UPDATE: Mutual, Viaduct failures were ‘commercial daring, not fraud’, court hears

Tuesday 9th August 2016

Property developer Paul Bublitz and other directors of failed finance companies Viaduct Capital and Mutual Finance say they weren’t part of any conspiracy to deliberately mislead investors for their own benefit and to the detriment of the companies.

Bublitz and his co-accused, Bruce McKay, Richard Blackwood, and Lance Morrison, have pleaded not guilty to charges of theft, making false statements in a prospectus, and making false statements to a trustee at the start of a 12-week trial in the Auckland High Court.

The Crown yesterday claimed investors in the two failed finance companies, which went under in 2010 owing about $17 million, along with the Treasury through the Crown retail deposit guarantee scheme, were misled over related party transactions designed to get Bublitz’s property company, Hunter Capital, out of financial strife.

Bublitz’s lawyer Rachael Reed told the court there was no conspiracy and that Viaduct and later Mutual Finance are examples of “proper commercial evolution at play in a difficult financial market”. The failure of the two companies doesn’t rest on related party transactions; rather the fact Bublitz put his own assets into Viaduct and lost some $5 million to $6 million shows he didn’t misuse those companies to benefit himself or Hunter Capital, she said.

“This is a case of commercial daring, not fraud,” Reed said.

Bublitz and the late Nick Wevers wanted to buy a Crown guaranteed finance company to take advantage of opportunities in the property market post the global financial crisis because “spooked investors would not risk their funds on finance companies in the wake of the collapse of many such companies”, Reed said.

There was no secrecy about the plan and the structure the pair used to buy Viaduct, then named Priority, followed top-shelf advice from experts in auditing and securities law in the form of BDO and DLA Philips Fox, she said. As a related party, Hunter Capital was not able to sell assets into Viaduct to fund its purchase and the final structure was therefore changed from what was originally intended, Reed said.

“This is where the first and fundamental gap arises between the Crown and defence. The Crown misconstrues the natural progression of a commercial deal and alteration of the resulting entity’s structure to meet regulatory requirements as being nefarious when it is in fact evidence of the parties’ commitment to abide by and respect the regulatory requirements.”

BDO also gave legal advice that Bublitz was not a key management personnel of Viaduct and therefore no related party transactions took place, she said. The Crown yesterday said Bublitz received a $240,000 annual fee as a management consultant to Viaduct, the same as Wevers got as chief executive.

The other co-accused denied being part of any conspiracy.

McKay, a director of Viaduct and a chartered accountant formerly on the board of the Institute of Financial Professionals (INFINZ), also denied he was aware of the relationship between Wevers, Bublitz, Hunter Capital and Phoenix, the shelf company used to buy Viaduct, said his counsel Greg Bradford.

The Crown alleged McKay failed to disclose to advisors the relationship between the parties and the content of discussion about Hunter Capital taking a shareholding in Phoenix.

But Bradford said to the best of McKay’s knowledge, he fully and fairly informed the advisers of what he knew about the proposed transactions and who was involved.

Blackwood was initially employed as a contractor to Viaduct to source and manage lending and was appointed a director of the company in September 2009 until it went under in early 2010. He had a similar role at Mutual though was not on the board.

His lawyer Shane Kilian said throughout Blackwood’s engagement with both companies he believed the structures, transactions, and arrangements put in place by others were legitimate. He relied on what he was told by others, and “drew comfort from the fact that they had legal advice”, he said.

Blackwood had only been a director for around 10 days when he signed a prospectus for Viaduct and hadn’t fully reviewed or understood the documents, but relied on legal advice given during the drafting of it, he said.

Lance Morrison, who’s representing himself, said he relied on expert advice that Viaduct and Mutual Finance were not related parties. He questioned whether it was fair to hold him to a standard that even financial experts can’t agree on.

Morrison, who had been Bublitz’s accountant for many years, said he had no involvement in the day-to-day running of Hunter Capital, and had no reason to think Bublitz controlled or owned Viaduct, although that was originally intended.

He was appointed to the Mutual board until the company could afford a more high profile director. Morrison said he believed documents he saw from outside experts on the question of related party transactions were the same as those put before two other Mutual directors, Paul Hocking and Lindsay Kincaid, both of whom have not been charged.

“If those statements were incorrect…I made a honest mistake, which was also made by others,” he said.

BusinessDesk.co.nz

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