By Gareth Vaughan
A significant amount of the information the Serious Fraud Office (SFO) has used to launch an investigation into related party loans at South Canterbury Finance (SCF) came from one of the company’s independent directors.
Chief executive Adam Feeley told interest.co.nz in a Double Shot interview that the SFO had received the information it has acted on from more than one source.
“But a lot of our information came from one of the independent directors within South Canterbury,” Feeley said. He added that he’d prefer not to name the director “at the moment.”
The SFO announced on Tuesday it was investigating five related party loans – made by SCF - between 2005 and 2009 for potential false statements or other fraudulent conduct. Feeley said that although the transactions all up were probably worth between NZ$40 million and NZ$50 million, the related party transactions per se weren’t the issue.
“Rather what affect that might have had on the financial position of the company, and from an SFO position most importantly, whether those transactions should have been disclosed, how they were disclosed, and whether the absence or manner of disclosure gives rise to any suggestion of fraud on the part of people within South Canterbury (Finance).”
He said the transactions were “certainly material” to SCF’s balance sheet.
“The question then is ‘what were the consequences, including the financial consequences of those loans on the position of the investors, and equally important, on the position of the Crown (retail deposit) guarantee scheme’,” said Feeley.
Massive potential fraud against the taxpayer
SCF collapsed into receivership on August 31 triggering a NZ$1.6 billion taxpayer funded payout to 35,000 of the company’s investors under the Crown guarantee. Therefore the SFO probe raises the possibility that a NZ$1.6 billion fraud has been committed against the New Zealand taxpayer.
“If we find there is fraud, and it was fraud that enabled them (SCF) to enter into a guarantee scheme, the consequences have been immense in financial terms,” said Feeley.
The SFO investigation also raises questions about monitoring of SCF by the Treasury and insolvency specialists KordaMentha, who assisted the Treasury. Feeley said he didn’t know whether Treasury officials and KordaMentha staff had missed the issues the SFO was concerned about, so it wouldn’t be appropriate or fair to comment on that.
“I think as we move our way through the case, in a certain sense they (Treasury and KordaMentha) can be viewed as possible victims, if indeed a fraud has in fact occurred,” said Feeley.
“Therefore we will need to talk with them and we’ll need to understand what they knew, what they didn’t know, (and) what they were told by various people within South Canterbury (Finance).”
Asked about individuals associated with SCF whose activities might come under scrutiny, Feeley said he couldn't comment on individuals.
"But we are looking at the affairs of South Canterbury (Finance) and people will draw their own conclusions about whether any officers or directors of the company could be part of that," said Feeley.
"The difficult thing for us at the moment is we don’t know the specific roles that each of these individuals played in these transactions. We don’t know what they said, we don’t know what they knew. Some people could be witnesses, some people could be suspects. Some people may have been completely unaware that these things were going on."
A separate SFO investigation into Aorangi Securities, Hubbard Management Funds and several charitable trusts overseen by SCF majority owner Allan Hubbard, is expected to be concluded within a few weeks with the SFO due to decide whether to lay charges or close the investigation. Hubbard and his wife Jean, plus the companies and entities under investigation - excluding SCF - were placed in government enforced statutory management on June 20.
Asked whether this suggested the possibility of a Ponzi scheme, Feeley said he wouldn't necessarily describe it as a Ponzi scheme.
"What I would say is there are situations where people can invest contrary to instructions and it is not necessarily a Ponzi scheme," said Feeley.
"Indeed one can commit a criminal offence by taking money for one purpose and investing it for another even if that money wasn’t lost, because the crime that we look at in that situation is the relationship between the individuals and the deception by which that person obtained the money."
"So a Ponzi scheme certainly fits within that, but if you like it’s the very worst example of fraud or deception. There are certainly other levels of fraud which can occur and still be a crime."
*The interview was conducted prior to the announcement of an SFO investigation into would-be Crafar Farms buyers Natural Dairy Holdings and UBNZ.
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