Shock at South Canterbury Finance verdicts

Wednesday, 15 October 2014

There was disbelief on the faces of Bob White and Lachie McLeod yesterday as they were told they could leave the dock free men, leaving behind their former South Canterbury Finance colleague Edward Sullivan.

McLeod quickly gave Sullivan a handshake, as did White before they were advised by the Justice Paul Heath for a second time they were free to leave. Relief was etched on their faces as they greeted the packed public gallery of supporters in the High Court at Timaru.

Sullivan was stony faced as he was given bail until December for his sentencing and was advised by his lawyer not to comment, but did say to supporters: 'That's the way it goes'.

He then faced a media throng as he left the courtroom, angrily tying to push through the mob.

McLeod was the most jubilant, with his wife beaming. Asked outside court if his future now lay in farming or business, Lachie McLeod's answer was 'a beer'.

In thanking his family, friends and legal team, he said he was elated with the outcome and with 'being proved honest'.

'I was confident in the last few weeks of the trial. I had done my homework. I can't explain [how I feel]. I want to thank a lot of people, my family, wife and my daughters and all the people of South Canterbury who dropped an email or called in for a beer. It has been the toughest three years of my life, it has been like going to war.'

He did not feel angry at the charges, instead describing the court case 'as part of life'.

'It's not one chapter in my life though, more like four or five chapters in my book. It's a massive weight off my shoulders. Now I want to move on and keep out of the limelight.'

He did not consider the charges a personal insult. 'It was the opposite, because of the people it brought out of the woodwork [to support me].'

McLeod said he would continue to support co-accused Edward Sullivan.

'I feel bloody sorry for Ed, he is a good mate, and he was genuinely always there for the good of the company.'

He thanked his legal team and expert witnesses.

McLeod's lawyer Jonathan Eaton, QC, said the case had been a long road. 'Best of all the allegations of dishonesty have been roundly rejected by the judge.

'There were serious failings in evidence and it was peculiar [the secretary of the Treasury] was not there. We will be going through the judgment to look at it.'

McLeod's wife Sarah was jubilant after hearing her husband was found not guilty.

Outside the courtroom yesterday morning, she said it was a 'huge relief''.

'We can now get on with our lives.'

On hearing the not guilty verdicts, the first text she sent was to her daughters. 'They text back ‘yah',' she smiled.

If retired Timaru accountant and director White felt relieved at his not guilty verdict, it did not show on his face. He sat with co-accused Sullivan and McLeod at the end of the country's biggest fraud case and raised a slight nod and glimmer of a smile toward the public gallery after 30 minutes into the delivery of the verdicts.

White's wife, Margaret, said she was happy the trial was over: 'I'm smiling and I'm relieved but I'm angry, it's been three years of hell.' 

JUDGE'S REASON FOR VERDICTS

The following are the main points from Justice Paul Heath's reasons for his verdicts in the South Canterbury Finance fraud trial yesterday.

Justice Heath reiterated he was not conducting an inquiry into the collapse of South Canterbury Finance Ltd (SCF).

The SCF board did not review the content of prospectuses or financial statements included in the prospectuses at their meetings.

In October 2008 SCF realised it needed to raise $90m to survive. The financial crisis, the downturn in the property market and the fragile capital structure of SCF drove the directors to respond in a knee-jerk way rather than form a coherent strategy. At August 31, 2010, SCF owed holders of debt securities $1.6b.

The Crown's case was directors and management of SCF ignored or evaded important controls that should have regulated how the company operated.

The contention the company was run in a culture of concealment of information from the public did not withstand scrutiny. The conduct was more explicable by market phenomena and the way SCF was governed and managed.

The phenomena included rapid growth between 2004 and 2008 without robust loan authorisation processes and a less than orthodox approach to bad loans. The company was managed in a way that allowed Allan Hubbard maximum control. Hubbard was unable or unwilling to adapt to the conditions faced by the company.

It was common practice for SCF's parent company Southbury Group Ltd to acquire problem debts to keep them off SCF's books. Southbury would pay SCF for the debts but the money would be paid back after balance date. 'As a result the true state of the inter-company account was not transparently reported to investors'.

Southbury could obtain finance from SCF almost at will without apparent documentation although due to Serious Fraud Office deficiencies the existence of such documents could not be ruled out.

SCF entered the Non-Bank Retail Deposit Takers' Scheme established by the Government in October 2008 which resulted in a payment of $1.58b to investors when SCF went into receivership.

Justice Heath went through the counts in the chronology of the events to which they related:

Count 1: False statement in a prospectus by Sullivan and White regarding a company which bought shares in another of SCF's related companies.

Justice Heath decided disclosures about the deals were not material and found the defendants not guilty.

Count 9: Deceptive conduct by Sullivan in representing to a seller of shares (Hellaby Holdings) that the purchaser (Woolpak) was not related to one of Hubbard's companies. The seller was concerned about a breach of takeover rules.

Guilty because Sullivan deliberately gave a false assurance to ensure the transaction went ahead.

Count 6: Theft in a special relationship against Sullivan after SCF tried to recover the balance of a loan made to the Hudson Group when Hudson sold the Hyatt Hotel in 2005. Sullivan and Hubbard signed a cheque for $25m drawn on SCF's bank account for the benefit of Southbury. Justice Heath could not exclude the reasonable possibility Sullivan believed he was entitled to sign the cheque. Not guilty.

Count 11: False accounting by McLeod. The Crown alleged McLeod created a ledger card to mask the nature of the $25m cheque. Justice Heath found McLeod not guilty because Hubbard himself could have created the card.

Count 2: False statement by Sullivan in a prospectus in 2006 by omitting lending to a company in the Woolpak transaction and the $25m transaction. Guilty over the Woolpak lending because statements were deliberately and knowingly made but Justice Heath could not exclude the reasonable possibility Sullivan believed the $25m cheque was immaterial or in the ordinary course of business.

Count 3: False statement by Sullivan in a prospectus in 2007 over similar events in Count 2. Same verdict.

Count 10: Deceptive conduct over Crown Guarantee by Sullivan, McLeod and White by deceiving Crown into allowing SCF to enter Government guarantee scheme in November, 2008. Not guilty because the Crown failed to prove beyond reasonable doubt that representations led to the acceptance into the scheme. 'I could not exclude the possibility the secretary (of the Treasury) would have signed the guarantee deed that day regardless because (among other factors) one of the purposes of the scheme was to maintain the confidence of the general body of public depositors.' The secretary of the Treasury was not called to give evidence.

Count 4: False statement by White and Sullivan in a prospectus regarding the $25m cheque, the lending in Count 2 and a mis-statement of a 'committed' bank facility of $150m. Sullivan found guilty of the statement relating to lending but not guilty of making mis-statement because he might genuinely have not been aware it was not 'committed'. White not guilty of Count 4.

Count 7: Theft in a special relationship by Sullivan, White and McLeod over advance of $39m by SCF to Quadrant Holdings (end owner of Hyatt Hotel) in May, 2009. It was alleged the loan was contrary to the requirements of the guarantee deed. The guarantee required that SCF not lend more than 1 per cent of funds to a single entity. White did not appear to have played an active role in the transaction and Sullivan and McLeod did not have sufficient knowledge of the requirement to make them criminally liable, Justice Heath found.

Count 8: Theft in a special relationship against McLeod arising out of a loan to related party Dairy Holdings Ltd. The loan would have breached the SCF trust deed and a separate arrangement entered into. Not guilty because the transaction was legitimate.

Count 12: False accounting against McLeod for recording a fictitious transaction in 2009 to avoid SCF advances to Southbury exceeding 35 per cent of shareholders' funds.

Not guilty because Justice Heath was satisfied McLeod was not involved in creating the entries.

Count 5: False statement by Sullivan in a prospectus in 2009. The allegation related to a number of transactions including the Quadrant Holdings deal and the fictitious transaction referred to in Count 12. Guilty.

WIDOW'S REACTION

The wife of the late Allan Hubbard said she was 'very happy' both Bob White and Lachie McLeod were found not guilty in the South Canterbury Finance trial.

'I have known Bob for a long time (and Lachie) they are friends. . . so I am happy with the result,' Jean Hubbard said.

Speaking from her home in Timaru, Jean Hubbard said she had nothing to do with her late husband's business and then referred to the five-month court case as 'quite unnecessary'.

She would not be drawn in to discussion on Edward Sullivan's guilty verdict saying she did not know him that well.

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