By Bernard Hickey
The Serious Fraud Office (SFO) has announced it has completed its investigation into Hanover Finance and will not be proceeding with criminal charges, although it was very critical of Hanover Finance's disclosure, solvency, and related party transactions.
It said the decision brought to an end all its investigations into the 2007/08 finance company collapses, which had resulted in criminal prosecutions relating to 9 companies and charges against 23 people.
The Financial Markets Authority filed civil proceedings against Hanover directors and shareholders Mark Hotchin, Eric Watson, Greg Muir, Sir Tipene O'Regan, Bruce Gordon and Dennis Broit last year over statements they made in a 2007 prospectus. Hotchin's assets have been frozen since December 2010.
The SFO said its Hanover investigation had taken 32 months and it had analysed more than 107,000 pages and 3,730 gb of data over 12,700 hours. Fifty-four interviews have been conducted over 120 hours, and more than 30 individual loans or other transactions of interest have been identified and reconstructed.
“This has been by far the most extensive and challenging of the finance company investigations undertaken by SFO,” said Acting SFO Chief Executive Simon McArley.
The SFO said serious questions arose from the investigation, including:
1. The consistency between the overall view of the nature and financial condition of the companies disclosed to investors in the period from December 2007, and the actual position of the companies;
2. The solvency of the companies at the times that dividends were paid during the six months immediately prior to the suspension of payments to depositors in July 2008;
3. The propriety of a number of transactions entered into in the three months immediately prior to the suspension of payments to depositors that appear to have provided little or no benefit to the companies, while conferring some significant benefits on the related parties;
4. The accuracy of the valuation of the companies’ assets in the financial statements supporting the Debt Repayment Proposal put to investors in November 2008.
"However, in order for criminal charges to be successful it is necessary not only to prove beyond reasonable doubt that these circumstances occurred and that they breached the companies’ legal obligations, but that identified individuals in control of the companies had both knowledge of the circumstances and caused them to occur with dishonest intent," the SFO said.
“Recent decisions relating to other failed finance companies have highlighted how difficult it is to satisfy this standard,” said McArley.
“SFO’s prosecution decisions must also be made within the context of the Solicitor-General’s Prosecution Guidelines. These require me to be satisfied that there is a reasonable prospect, based on credible and admissible evidence, that an impartial jury could be satisfied, beyond reasonable doubt, that the person prosecuted has committed a criminal offence. On the basis of the evidence currently available, SFO is not able to reach that threshold. As a result it is unable to commence any criminal charges in relation to Hanover Finance and its related companies.”
Simon McArley said the SFO remained open to reconsider its decision if fresh evidence as to the actual knowledge and intent of those in control of the company became available.
“While many may view the conduct that occurred at Hanover Finance as egregious, that alone is not sufficient for me to commence a prosecution,” he said.
“This is a case that has attracted huge public attention and is of significant public interest. I believe that this justifies the vast time and resources that SFO has dedicated to it. However, we have now exhausted every available avenue of enquiry and the time has come to move on and focus our resources elsewhere.”
“While this has been an extremely difficult decision to make, I’m convinced that it is not only the right one but the only possible decision on the basis of the available evidence. The decision has not been reached in a vacuum. I have consulted with the Crown Solicitors, leading criminal Queen’s Counsel, and the Deputy Solicitor-General,” he said.
McArley told Interest.co.nz he shared the frustration of investors who "seemed to have been let down at every turn."
But he said he had received advice from five lawyers that the prosecution would almost certainly not have succeeded.
He said the related party transactions entered into near the end might have provided benefits for the related parties, but in the end no-one benefited, including the first mortgagee.
"It was so far under water that even the BNZ didn't get out of there. No one really missed out on anything because there was nothing left," McArley said.
SFO said it had coordinated its activities with the civil claims being pursued by the Financial Markets Authority (FMA), and would provide all the information and evidence possible to assist FMA in those claims for compensation of the investors.
“The vast majority of the information we have accumulated has already been shared with FMA, but if there is any additional material we can provide to assist we will do so,” said Simon McArley.
“We will now be reviewing the evidence we have gathered to see if other referrals are appropriate,” he said.
McArley said the SFO had already budgeted for a prosecution in its financial planning and finances were not an issue in the decision not to prosecute.
(Updated with more detail, background, comments by FMA and McArley)