Finance companies collapsed because regulators, courts, lawyers and accountants were 'unready, unwilling and unable' to do their jobs with integrity, QC says

Finance companies collapsed because regulators, courts, lawyers and accountants were 'unready, unwilling and unable' to do their jobs with integrity, QC says

Auckland QC Tony Molloy

By Gareth Vaughan

The destruction of billions of dollars of "ma and pa" retail investors' wealth, through finance company meltdowns, was the inevitable consequence of at least three decades of unreadiness, unwillingness and inability of regulators, enforcers, courts, lawyers and accountants to fulfill their roles with integrity, according to a leading Queen's Counsel.

Tony Molloy QC, who provided independent specialist advice to Parliament's commerce select committee on its inquiry into finance company collapses, argues this in a hard hitting report he produced for the committee. Molloy's scathing criticism ranges from questioning why lawyers for investors in the ANZ-ING frozen funds apparently failed to point out to their clients that ANZ's advisers had breached their fiduciary relationship, to comparing comments from Inland Revenue Commissioner Robert Russell with the type of thing Hitler's propaganda minister Joseph Goebbels might have said.

The committee, chaired by Labour Party MP and former Minister of Commerce Lianne Dalziel, released a report on its inquiry last week. The parliamentary probe came after dozens of finance companies collapsed from 2006 onwards, costing hundreds of thousands of investors billions of dollars. See full details in our Deep Freeze List here.

Among other things, the select committee recommends the government launch a coordinated effort to improve New Zealanders’ understanding of financial matters, and that Parliament passes legislation to give disgruntled finance company investors the option of taking class actions against the likes of directors, trustees and auditors to try and recoup some of their losses. See more here.

'Systemic, high level forces stacked against New Zealand investors'

In their report the select committee members highlight Molloy's comment that: "Meaningful consideration of investor protection legislation is impossible without first identifying the culture of the New Zealand market that has treated investors as prey, rather than as fellow citizens engaged in an enterprise from which all might profit to the benefit of the nation as a whole."

Molloy's 38-page report also points to "systemic, high level" forces stacked against New Zealand investors, and therefore against capital raising in the New Zealand economy. Molloy served as tax adviser to the high profile Winebox Inquiry in 1994-1995, and was leading counsel for clients of law firm Russell McVeagh McKenzie Bartleet & Co in a six year battle against the firm over tax schemes, the experiences of which he wrote up in a book Thirty Pieces of Silver.

He advised the select committee there was no need to rush through new investor protection legislation because the lessons of the latest crisis are still being learned, billions of dollars of investor wealth has been "vaporised" and others have "over borrowed" against their homes meaning many people don't have anything to invest. On top of this, the next crisis is likely to be several years away.

Furthermore he points out every financial crisis is followed by legislation designed to prevent the meltdown that it had been hoped to prevent by the legislation passed after the last meltdown. That last meltdown in turn, had occurred in the face of the legislation passed after an earlier meltdown.

"And so on, in an almost infinite regression," says Molloy.

A major reason why legislation wasn't as effective as hoped was because Parliament wasn't content to describe the economic event that ought to attract censure/retribution/liability to make restitution, Molloy says. Because politicians like to be seen to be “doing something," Parliament has a propensity for tinkering with legislation and getting "far too far into detail."

"Parliament’s function surely is not to legislate just because, if it is not legislating, its Honourable Members will fear being seen to have nothing to do except have their moats cleaned on the public purse," Molloy says in an example he gave in a speech to a British tax conference.

"Parliament’s function surely is to refrain from legislating when, although it could, mature and properly informed consideration suggests that things would be better if it didn’t: if it was to show restraint."

Exhibit A: Feltex

He uses the demise of carpet maker Feltex, and an unsuccessful criminal case taken against its directors by the Registrar of Companies, as an example of this. Although there was a breach of Feltex's banking covenants in its about NZ$100 million ANZ loan, meaning the money was repayable on demand, this wasn't disclosed by the directors. And there was nothing to penalise them in the law for keeping this to themselves, notes Molloy.

This, he says, is because of a change to the Financial Reporting Act that meant financial accounts no longer had to be "true and fair" but rather needed to "comply with accounting standards."

"Parliament couldn't leave it alone. It decided to 'clarify' the law," Molloy bemoans.

Given a generation of so-called "ma and pa" investors had their faith in the sharemarket destroyed in the crash of 1987, the consequence of this was flight to the perceived relative safety of bank sponsored investments, and fixed interest investments in finance company lending on security perceived to be sufficient. Thus disillusionment with the sharemarket provided banks and finance companies with a captive market.

"The recent destruction of wealth by the finance company and investment product industry was the inevitable consequence of a failure to read the signs that were there for anyone to see: at least three decades of unreadiness, unwillingness, and inability on the part of regulators, enforcers, courts, lawyers and accountants, to fulfill their respective functions with integrity," Molloy says.

Exhibit B: 'ANZ advisers breached fiduciary relationship with clients'

Molloy looks at the ANZ-Commerce Commission settlement last year and outlines how he believes lawyers let down the investors.The bank agreed to pay NZ$45 million to settle a dispute over whether it misled 15,000 investors in two ING funds that were frozen in 2008. He points to the "lamentable fact" no legal adviser consulted by ANZ clients appears to have advised them of the existence of a fiduciary relationship, or of the bank's apparent breach of this fiduciary obligation and the client's right to complete compensation.

Given ANZ was then 49% owner of the ING business (it now owns 100% of the rebranded OnePath), part of its advisers' fiduciary duty was they shouldn't act for a client where the adviser, or any other person for whom the adviser acts or is associated with, has any interest in the matter that could be in conflict with the adviser's client.

Molloy says the "apparent clear breach" of this duty by ANZ advisers who put their clients into ING products entitled the clients to full compensation from ANZ via total repayment of the full amount of their original investment, plus compound interest from the date of investment to the date of repayment.

'IRD director's statement like something from Goebbels'

As for authorities letting down the public, Molloy tees off on the Inland Revenue Department (IRD). He looks at the IRD's December 2009, NZ$2.2 billion settlement with ANZ, ASB, BNZ and Westpac over structured finance tax disputes, or as he puts it: "The four major New Zealand banks' multi-billion dollar assault on the New Zealand tax system."

Molloy notes that the settlement saw the banks agreeing to pay 80% of what IRD said they owed, and that prior to settling the IRD had won two High Court cases, one against BNZ and the other against Westpac. He suggests the full amount IRD could have sought from the banks, if penalties were included, amounted to about NZ$2.75 billion.

"(So) effectively a gift was being made to the banks of at least three quarters of a billion dollars."

Yet Russell described the settlement as a very good result for New Zealand taxpayers.

"The 'taxpayers of New Zealand,' for whom the Commissioner was arrogating the right to speak, might have differed from his view that rewarding this anti-social assault on the New Zealand economy with a gift of three quarters of a billion dollars at their expense had been a 'very good result'."

"It is the sort of thing Dr Goebbels might have said," Molloy adds.

Beating up the little guys & accounting companies with 'disgraceful' records

 Although apparently happy to allow "free riding by taxpayers who have massive obligations which they condescend to  settle at a discount," our regulators and enforcers can be fearless in prosecuting people without power or standing, even when the amount at stake is trivial.

Here, Molloy points to the case of a taxpayer convicted in 1999 of misleading IRD. The man had put his five year-old son's name on a tax return stemming from him being paid NZ$50 as "expenses for return preparation." The man was fined NZ$500, plus NZ$400 costs, with the costs of the investigation and High Court prosecution coming on top of that.

Molloy also has a crack at the big accounting firms, noting the role of Deloitte as auditor of Italy's Parmalat, which became bankrupt under 14 billion euros of debt after discovering a 4 billion euro gap in its accounting. Deloitte coughed up NZ$149 million to settle a lawsuit arising from its auditing of Parmalat. Closer to home he notes the role of Ernst & Young as Feltex's auditor, where it gave the opinion accounts were true and fair even though they failed to mention a breach of banking covenants that made Feltex's bank loan repayable on demand to the ANZ.

"There is a major problem when firms with such disgraceful records are permitted to continue to practice in New Zealand," argues Molloy. "No sensible person would hire an individual with such a track record."

"It beggars belief that what would not be tolerated in an individual who cannot be trusted, should be tolerated just because it is a firm. The situation is truly a fantasy," he continues. "It is closely akin to the 'magic of the market' whereby a bunch of worthless sub-prime mortgages can be transferred from the lender's balance sheet to an investment fund assembled on the correct premise that there is a fool born every minute."

"The name of each of these international accounting firms should be recognised as a badge of shame."

Trustees giving 'deceptive' comfort to investors

Molloy also unloads on trustees, saying they can be disregarded as a source of any significant investor protection. Appointed to oversee securities issued by finance companies, trustees are "deceivingly" named, and lack the power, resources, and "judging by the few instances of trustee heads being raised above the parapets," the inclination to bite the hand of the issuer who feeds them.

"The appellation, 'trustee', is a snare giving deceptive comfort to investors. The knowledge that they were toothless or timid or both was a further incentive to issuers to cynically pillage their investors," says Molloy.

Directors like Bridgecorp chairman Bruce Davidson 'lacking expertise took up flattering invitations'

Next he trains his sights on directors, noting professional people, devoid of the relevant assumed expertise, proved easy targets for flattering invitations to serve on finance company boards.

"There is a major problem when entrepreneurs with 'form' arising from past failures can, by engaging and hiding behind that perceived integrity and assumed competence of such incompetent directors, lure investors into financial desolation."

Here he cites Bridgecorp chairman Bruce Davidson, now serving nine months' home detention at his Parnell house after Bridgecorp's 2007 collapse left more than 14,000 secured debenture holders likely to get back less than 10 cents in the dollar of their NZ$459 million.

"Mr Bruce Davidson unhappily was one of these," Molloy says of professional people becoming directors of perceived integrity. Davidson, had been a senior partner at law firm Minter Ellison Rudd Watts and chancellor of the Anglican Diocese of Auckland.

"He reached the conclusion that certain actions of the CEO involving the use of group funds to buy himself a very expensive boat had been 'dishonest and unauthorised', yet not withstanding non-compliance by the CEO with repeated board requests for written reports on various critical matters, he did nothing to bring matters to a head on this matter or on many others."

The CEO, Rod Petricevic, certainly had "form" dating from his days as founder of Euro-National in the 1980s. Petricevic, along with Bridgecorp's finance director Robert Roest, is now facing Serious Fraud Office charges.

"In August 1987 he (Petricevic) had net assets of NZ$70 million. After the sharemarket collapse in October 1987 and the dramatic fall in the listed market price of Euro-National shares he was insolvent. His commercial reputation was tarnished and his continued presence as chairman of the Euro-National board was seen as an impediment to the company."

Therefore, unless Petricevic could "hide behind an untarnished commercial reputation," he could go nowhere.

"So when he founded Bridgecorp, Petricevic quickly persuaded Bruce Davidson to join the board and to become chairman of the holding company."

Molloy concludes that there should be no room for caveat emptor when New Zealanders' savings are being handled, and notes the country can't flourish unless investors are protected - to the full extent realistically possible - by a clearly understood body of law.

"The finance and investment industries, the legal and accounting professions, the courts, and as the Feltex prosecution shows, even Parliament, are creating problems for an economy that cannot afford them."

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"the country can't flourish unless investors are protected - to the full extent realistically possible - by a clearly understood body of law." """""""bbbbb

Great article.

So our politicians need to focus on solutions, not tinkering with existing legislation.

Seems to be the same with tax reform, where the tax working group, Gareth Morgan et al, are

suggesting a big clean up. But...our polies just add sub clauses.

I consider myself to be a mid to high risk investor, but find myself in fixed interest & property through lack of faith in existing legislation.

Can you see an article like this being on Campbell Live or Close Up???

Zounds. Sounds of cannon.

A man with scruples. Tony Malloy for PM. President. King.

Quick. Put his name on the ballot paper. Christofff are you listening.

Gareth - An excellent article.  However I disagree with TM's conclusion that caveat emptor is not good enough.  He rightly points out numerous times that Government legislation has without exception been ineffective, yet concludes that more is now required to solve the problem.  I feel that the problem is investors automatically believe that Gov't legislation will protect them, yet every financial scandal proves that this is not the case.  Why don't we just try the caveat emptor option as the Gov't legislation solution has been proven on numerous occasions to be useless. 


I don't know why you're targeting Sean Hughes here,.

He's trying to clean up the mess and has taken a much more robust approach to the finance companies than his predecessor.

Just a warning.

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If we didn't have fiat debt based money that is constantly being debased people would quite happily put their money in the bank or under the bed and know that it would still be worth the same when they needed.  Hence no need to invest in these highly risky companies.  Fiat debt based money is a sinking ship.  I will be very suprised if it is still around in ten years.  Peak oil, Peak Debt, Peak Retirement, Deflated asset prices, Minimum savings, Climate change.  Interesting times.

Where the law ends peril begins comes to mind.
I learnt from the well thought out, comprehensive assessment - thank you.
Don't see greed, selfishness, risk-taking/gambling ending as its human nature.
There's a need for an ethical, independent regulation, monitoring, training, practice, accountability, transparency system.
The public need education on these dishonest Individuals through the Main line media, made to apologies, assets stripped including trusts all front page reporting, basically make an example of, so people understand there are effective consequences. Informing in this way educates and God willing alters behavior.
What ever is decided it needs to be simple and effective.

It would be hard to find anybody with a better understanding of the tax and finance systems of NZ than Tony Molloy. He has been relentless in his criticism of the SFO , Russell McVeagh and all kinds of other financial organisations in NZ. I can understand his frustration but I am inclined to agree with Andy Rogers that caveat emptor offers the best solution. Investors are misled by the government's attempts at regulation into thinking that there is some law somewhere that will protect them if things go wrong. That was proven not be so after the 87 crash when small investors were bewildered by the vaporising of their nest eggs, and now it has happened again with finance companies. Inevitably, the govt will make up some new laws and tell us that its all safe now, and it won't be. I sometimes wonder if the government would do better putting ads on TV like road safety ads, showing how people have crashed and burned by trusting in financial advisors, lawyers, accountants, banks, the SFO , IRD and so on. If people were wary investors it would make those offering to manage their money have to work a lot harder to prove their trustworthiness. It  would be all about reputation rather than regulation.

Surely it's the government that have failed investors for not legislating to tighten regulation of finance companies. It's outrageous that sixty-five companies have gone to the wall since 2006 and no-one seems to be in control or accountable for the losses sustained by investors. In the case of NZF, they were still taking deposits just before declaring insolvency. In the UK this would be investigated as fraud but in New Zealand it seems anything goes.     

Tommo - Even if the Gov't create new laws to try to protect investors there is no guarantee that the supervising authority won't fall asleep at the wheel again or be subject to regulatory capture and that crooked companies will be able to navigate around them.  Individual investors have to be more responsible for the investment of their own funds.   If they don't understand where their money is being invested e.g ANZ/ING funds then they should stay clear.  I just don't see how anything but caveat emptor is going to work successfully.

Chartered Accountants have a manoploy on auditing light of the financial crisis, one wonders just how good a job they have been doing.... small comfort I would say.

It's called power and influence. Size and muscle. Globalisation is a reality. Standardisation of services, one size fits all. Once there were (many) thousands of small to medium sized auditing firms around the world. They merged to become known as the "big six". The SEC caught Arthur Anderson with its thumb in the pie, and they became 5. Now they are the "big 4". Who is willing to take them on?

If you want answers, search and find out why the parliament changed the Financial Reporting Act so that financial accounts no longer had to be "true and fair" but rather needed to "comply with accounting standards." "Parliament couldn't leave it alone. It decided to 'clarify' the law," Molloy bemoans. Don't you sense a bit of lobbying going on?

Tony Molloy's comments should be front page news in every daily in the country and his comments could be distilled down to a simple headline "Wild west alive and kicking in NZ".

That scary characters like Petricevic and Bryers can be banned as company directors for only 5 years is an example of the inadequacy of current legislation and sentencing. Some of them deserve a life sentence.

Oh and by the way, if our two ex Justice ministers at Lombard are found guilty on charges of misleading investors, what are the chances of them spending even one night in the comfort of one of our corrections facilities? Instead, wet bus ticket at the ready and home detention with easy access to the well stocked wine cellar will be more than adequate punishment.

ma and pa investors were just greedy in their quest for riches beyond anybodies give me adollar,and i will give you two dollars back.nobody to blame but youselves.

ng - I'm not sure that most investors were driven by greed as the rates on offer by many of the now defunct finance companies were in some cases only around 1% to 2% higher than what could be achieved on term deposit at the bank. Hardly a "quest for riches beyond anybodies dreams".

I think that many of the investors concerned delegated the decision making to financial planners and advisers, essentially people that they trusted. Where many investors can be criticised is for their lack of understanding and appreciation for the principles of risk and return. Comprehensive research and a higher level of financial literacy would have helped many avoid the investment decisions that were made.


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This report will last max 24 hours in the mainstream media and max 1 week in the inside pages of the non mainstream media. Then it will disappear  from light forever.....Don't forget we have RWC Finals coming up this weekend....All Blacks will win and everything will be forgotten.... 

maybe kin, but our stories are easily searchable on Google, Bing, etc, and more than 50% of the news pages we serve up come from such search. Maybe it will move off the front page, but we have a very 'long tail' and every week we deliver ten of thousands of pages for 'old' stories, proving that there remains a high demand for useful and interesting topics.

The more you share such stories around, the higher they are Google-ranked, the longer they stay in the conversation of people who are interested in such matters. We only get 200-300 comments on our stories each day, and the volume of comments for any one story is a very poor indicator of how many people read them. Some of our highest-read stories get few comments, and vice-versa. Certainly public-policy people read us a lot. They notice; as do tens of thousands of voters.

'..... at least three decades of unreadiness, unwillingness, and inability on the part of regulators, enforcers, courts, lawyers and accountants, to fulfill their respective functions with integrity' 

Something you might expect from a banana republic but not from a country supposedly belonging to the 1st world. The message is clear - clean up the rotten financial services or risk losing your investors.   


Yes it is good to have thousands of areticles in file and accessed by thousands more too.

But as soreloser says below, it is of no use if not translated into action....Occupy AOTEA SQUARE is a good example.....pathetic in numbers ....