Two former Ministers of Justice, Doug Graham and Bill Jeffries, have been found guilty on four of five charges relating to their role in the collapse of the Lombard finance group.
Graham, knighted for his contribution to the Treaty of Waitangi settlements process, was reportedly visibly shaken by the verdict, delivered in the High Court in Wellington this morning by Justice Robert Dobson against four Lombard directors: Graham, Jeffries, Lawrie Bryant, and Michael Reeves. All four had denied the charges.
The four were released on bail without conditions after an eight-week trial that wrapped up earlier this month and involved some of the highest-profile professional directors to get caught up in the widespread collapses of finance companies as the New Zealand property market went sour and the global financial crisis hit. Sentencing is scheduled for March 29.
Under the Securities Act the four potentially face the prospect of prison terms, fines of up to NZ$300,000, or community sentences. However, Justice Dodson's judgment says the four Lombard Finance directors’ offences are “a material step away from the seriousness required for a custodial sentence."
While the directors argued there had been no criminal intent in their actions, Justice Dobson said that was not a relevant issue from a legal perspective.
“The alleged offences are ones of strict liability so the Crown is not required to prove any form of mental intent to distribute documents that were false or misleading."
“Nor is it any part of the Crown’s case that the conduct by the directors … was other than honest.”
“In the relevant respects, the law has created criminal liability for what may be no more than a material misjudgement about the accuracy and adequacy of the description of the state of financial health of the company, as directors authorise it in offer documents,” he said. See Justice Dobson's judgment here.
The charges were laid by the then Securities Commission, which subsequently became the Financial Markets Authority, and relate to making untrue statements in a 2007 prospectus, investment statement and advertising material. See full detail of the charges here. Property financier Lombard, whose trustee was Perpetual Trust, went into receivership in April 2008, owing approximately NZ$127 million to about 4,400 investors.
FMA chief executive Sean Hughes said the regulator welcomed the verdicts but, because the matter is still before the court, he wouldn't comment further.
The four charges successfully prosecuted relate to registration of a prospectus that omitted to disclose the company’s deteriorating cash position, advertising in December 2007 seeking investors for various types of unsecured notes and debenture stock. A fifth charge, relating to a DVD, was not upheld.
The most recent letter to investors from Lombard's receiver PwC estimates secured debenture holders will get back between 15% and 22% of their original investment. So far they've got back 11.5 cents in the dollar. PwC says a further distribution is likely in March or April.
Lombard's major asset is its property loan book which consisted of 27 loans with a total book value of NZ$136.7 mill lion as at March 31, 2008. Gross realisations of about NZ$67 million have been recovered from the property loan book as at January 31 this year, PwC says. Of these realisations, Lombard has received about NZ$19 million, with the balance being paid to prior ranking security holders and to cover direct sale costs.
Lombard's receivership came after the company told investors it would seek a moratorium on its repayment obligations to secured debenture and note holders. But after reviewing the company's position, Perpetual Trust decided the interests of investors would be better served through receivership. In their first report PwC estimated secured debenture investors could recover 21% to 44% of their investments over time. But unsecured creditors, including capital and subordinated note holders, were unlikely to recover anything.
Additional reporting Gareth Vaughan.
(Updates add comments from Sean Hughes, detail from PwC) & Justice Dobson's judgment).