We haven't seen last of corporate fraud

MATT NIPPERT
Last updated 05:00 16/11/2013
Simon McArley
PETER MEECHAM/ Fairfax NZ

UNIQUE PERSPECTIVE: Simon McArley can now look back on the great finance company meltdown of 2007-09.

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Simon McArley arrived at the Serious Fraud Office (SFO) in March 2010 to find a bulging in-tray. The tsunami of the global financial crisis was receding, after decimating the finance company sector, and the SFO's deputy director and head of corporate fraud was assigned the task of cleaning up.

"It was probably the biggest number of cases presented on a plate, at once, that the Securities Commission, the Financial Markets Authority or the Serious Fraud Office had ever seen," he says.

"Cases normally come at a nice steady flow, but here were 30-odd cases that needed to be looked at, all at once. It was a Herculean task."

A fumbled response from regulators, lurching from inaction to multiple regulators investigating the same cases, almost stalled the whole process, he says. "At one stage a judge had two groups of people from two government agencies prosecuting the same people for the same offence - in different proceedings . . . When the courts start criticising you, you've got to start paying attention."

The SFO eventually opened 15 finance company investigations, launched prosecutions in 10, and secured convictions and prison terms against 15 fraudulent directors and managers.

Only one case, South Canterbury Finance, remains to work its way through the courts, but McArley won't be around to see whether New Zealand's largest fraud prosecution succeeds.

McArley, talking in shorts and shoeless on the deck of his Grey Lynn home, is no longer on the clock. After missing out on a bid to make his acting role at the SFO permanent, he decided to call time and give newly appointed director, Australian Julie Read, a clean slate to work with.

Finally out of the office - he says he is taking the summer off before looking for a new challenge - McArley has a unique perspective on the most visible manifestation in New Zealand of the globe-spanning financial crisis: The great finance company meltdown of 2007-09.

The common symptom among the fraudulent finance companies was "pretty cynical" and murky related-party lending, he says.

"There was this desire to use clever boundary-pushing. They pushed the boundaries of what they could get away with with these imaginative transactions, to get quite substantial personal benefit without any regard whatsoever for the people whose money that was used."

When McArley arrived, legal advice said while such clever tricks may be morally abhorrent, they did not break the law. In response to the advice, the SFO took what McArley calls a "pretty out-there" approach and began looking closely at trust deeds. It built prosecutions that argued breaking the deed was literally theft - at least theft as defined under the Crimes Act.

"A lot of defendants would say they hadn't stolen anything, but they did. Taking money for one thing, and using it for things you're not allowed to do is pretty much the same as stealing someone's money. Just because you didn't steal it and put it in a bag with a dollar sign and run away with it is no defence."

Adam Feeley, appointed in 2009 to head the SFO after its string of failed prosecutions, had a lot to lose if this novel approach failed, particularly given mounting political and public pressure for heads to roll after the finance company collapses. McArley gives his former boss much credit for letting his legal team run loose: "That must have taken a fair bit of balls, really."

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McArley says subtle differences in trust deeds defining the proper use of investor funds led to divergent outcomes. To illustrate his point, he raises the two-year, seven month prison term for Dominion Finance chief executive Paul Cropp after a conviction for overseeing fraudulent related-party lending. "I feel a little sorry for Cropp, who ended up wearing the offending at Dominion Finance. He had come from Hanover, where he'd done exactly the same thing, but that trust deed permitted it," McArley says.

Hanover Finance, subjected to a 30-month investigation, was finally cleared in April of criminality. McArley was left to carry the can and make that announcement, pointing out "serious questions" needed to be asked over the state of Hanover, but he insists he is proud of the work of his team despite finding no grounds to prosecute.

"If I was going to talk about the business ethics and morals of what I saw in that investigation, there would be a different outcome, but that's not what the state funds me to do," he says.

While the Hanover probe was lengthy, progressing matters through the courts can make the wheels of justice appear static. This lack of speed is best illustrated by three recent SFO prosecutions, against Timaru financier Allan Hubbard, Dominion boss Terry Butler and B'On manager Michael Bradley, being derailed by the accused parties dying before trial.

McArley defends his investigations, saying most were resolved in about 12 months. He lays blame for delays at the feet of the courts system. "It's interesting why there's not more commentary around that: Why does it take two years to grind through the prosecution process?"

Speaking more broadly, McArley says such delays mean the civil list system is in danger of breaking down.

"Effectively, the speed with which things move through the courts, most people looking for civil remedy go somewhere else. You go for binding arbitration or you settle - very few civil cases now get through the whole process, because it's become not a workable solution."

Of all the characters to cross his path over the past three years, he says the late Hubbard, famous for living in a modest Timaru home and driving a 1971 Volkswagen Beetle, stood out. "He certainly didn't surround himself with the trappings of wealth," he says.

His politeness, too, was a mark of difference, sparking regular correspondence to the SFO office from "evangelists" defending the late financier.

"He was one of the genuinely nicest people I had ever met. He was courteous and possibly the only nicer person was his wife," McArley says.

Hubbard famously declared he would see himself impoverished before letting his investors lose money, and McArley believes he may well have ended up under canvas.

"I think he probably would have honestly lived in a tent if he could have fixed it, but I think it got out of his control to fix."

McArley says the end of the Timaru empire came with a ratings downgrade in August 2009 that triggered frantic and eventually fatal shuffling to free up liquidity.

"With South Canterbury Finance and Aorangi it was probably the old world meets the new world - the ‘she'll be right, we'll sort it out on the day' met Standard & Poors. And it didn't go so well," he says.

Three former directors and executives of South Canterbury Finance are due to stand trial in March. It will mark the final finance company prosecution.

Once it has washed through the courts, what will have changed in New Zealand? Not a lot, McArley says.

"To be cynical, the tide's come back in. Companies aren't falling over and third parties aren't coming in the front door and looking through the dirty washing."

A lack of recent evidence is not evidence that fraudulent behaviour has been banished from boardrooms, he says. "I don't believe, suddenly, overnight, everyone's become more honest. There are probably exactly the same number of people in business somewhere cutting the same corners for personal gain," he says.

History, including cycles of sharemarket rorts in 1987 and the great finance sector meltdown of 2008, seems destined to repeat.

"Undoubtedly, it will happen again," he says.

"It will happen again unless you actually start trying to solve the problems rather than putting out the fire after the house has burnt down."

- © Fairfax NZ News

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