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Business year in review: Adding up the costs of failure

By Tim Hunter

You could call it a year of reckoning, a calling to account. Like Icarus, who flew too close to the sun, we learned there can be a heavy price to pay for ambition.

At Pike River, the price was the lives of 29 men and the livelihoods of hundreds more. In the Gulf of Mexico, the price was the lives of 11 men and an environmental disaster. In Greece and Ireland, the price was a humiliating bailout and the prospect of years of austerity.

For others, however, the calling to account was more literal and personal.

Allan Hubbard, the humble southern accountant who transformed himself into a multimillionaire philanthropist, saw the collapse of his life’s work and his reputation trashed amid a Serious Fraud Office probe of his finance company.

As South Canterbury Finance struggled desperately to stay afloat, statutory managers were appointed in June to take control of all his business affairs, particularly two lesser known entities Aorangi Securities and Hubbard Managed Funds.

It was a shocking move and became the big business story of the year. Despite all the scandal and loss in previous financial failures  Blue Chip, Hanover, Bridgecorp, to name but a few  Mr Hubbard was the only financier to have had his assets drastically seized in this way.

Two months later his flagship, South Canterbury Finance, collapsed owing $1.7 billion. Taxpayers carried the can for most of that debt because South Canterbury was covered by the Government’s deposit guarantee scheme. The big losers, apart from taxpayers, were South Canterbury’s shareholders, mainly Mr Hubbard himself, and the owners of $100 million in preference shares.

In the aftermath, the trickle of information about South Canterbury and Mr Hubbard became a torrent as the Treasury and Reserve Bank added a mass of documents to details released by statutory managers and receivers. There was even a biography, published with perfect timing, containing further revelations on the rise and fall of Timaru’s favourite “son”.

Collectively, the story they told showed South Canterbury  as anything but the model of probity it made itself out to be. Despite the company’s headlong growth, Mr Hubbard clung to his anachronistic management style, opening the mail personally, keeping handwritten ledgers of loans he personally controlled and shuffling assets around to avoid booking a loss.

The empire he controlled could be clearly seen as a mess of related-party dealing, an arrangement that made efforts to rescue the finance company much more complicated.

After receivers were appointed, Mr Hubbard came out fighting.

“I will be providing my own analysis, with the assistance of my team of professional legal and financial advisers, to put my side of the story and I will be taking this matter further,” he said.

“I cannot allow my reputation to be savagely attacked by this shameful process and all of those who trusted [wife] Jean and me, over so many years, to allow this tragic set of events to go unanswered.”

However, despite a deluge of press releases from his supporters, Mr Hubbard,  with other company directors and executives, remains in the shadow of investigations by statutory managers, receivers and, since October, the Serious Fraud Office, which says it has “grounds to suspect that a number of related-party transactions involving SCF may have involved false statements or other fraudulent conduct”.

In taking on South Canterbury, the SFO was adding to a string of investigations and prosecutions announced since chief executive Adam Feeley got his feet under the desk in November 2009.

Also feeling its oats was the Securities Commission, which decided this month  to make the rare move of announcing which finance companies it was investigating  24 of them, in some cases two or three years after their collapse.

Of those, its most notable target was Hanover Finance, which failed in July 2008 owing $465m. This month the commission got a court order freezing assets belonging to Hanover managing director Mark Hotchin, after announcing it would decide before Christmas whether to lay criminal charges agains any of Hanover’s directors.

It was the first time the commission had used those powers, despite having them since 2006.

Instrumental in the probe was Allied Farmers, which found some nasty surprises in Hanover’s loan book after acquiring it in a debt-for-equity deal a year ago. Allied managing director Rob Alloway memorably described his reaction to finding out Hanover had forgiven personal guarantees for two borrowers.

“Some of these things we did not know about until after [the deal was done],” he said. “We called those two borrowers in, and they were smiling like cats.”

Mr Hotchin, holed up in a beachfront apartment on the Gold Coast, may have found little to celebrate on Christmas Day, also his 52nd birthday, given he’s now living on a $1000 a week allowance  oh, and A$240,000 or so stashed away in Australian bank accounts.

Another under a cloud over the holidays will be Peter Huljich, former managing director of Huljich Wealth Management, who is due in  Auckland District Court on January 14 to face criminal charges for allegedly misleading investors in his KiwiSaver scheme and making false statements in its prospectus.

Mr Huljich, who stepped down in March from the firm he founded with former National Party leader Don Brash and former Auckland mayor John Banks, artificially boosted the fund’s income by selling his own shares to it at a huge discount. In one case shares worth $141,540 were sold for just $5.

“I provided compensation because I felt morally responsible for the two particular investment decisions, which proved disappointing,” he said in February.

Still, Mr Huljich is better off this Christmas than Nicholas Kirk and Marcus MacDonald, former directors of $43m failure Five Star Consumer Finance, who were to spend the festive season in jail after a successful prosecution by the SFO.

These were the first jail terms handed out to directors involved in a major finance company collapse.

Perhaps the oddest saga of the year came to a sort of conclusion this month with the bankruptcy of businesswoman May Wang, allowing the Government to reject, on Overseas Investment Office advice, her bid to buy 20 dairy farms  on behalf of Chinese investors.

The bid company, Cayman Islands-registered, Hong Kong-listed Natural Dairy, revealed big plans in March involving farm acquisitions and processing facilities, but its shares were suspended for much of the year and its periodic opaque announcements did little to dispel the clouds of suspicion surrounding it.

A foreign company trying to buy so much farmland was always going to stir up feeling, so Natural Dairy’s association with Ms Wang to front its bid was odd.

Ms Wang’s property development venture Dynasty Group had defaulted on its debts in 2008 and Westpac served a bankruptcy notice against her in November 2009.

Meanwhile, Ms Wang had been successfully sued for naming her firm UBS Funds Management, initials many would recognise as belonging to a giant Swiss bank.

Receivers who thought they had a $213m deal to sell 16 former Crafar farms to Natural Dairy must now go back to the drawing board.

As will investment company GPG, which ended two decades under the stewardship of Sir Ron Brierley with a boardroom bust-up and an extraordinary shareholder revolt during the winter months.

Having grown into a clumsy amalgam of often-troubled assets listed on three stock exchanges, GPG had problems its directors proved unable to resolve.

After a board restructuring plan got a hostile reception from shareholders, New Zealand-based director Tony Gibbs broke ranks and paid the ultimate price when his former mates kicked him out of the job.

“I’m ashamed of the fact that I agreed to it in the first place,” he said. “I didn’t believe in it, but I did it, and that’s why I’m ashamed.”

When the smoke of battle cleared, Sir Ron had stepped down as chairman and shareholders had their desired majority of independent directors on the board.

And after the reckoning? A clean slate and a new year, at least for some.

www.stuff.co.nz

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