Emails talking of half truths, hiding loans and auditors "on the warpath" were outlined on the first day of the South Canterbury Finance fraud trial in the Timaru High Court yesterday.
Prosecutor Colin Carruthers QC said a culture of "round the mulberry bush" related party transactions by South Canterbury Finance (SCF) directors was behind its downfall and the subsequent $1.6 billion government bailout.
The country's largest fraud trial began yesterday with SCF chief executive Lachie McLeod and two former directors, Timaru lawyer Edward Sullivan and accountant Robert White, pleading not guilty to the 18 individual and combined charges they face.
SCF collapsed on August 31, 2010, owing $1.58b, which was paid out to investors under the Crown retail deposit guarantee scheme.
Mr Carruthers said in opening that 41 witnesses would canvass nine key transactions undertaken by the company, including deals to finance farming empire Dairy Holdings and the buying and selling of Auckland's Hyatt Hotel.
"They moved beyond [being] cavalier and contributed directly to the collapse. The hallmark was related-party lending, highly structured to hide it."
He read out an email from McLeod to a SCF accountant on February 21, 2008.
"Obviously trying to hide my loan as a related party and now need to flesh out fully."
In an email to Sullivan, White said "the auditors are on the warpath re related party loans and are clearly unwilling any longer to work with the half-truths and related party loans that they have endured in the past".
In another email White said he had, "spent all afternoon trying to get rid of the smoke and mirrors to try and understand what the shape of the transaction is and now I have thrown in the towel".
He also described other transactions as "round the mulberry bush", and "trying to hide a pea under a thimble".
Emails from another SCF insider described a "juggle of related party debt to keep the trustee from busting my balls".
The case will draw in members of Sullivan's family, including Geoffrey Sullivan and Peter Symes, respectively his nephew and his brother-in-law.
Mr Symes' evidence will be written, as he died in August last year. His evidence relates to his role as director of Quadrant Holdings and Shark Wholesalers.
Mr Carruthers said Mr Symes acted as a proxy of Sullivan in these companies.
Geoffrey Sullivan was the general manager of Specialised Sales and Marketing (SSM), who noticed the company faced funding issues, Mr Carruthers said.
"[Ed] Sullivan proposed a solution to the funding issue, where Shark could purchase stock from SSM which SSM would gradually purchase back. He will say that is exactly what occurred," Mr Carruthers said.
Sullivan's personal assistant, Florence Smith, and RSM Law practice manager Greg O'Brien will also be called.
Stuart Nattrass, a former director of SCF, is the first witness to be called and is expected to occupy the stand for all of next week.
BID TO HAVE TRIAL ADJOURNED FAILS
Lawyers for the three South Canterbury Finance accused made a dramatic early-morning bid yesterday to have the trial adjourned and Justice Paul Heath removed from the case over perceived bias.
The claim relates to comments made by the director of the Serious Fraud Office, Julie Read, at an Insolvency Conference in Auckland last week.
Justice Heath chaired the conference and, according to an affidavit filed by Ms Read, she said during her presentation, "we are very fortunate to have Justice Heath as our trial judge", for the SCF case.
Lawyers acting for Sullivan, White and McLeod submitted the trial should be put off while additional evidence was gathered to determine whether Justice Heath was able to hear the case.
Justice Heath said he had not faced prior allegations of bias from counsel, and he believed that while the comment was "unfortunate", it was merely complimentary of his abilities.
"The clear impression I formed was that the comment indicated no more than Read was pleased that a person with some experience in the [insolvency] area was presiding over the trial," he said.
Justice Heath declined the application to adjourn the case, and ordered the trial to begin as planned. He gave leave for defence counsel to make another application to have him removed if they obtained further evidence.
- The Timaru Herald