Regulatory Review – A Hubbard

Regulatory Review – A Hubbard

TO THE HUBBARD SUPPPORT GROUP FROM KERRY GRASS DATE 22 JUNE 2010 SUBJECT REVIEW OF REGULATORY ACTIONS AGAINST ALLAN HUBBARD, JEAN HUBBARD AND RELATED ENTITIES

Two days ago, on 20 June 2011, the Serious Fraud Office filed charges against Allan Hubbard. The announcement came exactly one year following the statutory management decision and the referral to the Serious Fraud Office.

Due to the unexpected timings of the SFO action, I have not completed this report as comprehensively as first intended but highlight that a further supplementary report will be provided before 31 August 2011.

In completing this report I have relied on information provided from media sources, the Official Information Act and discussions with investors and Allan Hubbard. This report provides general background information on matters relevant to the regulatory actions against Allan Hubbard. It has been commissioned by the Hubbard Support Group.

STATUTORY MANAGEMENT

Cabinet’s decision to place Allan Hubbard into statutory management was based on a report dated 18 June 2010 prepared by the Companies Office. The content of the Companies Office report has not been disclosed. It remains a confidential document. Regulatory Review – A Hubbard

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The Companies Office enquiries started and concluded within three weeks. It appears to have been rushed and I suspect that the allegations in the report were substantiated with innuendos and misinformation.

Now that charges have been filed by the Serious Fraud Office it is not likely that the Companies Office report will keep its confidentiality status. The content of that report is crucial in determining the reasonableness of the substantive grounds to bring about statutory management and the fraud investigation. The report will need to demonstrate that proper enquiries had been conducted and that the substantive grounds were reasonably formed.

The announcement of the statutory management caused high risk to investors of Aorangi, Hubbard Management Funds and South Canterbury Finance –

• SCF would collapse following the announcement. • Preferential shareholders in SCF stood to lose the totality of their investments (they were not protected by the government guarantee). • Aorangi would suffer capital erosion. • Investors in Aorangi had their interest returns and principal frozen. • Investors would no longer receive their interest payments on a regular basis that many relied on for covering living costs. • The statutory managers would clock up exorbitant fees to administer the statutory management.

From a paper written by Mike Ross, a lecturer at the University of Auckland Business School, he stated, “Statutory management is like a neutron bomb, leaving the business structure intact while destroying all around it. It was not designed to rescue companies in financial difficulty. Its primary aim is to take control of companies where fraud is suspected or where there is no alternative legal procedure available to deal with a sudden crisis.”

The impact of statutory management on share value was demonstrated in 2001 when Air New Zealand’s share price fell by 40% in one day after media speculation that statutory managers might be appointed.

Correspondence from Treasury confirms how a statutory management order against Allan Hubbard would impact South Canterbury Finance. On 19 June 2010 (a day before the order) Brian McCulloch (Director of Financial Operations, Treasury) made reference to the statutory management against Allan Hubbard and stated, “… but nonetheless even just the action against Mr Hubbard would seem likely to be terminal for SCF”. Regulatory Review – A Hubbard

At the time of the announcement South Canterbury Finance was in the midst of capital raising and was receiving approximately $2million in deposits on a weekly basis. Following the announcement, market rules required SCF to take its prospectus off the market and to stop taking funds from the public. Any funds received would need to be held in trust and returned to investors. All the work SCF had put into recapitalising - including working with regulators to issue the prospectus – were to no avail. Without liquidity assets would have to be sold off.

SCF went into receivership 9 weeks later.

Within 24 hours of the announcement SCF had a credit rating downgrade and it was required to halt capital raising.

On 22 June 2010, within 48 hours of the announcement, S&P downgraded SCF long term rating two notches to B- and short term 4 notches to C, and put SCF on Credit Watch Negative.

On 20 August 2010, eight weeks following the statutory management announcement, S&P downgrades SCF's long term rating two notches to CC. The short term rating cannot be downgraded anymore other than to D for default.

On 31 August 2010, nine weeks following the statutory management announcement, SCF announced it would be placed into receivership.

In the National Business Review (22 June 2010) the following was reported – • Standard & Poor’s has cut South Canterbury Finance’s short-term credit rating to C on the back of concerns that statutory management of Allan Hubbard’s business interests will likely erode debenture investor confidence.

• S&P said debenture investor confidence is critical to South Canterbury’s ability to manage its liquidity and its significant debenture reinvestment requirement.

• The downgrade comes after Mr Hubbard’s personal interests, including Aorangi Securities and seven charitable trusts were placed in statutory management on Sunday. Regulatory Review – A Hubbard Page 4

• Mr Hubbard is South Canterbury’s principal shareholder through Southbury Group.

• S&P - “We are also now concerned that the company’s recapitalisation efforts could be compromised or delayed,”

With respect to John Key he was incorrect when he advised NZ’s public the collapse of SCF was ultimately the responsibility of Allan Hubbard. Beyond any doubt the ultimate collapse of SCF resulted from the government’s announcement of regulatory action against Allan Hubbard on 20 June 2010.

LEGALITY OF STATUTORY MANAGEMENT

Statutory management of an individual is not dissimilar to the situation of a person in bankruptcy. A person who is bankrupt has their estate controlled by the Official Assignee. A person in statutory management has their estate controlled by the statutory manager. A clear difference in procedures is that a person facing bankruptcy has the opportunity to put their case forward to an independent official of the High Court.

In the circumstances involving the Hubbards, Cabinet made their decision ex parte – without the opportunity of Allan or Jean Hubbard being afforded an opportunity to respond to the claims. The process was procedurally unfair and lacked natural justice.

The legality of the statutory management against the Hubbards is being contested by the Hubbards’ lawyers, Russel McVeagh.

ALLAN HUBBARD

Prior to the SFO investigation and statutory management, SCF’s principal, Allan Hubbard, held a reputation of high trust amongst the investment community. Their trust was well placed. Hubbard protected his investor’s funds through pledging his own equity. His priority ranked behind the investors and his equity was $40m to $50m. It was Allan Hubbard who stood to lose before the investors – this was how he structured his business.

Hubbard’s business acumen was built on integrity – not greed. An illustration of this is the operations of the TeTua Charitable Trust. Through that entity he provided loans with an interest-free period of up to 5-years. Hubbard recognised that young farmers starting out needed time to get Regulatory Review – A Hubbard

their operations running smoothly and to establish a regular liquidity flow so he reduced their financial pressure.

Hubbard had a personal approach to his investors’ needs. This was the style that drew investors to him.

SOUTH CANTERBURY FINANCE

At the time that Allan Hubbard’s statutory management and SFO investigation was announced, a number of reputable international investors were looking to become a major shareholder in South Canterbury Finance (SCF). SCF had been operating for 89 years. It had a niche in the South Island market – dairy farming – a commodity industry where prices are reasonably stable and expected to have long term growth.

There has been a lot of hot air in the media around SCF’s related party transactions. It is important for investors to understand that related party lending has its purpose and that in Hubbard’s case, his related parties were backed by good assets.

During a regulatory meeting with the RBNZ in 2009, Hubbard stressed that not all related party funding is bad and that in SCF’s case all such transactions are undertaken on an arms length basis. In making this statement Hubbard referred to the current environment (2009) in which banks were either unable or unwilling to lend. He stated SCF’s equity which was held in related parties enabled real economic losses to be avoided.

In Hubbard’s view that approach protected depositors by insulating them from non-performing assets and demonstrated that the Southbury Group was standing behind SCF to ensure that SCF never had to post a loss.

The regulators did not express concerns to the related party lending and even suggested exemption notices may be appropriate.

During that meeting in 2009, the regulator made a note of a comment made by Hubbard, “I will live in a tent before I see any of my depositors lose out”. At that time Hubbard was aged 81 years, living in a modest house in Timaru, the same house where he and his wife raised their children and he was driving a 1960s VW bettle. He stated he would suffer losses personally before the investors and in Regulatory Review – A Hubbard

February 2010 he demonstrated that he meant what he said when he transferred his equity held in Southbury Group into South Canterbury Finance. The transfer of his assets was for the purposes of protecting SCF investors.

In May 2009 those assets were described as - • Scales Corporation Ltd (83% owned) – a diversified agribusiness company ($500-600m assets) with investments in various companies associated with primary export supply chain; shipping agency (services incoming ships), cool store operation (meat and veg), tallow business (exporting meat fats to China), orchardist (15% of NZ’s export apple crop employing circular 10,000 pickers in high season), pet food manufacturer for US export market, dry goods stores and blast freezing operations for meat industry. At that time Scales Corp was forecasting a record profit of $15m. • Helicopters NZ Ltd (100% owned) – A helicopter contracting firm established since 1955. Owns and operates 60 helicopters (mostly outside of NZ) focussing on oil exploration work in Australia, locating missing in action veterans for the US Defence Department in Laos/Cambodia and working in the Antarctica. Operations located in Perth WA and Nelson. Annual turnover of USD100m with forecast earnings of NZD10m for 2009. • Dairy Holdings Ltd (59% owned) – owns circa 60 dairy farms in South Canterbury and Otago and was the single largest supplier to Fonterra. Dairy Holdings (DHL) had been at the forefront of the development of commercial dairy farming. DHL earnt $25m last year and after under ongoing infrastructure (irrigation) investment was expecting to break even for the current financial year.

The regulator’s meeting also discussed the outlook for SCF. The regulator reported, “They (SCF) are confident that the payout (from Fonterra) will increase over the next two years and believe that the China and other SE Asian markets will provide growing demand for NZ sourced product”.

Hubbard and his SCF managers at that time were correct in their predictions. Fonterra payouts did increase and the market growth in China eventuated - Fonterra recently announcing its increased presence in China’s market. Regulatory Review – A Hubbard

Hubbard’s business enterprises give an indication of the level of Hubbard’s expertise. That Hubbard was additionally managing one of NZ’s best performing funds in 2010 (as claimed by PriceWaterhouseCoopers) shows that Allan Hubbard was an astute businessman. When he was forced out of SCF in 2010 as a consequence of a management restructure (a condition required by Treasury) the pillar that was the strength of SCF went with him.

SCF was NZ’s largest finance company. It was recapitalising and had weathered the storms. When one examines the business enterprises operating within SCF and the expressed interest from international investors to provide growth funding, SCF had a positive outlook but that all changed when officials announced Allan Hubbard was in statutory management and under investigation for fraud.

Hubbard Management Funds Ltd

HMF was a discretionary fund holding a portfolio of diversified assets, primarily NZ listed companies. Hubbard was an active fund manager and monitored the market regularly. His trading decisions resulted in good returns. His expertise was recognised by PriceWaterhouseCoopers who in 2010 stated that the fund was one of the best performing in NZ.

Aorangi Securities Ltd The Aorangi fund was a fixed term security providing an average return of 8-9% per annum. In all its years of operating, Aorangi Securities had not missed an interest payment to investors. Like Hubbard Managed Funds, Aorangi as an investment vehicle was a high performer.

With a history of high performance and unquestionable integrity, what caused the Securities Commission to commence their regulatory action?

ADVERSE MARKET STATEMENTS

A primary function of regulation of financial markets is to uncover and discipline misconduct. An adverse announcement by a regulator is a ‘name and shame’ strategy. Announcements effect reputation and an adverse announcement impacts investor confidence with a likely consequence of a reduction in share value. Regulatory Review – A Hubbard

A study carried out in the United Kingdom examined the impact of enforcement announcements upon an investment company and revealed the share price of the disciplined firm is, on average, nine times larger than the financial penalties imposed. The report found that any such losses should, if they are reputational, be greater where the harm of the regulatory action is felt by trading partners (customers and investors). The Financial Services Authority (FSA) is the governing regulatory body in the United Kingdom. The UK’s governing legislation provides that the FSA shall not release information about on-going investigations until they have been concluded and a final notice issued, and even then only to release information in such a way as is ‘fair’ to the party who has been investigated (Financial Services Market Act 2000 s 391).

The extent of the reputational loss resulting from an adverse announcement will be dependent on the content and context of the announcement.

On 20 June 2010 the following headlines dominated NZ’s media - • HUBBARDS IN STATUTORY MANAGEMENT – New Zealand Press Association • SERIOUS FRAUD OFFICE TARGETS ALLAN HUBBARD – National Business Review NZ • SERIOUS FRAUD OFFICE INVESTIGATING HUBBARD’S AORANGI - www.interest.co.nz • SFO PROBES CANTERBURY MILLIONAIRE ALLAN HUBBARD’S BUSINESSES - www.stuff.co.nz

On 20 June 2010 it was clear SCF would inevitably collapse. The causation in simple terms is that the announcement resulted in investors losing confidence in South Canterbury Finance. The headlines continued on television as main feature national news. Allan Hubbard’s face was splashed across screens in the context that he was a fraudster – the reports confirmed his assets and that of his wife’s were frozen, including personal bank accounts, charitable trusts and corporate entities pertaining to Allan and Jean Hubbard. Their estate was literally under seize by the government. They had no access to their cash for personal items such as groceries. The statutory managers even denied the Hubbards access to funds to allow them to challenge the legitimacy of the statutory management. The order went to the extent of depriving the Hubbards from opening their personal mail. No one (including Allan Hubbard) would deny SCF was already in some trouble but it was recapitalising and keeping its head above water. Unlike the 40 odd finance companies that Page 9

collapsed, South Canterbury Finance was still standing and its good reputation was resulting in strong demand for its interest bearing products which were providing a return superior to what was being offered by banks. SCF had weathered the storm of the global financial crisis that commenced in 2007 but as a result of the Securities Commission’s recommendation SCF would be closing its doors permanently.

SECURITIES COMMISSION The Securities Commission was established under the Securities Act 1978 as an independent crown entity. Up until 1 May 2011 it was the main regulator of investments in New Zealand, and was responsible for the enforcement, monitoring and market oversight of securities markets, authorising participants and promoting pubic understanding of investments. The Securities Commission’s code of ethics was to “operate a fair, transparent and orderly market” for the purpose of “protecting investors’ funds”.

Over the years there has been much criticism directed at the Securities Commission with accusations of ‘all talk, no action’.

In regards to the Companies Office and Securities Commission investigation against Allan Hubbard they have picked on the wrong man.

The Securities Commission and Companies Office have a history of poor performance for protecting investors.

Between 2007 and 2009 NZ suffered approximately 40 collapsed finance companies with a loss equating to approximately $7 billion dollars – the victims predominantly mum and dad investors.

On 18 April 2010 well known broadcaster Paul Holmes on his TV series Q&A interviewed the CEO of the Securities Commission, Jane Diplock. Diplock had held that position for a decade. During the interview Holmes made reference to the domino finance company collapses which were still being investigated by the Securities Commission. When questioned why the Securities Commission had a history of under-performance Diplock stated - Regulatory Review – A Hubbard

Paul, it's clear that the Commission is under resourced, there's no doubt about that. Over the years we've had extra responsibilities placed on the Commission, which we welcomed, and each time we've gone to the Ministry and they go to the Treasury to ask for funding we've received about half or a third of what we felt we required, and when you accumulate that over a number of years it leads to under resourcing. … …. ….

Well we have lobbied very hard Paul, but the mechanism for lobbying is not through the media, it is through the government channels and we have lobbied hard, and we've been successful in some cases. But in relation to the finance company area there was a regulatory desert, and frankly that needed to be filled.

And further, in the NZ Herald in March 2010, Diplock stated –

There's a clear consensus emerging - we need a single comprehensive regulatory agency with extended powers to offer real confidence to both domestic and foreign investors. The current review of the Securities Act began in 2004 before it stalled in consultation. The cost of that seven-year prevarication is a decent chunk of the $1.5 billion of investors' money that was lost in the loosely regulated finance company sector collapses of 2007 and 2008.

Diplock is correct that the industry was “loosely regulated” but she is incorrect that the loss to investors was $1.5b. The losses were between $6b to $7b – these were predominantly mum and dad investors that were either saving for retirement or were already in retirement. Literally their life savings vanished. They were not in a position to return to the work force and recoup savings. For some their livelihoods changed forever, for others their lives were destroyed. Their mistake was their assumption the Securities Commission was doing what it said it was doing “regulating and monitoring the financial markets”.

One victim who thought they had invested in a “blue chip” company ended up with their home in the ownership of a United States bank. That investor has said they have given up on their fight for justice. It should not have been the investor’s fight – the responsibility for regulation was with the Securities Commission and the Companies Office. By their own admissions the Commission was under-resourced and despite the markets being “loosely regulated” their calls to Treasury for adequate resourcing were declined. Treasury’s decision contributed to mum and dad investors losing approximately $7 billion. Given that maintenance of the financial markets has a direct impact to economic prosperity, I am perplexed as to why Treasury would not consider improvement to NZ’s financial regulatory regime as a high priority. A market cannot build a sound reputation without adequate regulatory infrastructure – including oversight. An unregulated market would only invite shenanigans such as the use of investors’ funds to finance personal assets - luxury cars and luxury homes. Regulatory Review – A Hubbard Page 11

Had the investors known what they know now – that NZ’s finance companies were left to run their operations with little regulatory oversight - investors may have considered their risks more carefully. Investors may have carried out their own due diligence on brokers had they known that brokers operating in NZ had no regulatory requirement to be “competent” and no regulatory requirement to disclose conflicts of interest, including commissions received for securing investors’ funds.

Did the Government hold itself accountable for NZ’s financial market catastrophe? No it did not. The finger was pointed at the Trustees of the Finance Companies.

Exactly what monitoring was the Securities Commission and the Companies Office conducting on these finance companies? Were they assessing asset allocation and investment risk of depositors’ funds? Were they monitoring liquidity ratios? Were they scrutinising financial statements? Did they analyse subsidiaries and shareholdings? Did the Securities Commission consider the merits of independently verifying information provided by the finance companies?

The Securities Commission was not a pro-active body intent on protecting investors. It was a regulatory body that placed itself at the bottom of the financial cliff, picking up the pieces as and when they fell. And even as a body standing at the bottom of the cliff four years following on from NZ’s financial disaster, there is still no proper enforcement action from them and recent headlines from the Financial Markets Authority confirm they are closing some of the files that the Commission had not completed. That the files are being closed must be good news for the directors but it does not tell the investors what went wrong or where their funds ended up.

It is ironical that Jane Diplock, who was also Chairperson of IOSCO (International Organisation of Securities Commissions) was unable to lift NZ’s standards to the minimum expectations set by IOSCO. NZ continues to perform below IOSCO’s international standards. REGULATORY CONFLICT OF INTERESTS Conflicts of interests refer to a person or person(s) who have an interest in a matter which may be perceived by others to motivate or influence their decision making or in some-way cause bias to their decision making. Conflicts include interests of public duty versus private interests and includes a situation where the conflict may be reasonably perceived, potential or actual. Regulatory Review – A Hubbard Page 12

In 2009/2010 the issue of conflicts was thoroughly debated in the NZ High Court (Saxmere case) where the Court made clear findings as to the meaning of conflicts and bias – • The test for bias provides that a person should be disqualified “if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide”.

• “*a+ matter should be disclosed in any case where it is possible that the observer might reasonably think the judge could be biased as a consequence of it. The judge or the court can then consider the responses of all the parties to the disclosure and assess what course to take on that fully informed basis.”

• The foundation of the rule against an appearance of bias lies in protecting public confidence in the Government and its administrative functions. Without the appearance of impartiality, Government administrative actions loses its legitimacy and brings Government actions into disrepute.

Managing conflicts is good governance. Disclosing conflicts or potential conflicts is an act of moral behaviour. To work effectively it relies on self-disclosures. Self-disclosure relies on the integrity of the person to exercise moral behaviour. From the office of the Controller and Auditor-General (www.oag.govt.nz) further guidelines are provided as to how government departments should deal with conflicts. It sets out that the responsibility of identifying and disclosing conflicts is “primarily the responsibility of the member or official concerned” –

• The member or official with the conflict of interest is obliged to identify it, and disclose it to the relevant people in a timely and effective manner. • The member or official concerned will always have the fullest knowledge of their own affairs, and will usually be in the best position to realise whether and when something at work has a connection with another interest of theirs. • Managers and other senior personnel should remain generally alert for issues affecting other people that may create a problem.) • It is better to err on the side of openness when deciding whether something should be disclosed. • If a member or official is uncertain about whether or not something constitutes a conflict of interest, it is safer and more transparent to disclose the interest anyway. The matter is then out in the open, and the expertise of others can be used to judge whether the situation Regulatory Review – A Hubbard Page 13

constitutes a conflict of interest, and whether the situation is serious enough to warrant any further action. • Disclosure promotes transparency, and is always better than the member or official silently trying to manage the situation by themselves. • The most typical mitigation options involve withdrawal or exclusion from involvement in the public entity's work on the particular matter. • In the interests of openness and fairness (and to minimise the risk of the public entity having to defend itself against an allegation of impropriety), it is always safer to err on the side of caution. • Once a conflict of interest is recognised, the most common response should be withdrawal or exclusion from considering the matter.

REGULATORY CHINESE WALLS

Chinese walls are used to prevent sensitive information landing in the hands of a conflicted party. An examination of correspondence received under the Official Information Act from regulatory agencies indicates there was a lack of management structure and reporting lines between the regulators, namely the Companies Office, Securities Commission, Treasury and the Reserve Bank.

The correspondence shows there was chat in weekends between heads of departments, that senior managers had ‘contacts’ passing sensitive information to them relating to SCF which was then communicated within their own departments and then on to other inter-government entities. An email refers to “industry figures” (the inference relates to PGC) contacting Treasury and Companies Office directly for the purpose of influencing SCF regulatory action. The correspondence makes poor reading.

The Hubbard Support Group is continuing to request disclosure under the Official Information Act but their requests are presently being delayed by officials.

From the information provided to-date, indications are that it was perhaps Treasury that was more careless at ensuring communication protocols were properly managed. In December 2008 after SCF wrote to Brian McCulloch (Director of Financial Operations, Treasury) seeking recognition of their ability to enter the wholesale guarantee fund market, McCulloch appears to have singlehandedly determined SCF’s request and declined the application. It appears his decision was based on draft RBNZ policy. SCF was not a bank – it was a non-bank deposit taker (NBDT). Capital ratios are calculated on a risk basis. An NBDT that has a customer base of high-net worth investors will not necessarily have the same capital ratio requirements as a retail bank. A Regulatory Review – A Hubbard

senior member at the Reserve Bank recorded his observations – “I was somewhat surprised to be copied into Treasury’s response given that it is their scheme. Felt vaguely inappropriate to me at the time but not enough to raise with Brian”.

Four months later and in May 2009 Hubbard and his directors attended a meeting with the RBNZ and again raised the issue of the wholesale market. The file note from RBNZ made the following comments –

SCF pressed the need for regulators to maintain a distinction between bank and non-bank entities. In support of this they cited various examples where SCF has been able to provide funding to businesses that for various reasons (reduced risk appetite, market withdrawal, parent approval/timing constraints) the banks had been reluctant to support. Unlike many other NBDTs, SCF did not reveal a desire to seek registered bank status. Their preference is to remain a non-bank.

SCF remain keen to get a wholesale guarantee claiming that their US investors are interested in providing term funding.

An independent review of the correspondence released to-date indicates, in my opinion, that there has been an orchestrated effort by Treasury, the Companies Office and the Securities Commission to cause the demise of SCF.

The Securities Commission highlighted in one of their emails that they “wanted to be seen to be operating at arms-length from Treasury”. How did they manage that requirement? A later email from the RBNZ (dated 28 May 2010, 3.52pm) stated, ‘They (Treasury) don’t want to be seen to be the one pushing it (SCF) over’.

A day before the statutory management announcement, Treasury (Brian McCulloch, Director of Financial Operations) stated in an email – “… We have been advised that the Securities Commission has (or is about to) recommend statutory management …. … We haven’t seen any paper yet but our advice is likely to be along the lines that the established regulatory processes should be allowed to run and we should rely on the regulator’s judgement”.

Treasury had contracted KordaMentha Accounting Services to examine the books of SCF. Valuing of assets is both objective and subjective. Market values can fluctuate and are influenced from the existing economic environment. KordaMentha was writing the report to Treasury and Treasury through Brian McCulloch, the head of Financial Operations, elected to share the report with the Bank of New Zealand (BNZ). Regulatory Review – A Hubbard

BNZ was a significant credit customer to SCF and provided a joint $100m credit facility to SCF. In an email on 3 August 2009, the RBNZ commented that BNZ’s ‘rollover’ of the credit facility was due in two weeks and that “S&P would clearly downgrade them if BNZ pulled out”. Why did Treasury share their confidential report with BNZ? I am of the view a regulator should not take such a position. It questions their role of independency.

And who was really drafting the KordaMentha report? Treasury had contracted to KordaMentha but was Treasury influencing the content? In one email from Treasury it stated the report would be finalised “once we are comfortable”. Comfortable with what? What instructions were KordaMentha receiving from Treasury? How much influence did Treasury have over the report that they were paying KordaMentha to produce?

In September 2009 an RBNZ employee reviewed the KordaMentha report on SCF and commented, ‘It strongly supports that the only real option available is statutory management’. Was that Treasury’s objective – for SCF to go into statutory management? Is that what the email meant from the Securities Commission when they said, “we want to be seen as keeping at arms length with Treasury”.

Was the sudden swift change which ended in the statutory management action against Allan Hubbard himself a means for the government to swipe his assets? Kill two birds with one stone perhaps? Declare statutory management upon Allan Hubbard which will cause the demise of SCF? Simple strategy and if that was the objective it worked perfectly.

There are other actions showing the level of turmoil that either the Securities Commission or Companies Office caused for either SCF or Allan Hubbard where they appear to have acted heavy-handed. On at least one occasion this type of behaviour caused SCF’s capital raising to be suspended – which caused SCF to lose funds. These types of actions were detrimental to the reputation of SCF – it was on market then off market – it created uncertainty to the investors and the public in general.

In a supplementary report I will report further on the matters that indicate the statutory management of Allan Hubbard and the demise of SCF were orchestrated actions by officials. Regulatory Review – A Hubbard

SIMON BOTHERWAY CONFLICT

An early demonstration that conflicts were not managed is now well known as the “Simon Botherway conflict”. Three days following the announcement of the statutory management and Serious Fraud Office investigation, media reported that Simon Botherway’s brother had his business placed into receivership by South Canterbury Finance. As a consequence of the receivership action the brother was adjudicated bankrupt on 14 June 2010.

Simon Botherway’s role as a member of the Commission was pivotal in the recommendation to place Allan Hubbard into statutory management and under investigation for fraud. Simon Botherway was also the Chairman of NZ’s newly established Financial Markets Authority. He was therefore one of the most senior members of the Commission.

During 2009 South Canterbury Finance took receivership action against the brother of Simon Botherway. The receivership was valued at approximately $6.6m. On 14 June 2010 the brother was placed into bankruptcy (www.insolvency.govt.nz). On 20 June 2010, 6 days after his brother’s bankruptcy order, Simon Botherway recommended Allan Hubbard be placed in statutory management and be referred to the Serious Fraud Office for investigation. Given SCF’s receivership action against his brother and the consequential bankruptcy of the brother, Botherway should not have had any role to play relating to any regulatory action against Allan Hubbard. Botherway’s conflict is clear and there can be no denial that it was real.

The Ombudsmens Office has claimed there was no financial interest between Simon Botherway and his brother. This is not correct. Simon Botherway was a shareholder of a company and his brother was a Director. The company was investing in a hotel in Marlborough. Simon Botherway clearly had a financial interest directly linked to his brother. Botherway should have distanced himself from any regulatory actions involving SCF and/or Allan Hubbard. The Securities Commission’s own acknowledgement confirms he consistently failed to disclose either the conflict or a ‘potential conflict’.

Why then would the Ombudsman’s Office say there was no conflict? Is the Ombudsman’s Office truly an independent body appointed to oversee complaints against government officials? If so, then why has the Ombudsman’s Office reported there was no conflict? Are government officials not required to be held accountable when they have made a material blunder? Does political influence Regulatory Review – A Hubbard

prevent an independent body fairly exercising its statutory function? The Ombudsman’s Office website states – “Ombudsmen are independent Officers of Parliament who investigate complaints against central and local government agencies (including, in the case of the official information legislation, Ministers of the Crown)., Ombudsmen, as Officers of Parliament, are responsible to Parliament but are independent of the Government of the day. This is because, for the Ombudsmen to impartially investigate and review complaints against government agencies and Ministers, the Ombudsmen must be independent of them. On this occasion evidence clearly illustrates the claims of independence are words of policy only and are not practiced.

INTEGRITY OF AN INVESTIGATION

The integrity of any investigation is paramount. The investigation must independent from any influences and conducted without bias or malice. Investigations should not be politically motivated, nor should politicians seek to influence before an investigation has concluded. To speak openly and publicly about an investigation before a conclusion has been formed is foolish. It impedes rights enshrined in the Bill of Rights Act - the right to a fair trial and the right to natural justice.

INDEPENDENCY OF STATUTORY MANAGERS

[Information relating to the statutory managers will be comprehensively covered in a supplementary report.]

THE ANONYMOUS LETTER

The Securities Commission confirmed that on 28 February 2010 they received a written anonymous complaint relating to Allan Hubbard and entities pertaining to Allan Hubbard. The date they claim to have received the complaint (28 February 2010) was a Sunday. As a Sunday is not a business day it indicates that the complaint was sent via email. Emails of course are not anonymous and even if one was to use a nom de plume email address, enquiries have the possibility of still identifying the author. Regulatory Review – A Hubbard Page 18

As an ex investigator for the Companies Office I am aware of the need to use caution when receiving anonymous complaints. Malicious motivations are relevant and should not be ignored. The need for this caution increases if the information has the potential to be market sensitive.

I have viewed the censored copy and I note that the author demonstrates sound comprehension of securities law and enforcement procedures. This type of knowledge is rare amongst investors and I suspect the letter may have been written by someone with a regulatory background or the complaint has been critiqued by someone with a regulatory and/or enforcement background. During the investigation process the Securities Commission vigorously contested the release of the letter in an uncensored format. Now that charges have been filed continued protection of the content of the letter cannot be justified. Officials have stated the statutory management of Allan Hubbard resulted as a consequence of that letter of complaint. It is therefore integral to the charges. To further test the integrity of the Securities Commission’s investigation it will be necessary to examine the letter in its original format to rule out that the letter was submitted in foul play. CRIMINAL CHARGES FILED BY SFO SFO announced on 20 June 2011 they have laid fraud related charges against Hubbard. I have some knowledge to the background of these charges and based on the information provided to date I am of the view the charges will not establish any monetary losses, deceit or fraudulent conduct. Given that the announcement of the statutory management and fraud investigation caused the collapse of SCF, had the SFO not laid charges the government would have been exposed to class actions from SCF preferential shareholders and class actions from investors in Aorangi and Hubbard Managed Funds. That the government’s actions ultimately caused the collapse of SCF, one can understand the pressure upon the SFO to find wrongdoing. Regulatory Review – A Hubbard Page 19

If the officials have erred accountability is required. During her interview with Holmes in April 2010 ex CEO of the Securities Commission agrees that when people’s hopes and dreams have been destroyed as a result of money being lost it is necessary to bring these people to account –

DIPLOCK Paul, I think if you asked me what keeps me awake at night, it is precisely that people have lost this money, and that people's hopes and dreams have been destroyed and the fact that they've lost the capacity; very, very intelligent people who'd saved for their retirement are facing enormous challenges as a result of this disaster. And frankly that's the thing that motivates me and worries me more than anything, and that's why we need to take action to bring the people to book who actually cause these collapses.

The legality of the SFO charges are yet to be challenged and so is the procedural fairness and natural justice of the original statutory management decision. Now that the SFO has filed charges, full disclosure of all relevant information is required (over and beyond the Official Information Act).

The integrity and impartiality of the multi-agency investigation will then be further examined.

I intend providing a supplementary report by 31 August 2011. Regulatory Review – A Hubbard

ABOUT THE AUTHOR Kerry has approximately 18 years investigative and analytical experience. Her previous experience includes –

• Investigator / Analyst with the National Enforcement Unit, Ministry of Economic Development

• Investigator / Analyst with the Australian Securities & Investments Commission (based in Sydney, Australia)

• Associate Supervisor and Financial Crime Expert with the Financial Services Authority (based in London, United Kingdom)

• Assistant Vice President and Deputy Money Laundering Reporting Officer at the Bank of New York (based in London, United Kingdom)

• Anti-money Laundering Adviser at the Reserve Bank of New Zealand

• Consultant and Director of Anti-Money Laundering Consultants (present occupation)

She holds a Diploma in Financial Markets and is midway through a Masters in Applied Finance.

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