Statutory Managers for Hubbard Management Funds (HMF) and Aorangi Securities say investors face significant losses on their investments and that the quality of the financial reporting by Allan Hubbard "is of serious concern to us".
Hubbard and South Canterbury Finance are being investigated by the Serious Fraud Office.
Statutory Managers from Grant Thornton, Richard Simpson, Trevor Thornton and Graeme McGlinn, made the comments as they issued their fourth report into the affairs of HFM and Aorangi.
"Investors in Hubbard Management Funds (HMF) could receive only 60% of what was on their March 2010 statements and it could be well into next year before they will see any returns," they said in a news release issued with the report.
"There is likely to be an overall shortfall of NZ$30 million based on the current state of HMF," the report says.
Grant Thornton plans to seek court direction on how the money should be allocated between investors.
Farmers who may never be able to meet obligations to Aorangi
As for Aorangi, the statutory managers say total loan and investment arreears are now estimated at NZ$3 million. They say they are working with Hubbard on the disposal of some Aorangi assets and trying to "rectify" loans that aren't meeting their obligations.
"From the approximately 50 loans and farm investments, we hope to realise NZ$20 million by the middle of 2011. This will include refinancing a number of loans and selling properties where Mr and Mrs Hubbard are the sole owners."
"We will also be working with farmers who have been unable to meet their interest obligations to Aorangi and who may, in fact, never be able to do so."
Big loss on Te Tua Trust, transfer of NZ$2.7 million from Presbyterian Support Services
Meanwhile, the state of Te Tua Trust's loan records was "very poor." Of Aorangi's NZ$24 million investment in Te Tua, a "worst case" estimate was that just NZ$6.88 million was recoverable.
The report also highlights the transfer to Te Tua from Presbyterian Support Services SC Inc, at face value, of NZ$2.7 million worth of debentures held in finance companies that are either in receivership or liquidation. Whilst hopeful some recovery on this will be achieved, Grant Thornton says it's likely to be minimal.
The statutory managers' say they are negotiating with the tenant in a property owned by Te Tua, where no rent has been received for 12 years, over the arrears and the future lease of the property.
"We have been advised that the roof on this property may now need a full replacement."
Of a total of 104 Te Tua loans, 25 are not being serviced, they have no address or contact details for nine further borrowers and 11 loans are likely to be written off.
The face value of Aorangi's assets is NZ$130 million, suggesting significant headroom compared to the NZ$96 million owed to investors. However, the statutory managers say they have "serious concerns" about the recoverability of the assets. Aorangi could suffer a writedown of NZ$28 million when a loss on a NZ$10 million loan to South Canterbury Finance's parent Southbury Corporation is included.
'Doubtful validity' in equity transfers to charitable trusts
They also note that in March this year Hubbard transferred a number of his equity interests to charitable trusts.
"We have investigated this arrangement and have concluded that these transfers are of doubtful validity. A number of shareholders in these companies have taken action to reverse these transfers, as they required the consent of all shareholders. A formal annulment process is under way and all shareholders of each company will be contacted with regard to the annulment."
"There are a number of associated tax issues that need to be addressed because of these unauthorised transfers."
On Aorangi the statutory managers say they, their lawyers and other advisers have raked up NZ$769,189 of costs between their appointment on June 20 and September 24. As for HMF, they say their costs are NZ$603,471 but note Hubbard himself would charge investors a management fee they estimate would be in the range of NZ$1 million to NZ$1.2 million annually.
The statutory managers, appointed by Commerce Minister Simon Power on June 20, said: "This is one of the most complex cases we have ever seen and as a consequence it has taken an enormous effort to protect the interests of investors. We have had to reconstruct much of the documentation to bring it up to a standard to enable us to manage the loans and investments."
See the full release below. See the full fourth report here. The next report is due at the end of November.
Investors in Hubbard Management Funds (HMF) could receive only 60% of what was on their March 2010 statements and it could be well into next year before they will see any returns.
Statutory managers Richard Simpson, Trevor Thornton and Graeme McGlinn, of Grant Thornton New Zealand Ltd, in their fourth report on the statutory management of Aorangi Securities, Hubbard Management Funds, Mr and Mrs Hubbard and associated charitable trusts, said that the documentation they received reported HMF’s total value at March 31 was $82 million.
“However, our review of the assets owned by HMF and allocated to investors confirmed a shortfall of some $13 million of investments and almost $6 million of cash when compared with a summary of all investors’ statements,” the managers said. On the flip side, there were excess shares valued at $8 million.
“The quality of the reporting by Mr Hubbard in the statements issued to investors is of serious concern to us. One of our main tasks has been to understand precisely what assets HMF owned, and to assess the market value of these assets.
“We achieved this by meticulously verifying the shares and their market values, in consultation with Mr Hubbard’s advisors.”
Of equal concern to investors is that the statutory managers are very likely to have to seek a court ruling on whether the fund is considered a pool or made up of individual investor portfolios.
“If we require a court ruling, it could take many months before we receive that decision. In the meantime, we will be actively managing HMF to protect and enhance investors’ interests,” the managers said.
The report also reveals that Aorangi’s borrowers and investments paid only a quarter of the $3.25 million expected by September 30, 2010.
“This shortfall has been a trend for sometime. The cash received to date is less than half what would be required to meet Aorangi’s interest obligations to investors on the pre statutory management interest payment regime.
“Total loan and investment arrears are now estimated at $3 million and while, in the past, Mr Hubbard has been able to use his own assets and cash to make up the shortfall in the income of Aorangi, there is now uncertainty whether investors can rely on Mr Hubbard’s support in the future given his changing financial position,” the report says.
The statutory managers, with the support of Mr Hubbard, are actively trying to rectify loans that are not meeting their obligations while also hoping to realise $20 million by the middle of 2011.
The managers say that of Aorangi’s $24 million investment in Te Tua Trust, a worst case estimate is that only $6.88 million may be recoverable.
“The state of Te Tua’s loan records, which are very poor, is also of serious concern.” The report breaks down the 104 loans into nine categories. In the report, the statutory managers give details of their costs of managing HMF and Aorangi, noting that a significant effort has been involved due to the state of the records.
They say that in Aorangi’s case they have had to reconstruct much of the documentation to a standard that allows them to manage the loans and investments. Grant Thornton will shortly establish a Question and Answer section on its website for investors while the statutory managers are also beginning to work with a liaison group of six investors.
This group will report back to other investors on their regular meetings.
(Updated with further detail).