R v Bublitz
[2019] NZHC 222
•21 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CRI-2014-004-2293
[2019] NZHC 222
BETWEEN THE QUEEN AND
PAUL BUBLITZ, BRUCE McKAY and RICHARD BLACKWOOD
Hearing: 13-17, 20-23, 27-28 August, 3-5 September 2018 Appearances:
DG Johnstone, SS McMullan and S Closey for the Crown
SJ Lance, SNB Wimsett and F Iggulden for Defendant, P Bublitz GNE Bradford and S Withers for Defendant, B McKay
S Kilian and R McCausland for Defendant, R BlackwoodVerdicts:
5 February 2019
Reasons:
21 February 2019
VERDICTS AND REASONS OF TOOGOOD J
[Judge-alone trial under Part 4, Subpart 1 of the Criminal Procedure Act 2011]
This judgment was delivered by me on 21 February 2019 at 3.00 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
R v BUBLITZ [2019] NZHC 222 [21 February 2019]
Table of Contents
VERDICTS AND CONSEQUENTIAL ORDERS - Delivered orally at 10am on
5 February 2019......................................................................................................... [1]Addendum............................................................................................................... [10]
REASONS FOR VERDICTS: Delivered in writing on 21 February 2019............ [11]
Introduction............................................................................................................. [11]
The Crown's case..................................................................................................... [12]
The consequences of the alleged offending............................................................ [40]
Viaduct losses...................................................................................................... [41]
Mutual losses....................................................................................................... [43]
The respective roles of the defendants.................................................................... [45]
The regulatory framework....................................................................................... [50]
The Priority/Viaduct trust deed........................................................................... [53]
The New Zealand Accounting Standards............................................................ [56]
NZ IAS 24........................................................................................................... [57]
NZ IAS 27........................................................................................................... [60]
The Mutual Crown guarantees................................................................................. [63]
The conduct of the trial............................................................................................ [68]
The first trial............................................................................................................ [71]
This trial – evidential issues..................................................................................... [73]
Mr Nicholaas Wevers.......................................................................................... [78]
The approach to setting out the reasons for the verdicts......................................... [79]
Reasons must be concise...................................................................................... [79]
Relevant rules of law and practice........................................................................... [83]
Burden and standard of proof.............................................................................. [84]
Defendants giving or calling evidence................................................................ [86]
A circumstantial case and the drawing of inferences........................................... [88]
Expert evidence................................................................................................... [93]
Separate trials and verdicts.................................................................................. [96]
The corporate structure............................................................................................ [98]
The projects........................................................................................................... [100]
Homebush/Cashmere/Khandallah...................................................................... [101]
Dockland Holdings Limited.............................................................................. [102]
Northgate/Silverdale Project.............................................................................. [103]
The Hilltop/Kawakawa project.......................................................................... [104]
NKE/Awaroa/Helensville project...................................................................... [107]
The charges............................................................................................................ [109]
Theft by a person in a special relationship......................................................... [109]
False statement by a promoter........................................................................... [116]
False statement to a trustee................................................................................ [122]
The question trails.................................................................................................. [125]
Charges 1, 6 and 7 against Mr Bublitz – Theft by a person in a special relationship
........................................................................................................................... [127]
Charges 2, 3, 5, 8, 10, 11, 12, and 13 against Mr Bublitz; Charges 10, 11 and 12 against Mr McKay; Charges 10, 11, 12, and 13 against Mr Blackwood – Theft by
a person in a special relationship....................................................................... [130]
Charge 4 against Mr McKay; Charge 8 against Mr McKay and Mr Blackwood; Charges 14 and 15 against Mr Bublitz – Making a false statement as a promoter
........................................................................................................................... [134]
Charge 9 against Mr McKay and Mr Blackwood – Making a false statement to a
trustee................................................................................................................ [136]
Control of Viaduct by Mr Bublitz.......................................................................... [138]
The nature of the Crown's case.............................................................................. [140]
"Control" in terms of NZ IAS 24........................................................................... [147]
The expert witnesses.......................................................................................... [148]
Discussion to the relevant accounting standards............................................... [152]
NZ IAS 24......................................................................................................... [155]
The power to govern.......................................................................................... [169]
Summary of evidence from which Crown says Mr Bublitz's control of Viaduct should be inferred............................................................................................................................... [173]
Did Mr Bublitz have control of Viaduct in terms of the accounting standards?... [178]
Did an "abiding, secret arrangement ceding control of Viaduct to Mr Bublitz" exist from the date Priority Finance was acquired?.......................................................................... [178]
What occurred around the time of the establishment of Viaduct...................... [180]
The significance of the advice from Mr Rhys Barlow of BDO Spicers............ [198]
Conclusion on control of Viaduct up to 29 September 2009 in terms of the
accounting standards............................................................................................. [209]
Verdicts on Charges 1 to 9..................................................................................... [218]
Charges 10 to 15 – Control of Viaduct in terms of GAAP/NZ IAS 24 after Mr
Wevers' resignation................................................................................................ [220]
The nature of control in terms of the "real or effective control" definition in the
Crown guarantee.................................................................................................... [221]
What is meant by "real or effective" control?................................................... [224]
Control of Mutual Finance..................................................................................... [227]
Did Mr Bublitz have "real or effective" control of Viaduct?................................ [229]
Factors leading to conclusion that Mr Bublitz had real or effective control of
Viaduct.............................................................................................................. [229]
Attempts to conceal or disguise Mr Bublitz's involvement............................... [233]
The management services agreement................................................................ [236]
The Treasury investigation and withdrawal of the Crown guarantee................ [238]
The 13 May 2009 "Policy Directive" on salaries............................................... [243]
Subsequent transactions said to favour Hunter over Viaduct............................ [250]
Hilltop Ridge Farms Limited............................................................................. [251]
Capital note redemptions................................................................................... [252]
Other evidence of Mr Bublitz's real or effective control of Viaduct................. [259]
Conclusion......................................................................................................... [266]
Charges 10 to 13 – Theft by a person in a special relationship............................. [267]
Charge 13 – Mr Bublitz's real or effective control over Hilltop Ridge Farms
Limited.............................................................................................................. [269]
The other elements of Charges 10 to 13................................................................ [272]
Mr Bublitz's control over Mutual's investor funds............................................ [273]
Mr Bublitz's intentional dealings in the transactions......................................... [274]
Related party transactions.................................................................................. [275]
Other particulars................................................................................................. [276]
Certification of arms' length terms by independent expert............................... [278]
Breach of limit of 1 per cent of Mutual's total tangible assets........................... [280]
The defendants' knowledge and intent.................................................................. [281]
What each of the defendants knew about the transactions forming the basis for
charges 10 to 13..................................................................................................... [292]
Mr McKay's credibility.......................................................................................... [302]
Verdicts on Charges 10 to 15................................................................................. [304]
Charges 14 and 15 - False statements by a promoter............................................ [305]
Verdicts on Charges 14 and 15.............................................................................. [315]
VERDICTS AND CONSEQUENTIAL ORDERS - Delivered orally at 10am on 5 February 2019
[1] Paul Neville Bublitz: you have been tried on ten charges under s 220 of the Crimes Act 1961 of theft by a person in a special relationship, and two charges under s 242 of the Crimes Act of making a false statement as a promoter of securities under the Securities Act 1978.
[2] Bruce Alexander McKay: you have been tried on three charges of theft by a person in a special relationship; one charge of making a false statement as a promoter of securities and one charge of making a false statement to a trustee for debenture holders under s 377 of the Companies Act 1993.
[3] Richard Timothy Blackwood: you have been tried on four charges of theft by a person in a special relationship; one charge of making a false statement as a promoter and one charge of making a false statement to a trustee of debenture holders.
[4] I regret that, because of late changes that I have made to the way in which I have set out my reasons for the verdicts I have reached, I am not in a position to deliver my written reasons today. I propose to deliver my verdicts now but to provide the written reasons on either Thursday or Friday of this week. I apologise for that delay. But I want to make a comment which may give the parties an understanding of at least part of my reasoning.
[5] In general terms, the charges fell into two categories; first, those relying on alleged breaches of the Priority Finance or Viaduct Capital trust deed and, second, those relying on alleged breaches of the Mutual Finance Crown guarantee. An essential element of all of the charges is proof that Mr Bublitz was in control of the transacting entities so as to make the relevant transactions related party transactions. For the purposes of the charges relying on the Priority Viaduct Trust Deed, that is charges 1 to 9, the definition of "control" in the Priority Viaduct Trust Deed is that which is found in the New Zealand Accounting Standard NZ IAS 24. I have accepted that, among other things, it required proof that Mr Bublitz was in control of Viaduct by reason of what Mr Johnstone described as "an abiding, secret arrangement ceding control" to him. For charges 10 to 15, however, the relevant definitions of "control"
are those in the Mutual Crown guarantee; they are alternatives, either of which may apply. One definition incorporates the accounting standard NZ IAS 24. The other is a broader definition requiring proof, for the purposes of this case, that Mr Bublitz was able to exercise real or effective control directly or indirectly over the parties to the transaction, whether pursuant to a contract, an arrangement, an understanding or otherwise. The differences between the requirements in the two sets of charges goes some way to explaining my verdicts.
[6] Will the defendants please stand? For the reasons that I shall deliver in writing I have reached the following verdicts:
CHARGE
VERDICT
Charge 1: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 2: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 3: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 4: Making a false statement as a promoter
Mr McKay: Not guilty
Charge 5: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 6: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 7: Theft by a person in a special relationship
Mr Bublitz: Not guilty
Charge 8: Making a false statement as a promoter
Mr McKay: Not guilty
Mr Blackwood: Not guilty
Charge 9: Making a false statement to a trustee
Mr McKay: Not guilty
Mr Blackwood: Not guilty
Charge 10: Theft by a person in a special relationship
Mr Bublitz: Guilty Mr McKay: Guilty
Mr Blackwood: Guilty
CHARGE
VERDICT
Charge 11: Theft by a person in a special relationship
Mr Bublitz: Guilty Mr McKay: Guilty
Mr Blackwood: Guilty
Charge 12: Theft by a person in a special relationship
Mr Bublitz: Guilty Mr McKay: Guilty
Mr Blackwood: Guilty
Charge 13: Theft by a person in a special relationship
Mr Bublitz: Guilty
Mr Blackwood: Guilty
Charge 14: Making a false statement as a promoter
Mr Bublitz: Guilty
Charge 15: Making a false statement as a promoter
Mr Bublitz: Guilty
[7]I discharge each of you on the charges on which I have found you not guilty.
[8] On all charges on which you have been found guilty, you are remanded on bail on your existing terms, to appear in this Court for sentencing at 9:00 am on Wednesday, 27 March 2019.
[9] I call for pre-sentence reports and, in each case, without giving any indication about the likely sentences that will be imposed, I direct that home detention appendices be prepared.
Addendum
[10] Mr Kilian, on behalf of Mr Blackwood, signalled that he is instructed to make an application for a discharge under s 106 of the Sentencing Act 2002 and requested that no convictions be entered. I indicated that I considered such an application had almost no prospect of success but Mr Johnstone, for the Crown, did not oppose the deferral of convictions. The matter will be dealt with at the time of sentencing and I recalled orders that I made entering convictions for the defendants.
REASONS FOR VERDICTS: Delivered in writing on 21 February 2019 Introduction
[11] On 13 May 2010, finance company Viaduct Capital Limited (Viaduct or VCL) was placed into receivership by the trustee for the finance company's debenture holders. On 14 July 2010, receivers were appointed to another finance company, Mutual Finance Limited (Mutual or MFL). This criminal proceeding follows subsequent investigations by the Treasury, the Serious Fraud Office and the Financial Markets Authority into the affairs of the two companies and the actions of their shareholders, directors and managers.
The Crown's case
[12] The essence of the Crown's case is that the defendant Paul Neville Bublitz, as the ultimate owner of a group of investment companies known as the Hunter Capital Group (Hunter, Hunter Capital, Hunter Group or the Group), arranged the acquisition of, and controlled, the two finance companies, primarily to use them as vehicles for obtaining funding from members of the public to support property development ventures he was undertaking through the Group.
[13] It is alleged that, in the wake of the 2007-2008 global financial crisis (GFC) and the ensuing recession, Mr Bublitz's several ventures were experiencing serious cash-flow problems by late 2008. A strategy was developed to create a "distressed asset" fund to take advantage of opportunities to acquire distressed assets (in the form of property loans) at low prices. The plan involved the acquisition of a Crown- guaranteed finance company that would seek deposits from the investing public, purchase Hunter assets for cash, and lend cash to Hunter and other business ventures associated with Mr Bublitz, in order to reduce Hunter Capital's debt servicing burden.
[14] In a proposal put to share brokers Forsyth Barr in December 2008, Mr Bublitz and an associate, Mr Nicholaas Wevers, indicated an intention to raise at least
$25 million by way of a public debt instrument. They explained that:
The impact of the current economic and investment climate on the property sector, and finance companies that fund the sector, is well documented. Property values are under considerable downward pressure and certain
financiers have compromised. Illiquid capital markets are compounding the situation.
The confluence of these factors provides a rare opportunity for an experienced and entrepreneurial property financier to acquire/structure and manage distressed property loans.
The success of this venture is predicated as much on appropriate capitalization as management capability.
[15] The Crown Retail Deposit Guarantee Scheme was established under the Public Finance Act 1989 during the recession which followed the GFC. It was designed to support the New Zealand banking system and give some degree of assurance to New Zealand depositors at a time of financial market uncertainty. The Scheme guaranteed that the New Zealand government would repay depositors affected by the failure of the New Zealand financial institutions who participated in it.
[16] Mr Bublitz and Mr Wevers saw the Crown guarantee as an essential prerequisite for obtaining the required funding from capital markets at that time, the Crown's assertion being that the acquisition of a finance company that already had the guarantee would enable Mr Bublitz to extend its benefits through the Hunter Group.
[17] A potential difficulty with the proposal – limitations on related party transactions – was identified at an early stage by the defendant Bruce Alexander McKay, who was at that time the manager responsible for the financial management and reporting of the Group. In a memorandum dated 12 December 2008 addressed to Mr Bublitz and Mr Wevers, Mr McKay said that it was preferable for presentations to investors not to propose a structure that would involve related party transactions because, although they may be commercially sound, the mere fact that they were between related parties might be considered to be a negative in the eyes of potential investors.
[18] It is not disputed that related party transactions are neither uncommon nor inherently improper, but they can impact significantly on the financial performance of a company. The relevant accounting standard, NZ IAS 24 issued by the Financial Reporting Standards Board of the New Zealand Institute of Chartered Accountants,1
1 A body established under the New Zealand Institute of Chartered Accountants Act 1996.
explains the significance of related party relationships and transactions in the following terms:
5.Related party relationships are a normal feature of commerce and business. For example, entities frequently carry on parts of their activities through subsidiaries, joint ventures and associates. In these circumstances, the entity's ability to affect the financial and operating policies of the investee is through the presence of control, joint control or significant influence.
6.A related party relationship could have an effect on the profit or loss and financial position of an entity. Related parties may enter into transactions that unrelated parties would not. For example, an entity that sells goods to its parent at cost might not sell on those terms to another customer. Also, transactions between related parties may not be made at the same amount as between unrelated parties.
7.The profit or loss and financial position of an entity may be affected by a related party relationship even if related party transactions do not occur. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties. For example, a subsidiary may terminate relations with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity as the former trading partner. Alternatively, one party may refrain from acting because of the significant influence of another - for example, a subsidiary may be instructed by its parent not to engage in research and development.
8.For these reasons, knowledge of related party transactions, outstanding balances and relationships may affect assessments of an entity's operations by users of financial statements, including assessments of the risks and opportunities facing the entity.2
[19] As a consequence, debt security trust deeds related to the creation and issuing of secured debentures, unsecured deposits and unsecured subordinated capital notes commonly contain covenants restricting dealings between related parties and requiring certain forms of disclosure. The Crown's guarantee scheme similarly imposed limitations on, and obligations concerning the disclosure of, transactions between related parties.
[20] It is said that Mr Bublitz, Mr Wevers and Mr McKay knew that Mr Bublitz could not formally take a controlling interest in the acquired finance company or be
2 New Zealand Equivalent to International Accounting Standard 24, Related Party Disclosures (NZ IAS 24), Financial Reporting Standards Board of the New Zealand Institute of Chartered Accountants, issued November 2004 and incorporating amendments up to November 2008.
seen to undertake key management roles until after the finance company's Hunter asset purchase and lending programme was concluded. On the other hand, without the programme Hunter was likely to fail and Mr Bublitz would be exposed to very considerable personal liability. The Crown alleges that a scheme to avoid the serious constraint on related party dealings was developed in a meeting held in Pauanui on 13 January 2009 by Mr Bublitz, Mr McKay and Mr Peter Chevin, an associate of Mr Bublitz who was then a bankrupt. Mr Wevers was not present at that meeting.
[21] The Crown's case is that Mr Bublitz, Mr McKay and Mr Chevin proposed the acquisition of a finance company that would be affordable but which would also have a relatively permissive related party definition and be covered by the Crown guarantee. Mr McKay and Mr Wevers subsequently provided Mr Bublitz with advice on various prospects, comparing each target's treatment of capital notes and equity ratios, balance sheet, price, the existence of the Crown guarantee and the requirements of each company's trust deed. Having identified a Christchurch-based company, Priority Finance Limited (Priority), as a potential target, Mr Bublitz and his associates incorporated Phoenix Finance Holdings Limited (Phoenix) as the vehicle for the acquisition. It is alleged that Mr McKay devised the acquisition structure which featured:
(a)with the cooperation of the vendors of the finance company, Mr Bublitz selling certain Hunter loan assets and shares to Priority for cash;
(b)Hunter lending that cash to a holding company, Phoenix, the shares in which would be held by a private company owned by Mr Wevers; and
(c)Phoenix acquiring Priority.
[22] Under this plan, notwithstanding that Mr Bublitz's Hunter Group would provide all of the finance for the acquisition of Priority by Phoenix, Mr Wevers' company would be the sole holder of the shares in Phoenix which would in turn be the sole shareholder of the finance company. The advantage of this order of events was that, prior to its acquisition by Phoenix, Priority was not controlled by interests associated with Mr Bublitz or Mr Wevers, so pre-acquisition transactions and the
acquisition itself would not involve related parties when they occurred on Friday, 13 February 2009.
[23] The parties to the acquisition sought professional advice on whether the acquisition would involve related party dealings, and offered that advice to the trustee appointed under Priority's debenture trust deed. Mr Wevers and Mr McKay let the advisors know of the prospect that, following its acquisition, Priority might consider further dealings with Hunter entities, and that Mr Bublitz might seek a shareholding in its parent. The Crown asserts, however, that they did not disclose to the advisors:
(a)the details of a settled plan to acquire a series of Hunter assets immediately after Priority's acquisition;
(b)that Mr Bublitz and Mr Wevers had agreed Mr Bublitz would take a 60% shareholding in the finance company's parent, Phoenix; or
(c)the full extent to which they anticipated Mr Bublitz would be in a position to control, and act in a key management role for, the finance company.
[24] Much occurred on the next working day after the acquisition, Monday 16 February 2009:
(a)Mr Wevers and Mr McKay were appointed the directors of the finance company, which was renamed Viaduct Capital Limited.
(b)Viaduct was assigned the lease of premises at Viaduct Harbour Avenue, Auckland from which the Hunter Group operated and assumed primary responsibility to make lease payments.
(c)As well, Viaduct purchased Hunter's plant and equipment held at those premises for cash in the order of $135,000.
(d)On that day, and over the ensuing weeks and months, a number of transactions occurred which the Crown says were part of the pre- arranged plan.
[25] The Crown alleges that, because Mr Bublitz controlled Viaduct and the Hunter- related parties with whom it contracted, the transactions were between related parties. It says that the failure of the defendants to disclose them and, where necessary, obtain prior approval, breached the defendants' obligations under the relevant trust deeds and the Crown guarantees.
[26] The Crown maintains that various techniques and elaborate structures were implemented to disguise Mr Bublitz's overall control of each of the parties to the ongoing asset purchases and loans. It is said, for example, that the transactions involved requests of associates, who were not truly undertaking investments, to "warehouse" or store shares for a limited period, or to have them held off the Hunter Group balance sheet, in order to generate cash-flow for the Hunter entities by on- selling them to Viaduct. Some associates were asked to "front" an ostensibly independent entity to which Viaduct would advance funds or from which Viaduct would purchase pre-existing lending. Most significantly, it is alleged by the Crown that, although Mr Wevers appeared to own 100 per cent of Viaduct through his private investment company, there was in fact a shareholder arrangement between Mr Bublitz and Mr Wevers giving Mr Bublitz actual control over Viaduct's governance and management. This arrangement was not disclosed to the advisors engaged by the Hunter Group and Viaduct from time to time, the Viaduct trustee or the New Zealand Treasury.
[27] The Crown alleges that, in reliance on the benefits provided by the Crown guarantee, a prospectus was issued by Viaduct on 3 March 2009 for the subscription of up to $20 million of debenture stock. It is said that, while the prospectus noted the Viaduct trust deed's restrictions on related party lending, Mr McKay and Mr Wevers, as the directors responsible for issuing it, deliberately omitted any reference to what the Crown says were the numerous related party transactions that Viaduct had already undertaken after the 13 February 2009 acquisition. The Viaduct offer was said to lead to a $6 million increase in Viaduct's cash position.
[28] On 20 April 2009, however, Treasury advised Viaduct that it intended to withdraw the Crown guarantee from Viaduct Capital Limited. The Secretary to the Treasury considered that Viaduct's activities included breaches of the guarantee deed, demonstrating that the business or affairs of Viaduct were being, or were intended or likely to be, carried on in a manner which may extend the effective benefit of the guarantee to persons who were not intended to receive that benefit and that was otherwise inconsistent with the intentions of the Crown in entering into the guarantee deed.
[29] The withdrawal of the guarantee led to a renewed tightening of Viaduct's cash- flow such that, on 13 May 2009, Mr Bublitz issued what the Crown says was a directive to Mr Wevers to cut senior executive base salaries by 40 per cent with effect from 1 June 2009. Matters did not improve and, in September 2009, Mr Wevers advised Mr Bublitz that "drastic actions" were required, including a suggestion that Mr Bublitz should sell his house and other Hunter assets to raise cash. Mr Wevers said that serious consideration should be given to winding up Viaduct. It is alleged that Mr Bublitz's control over Viaduct is demonstrated, among other things, by his arranging for Mr Wevers to be replaced as a director of Viaduct by the defendant Richard Timothy Blackwood, another long-term associate of Mr Bublitz, and for the transfer of 51 per cent of the shareholding in Phoenix (Viaduct's owner) to Mr McKay "for a peppercorn price". The Crown alleges Mr Bublitz remained in effective control of Viaduct nevertheless.
[30] Mr Bublitz set about purchasing another finance company which had the benefit of the Crown guarantee. Through a Hunter Group company, Argus Capital Limited, he arranged the purchase of Mutual Finance Limited on 11 December 2009. Being conscious of the need to leave Viaduct at arms' length from Mutual, ostensibly at least, the acquisition was structured on the basis that Mr Bublitz's company would acquire 60 per cent of the shareholding initially, with the balance of the shares to be acquired in two further tranches in March and October 2010 respectively. Upon initial acquisition, the managing director of Mutual, Mr Lindsay Kincaid, remained a director; he resigned on 21 April 2010.
[31] Mr Bublitz was managing director of Mutual and the ultimate owner of its shares. It is not disputed that he controlled Mutual. Mr Bublitz appears to have been alert to the prospect that, having removed the Crown guarantee from Viaduct, Treasury officials would take a close interest in the circumstances of the Mutual acquisition. The Crown says that, to pre-empt any Treasury intervention, and notwithstanding that there was no legal requirement to do so, Mr Bublitz sought the Treasury's "comments and questions about the proposed transactions so that the parties [could] be informed as to The Treasury's view of the transaction".
[32] After saying that the Hunter Group proposed to settle the purchase of an initial 60 per cent stake in Mutual for cash, Mr Bublitz said:
HCG does not intend to or propose to sell any assets to MFL or undertake any other form of capital restructuring.
[33] In a letter dated 27 November 2009, Mr Bublitz told the Treasury's team leader of the guarantee scheme:
Mutual currently does not intend to purchase any assets from Viaduct Capital. However, if in the future Mutual does consider purchasing assets from Viaduct Capital, an independent expert will be employed to assess the merits of any such transaction and to ensure it is on arms' length terms.
[34] It is the Crown's case that those assurances were disingenuous in that Mr Bublitz always intended that Mutual would be operated as part of and for the purposes of providing related party funding to Viaduct and other Hunter Group entities, including through selling in loans. For example, responding to concerns expressed by Kiwibank in February 2010 about the state of the Hunter Group's bank accounts and Kiwibank's exposures to three Hunter Group projects, Mr Bublitz addressed in tandem the circumstances of both Viaduct and Mutual, and referred to "a number of interdependencies within the funding structure of the [Hunter] group".
[35] The Crown says that, in issuing prospectuses in March 2009 and October 2009, Mr McKay and, in respect of the latter document, Mr Blackwood also, failed to disclose related party dealings which ought to have been disclosed to potential investors. Similarly, in prospectuses issued by Mr Bublitz on behalf of Mutual in
March 2010, the extent of related party transactions entered into was withheld improperly from potential investors.
[36] The Crown alleges that, up to the receivership of Viaduct in May 2010 and of Mutual in July 2010, the defendants conducted a considered and sophisticated deceit. Drawing on their experience in finance and commerce, it is said the defendants understood the importance of appearances, including those created by regular business documentation. The Crown says that the defendants maintained a façade of legitimacy designed to support representations made to those who could not abide related party transactions, such as the Treasury and the trustees of both Viaduct and Mutual.
[37] It is common ground that advice was sought, from time to time, from reputable professional advisers, such as law firm DLA Phillips Fox and accounting firm BDO Spicers, concerning the acquisition of Priority Finance Limited (Viaduct) and its initial lending arrangements. The Crown alleges, however, that in establishing the scheme Mr Bublitz, Mr McKay and Mr Wevers carefully controlled the scope of the advice and the information on which it was based, particularly when initial advice was not favourable. It is said that what the Crown calls the "layers of deceit", intended to convey a false impression that Viaduct was under the control of Mr Wevers and Mr McKay, were difficult to maintain. The Crown says that the staff and contractors employed or engaged by the finance companies and the Hunter entities effectively merged the activities of the various entities, sharing premises and resources, under Mr Bublitz's overall control. Although Mr Blackwood joined the enterprise after the initial planning and implementation of the scheme, it is asserted that he knew at times relevant to the charges against him that Mr Bublitz had control of Viaduct and the other entities and that undisclosed related party transactions had occurred and were continuing to occur.
[38] The central proposition in the Crown's case is that whether any particular transaction is a restricted or prohibited related party transaction is a question of substance, assessed by reference to all of the facts relating to the transaction. The Crown says that is particularly so where a transaction may have been structured with the intention of avoiding characterisation as a related party transaction.
[39] It is the Crown's case that restrictions on related party transactions and the requirement that they must be reported presented Mr Bublitz and the Hunter Group with an insurmountable legal obstacle to their ongoing reliance upon the finance companies it acquired for the purpose of resolving Hunter's serious cash-flow issues following the GFC. It is alleged that to rescue the Hunter Group, Mr Bublitz, Mr McKay and Mr Blackwood needed to use for the benefit of entities within the Hunter Group funds provided by investors who believed that the Crown guarantee and Viaduct's trust deed prevented the finance companies from entering into more than a minimum of related party transactions. It is submitted that despite the legal obstacles, the defendants created an elaborate deception reaching well beyond the ordinary bounds of commerce, or even risky commercial decisions, into deceit and fraud. The defendants are alleged to have exploited weaknesses in the systems designed to prevent their actions, establishing sophisticated structures designed to disguise the substance of lending arrangements and carefully controlling the disclosure of information of the structures' true substance. It is said by the Crown that Mr Bublitz's control must be inferred because, among other things, many of the transactions under scrutiny were not managed commercially in Viaduct's interests but in the interests of the Hunter entities he owned and controlled which obtained much-needed cash as a result.
The consequences of the alleged offending
[40] Although it is not relevant to proving any element of the charges, I record the Crown's submissions about the recoveries and stakeholder losses said to arise from the alleged offending to put the proceeding into context. It is said that assessing the total amount of recoveries and losses following the failure of the two finance companies is difficult. First, the receiverships have not as yet concluded. Moreover, recoveries relating to Mutual have been complicated by the involvement of Crown Asset Management Limited (CAML) which, upon the Crown guarantee to Mutual being met by way of payment directly to Mutual's depositors, acquired its remaining assets for the purpose of off-setting the Crown's losses under the guarantee.
Viaduct losses
[41]It is said that minimal recoveries have been made from the more than
$8 million in loans that were outstanding at the date of the Viaduct receivership. In particular, Viaduct's receivers recovered little on amounts outstanding under Viaduct's loan to Hunter-related entities. Nothing was recovered from the Northgate, Homebush, Hilltop and NKE loans. At the time of receivership, depositors with Viaduct had advanced amounts totalling about $7.85 million of which around
$530,000 was not guaranteed under the Crown guarantee because it had been advanced following withdrawal of the guarantee on 20 April 2009. In total, the Crown paid the Viaduct deposit holders who were covered under the guarantee the sum of
$7.6 million.
[42] Viaduct's receivers have distributed seven cents in the dollar to the Crown and to non-guaranteed depositors, totalling $550,000. The receivers have estimated being able to pay a further 40-50 cents in the dollar because the Financial Markets Authority have reached a settlement with Viaduct's trustee in the sum of $4.5 million, based on a claim that the trustee failed to prevent the defendants' conduct which gave rise to the losses.
Mutual losses
[43] All Mutual deposit holders were guaranteed by the Crown. Under the guarantee, the Crown paid the debenture holders just over $9 million, but it is said that the Crown is unlikely to recover all of that sum. To date recoveries have been made as follows:
(a)around $1.8 million by way of interim distribution; and
(b)around $2.8 million, the proceeds of the sale of assets that CAML acquired from the receivers, although the costs incurred in realising that amount from those asset sales has not been taken into account. The Crown also expects to recover the bulk of a sum of $1.12 million in cash which Mutual's receivers continue to hold pending resolution of a
dispute with Viaduct's receivers arising out of the security sharing arrangements.
[44]It is said that, in total, the Crown is likely ultimately to have lost around
$3.38 million because of Mutual's failure and the Crown's obligation to honour its guarantee.
The respective roles of the defendants
[45] In the Hunter Capital corporate profile of December 2009, Mr Bublitz was described as the major shareholder and managing director. It was said that Mr Bublitz drove the overall Group's strategic direction and that he took a lead role in the structuring and negotiation of transactions. Mr McKay was said to be the chief financial officer for Hunter Capital, responsible for the financial management and reporting for the Group and its various entities. He was described as taking a key role in the analysis of investment opportunities and as being responsible for risk management for the Group. The profile said Mr Blackwood was chief investment officer for Hunter Capital, responsible for the lending and equity investment activities of the Group.
[46] The outcome of this prosecution, however, does not turn on the broad description of the positions held by and the experience of these three men. It turns on what may be proved by an analysis of the activities conducted by each of them in the period from 8 March 2009 to 14 July 2010; more specifically, on what each of them knew, intended and did at material times during the period.
[47] The defendants are charged with a variety of offences. Mr Bublitz faces ten charges under s 220 of the Crimes Act 1961 of theft by a person in a special relationship, and two charges under s 242 of the Crimes Act of making a false statement as a promoter of securities under the Securities Act 1978.
[48] Mr McKay also faces three charges of theft by a person in a special relationship. In addition, he faces two Crimes Act charges of making a false statement as a promoter and one charge of making a false statement to a trustee for debenture holders under s 377 of the Companies Act 1993.
[49] Mr Blackwood faces four charges of theft by a person in a special relationship; one charge of making a false statement as a promotor and one charge of making a false statement to a trustee of debenture holders.
The regulatory framework
[50] Restrictions on the dealings between related parties and the requirements to disclose any such dealings at relevant times are at the heart of this case. There is nothing inherently wrong or unlawful about transactions between related entities, but commercial decisions in such dealings may be motivated by factors that result in an exchange of assets at less than the value that might apply in an arms-length transaction. The framework within which funds are sought from members of the investing public is intended to ensure that potential investors are fully and fairly informed about the true nature of the investment they are invited to make, and sufficiently aware of the proposed use of their funds, to undertake a reasonable assessment of the risk.
[51] The protections provided for the investing public involved in this case are contained in:
(a)the Priority/Viaduct trust deed between the finance company and subscribers whose investments were secured by the issue of debentures; and
(b)the provisions of the Crown guarantees.
[52] While the related party provisions of the relevant documents addressed similar issues, they were not in identical terms and it is necessary to set them out.
The Priority/Viaduct trust deed
[53]Clause 6.4 of the Priority trust deed relevantly reads as follows:
6.4Restrictions on Dealings
Neither the Issuer nor any of the Charging Subsidiaries will without the prior written consent of the Trustee:
Related Party Transactions
6.4.3Enter into:
6.4.3.1any Related Party Transaction except in the ordinary course of business and where the terms thereof are evidenced in writing and the consideration therefor is on the basis of an arms' length transaction as between two unrelated parties contracting in an open market, provided however that in any twelve month period the aggregate value of all Related Party Transactions entered into or remaining outstanding shall not exceed 2% of the Total Tangible Assets, or
6.4.3.2any Related Party Loan.
[54]Clause 1.1 (headed "Definitions") relevantly read as follows:
In this Deed unless the context otherwise requires:
"Accounting Standards" means "generally accepted accounting practice" as defined in Section 3 of the Financial Reporting Act [1993].3
"Charging Group" means the Issuer and the Charging Subsidiaries (if any) or when the context so admits or requires any one or more of them.
"Related Party" means:
(a)a Related Company; or
(b)any shareholder and director of any member of the Charging Group or any Person with the first degree of relationship to such Person or any Person who is a related Person under any applicable Accounting Standards [Emphasis added].
"Related Party Loan" means:
(a)the provision of financial accommodation by a member of the Charging Group to a Related Party, or
(b)the giving of a guarantee or indemnity by a member of the Charging Group to the benefit of a Related Party,
but, for the avoidance of doubt, does not include the provision of financial accommodation, in the ordinary course of business, and on arms' length commercial terms, to a person who is not a Related Party but who has entered into a contract, in an open market, with a Related Party.
3 Now replaced by the Financial Reporting Act 2013 but in force at all relevant times. Section 3 provided materially that "financial statements … comply with generally accepted accounting practice only if those statements comply with … (a)pplicable financial reporting standards…."
"Related Party Transaction" means a transaction of any nature between a member of the Charging Group and a Related Party including, but not limited to:
(a)the investment by a member of the Charging Group in the capital or equity of a Related Party;
(b)the transfer of assets between a member of the Charging Group and a Related Party;
(c)the provision of services by or to a member of the Charging Group to or by a Related Party;
but does not include:
(d)a Related Party loan;
(e)the provision of a financial accommodation by a Related Party to a member of the Charging Group on arms' length commercial terms, or any payment by a member of the Charging Group to that Related Party of principal, interest or other moneys in respect of that financial accommodation in accordance with those terms;
(f)the provision of management and/or administration services to a member of the Charging Group by a Related Party on arms' length commercial terms;
(g)transactions with a Related Party in relation to investments of a member of the Charging Group which are, or are to be, held by that Related Party as nominee or trustee for a member of the Charging Group;
(h)payment of reasonable salary and other remuneration benefits to a Related Party who is employed by a member of the Charging Group, or
(i)payment of reasonable remuneration and expenses to a Director for his or her services as a Director,
and, for the avoidance of doubt, does not include the provision of financial accommodation, in the ordinary course of business, and on arms' length commercial terms, to a person who is not a Related Party but who has entered into a contract in an open market, with a Related Party.
[55] As will be seen from the particulars of the charges set out below, the restrictions on the Priority/Viaduct trust deed on related party dealings differ depending on whether the subject transaction is a "loan" as defined in the trust deed, or a "transaction" as defined. Importantly, the trust deed contemplates that related party transactions other than loans will be permitted so long as they meet certain conditions and, significantly, do not take the aggregate value of all related party transactions conducted over a 12-month period beyond specified limits.
The New Zealand Accounting Standards
[56] All of the charges, including those related to allegations regarding the relevant prospectuses, rest on an allegation of a failure by the defendants to disclose the undertaking of related party transactions on the basis that Mr Bublitz, at relevant times, was a related person under any applicable accounting standards.4 It is common ground that, as the Crown has submitted, the primarily applicable accounting standard during the period 16 February 2009 to 13 May 2010 was New Zealand Equivalent to International Accounting Standard 24 – Related Party Disclosures (NZ IAS 24). This standard was issued in November 2004 and incorporated amendments up to and including 30 November 2008. Its interpretation is assisted by cross-reference to the New Zealand Equivalent to International Accounting Standard 27 – Consolidated and Separate Financial Statements (NZ IAS 27).
NZ IAS 24
[57]The relevant provisions of paragraph 9 of the NZ IAS 24 are:
Related party A party is related to an entity if:
(a)directly or indirectly, through one or more intermediaries, the party:
(i)controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries);
(ii)has an interest in the entity that gives it significant influence over the entity; or
(iii)has joint control over the entity;
…
(d)the party is a member of the key management personnel of the entity or its parent;
…
(f) the party is an entity that is controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, an individual referred to in (d) or (e); or …
4 For the purposes of Charges 11 to 15, an alternative definition of "control" may apply under the provisions of the Mutual Crown guarantee.
A related party transaction is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
Significant influence is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies. Significant influence may be gained by share ownership, statute or agreement.
[58]Under paragraph 10:
In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely the legal form.
[59]And relevantly under paragraph 11:
In the context of this Standard, the following are not necessarily related parties:
(a)two entities simply because they have a director or other member of key management personnel in common, notwithstanding (d) and (f) in the definition of "related party".
…
(c) (i) providers of finance,
…
simply by virtue of their normal dealings with an entity (even though they may affect the freedom of action of an entity or participate in its decision-making process); …
NZ IAS 27
[60] The meaning of "control" in NZ IAS 24 is informed by NZ IAS 27 Consolidated and Separate Financial Statements. This standard adopts the same meaning of "control" as appears in NZ IAS 24; namely:
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
[61]Paragraph 13 of NZ IAS 27 provides:
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:
(a)power over more than half of the voting rights by virtue of an agreement with other investors;
(b)power to govern the financial and operating policies of the entity under a statute or an agreement;
(c)power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body; or
(d)power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
[62] I return to these issues below in discussing the evidence upon which the Crown relies.
The Mutual Crown guarantees
[63] The provisions of the Crown guarantees also formed part of the regulatory framework. Clause 6.2(b) of the replacement Crown guarantee to which Mutual was a party from 8 December 2009 (headed 'Related Party transactions') reads:
The Principal Debtor shall not (and shall ensure that its subsidiaries shall not), without the prior written consent of the Crown, enter into any transaction (or series of linked or related transactions) having a value (at the time of entry) exceeding one per cent (1%) of the Total Tangible Assets of the Principal Debtor (at the time of entry) to which a Related Party of the Principal Debtor (other than a wholly-owned subsidiary of the Principal Debtor) is party unless:
(i)that transaction is on arms' length terms; and
(ii)an independent expert approved by the Crown in writing first certifies to the Crown in writing that the transaction is, in the opinion of that expert, on arms' length terms.
[64]Clause 1.1 (headed "Definitions") relevantly provides as follows:
GAAP means "generally accepted accounting practice" within the meaning of that term under the Financial Reporting Act 1993.
Person includes an individual, a body corporate, any association of persons (whether corporate or not), a trust (including the trustees of a trust acting in that capacity), and a state and any agency of a state (in each case whether or not having separate legal personality).
Related Party of the Principal Debtor means a Person who is, or at any date after the Announcement Date was, a Person who would be a "related party" as that term is defined in section 157B of the Reserve Bank Act 1989, as if:
(a)the Principal Debtor was a "deposit taker"; and
(b)"related party" included any Person who controls the Principal Debtor and any Person who is controlled by any such Person or by the Principal Debtor.
[65]And clause 1.2 (headed "Construction"), so far as is relevant, reads:
In this Deed, unless the context requires otherwise:
…
(f)Control: a Person ("A") is "controlled" by another Person ("B") if:
(i)A is a subsidiary of B under the law of incorporation of A or for the purposes of GAAP; or
(ii)B is able to exercise real or effective control, directly or indirectly, over A or over a material part of A's business or affairs (whether pursuant to a contract, an arrangement or an understanding, as a result of the ownership or control of securities or other interests in or issued by A, or otherwise) except where A is a natural person and B's control arises solely under an enduring power of attorney granted by A in favour of B.
[66] The Crown case in respect of each of Mutual's transactions with related parties said to breach the Crown guarantee is as set out in the Crown Charge Notice; that is, in terms of the Crown guarantee, Mr Bublitz controlled both parties, because:
(a)each party was a subsidiary of Mr Bublitz for the purposes of GAAP/NZ IAS 24; or
(b)Mr Bublitz was able to exercise real or effective control, directly or indirectly, over each party or over a material part of each party's business or affairs.
[67] In Charge 13, the Crown alleges that Mr Bublitz breached the related party provision of the Crown guarantee because he controlled both Mutual and Hilltop Ridge Farms Limited; the Priority/Viaduct trust deed does not apply so the Crown's case rests on the application of the accounting standards to Mr Bublitz's relationships with Mutual and Hilltop Ridge Farms Limited or, alternatively, on the "real or effective control" definition.
The conduct of the trial
[68] The trial was conducted by me without a jury in accordance with the provisions of s 105 of the Criminal Procedure Act 2011. As directed by me under s 105(1)(a), counsel provided me with written opening and closing statements, supplemented (except in one instance) by oral submissions, addressing me on matters of law and fact.5 I was assisted by counsel's submissions on aspects of the Crown Charge Notice and a draft question trail I had prepared to assist me to identify the elements of the alleged offending the Crown is required to prove beyond reasonable doubt for each charge against each defendant.
[69] At the conclusion of the hearing, I reserved my decision on the verdicts to be entered in respect of each charge and adjourned the sitting of the Court until 14 December 2018. I later remanded the defendants to appear on 5 February 2019 for the delivery of my verdicts.
[70] Having heard the evidence adduced by the Crown and the submissions on behalf of both the Crown and the defendants, I gave the verdicts recorded above at [6] when the case resumed.
The first trial
[71] It is not insignificant that this is a re-trial of a prosecution first tried before Woolford J as a Judge sitting without a jury. In that case, there were four defendants: Mr Bublitz, Mr McKay and Mr Blackwood, and a fourth man, Lance
5 Although he filed comprehensive written closing submissions, Mr Bradford elected not to address me orally in closing the case for Mr McKay.
David Morrison, who was an accountant who advised and worked on behalf of Mr Bublitz and the Hunter Group entities and was a trustee of several relevant trusts.6
[72] Woolford J described the 12 weeks initially allocated for the first trial as "grossly inadequate". The trial started on 8 August 2016 and was aborted nine months later, on 10 May 2017, because of late disclosure by the Crown. The original Crown Charge Notice contained 49 charges which would have required the Judge to deliver 125 separate verdicts. The defendants were discharged on a number of charges throughout the trial, in some cases because the charges duplicated allegations concerning the same transactions, or to remove allegations of offending as parties despite the defendant having no direct role in the transactions, or administrative reasons, to render a complex case more manageable in view of the significant over- run in the duration of the trial.
This trial – evidential issues
[73] The re-trial before me was initially set down for 22 weeks of hearing. Responsibly and sensibly, the prosecuting agency, the defendants and their respective counsel took a focused approach to the charges that remained for determination. That resulted in an agreement between counsel, approved by me, that much of the oral evidence given at the first trial could be included as part of the evidential record for this trial by consent, with the briefs of evidence and the transcript of oral evidence from the first trial, including cross-examination and re-examination, being made available without the witnesses having to be called. That evidence was treated for all purposes as if it had been given on oath in this trial. Other witness statements were admitted by consent. Several witnesses, including Mr McKay, gave evidence orally.
[74] Most significantly, several hundred documents considered by the parties to be relevant were also admitted by consent, subject to challenges to admissibility by one or more of the defendants. Although I was asked to address the objections to the admissibility of some exhibits prior to trial, I concluded that a detailed knowledge of the factual basis for the Crown's allegations was required before decisions could be made as to the relevance of certain challenged documents, especially in view of the
6 Mr Wevers was also charged, but he died before the trial.
different roles said to be played by each defendant and issues about the admissibility of documents on hearsay grounds or on relevance grounds under ss 7 and 8 of the Evidence Act 2006.
[75] Most of the exhibits were produced en masse, the Crown's evidence being that each of the documents other than those created specifically for the purposes of the prosecution or the trial, had been located on various computer drives or servers seized in the course of the investigation pursuant to search warrants. In a mid-trial ruling which summarises the position I had taken, largely without strong objection by counsel, I indicated my view that most, it not all, of the documentary evidence appeared to be admissible against at least one or more of the defendants, but that a determination of which document is admissible against whom and for what purpose was best made on a document by document basis in the context of reaching my findings on the facts.7
[76] I held that the documents produced through the Crown's witnesses should be treated as admissible on the basis that they met the threshold test of relevance, either to establish the factual background to and ingredients of the charges faced by a particular defendant, or to prove what he did, what he knew and what he intended at relevant times, or all of the above. I also held that the documents would be received into evidence on the basis that each of the documents had probative tendency which made them admissible, leaving open for later determination whether the evidence found to be admissible on close analysis had sufficient probative tendency to establish the Crown's allegations. I appreciated that some of the documentary evidence in the form of email correspondence or memoranda, while meeting a test of general relevance as to proof of the background or from which inferences as to the occurrence of certain events might be drawn, might have little or no probative value in respect of any defendant who was not proved to have been a party to the document, or to have been aware of its contents. I have been particularly mindful throughout that, to the extent that any document authored by a defendant may be taken as an admission by that defendant, the admission would be admissible against only that defendant and not against any other defendant who had not adopted it.
7 R v Bublitz HC Auckland CRI-2014-004-2293, 17 September 2018.
[77] Where a document was not referred to or explained by a Crown witness, I have taken the view that unless its meaning is plain on its face, I should not draw any adverse inference from it against any defendant unless it is plainly admissible against that defendant and its meaning or import is clear on the face of the document.
Mr Nicholaas Wevers
[78] Nicholaas Wevers, who was a central figure in the acquisition of Priority Finance Limited, its conversion into Viaduct Capital Limited and the operation of that finance company in conjunction with Mr Bublitz and Mr McKay, was originally charged with the others as a defendant. Mr Wevers died before the trial. He had been interviewed twice by Mr Jason Weir, a member of the forensic team of the chartered accounting firm, Deloitte, who was engaged by the Financial Markets Authority to conduct an investigation into the affairs of both Viaduct and Mutual. The defendants sought to have the transcripts of the two interviews, on 15 and 21 November 2012 respectively, admitted as evidence, notwithstanding that it is hearsay, on the grounds provided by s 18 of the Evidence Act 2006, given that Mr Wevers was regrettably no longer available as a witness. The statements had been admitted by the Crown as evidence at the first trial. After initially objecting to that course on the grounds that the circumstances relating to the statements did not provide reasonable assurance that the statements were reliable, the Crown admitted the statements as evidence by consent, reserving its right to criticise Mr Wevers as an untruthful witness.
The approach to setting out the reasons for the verdicts
Reasons must be concise
[79] Because this matter proceeded as a Judge alone trial, I am required by s 106(2) of the Criminal Procedure Act to give reasons for the verdicts. The Court of Appeal's judgment in R v Connell directs me to give a statement of the elements of each charge and any other particularly relevant rules of law or practice; a concise account of the facts; and a plain statement of my essential reasons for finding as I have.8
8 R v Connell [1985] 2 NZLR 233 (CA) at 237-238.
[80] My reasons should be enough to show that I have considered the main issues raised at the trial and to make clear in simple terms why I have found that the prosecution has proved or failed to prove the necessary ingredients beyond reasonable doubt. In this case, the credibility of Mr McKay is in issue, so I should say explicitly whether key evidence given by him is either definitely accepted or definitely rejected.
[81] In expressing these reasons, I have taken into account also the directions of the Court of Appeal in R v Eide that I should have regard to how the case will be addressed on any appeal.9 A judgment which is so concise that some of the key facts in the case are required to be reconstructed by the Court on appeal is too concise. In a complex case such as this, it is not possible to explain the key elements of the Court's reasoning without an adequate survey of the relevant facts. Although the evidence of the witnesses in this case occupies many hundreds of pages and over 1700 documents have been produced in evidence, I have been assisted by the pragmatic approach of all counsel to identify the key issues for determination; much of what the Crown must prove for each charge, while not conceded, is not seriously disputed.
[82] I acknowledge, however, that this case arises out of the collapse of two finance companies and involves allegations of theft and deliberate misconduct in dealing with funds invested by the public. The public interest is also engaged by the background to the alleged offending of the Crown Retail Deposit Guarantee Scheme and the need for the taxpayer to meet substantial costs and losses said to have flowed from the failure of the two companies. I am conscious, therefore, that these reasons are of interest to an audience which is wider than the prosecutor and the defendants so that I should explain in a comprehensible form the particular features of the scheme which has led to the bringing of these charges.
Relevant rules of law and practice
[83] These are the rules of law and practice I applied in making my findings and reaching my verdicts in respect of each charge against each defendant.
9 R v Eide [2005] 2 NZLR 504 (CA) at [21].
Burden and standard of proof
[84] The Crown carried the burden throughout of proving each element of each charge against each defendant beyond reasonable doubt before I could bring in a verdict of guilty. The starting point was the presumption that the defendant was innocent of any charge until the contrary was proved beyond reasonable doubt. A reasonable doubt requiring me to enter a verdict of not guilty on any charge is an honest and reasonable uncertainty left in my mind about the guilt of the defendant on that charge, after I had given careful and impartial consideration to all of the relevant evidence.10 The standard is very high: it was not enough for the Crown to persuade me that the defendant was probably guilty or even that he was very likely guilty of any charge he faced. If I am left with an honest and reasonable uncertainty as to his guilt,
I was required to find him not guilty.11
[85] That said, it is virtually impossible to prove everything to an absolute certainty when dealing with a reconstruction of past events and the Crown did not have to do so.12 Further, the Crown was not required to prove beyond reasonable doubt every fact upon which it relied in support of its case on any charge. To put that into the context of deciding on the crucial issue of Mr Bublitz's control of Viaduct Capital Limited, it was necessary for me to be satisfied beyond reasonable doubt that Mr Bublitz was in control of Viaduct in terms of the accounting standards, but the Crown was not required to prove to that same high standard every piece of evidence on which it relied to prove that element.
Defendants giving or calling evidence
[86] Mr McKay gave evidence and Mr Bublitz called evidence from an expert witness, Mr Hucklesby, but a defendant does not assume any burden of proof by giving or calling evidence. As a general principle, the evidence given or called by a defendant is admissible for all purposes for or against all defendants and it simply becomes
10 R v Wanhalla [2007] 2 NZLR 573 (CA) at [49]; Woolmington v Director of Public Prosecutions [1935] AC 462 (HL) at 481; R v Hansen [2007] NZSC 7, [2007] 3 NZLR 1 at [52] and R v Harbour [1995] 1 NZLR 440 (CA) at 448.
11 R v Wanhalla at [49].
12 R v Whale [2013] NZHC 731 at [48] and R v Wanhalla at [24]-[25].
evidence in the trial for consideration along with the other evidence adduced.13 I accept Mr Johnstone's submission that the content of the professional advice received by the defendants from time to time is relevant to prove only the nature of the advice received.
[87] Mr Bublitz and Mr Blackwood did not give evidence. They were not obliged to do so and the mere fact that they did not give evidence did not add to the Crown's case against them.
A circumstantial case and the drawing of inferences
[88] Despite the vast scope of the documentary material seized and examined during the inquiry into Viaduct's affairs by the regulatory authorities, no document proving the terms or even the existence of a "secret arrangement" vesting control of Viaduct in Mr Bublitz has been produced to the Court. The Crown's case on that essential element, and on other elements related to the state of mind of any defendant at a relevant time, was circumstantial, relying on inferences drawn from established facts to prove that Mr Bublitz had been given the power to govern Viaduct and to prove other elements.
[89] The answers to the several questions I was required to answer in considering each charge turn essentially on the inferences which may be drawn from memoranda, emails and documents that were prepared. A combination of circumstances, taken together as a whole, may create a strong conclusion of guilt even though no one of them would raise a reasonable conviction or more than a mere suspicion.14 Whether I drew these inferences was for me as the judge of the facts. If it was necessary to infer a fact to establish an element of an offence, I was required to be satisfied beyond reasonable doubt that it can be drawn, but only those inferences that are required to prove an element of an offence need to be proved beyond reasonable doubt.15
13 Hart v R [2010] NZSC 91, [2011] 1 NZLR 1 at [54].
14 Thomas v R [1972] NZLR 34 (CA) at 37 and 39-41, adopting R v Exall (1886) 4 F & F 922 at 928; (1866) 176 ER 850 at 853. See also, Milner v R [2014] NZCA 366 at [15].
15 R v Sullivan [2014] NZHC 2501 at [405].
[90] A permissible inference is a logical conclusion drawn from facts that I accept are reliably established.16 It is not a guess. If one or more inferences are equally available, what is left is mere speculation or conjecture. On ultimate issues, in order to avoid the possibility of inappropriate speculation, the inference most favourable to a defendant should be drawn.17 Mr Johnstone correctly identified the ultimate issues to be determined in this case as whether, to the extent relevant:
(a)Mr Bublitz controlled Viaduct, Mutual and the various entities in the Hunter Capital Group with which the finance companies transacted; and, if so
(b)the defendants knew that to be the case.
[91] I accept Mr Johnstone's submissions that "the mere fact that some circumstances might arguably permit an inference inconsistent with guilt is not enough" to raise a reasonable doubt,18 and that "speculation in aid of a defendant is no more permissible than speculation in aid of the prosecution".19
[92] Circumstantial evidence allows a fact-finder to infer that a particular fact exists, even if there is no direct evidence of it. A single piece of circumstantial evidence will generally allow for more than one explanation. However, a number of separate items of circumstantial evidence, when considered together, may strongly support the drawing of a particular inference. Circumstantial evidence derives its force from the involvement of a number of factors that independently point to a particular factual conclusion.20 Juries are commonly referred to the analogy of a rope in that while any one strand may not support a particular load, the combined strands are sufficient to do so. It is only the ultimate issue in a circumstantial case that must be proved to the required standard. The Crown is not required to prove separately each
16 R v Sullivan at [404], adopting R v Gunthorp [2003] 2 NZLR 433 (CA) at [142]. See also, R v Douglas [2012] NZHC 1746 at [16].
17 Edwardson R [2017] NZCA 618 at [77] and R v Sullivan at [403].
18 R v Seekamut CA82/03, 10 July 2003 at [21].
19 Edwardson R at [77].
20 Commissioner of Police v de Wys [2016] NZCA 634 at [9].
individual strand of evidence beyond reasonable doubt before the Court can take that evidence into account.21
Expert evidence
[93] Both the Crown and Mr Bublitz called experts to offer opinions about whether certain transaction ought to be disclosed as related party advances. They also provided views about the application of relevant accounting standards. Their opinions are each entitled to considerable weight.
[94] Expert witnesses are permitted to give opinions on subjects within their area of expertise if the fact-finder at trial "is likely to obtain substantial help from the opinion of understanding other evidence in the proceeding or in ascertaining any fact that is of consequence" to its determination.22 While an expert opinion may be rendered on the ultimate issue in a proceeding,23 it is not determinative. It is for me to determine how much weight or importance I should give to the opinions offered by the experts, or whether they should be accepted or rejected, in the context of all the evidence I have heard.
[95] My approach to the expert evidence is to evaluate what both Mr Lee, the Crown's expert witness, and Mr Hucklesby, the expert witness called by Mr Bublitz, have said and to consider whether their evidence is helpful to me in resolving the factual questions arising for decision. I acknowledge that, to the extent that each of them referred to documents, they accepted that they were providing assistance from an accounting perspective, and were not purporting to give evidence on questions of law. Mr Hucklesby inadvertently overstepped the proper limits of the scope of the opinions he was entitled to express, by giving his view on whether there was evidence of Mr Bublitz's control of Viaduct. I rejected that evidence as inadmissible. In any event, it was not founded on a proper approach to the standards, being based principally on the absence of any documentary proof. I have ignored that part of his evidence.
21 At [10]. And see Thomas v R [1972] NZLR 34 (CA) at 38.
22 Evidence Act 2006, s 25(1).
23 Evidence Act 2006, s 25(2)(a).
Separate trials and verdicts
[96] In the context of this case, although several charges have been heard together, it was necessary for me to consider and decide each charge separately. Generally speaking, it is necessary to avoid assuming that simply because a jury or a judge sitting alone has come to a certain view as to the proof of the Crown's case in respect of one of the charges, the same conclusion should necessarily follow in respect of any one or more of the others. In this case, as I have said, all but one of the charges necessarily involved a common consideration of the single element of Mr Bublitz's control of Viaduct, which has proved to be determinative. But in addressing that issue I was mindful that for each charge the question was whether Mr Bublitz had control at the time of the events giving rise to the particular charge. I also bore in mind the change of shareholding in September 2009 when Mr McKay acquired 51 per cent of the shares in Phoenix Finance Limited.
[97] A criminal trial in which there are multiple defendants and multiple charges involves the joint conduct of several separate trials, for obvious reasons of convenience. But I have been required consider the position of each defendant, and each charge faced by him, separately. This principle is particularly important because I have been urged by defence counsel to ensure that documents are only used against a particular defendant if properly admissible against him.
The corporate structure
[98] Because it is not in dispute, it is convenient to adopt from the Crown's opening submissions a brief discussion of the corporate set-up for the Hunter Capital Group including the three main entities and the related companies which undertook the various projects in which the group was engaged. The group comprised three main entities: Hunter Capital Group Limited; Hunter Capital Property Trust and Hunter Capital Limited. The ultimate owner of the companies was Mr Bublitz's family trust, the Nicholson Trust.
[99] Hunter Capital Limited was the Group's services arm, providing management services to various entities. It controlled Hunter's operations as lessee (from Hunter Capital Group Limited) of their premises at 6 Viaduct Harbour Avenue and owner of
Hunter's plant and equipment. Hunter Capital Property Trust Limited owned Mr Bublitz's home on Marine Parade, Herne Bay, and held shares in the Northgate development. Hunter Capital Group Limited was the main entity responsible for Hunter's various projects, including Northgate/Silverdale; Docklands; NKE/Helensville; Hilltop/Kawakawa and Homebush/Cashmere/Khandallah, all of which are the subject of charges and which are described more fully in the next section. By 2008, Mr Bublitz had built up, through Hunter, a large portfolio of assets, on paper at least. As at 31 March 2008, the Group's total equity was just short of $20 million comprised largely of illiquid assets including shares in, or loans to, associated entities which developed properties that Mr Bublitz ultimately owned and controlled.
Charge 13 – Mr Bublitz's real or effective control over Hilltop Ridge Farms Limited
[269] I rely on previous general findings in concluding that, despite the warehousing of shares and other devices intended to conceal the true position, Mr Bublitz had the ultimate beneficial ownership of and control over the Hunter entities, including Hilltop. The associates who acted as "fronts" for him put no assets at risk. Personal guarantees put in place to give an air of legitimacy were cancelled whenever it suited Mr Bublitz's interests, whether the decisions to do so was commercially reasonable or not.
[270] It is unnecessary to go much further for proof of Mr Bublitz's real or effective control over Hilltop than his own statement to the National Enforcement Unit of the Ministry of Economic Development in November 2010, in which he accepted that it was he, rather than Mr Chevin, who made the key decisions about Hilltop. The company was formed as an "off balance sheet special purpose vehicle" for the project and although Mr Mackie was appointed sole director and shareholder I am satisfied that he was merely involved, because of his friendship with Mr Wevers, to provide advice and some operational assistance from time to time. Mr Mackie expressed surprise at his appointment as sole director and shareholder, claiming that he was not aware that that had occurred until he was asked to sign relevant documents. He confirmed that so far as that was concerned he simply did as he was directed by Mr Bublitz and others. After he became the shareholder of the company, Mr Mackie provided a cheque for $100 for the purchase, believing that that was the right thing to do. He had not been asked to make the payment and it was not clear on the evidence whether the cheque was ever banked. Moreover, when Mr Mackie resigned as a
director and relinquished his shares, the directorship and the share ownership were acquired by Mr Peter Hill, an associate of Mr Chevin, who joined the enterprise following discussions with Mr Bublitz and Mr McKay. Mr McKay conceded in evidence that his view of Mr Hill's involvement at that time was that he was "a puppet shareholder-director".
[271] On 12 February 2010, Mr McKay emailed Mr Bublitz, Mr Chevin and Sally Rosenberg (who by then had become CEO of the project) regarding the composition of the Hilltop Board for the purpose of an investor statement he was preparing. In it, he described Mr Bublitz as "the sponsor or 'visionary' and effectively the major shareholder". A decision taken by Mr Bublitz, in directions given by him concerning Hilltop's affairs from time to time confirm Mr McKay's opinion. I am satisfied beyond reasonable doubt, therefore, for the purposes of charge 13 that Mr Bublitz controlled both Hilltop and Mutual at all relevant times.
The other elements of Charges 10 to 13
[272] I turn next to the other elements of charges 10 to 13. I am conscious of the need for the Crown to prove that each element existed at the time of the alleged offence under each particular charge. However, the nature of the conduct of the Viaduct/Mutual businesses and the related Hunter entities, including the knowledge and involvement of the three defendants in their respective capacities, is such that it is appropriate to consider them globally.
Mr Bublitz's control over Mutual's investor funds
[273] It was not disputed that, if Mr Bublitz had control of Mutual (as was obvious and conceded), he had control over Mutual's investor funds.
Mr Bublitz's intentional dealings in the transactions
[274] It was not suggested that Mr Bublitz was not engaged either directly or indirectly with each of the transactions founding charges 10 to 13; namely, the acquisition by Mutual of part of the Homebush loan from Viaduct, the purchase by
Mutual of the Bruce (Northgate) loan from Viaduct, the purchase of the Hilltop loan from Viaduct and Mutual's loan advances to Hilltop.
Related party transactions
[275] It follows from Mr Bublitz's real and effective control of the relevant transacting parties that, on each of the alleged occasions of offending, there were transactions between related parties.
Other particulars
[276] The particulars alleged by the Crown in respect of each of these charges require the Crown to establish a breach of the related party restrictions in the replacement Crown guarantee because the transaction (or a series of linked or related transactions):
(a)had a value exceeding 1 per cent of Mutual's total tangible assets;
(b)involved Mr Bublitz having dual control of the transacting entities; and
(c)required prior certification to the Crown in writing, by an independent expert approved by the Crown in writing, that the transaction was, in the opinion of the expert, on arms' length terms.
[277] The analysis conducted by Mr Weir on behalf of the Financial Markets Authority established that between 31 December 2009 and 31 March 2010, one per cent of Mutual's total tangible assets ranged between $64,300 and $100,000 approximately. None of the transactions on which the Crown relies was under the threshold.
Certification of arms' length terms by independent expert
[278] Under the Mutual Crown guarantee, related party transactions were permitted only if an independent expert previously approved by the Crown in writing had certified prior to the transaction that it had been conducted on arms' length terms. Such prior approval and certification was never obtained.
[279] I accept the Crown's proposition that attempts by the defendants to rely on opinions expressed by Mr Bevan Wallace of Morgan Wallace Limited about the arms' length nature of the loan transfers from Viaduct to Mutual, so as to purportedly satisfy part of the terms upon which related party transactions could be sanctioned, cannot assist them. As the Crown submitted, Mr Wallace was not approved by the Treasury in writing; Mr Wallace's reports followed the events they purported to consider and so were not certified to the Crown in writing prior to the transactions being undertaken. Planning the reports was patently an after-event attempt by the defendants to justify to the Treasury transactions of a kind that Mr Bublitz had assured the Treasury was not contemplated.
Breach of limit of one per cent of Mutual's total tangible assets
[280] I am satisfied by the analysis undertaken by Mr Weir that in respect of each of the transactions relied upon in support of charges 10 to 13, the transaction exceeded one per cent of Mutual's total tangible assets and, therefore, required the Crown's prior written consent which was not obtained.
The defendants' knowledge and intent
[281] The only remaining issue to be established in respect of each of the charges against Mr Bublitz is whether he knew that the transactions were in breach of the restrictions and, in respect of Mr McKay and Mr Blackwood, that they assisted Mr Bublitz in undertaking the transaction knowing that the transactions breached the restrictions.
[282] The acquisition of Mutual Finance is the starting point for consideration of what Mr Bublitz, Mr McKay and Mr Blackwood knew and intended so far as charges 10 to 15 are concerned. However, the plans made at Pauanui to use a finance company to fund Hunter Group activities provide a relevant backdrop. The way in which the defendants (including Mr Blackwood after he joined Viaduct) managed Viaduct's affairs, including by the acquisition of loans, the making of advances and the redemption of capital notes to support the activities of the Hunter entities is also significant. It was, of course, vitally important for the success of the Pauanui plan for Viaduct to be able to attract investor funds with the support of the Crown guarantee.
When the guarantee was withdrawn, Viaduct's inwards flow of cash diminished to the point that, although a prospectus was issued by Viaduct in October 2009 as a short- term measure, attention turned to the acquisition of another finance company which had the benefit of the Crown guarantee.
[283] Initially, it was proposed that Viaduct would be the purchaser of the business, Mutual Finance. Consistently with what I have held to be Mr Bublitz's control over Viaduct, the proposals for the Viaduct purchase of another company were driven by Mr Bublitz. He sought Mr McKay's and Mr Blackwood's input on whether, in directing the terms of a draft offer letter, he had "missed anything" but, as Mr Johnstone correctly submitted, there was no invitation by Mr Bublitz to Mr McKay or Mr Blackwood (the Viaduct directors) to comment about the identity of the purchaser, the purchase price and instalment programme, vendor liabilities and ongoing involvement, name, contact with the Treasury, shareholdings or governance. It was Mr Bublitz who signed the letter to Mutual. I do not accept Mr McKay's evidence that Mr Bublitz's work was simply to form a proposal. In terms of deciding what was known and intended by Mr McKay and Mr Blackwood, it is significant that they were fully appraised of the details of Mr Bublitz's decisions.
[284] Mr Blackwood attended the Viaduct/Mutual meetings with Mr Bublitz who appeared to Mutual's then proprietor, Mr Lindsay Kincaid, to be in control of the Viaduct side of the negotiations. I am satisfied that Mr McKay signed the offer as a mere functionary and only because he was a director of Viaduct and, on paper, the majority shareholder in Phoenix which, in turn, held Viaduct's shares. Mr Blackwood and Mr MacMillan conducted the due diligence examination of Mutual on behalf of Viaduct. Viaduct was dropped as the purchaser and substituted by Hunter Capital Group Limited. Mr McKay prepared a draft letter for Mr Bublitz and Mr Kincaid to send to the Treasury setting out the scheme of the proposed acquisition, which included the purchase of an initial 60 per cent stake by a cash payment, with two further acquisitions each of 20 per cent, on 31 March 2010 and 31 October 2010 respectively. The final version of the letter was sent on 9 November 2009. Based on the draft, it assured the Treasury that Hunter did not intend or propose to sell any assets to Mutual or undertake any other form of capital restructuring. The letter also assured
the Treasury that Hunter would not seek to significantly change the business operations of Mutual and, notably, stated that:
(a)lthough Viaduct Capital is not a related party of MFL, any transactions contemplated between MFL and Viaduct Capital will be treated as if they are related party transactions for the purposes of the Crown guarantee.
[285]The assurances that were reiterated in the letter included the statements that:
(a)Hunter did not intend to sell any assets to Mutual;
(b)the operations of Mutual would remain largely intact and that Mr Lindsay Kincaid would remain a director;
(c)Hunter did not intend to take full control of Mutual until 31 October 2010.
[286] The letter also assured the Treasury that there was no intention by either Hunter or Mutual that Viaduct Capital would have any ownership of Mutual or that there would be directors in common between the two entities. It was said that both "MFL and Viaduct Capital will remain entirely separate entities". Furthermore, it was asserted that Viaduct's activities in respect of MFL would be limited to sourcing and managing lending transactions.
[287] Given the way in which Viaduct had been operated up to that point and bearing in mind the motivation for the acquisition of Mutual, Mr Bublitz's statements in the letter to the Treasury, which I find were known and acquiesced to by Mr McKay and Mr Blackwood, were untrue and deliberately misleading. That the expression of present intention was not truthful is demonstrated by how quickly Mr Bublitz, Mr McKay and Mr Blackwood assumed control of Mutual and ran it in conjunction with Viaduct. That proposition is proved by, among other things, the means by which Mutual was acquired and by the marginalisation of Mr Kincaid as a director. That was achieved by dividing transactions up into "chunks" which meant that approvals could be given by Mr Bublitz alone operating under a $250,000 threshold which would have required approval by the board, including Mr Kincaid.
[288] The Treasury declined to indicate any approval of the transaction but did say that it would appreciate clarification on whether any of the current assets of Viaduct would be sold to Mutual. Mr Bublitz responded that Mutual "currently" did not intend to purchase any assets from Viaduct but he said that, if in the future Mutual did consider purchasing assets from Viaduct, an independent expert would be employed to assess the merits of any such transaction and to ensure it was on arms' length terms. That assurance reflected Mr Bublitz's knowledge and understanding of the related party limitations in the Mutual Crown guarantee.
[289] Both Mr Blackwood and Mr McKay were deeply involved in the acquisition process and they became discretionary beneficiaries of the Mutual Trust which was established by Mr Bublitz. He appointed his company, Argus Capital Limited, as trustee to acquire investments primarily to provide an income stream for the benefit of "the beneficiaries", including Mr McKay and Mr Blackwood as discretionary beneficiaries.
[290] Argus Capital Limited, which was ultimately owned by Mr Bublitz's family company, Nicholson Trust limited, purchased Mutual on 11 December 2009, holding its assets on trust for the Mutual Trust. It is simply not credible for Mr McKay to have claimed that he was not aware of the arrangement whereby Mutual would be acquired on the basis of his being a discretionary beneficiary of the Trust which held Mutual's shares as they were acquired as part of the staggered arrangements.
[291] Bearing in mind the close working relationships, the roles of Mr McKay and Mr Blackwood in all of the steps taken to acquire the finance company, and the extent to which each of them was involved in the operation of both Mutual and Viaduct after Mutual's acquisition, I am wholly satisfied that Mr McKay and Mr Blackwood were fully aware of the nature of the related party provisions in the Crown guarantee.
What each of the defendants knew about the transactions forming the basis for charges 10 to 13
[292] It could not reasonably be suggested that Mr Bublitz did not know about the transactions which are said to have been undertaken in breach of the related party provisions in Mutual's Crown guarantee: he was in control of the entities involved; he
either directed or was informed and approved of each transaction, either expressly or by silent acquiescence. As I have said, nothing was done contrary to Mr Bublitz's intentions.
[293] That each of the defendants was a knowing and active party to the transactions underlying the alleged offences is demonstrated graphically by Mr Chevin's record of a brunch meeting held on 30 January 2010 in which the affairs of relevant Hunter entities, Viaduct and Mutual would be managed collectively by the defendants, Mr Chevin and other executives such as Mr MacMillan. Mr Chevin's note contained a heading:
VCL liquidity (Slicing and Dicing)
[294]Under that heading, the steps which I find were agreed to be taken included:
(a)packaging up and selling of the last of the Viaduct loans to Mutual (contrary to the misleading indication given to the Treasury at the time of the Mutual acquisition), resulting in between $300,000-$500,000 of cash being obtained by Viaduct;
(b)altering the discretions for loan sign-off to give Mr Bublitz alone the right to approve an advance, or under a higher threshold to give Mr Bublitz and one other the approval right, with full sign-off (by the board) being required for larger amounts; and
(c)a number of transactions involving the transfer of loans to Hunter entities between Mutual and Viaduct and other transactions intended ultimately to assist Viaduct's dwindling cash-flow.
[295] As Mr McKay and the others recognised, the collapse of Viaduct would create major problems for the Hunter Group entities and Mutual. There can be no doubt that both Mutual and Viaduct were being governed by Mr Bublitz and managed by Mr McKay and Mr Blackwood pursuant to an agreed plan. That was observed by Ms Groom and, shortly before he resigned as a director, by Mr Kincaid. When, on 24 February 2010, Mr McKay emailed the management team referring to a big
problem with Viaduct's cash-flow, Mr Bublitz simply forwarded the email to Mr Blackwood saying:
Blackie:Please work some magic.
It was around this time that Mr Bublitz emailed Kiwibank acknowledging the "interdependencies" between the Hunter Group entities.
[296] On 25 March 2010, Mr Chevin sent an email to Mr McKay, Mr Blackwood and Mr Bublitz which demonstrates that all pretence of avoiding related party transactions had disappeared, at least internally. The email, which is headed "merry go round of funds", begins:
25/03 $220,000 Docklands SR, MFL buys slice 1. from VCL
26/03 $230,000 MFL loan advance to NKE, on to various others (KB interest, creditors, et al)
29/03 $220,000 Docklands (RB Person), MFL buys slice 2. from VCL 31/03 $220,000 Docklands (RB Person), MFL buys slice 3. from VCL
31/03 $230,000 MFL purchases $230,000 of the front end of VCL HTRFL loan
The reference to "RB Person" is to a person introduced by Mr Blackwood.
[297]It is telling that Mr Chevin said:
Please be warned that this keeps VCL ok, BUT, it does not solve all the various HCL [Hunter Capital Limited] issues. Some are dealt to, but not enough of them.
[298] I was encouraged by counsel for Mr McKay and Mr Blackwood to take the view that there was insufficient proof that each of them had played an active, knowing part in the transactions on which Charges 10 to 13 are founded, and that they knew not only that the transactions were between related parties but that they were also in breach of the limits requiring prior Crown approval. I am satisfied, however, that the only reasonable inference from the way in which the defendants operated after the acquisition of Mutual is that each of them was fully aware that what was done was done contrary to the obligations imposed by the Crown guarantee in the interests of Mutual's investors.
[299] It was established by Mr Weir, the investigator engaged by the Financial Markets Authority, that Mutual purchased $3,923,365 in Viaduct loans by 16 transactions. Although seven transactions were supported by reports considering whether the transaction was subject to arms' length commercial terms, none of those reports were obtained and provided to the Crown before the transaction occurred. Viaduct advanced a further $793,373.53 to the Hunter Group entities and the various projects in which they were engaged.
[300] As Mr Johnstone submitted, Mr McKay's and Mr Blackwood's incitement and assistance in those transactions are manifest. Mr McKay was directing which transactions needed to occur and when in order to keep Viaduct afloat. Mr Blackwood received his emails, was present at the various cash-flow meetings and must be taken to have encouraged these loan sales by Viaduct, a company of which he was regarded as joint managing director.
[301] Although I accept that Mr Blackwood did not prepare all of the credit submissions intended to provide a façade of analysis as to the risks involved, he signed many of them and I accept that he must have known about and authorised the others. It was Mr Blackwood who undertook the task of keeping Mr Kincaid onside and encouraging him, to the extent that his approval was sought for any transaction, to agree. It is clear Mr Blackwood fully understood the details of each transaction and the implications in terms of the impact on cash-flow and the relationship to the transaction limits in the Crown guarantee.
Mr McKay's credibility
[302] It follows from the conclusions I have just expressed that I do not accept Mr McKay's denials in evidence that he knew and intended that the transactions with which charges 10 to 13 are concerned involved:
(a)Mr Bublitz's engagement in related party transactions because he had real or effective control of both Viaduct and Mutual and, where relevant, Hilltop and
(b)that the advanced breached the related party restrictions.
[303] Having seen Mr McKay in the witness box over several days both giving evidence-in-chief and under cross-examination, and having read countless reports, letters and emails drafted by him, I am satisfied that Mr McKay was an extremely knowledgeable and capable financial manager. He had a complete grasp of the detailed information which he was required to obtain and understand in order to take a pivotal role in the "merry go round of funds" that had absorbed so much of his attention over the period of more than a year from the time of the planning meeting at Pauanui in January 2009 to the ultimate demise of the two finance companies late in 2010. He also understood the implications of every transaction, many of which were undertaken because he had alerted Mr Bublitz, Mr Blackwood and others to the need for the transactions to be undertaken. Although Mr McKay had apparently plausible explanations for a number of the decisions made within the group which appeared to have no genuine commercial purpose except in terms of the ultimate wellbeing of the Hunter entities, there were occasions in the course of his evidence when he was stumped for an answer. I found much of his evidence evasive under careful cross- examination by Mr Johnstone. Although I am prepared to accept that Mr McKay may not have set out to act dishonestly in February 2009, I am satisfied beyond reasonable doubt that from the acquisition of Mutual to the end of the downward spiral, he knew that there had been a complete failure of compliance with his obligations and those of Mr Bublitz and Mr Blackwood under the Crown guarantee. His emails and those of Mr Chevin and others demonstrate that caution had been abandoned because of the desperate circumstances in which they found themselves. As I said, they were reduced to digging Mr Bublitz out of the manure.
Verdicts on Charges 10 to 15
[304] I am satisfied beyond reasonable doubt, therefore, that each of the defendants is guilty of charges 10, 11 and 12, and that Mr Bublitz and Mr Blackwood are guilty of charge 13 (the loan advance by Mutual to Hilltop Ridge Farms Limited) within which Mr McKay was not charged.
Charges 14 and 15 - False statements by a promoter
[305] I turn, finally, to charges 14 and 15 which allege that Mr Bublitz was guilty of making false statements as a promoter by making or publishing the 3 March 2010 Mutual Prospectus and the amended Prospectus of 28 April 2010.
[306] Mutual registered its first prospectus under the new ownership on 3 March 2010. It continued to provide information to prospective investors until it was amended on 28 April 2010. Between 28 February 2010 and 30 April 2010, the offer had resulted in an increase in Mutual's secured debenture stock of some
$5 million. Mr Bublitz signed the offering as one of the directors, immediately below a statement which read:
The Directors of Mutual Finance Limited, after due enquiry by them in relation to the period between 30 November 2009 and the date of the registration of this Prospectus, are of the opinion that no circumstances have arisen that have a material adverse effect on:
(a)the trading or profitability of Mutual Finance Limited;
(b)the value of Mutual Finance Limited's assets; or
(c)the ability of Mutual Finance Limited to pay its liabilities due within the next 12 months.
[307] The prospectus also contained the directors' assurance, under the heading: OTHER MATERIAL MATTERS:
There are no material matters relating to the Secured Stock offered by this Prospectus other than those set out in this Prospectus.
[308] The Crown asserts that, at the time the prospectus was issued and thereafter until its amendment at the end of April 2010, Mutual's business was being conducted with the aim of supporting Viaduct's business and indirectly the interests of the Hunter Group owned and controlled by Mr Bublitz. The transactions supporting that proposition, which I accept as accurate, were well known to Mr Bublitz and because they were between related parties were highly material to the interests of prospective investors. I find that Mr Bublitz cannot have helped but to know that, and that he knew that the statement was false in that there were material matters which had not been disclosed.
[309] The Crown also alleges that the prospectus was false in that it misled investors as to the significance and benefit of the Crown guarantee as providing security both to the investors and to the future health of Mutual.
[310] The directors, including Mr Bublitz, said they were pleased to report that Mutual was one of the early recipients of a Crown guarantee which was said to provide "a great deal of comfort to [Mutual's] investors" but noted that the guarantee was set to expire on 12 October 2010. In considering regulatory risk, the prospectus recorded that the directors were unable to determine the impact on the company's operation should the Crown guarantee scheme not be extended or replaced.
[311] The Crown submits that the failure to mention breaches of the Crown guarantee, particularly the prohibited related party transactions inherent in purchasing the Homebush, Northgate or Hilltop loans and the subsequent advances was misleading. Those transactions put at risk the Crown guarantee which could have been withdrawn at short notice and with immediate detrimental effect to Mutual in the way in which the loss of the guarantee had adversely affected Viaduct.
[312] I have no doubt that Mr Bublitz was aware that the failure to disclose what I have held he knew to be breaches of the Crown guarantee was misleading in that such activities were inappropriate and would have justified the Treasury in immediately withdrawing the guarantee as it had done with Viaduct.
[313] I have given careful consideration to the further proposition which the particulars of Charge 14 require also to be proved; namely, that Mr Bublitz knew that the failure to alert investors to the prospect that the Crown guarantee might be removed because of the breaches of the related party provisions. It occurred to me that that might be too subtle a consideration to found a criminal charge. On reflection, however, I have decided that the enthusiastic reference by the directors to the "great deal of comfort" provided to investors by the guarantee was misleading without being qualified by a reference to the fact that related party transactions had been undertaken without approval and in breach of the guarantee and that continuation of the guarantee was at risk as a result. Having regard to Mr Bublitz's experience with the withdrawal of the Viaduct guarantee and the disastrous consequences for that company as a result,
Mr Bublitz knew of the risk and was, at the very least, reckless in not drawing it to the attention of investors.
[314] As the Crown properly submits, similar considerations apply in respect of the misleading statements of a similar kind provided in the amended prospectus issued on 28 April 2010, which is the basis for Charge 15.
Verdicts on Charges 14 and 15
[315] I am satisfied beyond reasonable doubt, therefore, that Mr Bublitz is guilty of charges 14 and 15.
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Toogood J
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