHALKIE

OPINION: The receivership of South Canterbury Finance has led to the media turning on the once-sainted Allan Hubbard.

However, Chalkie argues that before the receivership Mr Hubbard escaped almost unscathed over the most damning evidence presented against him by the statutory manager in charge of his other affairs.

Mr Hubbard somewhat unwisely put out a blaming and petulant press release following the receivership of South Canterbury, effectively putting a giant bull's-eye on his forehead, with the public outside Timaru outraged at the taxpayer cheque which needs to be written as a result of his business practices or lack thereof.

The media's attitude towards Mr Hubbard had subtly been changing for weeks.

Now even the odd journalist (Bernard Hickey on interest.co.nz for example) is dispensing with the obligatory preamble re the "generous, principled man etc".

Whilst the gloves have come off - pointing out Mr Hubbard's failing as a lender, his controlling attitude, an inability to listen to advice and inter-company dealings etc - Chalkie reckons the media generally has missed the most damning behaviour of all.

Sure, Mr Hubbard made mistakes at South Canterbury Finance, but he chucked all his net worth into the company in an effort to save it.

SCF's failings mainly sit with property loans made three or four years ago, not with all the tricky intergroup paper shuffling etc which was designed to save the company, albeit in a messy and unsatisfactory manner.

Where Chalkie has the most problem with Mr Hubbard's behaviour is with his funds management operation, through the lending of Aorangi and what is known as Hubbard Management Funds (HMF).

Although a sideshow in terms of scale and money lost, if ever Mr Hubbard is to be dragged before the courts it will probably be over this side of the business.

When individuals invested with SCF and the company on-lent the money to entities associated with Mr Hubbard, that was perfectly legal under New Zealand corporate law.

This sort of behaviour was common among a number of finance companies, if not desirable.

Rightly or wrongly, there seems a far greater duty of care on fund managers than on those running finance companies to look after people's money.

It is as a fund manager that Mr Hubbard seems to have flirted the closest with the law.

The second report by the statutory manager revealed a couple of disturbing facts that showed Mr Hubbard in a poor light.

Firstly, Aorangi (supposedly a first mortgage lender) and HMF (supposedly a funds management operation investing in shares and bonds) had lent $10 million each to Southbury, Mr Hubbard's holding company that owns his shares in SCF.

As Chalkie discussed in an earlier article, Southbury, even before the receivership of SCF, was theoretically worthless, its net assets and thus ability to repay any external borrowers - such as Aorangi and HMF - was sacrificed with the final rescue mission carried out on SCF in April this year.

The swapping of the valuable Helicopters New Zealand and Scales Corporation shares previously held by Southbury for worthless extra SCF shares was madness from a commercial point of view.

The transferring of these businesses into SCF was a suicide mission and it would seem that this has affected not only Mr Hubbard but some of his devotees with money in Aorangi and HMF.

These funds should not have had money in Southbury to start with and they have become collateral damage in the desperate battle being waged by Mr Hubbard to save his empire.

Where they once had security for their loans over Helicopters New Zealand and Scales, they now have none.

The most disturbing part of the statutory manager's report was the revelation of discrepancies at the funds management operation of HMF - that it had overstated the value of investors' money by "at least 25 per cent" simply by attributing to the fund equity investments and $5.65 million of cash that were nonexistent.

By the time the Southbury loan and investments in "venture capital funds and unlisted companies" are taken into account, Chalkie can only presume the deficit will be considerably larger.

When the story arose the press simply factually reported what the manager said and got some corresponding quotes from Mr Hubbard along the lines that he should have been consulted/could have sorted it out, etc.

Surely, the question has to be asked: "How could this be so?"

Apart from the statutory manager being so dull to have missed a cheque account balance somewhere in the empire or a certificate for BHP shares in the bottom drawer, there are, as Chalkie sees it, only two possible explanations for the overstatement of HMF assets, neither particularly palatable.

The first possible explanation Chalkie can think of is that the fund manager never had that extra $5.65 million in cash and $5m in shares - that the figures were made up to boost investor returns.

The boosting of investor returns by simply making up numbers with the aim of either drawing in more money or (typically near the end) stopping money flowing out is a core element of a Ponzi scheme.

Given Mr Hubbard wasn't doing a Bernie Madoff and living the high life on investors' money HMF was not a Ponzi scheme, but if it was misleading about the returns investors were achieving this reeks of appalling ethics not consistent with what was previously thought to be known about Mr Hubbard.

It is hard to think why the numbers might have been made up apart from some psychological desire to please supporters.

The second possibility is that HMF at one stage did have said cash and extra shares and they were lent/appropriated to other parties, presumably bodies within the greater Hubbard empire.

As noted previously, the game of funds management has very strict rules regarding using investors' money inappropriately.

If the explanation of numbers simply being invented looks damning, the second possibility carries more potential for court time.

South Canterbury chief executive Sandy Maier said in the paper that when the Hubbard empire, excluding SCF, was put under statutory management, money flow into the finance company dried up.

At the time many surmised that the statutory management was applied for technical reasons such as a lack of a prospectus, poor record-keeping etc, but the big hole in HMF suggests there is something much more rotten in the empire.

Just as the news of the statutory management dried up money flows into SCF, the revelation that there are serious discrepancies at HMF would have jolted anyone thinking of being involved in the last-minute rescue of SCF to be more cautious.

Chalkie used to think that the Serious Fraud Office investigation of Mr Hubbard could turn into a political nightmare.

But with the scale of the losses at SCF and the missing money at HMF - combined with his seeming non-acceptance of responsibility - the Hubbard halo is not just dented, it's destroyed.

Chalkie is an anonymous columnist. The name is derived from the people who used to "chalk" up the share prices on trading floors before the market went electronic.

- © Fairfax NZ News