Lombard Finance "more conservative" than its peers, defence says

Tuesday 18th October 2011 7 Comments

Lombard Finance chief executive Michael Reeves made sure the failed financier didn’t lend to related parties and only made loans on New Zealand property when he set up the firm nine years ago, the High Court in Wellington heard today.

In his opening address, counsel for Reeves, Stuart Henderson, told Judge Robert Dobson his client set up a conservatively run property lender that built up a capital buffer in what was a sturdier firm than its peers.

He rejected the prosecution’s claim that Lombard Finance’s offer documents were misleading, saying “they disclosed known material risks and didn’t contain any untrue statement.”

Directors Reeves, Doug Graham, Bill Jeffries and Lawrence Bryant yesterday pleaded not guilty to five counts relating to claims they made untrue statements in a 2007 prospectus, investment statement and advertising material.

The defence counsel for Graham and Bryant had told the court yesterday that the Crown’s case was “a post-mortem of a failed business” that came in the worst economic conditions in living memory. Counsel for Jeffries said “there is no suggestion in this case of any actual dishonesty.”

Michelle Peden, forensic accounting manager at the Financial Markets Authority, was called as the Crown’s first expert witness today and told the court Lombard Finance’s offer documents didn’t set out the material risk to the firm’s liquidity, particularly around the deterioration of its cash position.

By the end of January 2008, Lombard Finance’s liquidity buffer, which had been as high as $36 million in 2007, had been eroded and it didn’t have the funds to meet debenture maturities in February of that year, she said.

Yesterday, Crown prosecutor Colin Carruthers said a director’s duty is to direct, and that they can’t dump their responsibility on to management or other external parties, such as auditors, solicitors or independent advisers.

If the prospectus had reflected Lombard Finance’s actual situation, it would have said it needed the funds for working capital, its loan book was underperforming, and it faced a cash shortfall, Carruthers said.

Lombard Finance raised some $12.7 million during the period these documents were available, the court heard.

Carruthers said Lombard Finance’s lack of liquidity should have been disclosed to investors, who weren’t able to make an informed decision from the amended prospectus and investment statement. Loans needed to be severely impaired after it failed to attract the required cash flow from its five major lenders, he said.

The over-exposure to lenders who made up the majority of the loan book breached the company’s credit policy, as did repeated extensions granted on the loans when they were late.

Lombard Finance had followed standard practice of borrowing short-term from debenture investors and lending it to long-term property projects, in a system that gave investors similar risks to equity investments, but returns at debt rates, he said.

Last year, the then-Securities Commission laid civil and criminal proceedings against the directors.

Lombard went into receivership on April 10, 2008, owing approximately $111 million to about 3,900 debenture holders, $10 million to 310 capital note holders, and $4 million to subordinated note holders. It is unlikely that secured debenture holders will receive more than 24 percent of their investment back. Unsecured creditors are likely to receive nothing.

The case is continuing and has been set down for six weeks.

BusinessDesk.co.nz

Comments from our readers

On 18 October 2011 at 1:52 pm Nessa said:

Why have Blue Chip Directors escaped the same scrutiny from the then - Securities Commission and the new FMA now?

On 18 October 2011 at 3:47 pm Siena said:

Seeing these former Cabinet Ministers in the DOCK...I wonder if they'll only get a tap on the wrist. If as Lombard Finance chief executive Michael Reeves says is true and correct, “they disclosed known material risks and didn’t contain any untrue statement.” Then their current and prospective investors would have been been well aware of the company's 'Risk Factors'. Without citing the Prospectus at the centre of this court hearing I can only make an assumption that Lombards faced substantial risks but played it down to the investors and it failed to address these potential pitfalls, hence the company went Belly-Up and there they are today...In Court!

On 18 October 2011 at 4:21 pm Graeme said:

The same old lesson: never put your money into companies with ex-politicians on the board. They attract the public by offering a veneer of respectability and oodles of confidence but having lived for years in an artificial environment on taxpayers' subsidies and perks they are essentially useless in helping to govern a business or create wealth.

On 19 October 2011 at 8:24 am John said:

Seemingly another display of poor governance and lack of business acumen.

On 19 October 2011 at 9:36 am davidson said:

Agree with Graeme when we inquired were told that it did not matter whether secured or unsecured as money went into same pool

On 19 October 2011 at 10:03 am Ron said:

Graeme says it all about politicians on boards etc. Further, politicians are accustom to living in a world of half truths and in some cases outright lies and broken promisess. They love living spending other peoples money that is not strictly accounted for.

On 19 October 2011 at 2:06 pm Roger said:

This article is confusing in that it appears to confuse borrowers for lenders. Are people who borrow, "borrowers" referred to as "lenders" in this article, or were there five depositors who provided most of the cash deposited in Lombard. The phrase "lenders who made up the majority of the loan book" appears, on the face of it, to be an oxymoron.