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Taking Stock 27 March 2014

- The Facts -

Following the 2007-8 global financial crash and the collapse of New Zealand’s property development market, Dunedin City Council’s trading subsidiary Delta decided to buy a large number of unsold sections at Luggate and at Jack’s Point, near Queenstown.

Delta’s governance was in the hands of council-appointed private sector directors including property developer Mike Coburn, who had been a founding director and investor at Jack’s Point and a previous part-owner at Luggate, and Stuart McLauchlan, a Dunedin accountant who has had several experiences as a company director including as a director of South Canterbury Finance in the months prior to its collapse.

Delta has now sold out of its Jack’s Point and Luggate land purchases and has lost around $8.7 million of ratepayer’s money through this land speculation.

At the time Delta said it bought the land to secure a role for the council delivering infrastructure to the sections it bought.

I re-read the above paragraph with wide eyes, jaw dropping.  It is now clear Delta bought the land believing that land prices would rise in the near future.  Prices fell.

Many including me urged the Auditor-General to investigate this bizarre and disastrous behaviour, which looked simply like land speculation by a group of people in charge of other people’s money.

- The Outcome -

Given that the Auditor-General Lyn Provost has a powerful position and is a competent lady, I guess we can now relax and accept that the multi-million dollar losses of Dunedin ratepayer’s money was just bad luck.  She says so.

She has ruled that the losses were not caused by conflicts of interest but by a council appointed organisation (Delta) making idiotic property investments.  Her words were ‘’ill-advised’’; my word is ‘’idiotic’’.

The decisions obviously were unfortunate but the errors made were just caused by a genuine desire to take a punt, in the hope of producing higher dividends for Dunedin Council which had been appallingly misadvised about the losses it would make on the Forsyth Barr stadium.

Who provided the disastrous advice on the stadium?  (I do not know.)

In effect Dunedin Council had told another council-owned company to see what it could do to improve its dividends to the council to cover some of the stadium’s massive shortfall.

(Recall that the proponents of the stadium had said they would arrange tens of millions from corporate sponsorship but in fact raised hundreds of thousands, dumping the shortfall on the council, ie ratepayers.)

Dunedin’s mayor Dave Cull accepts the Auditor-General’s report on Delta and concedes the council should have given more direction on the risk/return equation before giving Delta a nod and a wink to ‘’have a go’’.

If this fairly describes the outcome of the Auditor-General’s enquiry into this dreadful affair then we should all accept her judgement and divert the Hitachi excavator which might have been heading towards Delta’s office, its bucket awaiting the heads of the people whose decisions cost Dunedin ratepayer’s close to nine million dollars.

Accepting her assessment does not imply agreeing with the process or the outcome, and demands discussion to ensure it does not happen again.

Delta is a trading company holding the council’s infrastructural businesses.  The council chooses who will govern Delta.  Presumably they get advice on this.

One obvious concern has been with Delta’s key governors.  They have included Mike Coburn (resigned), Stuart McLauchlan (resigned), Bill Baylis (appointed recently) and Denham Shale (appointed recently).  Coburn, who has had financial involvement with Luggate and Jack’s Point, stood aside from the ridiculous investment decision, the Auditor-General notes.

The Dunedin Tartan Mafia, an unnamed group of moneyed people in Dunedin, have often advocated Coburn, McLauchlan, Baylis and Shale for governance roles in the Otago and even South Canterbury region.

The Tartan Mafia, an Otago colloquialism understood by me rightly or wrongly to mean sharebroker Eion Edgar (Forsyth Barr) and friends, has allegedly had a lot to say in recommending people for governance roles.  Edgar, for example, has long had the Chancellor’s role at Dunedin’s University and McLauchlan has been his assistant.

Both have had much to do with the Otago Rugby Union, which has needed a great deal of help as has the Otago Cricket Association.

Forsyth Barr, a Dunedin sharebroking firm, has brokered a good deal of Dunedin’s business, being the dominant fish in a small pond.  Forsyth Barr’s biggest client was South Canterbury Finance (SCF), owned by the late Allan Hubbard.

South Canterbury Finance grew hugely in the period between 2000-2010 with Forsyth Barr at the helm, being its advisor and its biggest supplier of funds, almost double the next biggest supplier.

Edgar and his current manager Neil Paviour-Smith, did many things for SCF, recommending and managing preference share issues, bond issues, negotiating the settlement of a US facility when it was cancelled,  recommending staff changes, indeed demanding staff changes, arranging a new chief executive (Samford Maier Junior), installing new directors, virtually vetoing various asset sales,  promising to arrange new capital and at one stage, quite idiotically in my opinion, promising to list Southbury (the parent company) or SCF on the NZX at a time when any due diligence would have discovered the hole in their universe, making such a promise undeliverable.

Forsyth Barr, clearly, was not just SCF’s broker.  It was, in the words of the late Allan Hubbard, ‘’his boss’’, so important in terms of funding power that Hubbard virtually ceded control on many issues.  SCF paid many millions for this ‘’guidance’’.

The words ‘’shadow director’’ have yet to be formally used but in my view they may be a fair description of Edgar and Paviour-Smith’s roles with SCF.

When Hubbard in late 2009 was coerced into accepting Maier Junior as CEO, replacing Hubbard’s choice Nigel Gormack, he was also forced to replace his obsequious board.  Forsyth Barr, or perhaps the Tartan Mafia, nominated Stuart McLauchlan, Bill Baylis as chairman, and Denham Shale to replace Hubbard’s men, though lawyer Ed Sullivan did not resign for a few months into 2010.

The new board in 2010 pretty well immediately appointed Mike Coburn, a property developer, to take over as a ‘’consultant’’ on all property sales.  Baylis, McLauchlan, Shale, Coburn and Maier Junior, with Forsyth Barr’s guidance, ran SCF from December 2009.  They sold assets cheaply, trying to create time to effect a sale, but they failed.  The company lost more than $1.4 billion in 2010.

Times were tough then and it is probably fair to note that property sales were not optimal anywhere, so Coburn might be forgiven if it was he who supervised the sales achieved, often with the assistance of another Christchurch property developer, Ian Thompson, who had been given a management role in the distressed asset sale programme, unwisely in my opinion.

Whatever the cause - bad market, bad timing, bad management – SCF’s property assets were often sold off at prices that soon after looked so brainless as to qualify for institutional relief under the Health Act.

Land valued at $14m was sold for $4m, with interest-free loans to the buyer, yet within weeks the $14m valuation figure looked realistic again.  Land sold in Ashburton seemed to be sold at an unnaturally low price.  Others have enjoyed the subsequent gains.  A winery and property development sold at prices that seem silly now and write-offs of various hotel properties were eventually borne by taxpayers under the Crown Guarantee.

To be fair, the receiver appointed on August 31, 2010, McGrathNicol, was just as incompetent at timing sales, with two loan books sold at discounts that brought great profits almost immediately to the two buyers, a Japanese bank (Nomura) and an American finance company (GE Money).  In both cases the buyers reported immediate profits of more than $10 million from these deals.  The taxpayer paid.

To be accurate, the receiver’s bungling was in no way the fault of Maier Junior, or the 2010 SCF board, McLauchlan, Baylis and Shale, assisted by Coburn and Paviour-Smith/Edgar.  It was the receiver whose poor performance should raise the issue of accountability for the dreadful decisions after August 31.

SCF had done very poorly from its deals with land around Queenstown and Wanaka.  Millions were lost in 2006, 2007, 2008 and later.

So when Delta, under the governance of Coburn and McLauchlan and others, took up what was apparently Dunedin Council’s challenge to make some quick profits, I was astonished  that they chose to buy land at Jack’s Point, at that time a slow-moving property development at various times closely linked to John Darby, George Kerr, Hanover Finance and Babcock and Brown, and equally as surprised by the decision to buy into Jim Boult’s Luggate sub-division.  Boult had bought this from Coburn and others. 

Delta bought several million dollars worth of unsold sections at Jack’s Point.  The vendor must have been delighted.  Land values there subsequently, unsurprisingly in my view, fell substantially. Coburn was not the vendor.  He had been a founding director of Jack’s Point.  The Auditor-General clearly was satisfied that protocols observed by Delta’s governors ensured there was no conflict of interest and that the decision was simply ‘’poor’’, nonsensical in my view, but obviously logical in the view of Delta’s governors.

Delta’s current chairman Ian Parton is pleased with the Auditor-General’s report and noted that she had described the process as ‘’careful’’ and done ‘’cautiously’’.

The people of Dunedin’s recourse for the horrid losses can now be expressed at the ballot box but nowhere else.  The mayor is accountable.  The Delta people are not.

When Coburn and McLauchlan resigned from Delta, they were replaced by Baylis and Shale.  Is it time the Tartan Mafia retired from any role, official or otherwise?

To me, the appointment of Baylis and Shale was inexplicable and illogical.  Given the stresses at SCF and the mistakes at Delta, I would have expected Dunedin Council to seek fresh blood, to select people with no connections with all the errors that occurred in the period 2009-2010 at SCF.  Accountability?

Last week McLauchlan was interviewed on television about the accountability of directors, a question put to him relating to the responsibilities of the directors of a company owning a shipping vessel which had had an accident.

McLauchlan correctly and strongly advocated accountability and may feel his resignation from Delta displayed his attitude to accountability. 

My own summary of the SCF’s board of directors is that each of those directors and any shadow directors should be accountable.  Those clients with access to our closed website section will see our views on directors who should not be forgiven for bad corporate outcomes.

Indeed I am agitating to have the SCF directors and Maier Junior explain in court the massive failures under their continuous disclosure obligations with SCF and to reconcile the difference between Maier’s utterly incorrect guidance to the market in the months before SCF collapsed, resulting in the SCF preference shares becoming worthless.  SCF directors had legal responsibilities to disclose continuously.

It is possible that this issue cannot be advanced until the $1.7 billion fraud case against three other SCF directors is concluded.

If no case is brought against the 2010 board and Maier the only explanation that I would find to be credible is that the 2010 board and Maier had been given a full indemnity by the Crown, perhaps because their task was difficult.  If that were the case the Crown would surely be obliged to pay out any investors who lost money because the truth was not presented to them under continuous disclosure requirements.

If there was no indemnity I expect a case against Maier Junior and the 2010 directors to follow the resolution of the fraud case, which involved some of the 2008 SCF directors and the hapless chief executive in 2008.

I would also expect some authority – a court or a regulator – to examine the definition of a shadow director and to include in any new SCF case anyone who might meet the definition of a shadow director.

My definition could be too broad but I would have thought that anyone who is involved in recommending executive dismissals is acting like a director.

The Delta issue is now resolved.  No wrongdoing occurred.  There were just some breathtakingly bad decisions made.

The SCF issue is far from resolved.

The Financial Markets Authority is showing, with its various other actions, that it wants the court to decide if there should be accountability for losses borne by private investors or the Crown.

Surely this FMA resolve will reach the SCF errors of 2010.

_ _ _

THE death of Viaduct Capital executive Nick Wevers brings to four the number of key figures in the finance company sector who have died before their messes were tidied.

Allan Hubbard, Jock Hobbs (Strategic), Terry Butler (Dominion/North South Finance) and now Wevers were all key people on boards of directors that have been subject to scrutiny for their corporate behaviour.

Wevers died last week.  I met him when he was CEO of Capital Properties 15 years ago.  I was astonished when he left this reputable listed company and linked with the disreputable Blue Chip company and even more astonished that he made a second error, linking with the improbable Viaduct Capital finance company.

I guess his errors are even easier to identify in hindsight.  Perhaps they highlight the danger of being seduced by the huge profits that the highly-leveraged property development market can occasionally produce.

Huge, fast profits, as Michael Warrington noted last week, are usually an illusion or the result of an alignment of so many stars that only an astrologist would attempt to claim that they are predictable.

The unanswered question must still be, why did the banks and the regulators fail to put a stop to the high risk, highly-leveraged property transactions that Wevers, Hobbs, Hubbard and Butler pursued?

Why did any bank ever agree to a loan based on future deposits from sales contracts that were actually only an option, intended to be traded, rather than a real intention to buy and hold?

Does anyone recall those developments where, say, twenty ‘’pre-sales’’ would occur, allowing the developer to fund 10 more sections or dwellings, only to find that in trying to sell his ‘’10’’ units the developer found himself competing with the other ‘’20’’ that he had pretended were already ‘’sold’’?

Hubbard, Hobbs, Butler and Wevers all died without seeing their property plans fulfilled; and left an untidy mess for others to endure, collectively totalling more than one billion dollars of losses.

Literally thousands of people’s retirement plans have been damaged or destroyed.

_ _ _

THOSE who invested in property syndicates have always known that they would find their investments hard to sell, there being no transparent liquidity in the secondary market, if there was any secondary market at all.

The suspicion was and is that the cost of selling unlisted units would involve an unfair discount and very likely a hearty brokerage charge from the real estate people who control the secondary market.

Recently I spoke with an owner of KCL, a syndicator, and suggested that every syndicate should put up two valuations every second or third year and allow a simple vote to determine whether or not a sale process should begin.

The alternative relies on the syndicator deciding when to solicit a buyer.  Therein lies a conflict of interest, the syndicator having a vested interest in collecting his management fees each year.

The secondary market, lacking transparency, is simply a platform where fair practice would be subject to no audit and might therefore appear to be fickle, or even rigged.

Occasionally the property manager will be incentivised to arrange a sale and then there would be a debate about the size of the incentive.  Last week Cambridge Asset Management (CAM), whose ownership appears to relate to Mrs Lyncia Podmore, announced the potential sale of an Auckland property that it was managing at East Tamaki Drive.  CAM had an offer for a sum that would return $44,000 for each $20,000 unit held, a tidy gain.

A few years ago, a similar offer on the same property was stopped by the NZ Deerstalkers Association which held enough shares in the syndicate to veto the sale.

This blocking of the sale proved to be silly as the sale price then was better than the current offered price in real terms.  One has to hope that this time the NZDA will either buy the property itself or agree to the sale.

CAM would be entitled to a share of the profit on this transaction if it is confirmed.  I doubt that this would be resented as the quarterly returns have been good and the gain, which would be subject to a depreciation clawback tax, would be significant.  I would like the outcome but have loathed the process.

Even more do I dislike what is happening to those caught up in KCL’s property syndicates.

The underperforming Augusta Capital company is buying management control of KCL’s syndicates for $15 million, making a tidy sum for those who set up the management company.  Augusta has worked out that the sum paid to take over the management contracts will return much more to Augusta’s owners than $15 million, over time.

Property syndicate members clearly will pay for this with the fees charged in the future.  Augusta is controlled by Mark Francis, son of Peter Francis, best known for his involvement with Chase Corporation in the 1980s and Geneva Finance, a third-tier South Auckland moneylender.

I suspect that the Augusta takeover now makes it even less likely that KCL syndicate holders will find their properties are offered for sale.  Not unreasonably, Augusta will want to gain management fees for many years, to offset the cost of buying the contract.

Certainly I would be impressed if Augusta gave investors the option at selling out now at a fair current price.  I own one $50,000 unit that I would sell now if the price was anything like fair.  I have no wish to be represented by Augusta.

The CAM sale at East Tamaki, after 12 years, would enable the investors to move on, in contrast.

KCL, which itself merged with a Timaru-based company Commercial Investment Properties Ltd (CIPL) has left its investors at the mercy of Augusta Capital, a situation that no KCL or CIPL investors would have requested.  Why did KCL not promise investors that if ever it sold its management contract, it would first buy out anyone wanting to sell their units?

This whole business – managing other people’s property for large fees – needs to be regulated.  It seems to result in investors losing control of their destiny and has produced absurd and ridiculous gains for property contract holders many times in the past 30 years and, generally, poor outcomes for investors.

I hope Augusta will prove to be an exception.

_ _ _

Congratulations are due to Chatham Rock Phosphate’s key figure Chris Castle, who has cracked it.

He has found new shareholders in Britain and the US and Canada who will invest and underwrite a rights issue, enabling CRP to be fully funded for its horrendously expensive application for an environmental consent to convert its mining licence for phosphate pebbles into revenue, profits and dividends.

Castle’s dogged pursuit of progressing this project will be of no surprise to his followers.  He is a survivor, a battler, a determined character whose quiet demeanour should fool no one.

If the consent application is granted, Castle will have achieved what many would not have tried.

Note: CRP is hoping to list on the UK AIM market.

_ _ _

Travel News

Kevin Gloag will be in Invercargill next Thursday April 3.


Michael Warrington plans to visit Hamilton, Tauranga and Auckland in May.

I will be in Christchurch at the Russley Golf Club on Tuesday April 8 and Wednesday April 9.  Then I will be in Auckland on Tuesday April 22, available for meetings in Albany and at Waipuna Lodge in Mt Wellington.

Anyone wishing to make an appointment to see any of us is welcome to phone or email our offices.

Chris Lee


Chris Lee & Partners Ltd


Next week:

1) Revisiting the insurance involvement in the Credit Sails settlement.  Will there soon be litigation?

2) Why PricewaterhouseCooper should now withdraw from the receivership business, pending resolution of a $100 million plus legal suit.

Taking Stock 20 March 2014

BRIDGECORP investors can thank the High Court for the recent settlement of a case against the Bridgecorp directors but they will need more High Court help for the final claim they must win.  It is a much more important claim.

The directors have been found guilty of various crimes, are in jail or on home detention and have been fined what the court believed was a realistic amount, given the impenetrability of family trusts.

Collectively, these incompetent and in some cases dishonest directors were insured by Vero for ‘’negligence’’ with maximum coverage of $20 million.  The court ruled that the insurance was not to be used to finance the directors’ defence, so it has become available to investors.

The Bridgecorp receivers and the Financial Markets Authority deducted a sum of around $1.4 million, being the likely cost of litigation, and settled for $18.6 million approximately , roughly 4c in the dollar for investors. 

This seems logical.  Now the real war should begin.  The receivers MUST sue the auditors and the trustees.

If the Bridgecorp receivers do not sue the auditors and trustees then the investors will need to engage new help to consider what action they can take to force the receivers to perform.  Litigation funding might make this feasible.

Bridgecorp had regular changes of auditors and finished up with the Australian firm PKF Group, an appointment I described nearly 10 years ago as evidence that New Zealand audit firms were running scared of that audit role.

Bridgecorp’s childishly fiddled books were apparent to even the most casual observers long before it went broke, its grubby behaviour permeating the air for the whole of Auckland, let alone their One Queen Street headquarters.

It was virtually impossible that any inquisitive financial advisor, sharebroker, accountant, auditor, trustee, valuer, corporate advisor, regulator, employee, director, lawyer or collaborative finance company could claim that they were unaware of Bridgecorp’s deceptions and dishonesty.  If they were not complicit in this scam, they certainly were oafish in their roles.

For Heaven’s sake, details of some of their dishonesty were published years before they collapsed.  The Australian regulators had banned them from raising money in Australia just as the NZX, despite its own lax standards, could find no way of allowing Bridgecorp to be listed on the NZX.  Bridgecorp transferred related party loans out of sight the day before balance date!

Any auditor who did not know they were walking amongst a minefield must have been legless, if not from similarly dangerous assignments, then through imbibing incessantly.

Even an old sot would have been concentrating on this task.

Yet various auditors allowed their certificates to appear in Bridgecorp’s investment statements, effectively deceiving all others into believing Bridgecorp was to be taken at face value.

No remotely competent person should have been fooled.

Its CEO, Rod Petricevic, was a corporate joke, an ugly individual whose network comprised similar people.  Finance director Robert Roest was a surly bully, a slob in my jargon, whose occasional threats to sue me registered zero on the fear scale.  I have always been happy to face a day in court with corporate thugs like Roest.

Bridgecorp’s directors, by definition, approved of these people and were either involved in the scam and thus jailed, or were utterly incompetent and are now disgraced.

The insurers have paid for foolishly insuring such corporate clots.

The auditors should now answer the questions about their complicity in the scam, or explain their professional incompetence in dignifying the scam with audit certificates.

Just as culpable are the trustees, Covenant, the trustee of last resort for finance companies, though as it turned out Covenant was no worse than the others in most respects.

Covenant KNEW (ie did not have to guess) that Bridgecorp was grubby and was insolvent.   Eight months before Bridgecorp finally stopped lying about its state, Covenant agreed to a most unusual deal, allowing Bridgecorp to provide specific security for St Laurence so the latter would lend it a few million to enable Bridgecorp to pay its 2006 September interest bill.  No bank would lend Bridgecorp even a threepence.

At the time I discussed the significance of that loan here in Taking Stock and received widespread comment from financial markets, including puffball threats from the slob Roest, who denied the need for the loan.  A cousin who somehow gained entry into Petricevic’s office was told by him, in amongst a string of four-letter words, what a nuisance I was.

At the time I asked Covenant why it had allowed this loan.  Given that we had no clients who had Bridgecorp money, my motivation had no self-interest and was entirely professional.  Covenant said it allowed the deal so Bridgecorp could ‘’survive’’.  Bridgecorp then continued to accept public money for several more months.

If Covenant was monitoring the daily bank balance and acting as a guard dog for investors it was as noisy and effective as the stuffed fabric canine that rests beside the pillow of one of my grand-daughters.

The auditors and trustees will have a great deal of insurance, perhaps more than $200 million.  I don’t know the figure but other auditors and trustees have that sort of cover.  Two hundred million would be nearer 50c in the dollar if passed around investors in Bridgecorp.  Can yet more be recovered elsewhere?

What about the Registrar of Companies, the Companies Office and the Securities Commission, where outstanding bureaucrats like Liam Mason and John McPherson were working like demons, but with little help, trying to decipher the fabrications of several dozen finance companies?

Is there a liability there that might equate with another payout?  Did the regulators fail in their role?  And what about the cynical advisers?

Sadly, we have already heard from a High Court that all those boys and girls in the insurance and superannuation selling game who accepted double or triple brokerage (and in some cases Bridgecorp paid personal golf club fees) are not regarded by the High Court as liable for their failure to inspect Bridgecorp, as evidenced by a case involving an investor and an insurance-trained finance company saleswoman.

Justice Robert Dobson adjudged Carey Church and her Moneyworks company to have done enough ‘’research’’ by talking to visiting Bridgecorp salesmen and reading the investment statement.

I struggle to accept a standard requiring such pitifully low endeavour but I do accept that if the court rules that she had discharged her duty to investors with such a light touch, then the court, being the boss, must be right.

I imagine the client fees for her value-add will adjust to be in sync with the required featherweight touch.  (The fees should be zero if such little effort is the standard).

Her case has enabled a couple of hundred insurance-based advisers in Auckland, Hamilton, Napier, Hastings, Palmerston North, Lower Hutt, Wellington, Christchurch, Dunedin and Invercargill to escape judgement for the often greedy and self-focused work they did with Bridgecorp.  Most were members of the IAFP, as it used to be called, and a handful were honoured and held up as models for their peers for their sales achievements for Bridgecorp.  What models!

Sadly, that group will NOT be adding to the recovery pool for Bridgecorp investors, though a few have wisely salvaged some self-respect by compensating clients for accepting the double or even triple brokerage available.

No genuine researcher could ever have failed to be horrified by the 10-year stench of Bridgecorp, but the court’s definition of required research has let off these people, most of whom have changed professions, some presumably now selling encyclopaedias door to door.

There is, however, one more possible party for the receivers to sue.

Property Investment Research Group, an Australian-based company, was paid large sums to assess and credit-rate Bridgecorp, Capital + Merchant Finance, and possibly others.  Various crooked advisers had to arrange this after Axis (Rapid Ratings) belatedly ascribed a sub-investment grade rating to Bridgecorp.

PIRG’s work was pathetic.

Their work was described as talking to executives and directors for an hour or two and then leaving and announcing a credit rating.  Their work with CMF was so pitifully empty-headed that they mistook shareholder advances for capital and built a ridiculously strong rating on the basis of capital that did not exist.

Their ratings were about as meaningful as the claims of Bridgecorp’s sales manager, Andy Harris.  Yet their ratings were advertised and published by Bridgecorp and CMF and enabled the ghastly salesmen at places like Vestar, Broadbase and others to sell these abominations as ‘’investment grade’’, rated by PIRG.

Leave out the R and you must have discovered that the ratings involved one swine, putting lipstick on a kune kune.

Will the receiver of Bridgecorp be brave enough to ask PIRG to meet in court to discuss whether its acclaimed ratings may have been cynical and manufactured to enable grubby salesmen to sell these companies as ‘’investment grade’’?

Did Vestar ever pay $75,000 to PIRG or some similar sum to ‘’credit rate’’ Bridgecorp or CMF?  Will that question be answered under oath?

Finally one could ask if the receiver will ever ask Bridgecorp investors (and advisers) what they would be prepared to contribute to ensure all parties are interrogated in court.

Do the investors have the right to be heard?  Why have they never been asked what they think?

Is the receiver the only party with rights?

One hopes the Bridgecorp saga is still far from concluded.

_ _ _

THE High Court is now hearing two highly important cases, one being the fraud that allegedly occurred at South Canterbury Finance, the other being the alleged misrepresentation of Feltex when it was sold to investors eight years ago.

The SCF case is almost certain to be followed by another SCF case or a very important announcement by Treasury.

After the fraud allegations have been heard, I expect to hear of a new civil case involving the Financial Markets Authority against the SCF directors, chief executive and the company’s advisers who governed and mis-managed the company from December 2009 until the receivership in 2010.

If I had my way, this case would also examine the decisions of the receiver McGrathNicol, whose performance was so far below par that had it been a golf round it may have rivalled the effort of the North Korean President, whose unsigned card given to the Press recorded 18 consecutive holes-in-one.  If there is to be no such case, then I expect to hear a formal revelation that the Crown had granted indemnities to all the SCF rescue parties.  That would be the only conceivable explanation for the lack of action.

The fraud case has been distracted by the claim that the SFO chief executive Julie Read described the judge of this case as ‘’our’’ judge.  If one inferred from this that the judge was biased, one would be in a minority of one, or maybe two, the rest of the world knowing that the SFO would have no desire or ability to be heard in front of a biased judge.

To date, the evidence put forward by the Crown has contained little that has not already been publicly discussed, but the case will be of extreme interest to those who might see SCF as being representative of the whole finance company industry.

The Feltex case is unusual in that it pits a whole lot of retail investors against the might of some powerful organisations and two New Zealand sharebroking firms at the opposite ends of the spectrum.  Also involved are some Feltex directors who I would describe as below average but at least one, Joan Withers, who is regarded as above average.  Curiously, Withers has also been a director of one of the accused broking firms, Forsyth Barr.

What will be fascinating about this case, which examines a private equity fund’s sale of an asset to the public, will be the rights of retrospectivity, investors wanting to claim that they were entitled to a better picture of the future than they were given.

There will be many private equity firms paying attention.

There will also be many advisers and brokers lining up to hear the court’s decision.

Whether or not Feltex was accurately described is the issue that will be examined but at least one Lower Hutt broking branch will be anxious, as one of its advisers was so enthusiastic about Feltex that he had a client selling government stock, representing 25% of the investor’s wealth, to take up some unsold Feltex shares.  Perhaps that occurred before the law required such advisers to put the client’s interest first.

The SCF and Feltex cases may clear the way for other investors, as may the imminent case involving Capital + Merchant Finance’s trustees and auditors.

This year may be a great year to be a court reporter, providing the reporter has significant understanding of commerce.

_ _ _

IF this is to be the year featuring some court judgements on commercial behaviour, vying for headlines will also be the Genesis share float to be completed between March 28 and April 13.

This asset sale is being labelled as the NZ institutions’ revenge, the pricing of the float being conducted conventionally with an institutional book build.

The price range ($1.35-$1.65) is so low that even at the top of the range there might be genuine over-demand, the proposed 2015 dividend of 16c after tax offering a mouthwatering 10% return AFTER tax.  If the information leaked to date is correct, there should be a good deal of unsatisfied demand.

Investors in a confident era might pay a much higher multiple than 10 for a 16 cent dividend, so there may be two types of investors lining up for the NZ share pool, one wanting the attractive dividend, the other believing there will be a trading opportunity.

Given this demand, there should be a Treasury decision that there will be allocations to New Zealanders and to NZ institutions before anything is allocated to US, European, Asian and Australian institutions.

Why would we underprice an asset and let the gains go offshore?

There will be an argument that to get more breadth and depth to investor demand we need foreign investors.  But before this argument grows wings the organisers should look at the outcome of allocating Mighty River Power and Meridian shares to offshore institutions.  As far as I can see, of the roughly 200 offshore institutions which bought Meridian shares, roughly 90% had sold within weeks, capturing a 10% gain.

The enormous MRP turnover that occurred above issue price was also dominated by foreign sellers and we may never know how many more foreign sellers were shielded by the warehousing behaviour of two broking firms, the broker nominee company simply a conduit for foreigners.

If foreign institutions were really providing long-term breadth and depth to our market, every shareholder would welcome the effect on pricing.  But if the foreign buyers are simply five-day traders of the stock, what value do they really add, especially if their shares will be issued at a capped price, aimed at allowing NZ institutions to regain money lost in MRP trading?

I expect many genuine investors to line up for Genesis, spotting this opportunity and also noticing that Genesis has natural hedges from its ability to turn off, or on, its Kupe gas and its Huntly coal, exploiting times when rainfalls are low in the North Island.

Genesis would be a better company if it had a more appropriate chairman than the former politician Jenny Shipley, but it has a bright chief executive, a large retail client base and some nicely diverse sources of generation.  Shipley will surely resign soon.  Her work with Mainzeal should not be accepted by the investment world.

Given there might be a maximum allocation to NZ investors of just 170 million shares, I expect scaling might be significant, so this time the institutions which price the shares might ensure everyone gets a bargain, especially the institutions!

The investment statements arrive after the book build on March 27, so there will be a brief period of less than three weeks to invest.

Those wanting to see the investment statement should advise us now, so the abbreviated investment period (March 29-April 13) is not prohibitively brief.

Meanwhile, watch for sell downs of other generators’ shares, as money is re-gathered to spread into one more generator.

_ _ _

THOSE investors who 10 years ago would have used finance companies to get a better interest rate than banks now have a better alternative.

Next week we will have subordinated bonds, issued by banks themselves, as a source of higher rates, ASB being the first to make the new instruments available.

ASB announced its $400 million issue of Tier Two bonds at corporate briefings earlier this week, indicating a fixed five-year rate likely to be between 6.65% and 6.85%.

The bonds will have a legal maturity of 10 years but the bank can repay them after five years and there will be incentives for them to do so.  If not repaid in 2019, the interest rate would be reset until 2024.  We anticipate repayment in 2019.

The bonds will have all sorts of technical features imposed on them by the Reserve Bank, which supervises and monitors all our banks.  These technical ‘’fish hooks’’ would be meaningful if ASB became insolvent (‘’non viable’’) or breached required behaviour, but would be irrelevant if ASB continues to perform profitably and within the supervisor’s rules.

The corporate briefing attracted a packed audience of brokers and bankers, with many bank executives attending the function to learn what financial markets will require of these new issues and what approach ASB is taking.

We expect that in 2014 there will be several such issues, effectively offering investors a choice for higher returns than previously was available regularly only from finance companies.

I guess we all have learned that second-tier bank securities are not as vulnerable as first-tier finance company securities.  Largely this is because banks are well governed and supervised whereas the finance company sector suffered a moral collapse with commensurate collapses of governance standards and supervision.

ASB’s new offer will appear in an investment statement next week and will close on April 15.

We encourage all those who have been waiting for this offer to contact us now to ensure we can assist in arranging these investments in the inexplicably short timeframe announced.

We will mail out the investment statements when they arrive.

_ _ _

Travel News

David Colman will be in Palmerston North and Wanganui next Wednesday 26 March and in New Plymouth on Thursday 27 March.  Please contact us at our offices to arrange appointments to see him.


Kevin Gloag will be in Invercargill on Thursday April 3.


Michael Warrington plans to visit Hamilton, Tauranga and Auckland in May.

I will be in Christchurch at the Chateau on the Park boardroom on Tuesday April 8 and Wednesday April 9.  Then I will be in Auckland on Tuesday April 22, available for meetings in Albany and at Waipuna Lodge in Mt Wellington.

Anyone wishing to make an appointment to see any of us is welcome to phone or email our offices.

Chris Lee


Chris Lee & Partners Ltd

Taking Stock 13th March 2014


YOU would have to conclude that Christchurch City has had enough.  Simply dreadful behaviour is now converting natural disaster into a catastrophe that is partly man-made.

We can concede that gigantic earthquakes are no one’s fault, though the consequences are more serious when building standards have been supervised carelessly.

But the other dire consequences of the earthquakes were avoidable.

I refer to the appalling corrupt practices that have demoralised the city, the inconsistent and sometimes unfair practices of the Earthquake Commission, the greedy behaviour of insurers (Tower being one of the most criticised by our clients), the weak council performance, and now the evidence that the floods last week were a consequence of council and mayoral turpitude.

Enough is enough.

In an ideal world the council and its mayor would be replaced by a benevolent dictator.  The corruption is sickening.

Any number of civil cases have been disrupted by the disingenuous claim that vital documents were lost, carelessly appointed private sector managers have been free to disperse other people’s money to their mates, contracts have been feather-bedded and there is ample evidence to suggest that tax payers have spent hundreds of millions more than necessary on major projects.

One highly loyal Canterbury contractor has shown me how contracts have been won by tendering low and then loading up on ‘’extras’’ that should have been included in the tender price.  The result has been a final cost well beyond the sums tendered unsuccessfully by those who foresaw the costs now described as ‘’extras’’.

Many many stories have reached us of claims for insurance that were several times the amount paid to the sub-contractor who did the work.  One angry citizen was told that damage not covered by insurance would be put right if he agreed to use the ‘’book rate’’ for the rest of the claim and gave the job to a contractor who would fix up everything, including the uninsured damage, from the unrealistically high ‘’book rate’’.

Stories circulate of houses being bought by ‘’trusts’’ for prices well below the insurance cover.  The names behind the trusts need to be published.  This might reinforce calls for a national register of trusts and their trustees.

The Christchurch council has magnified the pain for many.  Its relationship with, and treatment of, its previous chief executive (town clerk?) was as erratic as the flight path of a blowfly and emblematic of a housekeeping standard that attracts more than its share of blowflies.

Previous mayor, one-time television frontman Bob Parker, proved to be an energetic and empathetic communicator in the days after the major quakes but his general performance was pitifully uncommercial, highlighted by the extraordinary deal he did with Christchurch’s serial defaulter David Henderson.

Parker and his council paid out Henderson’s crumbled empire nearly $20 million for some eclectic properties and sought to validate the price paid by some strange arrangement which Henderson sought, whereby he had the right to re-purchase, in the highly improbable event that he would have access to the required money.

I know of no other such arrangements between a council and any property developer, let alone a previously bankrupted developer.

Parker has now been replaced by Lianne Dalziel, who, if not New Zealand’s worst ever Minister of Commerce, was most certainly one of the worst, in the opinion of finance company investors, who lost at least two billion dollars.  Dalziel’s failure to regulate advisers like Money Managers, Reeves Moses, and Vestar during many years of office left the way open for thousands of New Zealanders to be ripped off.

Her successor, Simon Power, had barely signed his ministerial warrant before these selling chains had been pulled from the cesspit end of the market.

Dalziel simply failed to respond to proof that many finance companies were deceiving investors, she failed to beef up the Securities Commission, failed to introduce ‘’fit and proper persons’’ standards for finance company governance and did nothing about the dreadful behaviour of trustees and corporate advisors.  She was either empty headed or too weak to push through the change in Helen Clark’s government.

If she has been voted in as mayor because, like Paris Hilton, she is ‘’famous for being famous’’, then Christchurch would have a new lemon.  I think she has more claim for support than Paris Hilton but she has made a poor start by ignoring the advice of experts and doing nothing to prevent the floods that struck Christchurch last week.  She must start now to fix up what must be fixed.

She could not stop the rain but her council was well aware that drainage experts, with decades of experience in Christchurch, had warned of the urgent need to dredge rivers and streams clogged up after the earthquakes.  A drainage contractor described the council inaction as being the cause last week of misery and of damage worth many times the cost of the remedial work required.

Earthquakes, corruption, and now insipid council behaviour, leading the way to unnecessary flooding damage – this is unfair and asks too much of a stoic city that in another era might have won the George Cross  for its resilience, as Malta did  in WWII when under siege from Italian and German daily bombing.

Dalziel, if she is not to be another lemon, will make a good start today by ordering the dredging of the city’s rivers and streams, hopefully before winter dumps heavy rain again.

Back in Wellington at the Beehive, there should be a request of the Auditor-General to investigate the process of awarding contracts in Christchurch.

The appropriate person should review the behaviour of private sector insurance companies.  The Earthquake & War Damage Commission’s solvency and its erratic behaviour needs to be remedied and the truth about the cost of AMI’s losses needs to be revealed.

AMI, one recalls, took the risk of chasing market share in the Christchurch home insurance market and was so badly caught out by the multiplicity of claims that it sought a government underwrite so it could be sold to IAG, an Australian insurer.

IAG has done very well out of this.  The tax payer has done very poorly out of this.

The next item, prepared by a left wing ginger group known as Southern No Response, casts light on the AMI deal, which has slipped well off the media’s radar, probably to the relief of politicians.

All of the collection of Christchurch’s calamitous three and a half years is in one way a criticism of our government as well as the council,  although on balance the government, in my view, has done a commendable job in managing this crisis period for New Zealand, helped by some global tailwinds.  A less savvy government might have been much worse.

The Council has provided evidence that benevolent dictatorship might be a better solution than democracy!

In this election year, Christchurch should be in focus for much better leadership than it has seen to date.

_ _ _ _ _

Opinion – Southern No Response – a contributed article


On 5th April 2012 the Government exercised its right under a $500m support deed agreed shortly after the devastating February 2011 earthquake and took formal control of the insolvent Canterbury based insurer AMI.

A net $250m was secured from the sale of AMI’s customer base to IAG on the same date.  However almost immediately the estimated total claims liability of the newly created Crown owned entity ‘Southern Response’, began growing.

By June of the same year the estimated total claims liability of Southern Response rose from $1.8b to $1.9b.

By the time the first full year set of audited financial statements were produced as at June 2013, the estimated liability had grown to $2.2b, requiring a doubling of the support package to $1b of taxpayer funds to remain solvent.

Interestingly Southern Response decided late last year to discontinue production of interim financial statements. It stated that it was ‘’a Board decision’’.

The reality of this decision is that we currently have no idea where its total estimated claims liability currently sits.

What will be even more interesting is whether the financial statements for the year ended 30 June 2014 will make it into the public arena before, what many pundits are predicting, will be an early election later this year. (Now September 20 – Ed).

Given the uncertainty, one cannot help but wonder whether the government’s estimate (as at HYEFU 2014) of requiring the taxpayer to only contribute $359m from the $1b bailout fund (up from $301m at BEFU 2013) is still accurate.

Last week the Insurance Council released figures that show, of the estimated 20,000 claims for major repairs and rebuilds in Canterbury, only 15% of rebuilds and 10% of repairs had been completed.

That equates to approximately 1,500 homes, which is even below the 2,500 homes that the EQC have yet to successfully convince private insurers should also be passed over to them.

Considering Southern Response is responsible for 7,000 of the 20,000 current ‘’insurer owned’’ claims, escalating costs and an ever increasing claims tail will have them very concerned.

Given the Government’s election platform of returning the country to a wafer thin surplus in 2014/15, it will not come as a surprise to many in Canterbury if the claims liability has increased, given the number of times they have had their properties ‘’assessed’’.

It will also not be surprising if the $1b fund created by the government will need to be called on earlier than expected, given that Southern Response’s re-insurance will be, or could already be, exhausted.

Information indicates that IAG (NZI, State, etc) have roughly the same claim exposure as Southern Response (approx 7,000 claims). However IAG’s estimated claims liability is currently $2.65b, much higher than SR’s last estimate of $2.2b.

This is confirmation that Southern Response are in trouble with their low estimate of the total cost of these earthquakes.  Southern Response, and the Government, have realised this, as IAG have, but will not talk about it until after the election.

Reports of bullying tactics and intimidation from Southern Response and other private insurers abound among Canterbury homeowners.

Such behaviour appears to have added to delays in settlement.

While Southern Response rubbish such rumour, and point to technical issues such as land quality as the reason for such slow progress, one can’t help but wonder whether instructions to ‘‘keep a lid on the costs’’ until at least after the election may have come down from a high.

Southern Response has an estimated 3,500 rebuilds and repairs to complete by the end of 2016, with the remaining half expected to cash settle.

To date, after three and a half years since the first earthquake, Southern Response has only completed 316 of the 3,500 rebuilds and repairs required.

Certainly there is no question that there are technical issues, and cost control and protection of taxpayers funds are valid goals, but one has to wonder how taxpayers could possibly be protected by continuing delays in settling claims, especially given large monthly payments to ‘’project managers’’ such as Arrow International continue on top of a growing claims handling cost.

Unfortunately the true position of Southern Response will not be known until their audited financial statements are released in September this year, although IAG have been happy to report a record improvement to their profits, partly fed from premium revenue of Southern Response claimants.

The people of Canterbury are used to patiently waiting.  However groups such as Southern No Response are helping claimants understand their rights and fight for them, and they won’t be waiting for an election to push for results.

_  _  _  _  _

THERE are those who somehow still retain faith that the likes of PWC receiver John Fisk and Foundation Trust’s Kim von Lanten will find the strength to pursue ALL avenues of compensation for finance company losses and retrieve some meaningful money for investors.

I would like to have that faith.

In recent weeks there has been growing evidence, even in the High Court, that conduit lending, illegally disguised hidden rewards (‘’loans’’ for undisclosed profit shares) and illegal lending standards were a major reason for hundreds of millions of finance company losses.

The late Allan Hubbard and the late Terry Butler alone could account for losses from idiotic loans that would well exceed a hundred million dollars.

All of the other property development lenders need to be scrutinised, loan by loan, to ensure their practices were kosher.

If any loan or any lending arrangement appears fraudulent, the Limitation Act allows receivers and trustees to prosecute any transaction not made before 2002 - that is 12 years ago.

Of course if the transactions were found in a High Court to be fraudulent, then one can hardly assume that the failure to identify the fraud was the fault of a trustee or an auditor.

However, if the practice was so obvious and the fraud easily detectable, then once again dudded investors could assume that receivers and liquidators should be seeking compensation from all those who collectively or singularly have failed the investors.  But we must first ask the question.  Are those matters being competently and thoroughly examined?

Fisk and von Lanten and the other receivers will no doubt be aware of the allegations of conduit lending and illegal profit shares.

Surely they must investigate every loan for evidence of fraud.

I think investors, supported if necessary by the Crown, the FMA or the High Court, should demand of Fisk and others that they report to investors on their findings after examining every significant loss that occurred.

I imagine a detailed report of some hundreds of pages.  Such a report might be the first and only tangible proof that the millions paid in fees resulted in a meaningful explanation for the losses.

My preference is that every finance company is prosecuted and a High Court gets to interrogate under oath each of those who let down the investors, and interrogates the receivers.  If such a process clogs the court and prolongs the misery, tough bananas!

To date we have had very well paid receivers and trustees blandly telling us that they have done their best.  Now we should be demanding proof that they have examined every avenue, employing intelligence and energy, pursuing every bit of ‘’street knowledge’’ offered to them.

A bland corporate letter, with a final cheque for a few cents in the dollar, and nothing more, would be career-ending, if my view of justice prevailed.

_   _   _   _   _

THE potential takeover of some unlisted property syndicates by the unremarkable property fund manager Augusta might be good news for the syndicate investors, or it might not.

If the value of each syndicate holding is swapped for Augusta shares at an honest ratio, then those stuck in syndicates might get the ability to sell out when they want to do so.  The key would be the skill of the valuers of the syndicated buildings and the Augusta shares.

History does not give us much confidence in valuers.  Can we get it right this time?

It will not be good news if Augusta just wants to collect the lucrative fees for managing property syndicates.  That would not address the major issues of transparency, liquidity and fairness.

Did any investor in these syndicates ever want to have their property investments managed forever by a bunch of young Auckland people whose skills are as yet not widely recognised?  Watch for this subject to be fully scrutinised.

_   _   _   _   _

Travel News

Kevin Gloag will be in in Dunedin on Thursday March 20.  He will be in Invercargill on Thursday April 3.

David Colman will be in Palmerston North, Whanganui and New Plymouth in the last week of this month (March 25, 26 and 27).

Michael plans to visit Hamilton, Tauranga and Auckland in May.

In will be in Christchurch at the Chateau on the Park boardroom on April 8 and 9.  Then I will be in Auckland on Tuesday April 22, available for meetings in Albany and at Waipuna Lodge in Mt Wellington.

Anyone wishing to make an appointment to see any of us is welcome to phone or email our offices.

Chris Lee


Chris Lee & Partners Ltd

Taking Stock 6 March 2014


THE sudden surge in public offers – bonds and shares – will create a welcome opportunity for those who need to or wish to exit their low-yielding short-term bank deposits.

Changes in banking supervision and the quite explicit global withdrawal by governments from any sort of implicit bank guarantee has re-focused investors on the need to diversify away from banks, the level of deposits in New Zealand having fallen by roughly $30 billion in the past four years.

My own opinion is that our major banks and our New Zealand-owned smaller banks (TSB, Heartland, SBS in particular) have sound liquidity, sensible lending policies and are most unlikely to fail, none being big players in the activities that destroy banks elsewhere (derivative position-taking, sub-prime lending, illegal activities like money laundering).

I don’t foretell banking failures here and regard a bank term deposit as a very low risk instrument.

Even for the most conservative investors, some diversification remains a logical long-term strategy, however, and right now we face a menu of opportunities that look attractive.

When the Auckland City Council retail issue arrives this month, many will see the rate, likely to be around 5.75%, as attractive and the AA credit rating might make the diversification argument compelling.  Because the offer is for a long term - 10 years - some will fear that a possible rise in rates at some future date would represent a lost opportunity.

I have little such fear.  I don’t expect our long-term rates to rise sharply, I do expect our currency to rise over time as more troubled governments seek to devalue, and I cannot foresee Auckland Council defaulting on its debt, which is near impossible given the security they hold over ratepayers’ land.  I do not expect bank term deposit rates to return to pre-2008 levels for many years.

For a small percent of a portfolio, not more than 10%, ACC’s bond will be attractive to many.

Similarly I like the Fonterra long bonds issued to institutions recently but purchasable at around 5.75% for long term, though with a minimum of $100,000, and by habitual investors only.  The ANZ’s 5.43% 5-year bond offer, though offering no diversification from banks, is a useful secondary market alternative, especially if it can be bought at a small discount.

There is whisper that Auckland’s International Airport will issue long bonds soon, and we have of course, the current option of senior bonds from Sky Network TV and Contact Energy, SKT confirming a 6.25% 7-year rate, available now.  The Sky offer was so attractive that all brokers were scaled back but the bonds should be reasonably available to all comers for at least the next week.  The issue closes March 26 but will be filled before then.

The biggest share offer for this year will be from Genesis, where I expect nett returns to exceed 7% after tax.  These shares should be easily available, though there is some evidence that the institutions and fund managers will participate energetically.  I note that Meridian’s share price is rising, perhaps reacting to the falling possibilities of any poorly thought-out electricity policy changes.

There have been other equity issues, including a recent $50 million placement of NZ Refining shares, at a discounted price, reflecting its poor returns last year. I do not expect NZR to have poor years every year.

I expect other such placements and rights issues to occur regularly during these buoyant times as companies de-risk by increasing their equity levels, the reverse of Auckland Airport’s strategy which seemed to me to be driven by its largest shareholder, the Auckland City Council, though I doubt that view is shared by all.

What is encouraging is the recent round of corporate reporting, with profit rises justifying share price strength in companies we favour.  Summerset was an example and the Heartland Bank result will also encourage its investors, of whom I am one.

Barring any global collapse, I expect our interest rates to be quite stable, with lending demand still constrained.  I expect the NZD to strengthen against most currencies and the best of our listed companies to maintain or increase their dividends over the next two years.

I note other respected commentators believe our dollar will fall sharply soon and our interest rates will rise sharply.  Climate change is playing hell with crystal balls!

_   _   _  _   _

AFTER the vast majority of finance companies closed down in 1987-88, almost all of the main companies repaid their investors in full, principal and interest.

That happened for a variety of reasons, but largely because the shareholders had substance, the provisioning for bad debts had been realistic, because loan documentation was better, because audits were better, and because trust deeds were well written and administered competently.  Despite the fact that the likes of Broadlands, Marac, NZI Finance, General Finance, Natwest Finance, Beneficial Finance, NAB Finance and AGC all closed or were sold, no investor lost a dime.

Yet it was seven years before the sector was re-born, and even longer before the public was happy to trust the sector, a trust shattered again in 2007-08 when the collapses began, though Provincial Finance actually collapsed in 2006 (with minimal losses).

If it took seven years after 1988 to rebuild, how long will it take now, given the much worse results suffered this time?

Today we have Fisher & Paykel Finance progressing solidly; UDC Finance bank-owned has never faltered; Marac has become a bank and Instant Finance has earned much credit by repaying investors and continuing to grow as a Pasifika bank for many.

Is it the level of distrust that has put back the re-birth of the sector or is it the low level of demand for personal loans and property development finance?  Perhaps credit card lending looks after the personal loan demand better than before.

Property development funding, overseas, is now done more by hedge funds and by other fund managers where risk is aligned to returns.

My expectation is that personal lending finance companies will soon pop up again.  I am not so confident about property lending finance companies.

_   _   _   _   _

A FINANCE company director who withdrew from the sector well before it exploded has cast more light on a rotten practice that, if proven, may give hope to duped investors.

He withdrew as a director when he witnessed owners and executives of a company authorising loans in exchange for undocumented personal benefits, sometimes conceding security for the loan in exchange for a personal profit share, sometimes approving a particular loan in exchange for an illegal agreement on another loan.

I have previously referred to ‘’conduit lending’’, a foul practice which involved shielding the identity of the true borrower and excusing him from accountability.  Effectively this was fraud.  The Limitation Act allows one to go back 12 years in the case of fraud.

The late Allan Hubbard used this practice regularly, most obviously in a hotel transaction which was documented as a loan to a son-in-law of another director so that the loan appeared not to be a ‘’related party’’ loan.  The bemused son-in-law found himself named as the borrower of $60 million, a loan a galaxy away from his world.

Last week a retired director contacted me suggesting that conduit lending and illegal undocumented loan conditions were an obvious area that receivers, trustees and liquidators ought to examine if they genuinely wish to maximise returns for investors.  He is amazed that no directors seemed to observe these practices.

At least three finance companies regularly approved loans for property developments on the basis of a free equity involvement for particular executives or directors.

This practice first surfaced, to my knowledge, in the 1990s when a major Australian bank allowed a rotten corporate lender to resign, rather than be named, sacked and prosecuted for corruption.  The lender had negotiated personal profit shares as a condition of getting a loan application approved for a small South Island development.  The bank’s weak management eventually caught the cheat, but he was allowed to resign in order to avoid publicity and subsequent ‘‘brand damage’’.

The cheat went on to another role in the sector where he repeated his greedy behaviour.

The retired finance company director saw evidence of similar behaviour and wonders why no receiver has discovered this practice, why no auditors ever spotted it and why the trustees were blind to it.  Wilful blindness?

Conduit lending is even easier to identify.

Indeed one borrower of money from South Canterbury Finance was instructed by an SCF executive to buy out a failed project, using another SCF loan to finance the deal, the implication being that his original loan would be called up if he did not co-operate.  I presume this technique was used to hide a huge bad debt.

Two other finance companies had executives who regularly arranged loans for themselves but hid their identity behind third parties to avoid the loan being regarded as a related party loan.  Another example of this is now being tested in court (Belgrave Finance).

Of course trust deeds often limit related party loans to a small percentage of shareholders’ funds.  And the Crown Guarantee of 2008 definitely limited related party lending.

One Auckland-based company is believed to have used conduit lending on a regular basis.

Related party lending is itself a problematical area.

If Strategic Finance directors had any personal interest in the Hilton Hotel project in Fiji, would that make all lending to the project fit into the category of a ‘’related party loan’’?

I don’t know the answer.

Many will recall the dispute between the borrower of a Hanover Finance loan, and Hanover’s directors, over an American real estate loan, the borrower arguing that there was an equity component to the deal, Hanover claiming it was a straightforward loan.

The late Terry Butler of Dominion Finance approved loans that were controversial, their only logical purpose being to hide problems or benefit him directly or indirectly.  The Baring Head loan was an example.

And I recall a large Central Otago transaction, where the intending developer ‘’tendered’’ the right to lend him money, the finance company ‘’winning’’ the tender by agreeing to a loan that waived his personal guarantees.

This proved highly relevant when the project failed.  The borrower walked away and remains an extremely wealthy fellow, while the government, through its 2008 guarantee, has worn the loss – around $13 million, I am told.

I simply do not accept that today’s receivers should have the power to decide not to investigate all of these matters.  All of these lousy practices ought to have been revealed by someone.  Directors?  Auditors?  Trustees?  Receivers?

Should the independent directors have known?  Is it possible no auditor even examined the loans?  Was the trustee so wilfully distant that the smell never reached his nostrils?  Was the Securities Commission oblivious to all of this?

Possibly we can trace some of the blame to that Australian bank which chose to hide the issue when it allowed a corrupt individual to escape, his cowardly game never exposed.  I will disclose details to the FMA of this matter at the next opportunity.

My conclusion is that every receiver, every trustee and every director of each failed finance company should be interrogated in the High Court to discuss their knowledge of these practices or their explanation for their lack of knowledge.

If these practices have not been tirelessly investigated, would that not provide the whiff of evidence that not all the avenues for compensation have been explored?

Might a High Court have a view on the duty to investigate all avenues and perhaps consider an extension to the Limitation Act or, if not, some other form of remedy?

More next week.

_  _  _  _  _

IF one had to identify improvements in financial markets today the most obvious areas would be in transparency and in disclosure, which were disgracefully exploited until very recent times.

No longer, certainly not in 2014, should any market participant be allowed to hide relevant information.  I wonder if the media plays by those rules.

A retired newspaper editor has revealed a disturbing media practice, responding to my published surprise at the NZ Herald’s choice of guest columnists.  He emphasises that the practice may be of no relevance to that particular paper but he discloses that in recent years newspapers have often conceded weekly column space as part of undisclosed settlements of litigation.

Rather than litigate defamation threats, newspaper groups may allow the aggressor to promote themselves with regular columns, never disclosing to readers the reason for the columns.

Given that the media has a mission to present the truth, and thus is correctly focused on transparency, it does seem odd that this method of settling defamation disputes is not loudly disclosed by the media.

Most guest columnists these days are paid nothing or next to nothing.  They are there to promote their brand, or, in the worst cases, to amuse their third form mates or themselves.  Some are journalists.  I hope they are paid something.

Very very few seem to be specialists with specific knowledge of a subject, Brian Gaynor at the NZ Herald being a rare exception.

Given that the print media, almost without exception, is on a self-destructive path, having given up on quality in pursuit of popularity, I suppose it is natural that our papers now choose to run columns that minimise costs.

Any expectation that columnists are selected for their demonstrable expertise, general knowledge or social leadership is clearly naïve.

The retired newspaper editors shudder at this ‘‘progress’’, perhaps hankering for the days when Bernard Levin’s column was a part of so many people’s regular enjoyment.

My concern is the deception involved, the allowing of so-called social commentators to build their ‘‘brand’’ to help a newspaper to avoid the cost of resolving a dispute.  I see no integrity, honour, transparency or disclosure in this practice.

_  _  _  _  _

IT is not my lot in life to dedicate my time to correcting errors made by the media but a careless comment made last week by Fairfax business editor Fiona Rotherham could seriously mislead clients and the public.

Rotherham is one of New Zealand’s best business journalists, up there with Fran O’Sullivan, Jenny Ruth, Patrick O’Mara and Tim Hunter, but she blundered last week when she reported that ‘‘interest rates’’ would soon rise from 2.5% to 4.5%.

What she meant was that the Overnight Cash Rate, a figure that reflects rates between the Reserve Bank and our major trading banks, might rise from 2.5% to 4.5% over a two-year period.

The OCR has a minor potential consequence for call rates, a minor role in short-term rates and is a small factor in mortgage rate lending.  But it is simply incorrect to imply that bank deposit rates or lending rates rise or fall from OCR movements, or that the OCR is a synonym for ‘’interest rates’’.

Many financial market analysts and banking treasury staff believe interest rates will rise very slowly and may even fall later if the NZ dollar came under upward pressure.

Investors would be most unwise to assume deposit rates would rise by 2%.

_  _  _  _  _


Kevin Gloag will be in Christchurch on Thursday next week (March 13) and in Dunedin on Thursday March 20.  He will be in Invercargill on Thursday April 3.

David Colman will be in Palmerston North, Whanganui and New Plymouth in the last week of this month (March 25, 26 and 27).

Dates for my April visit to Christchurch will be confirmed shortly.  I will be in Auckland on Tuesday April 22, available for meetings in Albany and at Waipuna Lodge in Mt Wellington.

Anyone wishing to make an appointment to see any of us is welcome to phone or email our offices.

Chris Lee


Chris Lee & Partners Ltd


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