SFO says after 3 month investigation into Hanover Finance 'reasonable grounds exist' to believe fraud may have been committed

SFO says after 3 month investigation into Hanover Finance 'reasonable grounds exist' to believe fraud may have been committed

The Serious Fraud Office (SFO) is investigating at least four or five Hanover Finance transactions with a particular focus on dividends shareholders Mark Hotchin and Eric Watson paid themselves prior to the company freezing investors’ money in July 2008, and debt restructuring before Hanover's finance book was sold to Allied Farmers.

SFO director and CEO Adam Feeley told interest.co.nz  that after a three month investigation into the defunct property financier, the SFO had decided to focus its attention on a small number of deals. Both the dividend payments and some specific transactions had raised cause for concern.

“To be honest, this thing could be bigger than Ben Hur and it would be ultimately counter productive to try and try every issue that has been raised over time,” Feeley said.

“We’ve focused on things that appear on the face of it to have more obvious and more serious concerns.”

At least four or five transactions were “of particular concern.”

Hanover froze NZ$554 million owed to 16,500 investors in July 2008. Investors' subsequently approved a moratorium proposal in December 2008 that pledged to pay them back over five years. Then a year later after getting back just 6 cents in the dollar, Hanover investors agreed to swap their Hanover debentures for shares in Allied Farmers valued at 20.7c each which are now worth just 2.1c each.

Valued at NZ$396.2 million in last December 's deal, Allied Farmers had slashed the carrying value of the Hanover assets it acquired by more than NZ$300 million by June 30 to just NZ$94.3 million.

Hanover paid dividends to its shareholders of NZ$86.5 million in the two years ended June 2008.

Although the SFO was largely looking at events that happened late in Hanover’s life, it wasn’t just confining itself to the last rites Feeley said.

“You really have to go back and look at the whole life of Hanover over recent years to get some context for those transactions,” said Feeley.

“(We’re) primarily focused on the more recent years, but not exclusively so.”

He did confirm that the SFO was focused on events prior to the Allied Farmers deal.

'Reasonable grounds', will talk to more than 30 people

After three months the SFO’s investigation had reached a point where “reasonable grounds” existed to believe that fraud may have been committed. The SFO is targeting more than 30 people it wants to interview and seek documents from that are relevant to the investigation.

Although the SFO is focusing on “very particular transactions and specific individuals within Hanover management and their board,” Feeley wouldn’t name the individuals.

“What we can say is we’ve spent three months in the preparatory phase of this investigation. We have got a pretty clear idea about our concerns with these transactions,” said Feeley.

“We’ve got a pretty clear idea about who has either been directly involved with them or been providing some form of professional service in relation to them. So it’s a fairly focused number of people that we will be interviewing and in some cases at this stage they will be suspects and in other cases they will potentially be witnesses.”

Feeley wouldn't comment on whether the SFO would be speaking to any property valuers.

He said it would be at least four to six months before the SFO had a clear picture about the transactions and information it obtains from additional documents and interviews.

“It’s very complex, there are a lot of parties to be interviewed,” said Feeley. “It is not one we’re going to hurry for the sake of speed.”

The SFO statement comes 10 days after the Securities Commission revealed it had almost completed an investigation into Hanover and might lay criminal charges against directors in the New Year. Then last Friday Hanover released a brief statement, in which it said it was co-operating with "various" regulatory authorities.

Meanwhile, Allied Farmers released a statement today saying a short time after buying the Hanover assets, it became concerned about certain conduct of Hanover prior to the deal and immediately raised those concerns with appropriate regulators. (See the statement below).

Read the SFO's statement below:

The Serious Fraud Office (SFO) today confirmed that it had been conducting an investigation into the affairs of Hanover Finance Limited for past 3 months.

SFO Chief Executive, Adam Feeley, said that the investigation had now reached a point where the that reasonable grounds existed to believe that fraud may have been committed and accordingly the investigation had been elevated to a “Part II” investigation under the Serious Fraud Office Act.

“Given the intense public interest and media speculation, it has not been appropriate to make any public comment on this matter until we had a detailed understanding of the issues involved, and the entities and individuals behind the Hanover operation.”

“We have undertaken extensive preparatory work and are now in a position to move into a more active phase of the investigation.”

Mr Feeley said that the SFO had commenced issuing notices last week under section 9 of the SFO Act to over 30 individuals which would require their compulsory attendance at interviews and the production of documents relevant to the investigation.

“Given the volume of notices which are now being issued, it was inevitable that our investigation would now become a matter of public knowledge.”

Mr Feeley said that the scale of the Hanover collapse was such that it was not feasible for the SFO to investigate all aspects of its failure.

“We are focusing on some very particular transactions, and specific individuals within Hanover management and their board.”

Mr Feeley said that having considered the Securities Commission report and the complaints of a number of persons, including Allied Farmers, the efforts of the SFO investigation was best focused on several key areas relating to the payment of dividends and other transactions occurring immediately prior to announcement of the moratorium proposal, and debt restructuring involving the transfer of assets to Allied Farmers.

“We will be interviewing a small group of key Hanover staff and professional advisers to seek explanations of these transactions.”

Mr Feeley said that the even with a tightly focused investigation, the scale of the task was such that the SFO would be engaging significant external resources.

“The interest in Hanover is such that it is in the interests of all parties to ensure it is carried out with the utmost professionalism and urgency.”

“In addition to a large internal team, and collaboration with the Securities Commission and Registrar of Companies, we have engaged a number of New Zealand’s senior legal counsel and leading forensic accountants to assist us.”

Mr Feeley cautioned that, notwithstanding the focus of the inquiry and the resources which would be devoted to the investigation, the public should not expect quick results.

“It would be both unrealistic and unwise to think that an investigation of this complexity could be completed in a matter of weeks. This will be a lengthy inquiry and the only certainty from it is that any decisions reached will be the end result of a comprehensive and well-managed investigation.”

Read Allied Farmers' statement below:

Allied Farmers today confirmed that a short time after the purchase of the Hanover & United assets, it became concerned about certain conduct of Hanover prior to the acquisition, and immediately raised those concerns with appropriate regulators.

The Securities Commission confirmed on 19 November that it was investigating the conduct of Hanover, and today the Serious Fraud Office also confirmed it is conducting an investigation, with Allied Farmers named as one of the complainants.

Allied Farmers Managing Director, Mr Rob Alloway said “We were quite shocked at some of the activity that took place prior to our acquisition of the assets and immediately moved to alert regulators. Our staff has spent a considerable amount of time providing relevant files and interviews to both the Securities Commission and the Serious Fraud Office over the course of the year”.

“We feel that the actions of the Hanover Board and management while under moratorium have had a significant impact on the value of the assets, and investors deserve to have this investigated”.

Mr Alloway also expressed surprise at the media release from Hanover last Friday, which asserted that Hanover would pursue the payment of the $5 million that Allied Farmers refused to pay on the basis of serious breaches by Hanover of the agreement assigning the assets to Allied Farmers.  These breaches included a failure to comply with an obligation not to enter into abnormal transactions that would adversely affect the value of assets. Mr Alloway said that these actions included the releases of personal guarantees and the sale of assets at less than market value.

Mr Alloway said “You really have to wonder why, after all that has happened, and in light of the Securities Commission and SFO enquiries, Hanover would want to reopen this issue. Personally, I am aghast that they would have the gall to effectively ask ex-Hanover and United debenture holders for another $5 million, given what we now know about the Hanover lending practices and assets”.

“We also believe we have further substantial personal claims against former directors and officers of Hanover, including claims arising from breaches of duties, and we will pursue these.”

(Updates add comments from interview with SFO's Adam Feeley and Allied Farmers' statement).

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Note the stark constrast of the SFO's publicity in this investigation as opposed to other investigations particularly Hubbard.  Maybe this is because Feeley is finally understanding his responsibilities and nothing more sinister.

I have also noted that in cases that they decide not to proceed with he always notes that it is the crown solicitors advice that has been relied on.  This is a cop out and if he doesn't have sufficient evidence the SFO should know this.  Are they recommending that they want to take cases forward but are dissuaded because the crown solicitor doesn't consider that they have a strong enough case?  This refelects poorly on their own decision making.

Mark, apparently there's likely to be some news on the Aorangi Securities front before Christmas.

And FYI, I've updated the story to incorporate comments from an interview with SFO boss Adam Feeley.

Yes I fully expect there will be and it is being saved for after Parliament closes for the year and will be dumped just prior to Xmas when all the other embarrassing issues are dumped on the media and the public hoping for minimal backlash.

I think you will find that seeking the advice of the Crown Solicitor is standard practice for the SFO and other regulators like the Sec Com...

Its not about the quality of their judgement - its more likely to be about ability to secure a conviction and the costs and risks of doing so...

Same thing Horace - they have to be able to secure a conviction, if not then their judgement is wrong.

Further Feeley has been very open about using more outside experts which is probably an admission that he lacked the credentials for the job in the first place.

Real serious jail terms , the Crown needs to send a big message about graft here . Our reputation is at stake as an investment destination.

In a well run jurisdiction and financial hub like Singapore they would be locked up in an open -sided compound with pigswill for meals 

Better let Bubba know he might be getting some new cell mates to play with in a couple of years! He's a whole different kind of leggy blonde!  

Here's the new Tui billboard "Hanover Finance Directors will face serious jail term if found guilty - Yeah right!"