BusinessDesk: 'It wasn’t that complex' – Ex-DataSouth CEO on $103m fraud

By Pattrick Smellie

The whistle-blowing chief executive at IT supplier DataSouth has spoken out about the crazy few months she spent with the company, before it imploded under a Ponzi-style scheme run by the company’s owner, Gavin Bennett, in February last year.

Bennett pleaded guilty in the Christchurch District Court yesterday to a $103 million scam that ran for at least five years before the South Canterbury Finance collapse and Hayley Bryan’s appointment as the DataSouth’s chief executive exposed it.

Bryan called the Serious Fraud Office in March 2011, shortly after the Feb. 22 earthquake, after discovering there was something “fundamentally wrong” at the company.

She is damning of South Canterbury Finance’s internal processes, which allowed Bennett to write $5.5 million of mainly fraudulent IT equipment lease agreements when Bryan found less than $200,000 of business had been written.

“The biggest story is in South Canterbury’s failure to spot a reasonably simple fraud,” she told BusinessDesk in an exclusive interview. “It wasn’t that complex. There were so many things they should have picked up. Their systems, their people and everything about their operation was really amateurish.”

The successful owner of numerous IT businesses, Bryan also saw how Bennett lavished alcohol-fueled entertainment on his main contact at SCF.

McGrathNicol, the receivers at SCF, initially tried to force some repayment and stop extending credit, creating a volcanic reaction which included emailing Prime Minister Minister John Key and Finance Minister Bill English threatening “consequences” if his business suffered from lack of access to credit.

DataSouth was subsequently placed in the SCF “good bank”, where assets that were thought to be performing normally were quarantined from the toxic parts of the SCF book, an outcome Bryan says she “can’t understand.”

“We never had fully audited accounts,” she said of a company with no chief financial officer, since Bennett was a chartered accountant and ran its accounts, and whose general manager of the previous 10 years did not have chief executive-style rank.

“Gavin had separate accounts and kept people in siloes,” she said. “I learnt there was stuff he didn’t want them (her line managers) to talk to me about. I told him that was ridiculous, that I was CEO.”

Bryan joined the company in July 2010, a month before SCF was placed in receivership, as a sales director. Her first inkling of trouble was when the Timaru-based lender’s demise caused a “terrible reaction” in Bennett.

“He was really upset. It seemed to be a cashflow problem.”

She negotiated to buy a subsidiary company, Synergy Business Solutions, from Bennett, thinking that would free up cash she assumed he needed, given her observations about the size and likely cash needs of the business.

What she didn’t know was that Sydney-based, 54 year-old Bennett was living a fantasy high life involving fine food, five-star accommodation, and expensive women. Bennett funded this by issuing tens of millions of dollars in fictitious IT equipment lease agreements. SCF would pay out on the leases, which Bryan says Bennett disguised by creating numerous alias email addresses which all routed to him, and by using a separate signature page in his lease documents.

She declined to discuss the more lurid aspects of Bennett’s lifestyle, but saw it on a business trip to Sydney. “It was terrible on so many levels, and I knew he couldn’t afford it.”

The pace of DataSouth’s demise hotted up in the aftermath of the Feb. 22, 2011 earthquake.

“Gavin reacted badly because the 20th of the month was our normal collection period,” said Bryan. “I said: ‘you’ve had this business for 18 years; I’ve just bought Synergy; how can a month’s worth of outstanding invoices put you under so much stress?’”

By then, she had realised Bennett would not share key financial information with her, and had begun her own investigation, piecing together bank statements, company records, and gaining access to all the firm’s email accounts.

“I could see between November and January, a bit over $5.5 million had come into us from South Canterbury and we had paid out about $5 million, so it was about half a million in our favour. But I also knew we had only written less than $200,000 of leases during that period.”

She found false lease agreements were distinguished by their lack of a sequence number, which appeared on genuine leases. “The reconciliation showed it was out by $23 million to $24 million. I discovered it within 24 hours and rang the Serious Fraud Office.”

She praises how quickly the SFO moved, securing this week's conviction within 12 months of the inquiry beginning.

Bryan told how staff and Christchurch competitors of DataSouth helped remove customers’ servers before the SFO and receivers arrived to prevent quake-hit businesses suffering further by losing access to vital records and systems.

(BusinessDesk)

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2 Comments

Went to SCF back in the day, trying to flog data warehousing and related product.
 
Got a curious reception, which rather mystified us:  reluctance to discuss what actual systems these tools could hook into:  they (Tools...) of course need to have an Extract-Transform-Load layer to munge the data into reports and visualisations. 
Now we know....systems were AWOL.  Nothing much to ETL out of.....still, all we lost was a bit more ego and a sales commish.

The interesting back story is that Treasury, which was happily providing a guarantee to SCF, was just as incompetent about looking after its investment (or should I say "our investment?) 
 
Merely confirms what we had already surmised about standards at Treasury.
 
Cheers