Taxpayers lose $808m in finance collapse

South Canterbury Finance's collapse has left New Zealand $808 million out of pocket, with a Treasury representative admitting it knew the company was troubled but let it into the extended guarantee scheme anyway.

Former SCF chief executive Lachie McLeod, and former directors Edward Sullivan and Robert White, are on trial before Justice Heath in the High Court at Timaru, on a combined 18 charges laid by the Serious Fraud Office.

SCF collapsed in August 2010, with taxpayers' money paid to investors under the Government retail deposit guarantee scheme.

Treasury manager of guarantee schemes John Park gave evidence yesterday, discussing Treasury's awareness of the flagging finance company's troubles.

Following the receivership, the amount outstanding to taxpayers was just under $810m, he said.

The Treasury relied on information provided by SCF on its entry into the scheme. Had the Treasury been aware of related party lending, there would have been more investigation, he said.

"If SCF was not in the scheme, investors' money would have gone to other finance companies.

"If there was a delay [into the scheme] it would have put the particularly large entity under pressure." A memo from Treasury showed public confidence was a key concern.

"It is a very significant company and it is clear it would have a very significant effect on public confidence in financial institutions in New Zealand and the confidence of depositors generally and it is necessary or expedient to grant a guarantee."

SCF was at the time working on a merger which would inject $130m of equity into the cash-strapped company. It was also working on recapitalisation deals.

SCF was then allowed into the extended guarantee scheme.

"One of the reasons for the entry was the concern at the time that if SCF was not approved for the extended scheme, they would have come under major liquidity issues with people leaving and the company failing and losing the opportunity to realise recapitalisation deals in the interim and our loss would be crystallised.

"We didn't hold out great hope for the recapitalisation but otherwise it [SCF] was going to fail and fail quickly."

The judge asked Park if there was a sense Treasury did not have a choice.

"SCF went into the scheme and the run on [extended scheme] and [it gave] the best chance of ensuring our original liability was minimised. The company was engaging in extraordinary practices. It was selling off the front end of loans and subordinating its positions. It was working hard to stay solvent."

Receiver William Black gave evidence about winding up SCF and passing on information on irregular transactions to the Serious Fraud Office.

The trial adjourned until April 28. The Crown has indicated it expects to wind up its case in the last week of May.

The Timaru Herald