Court overturns tax scheme promoter's huge windfall

By Deborah Hill Cone

Thursday 8th April 2004

A transtasman twist in the Digi-Tech saga has seen John Reid's $51 million Australian court win dramatically overturned on appeal after a new finding that he misled investors.

Mr Reid, the self-styled merchant banker who promoted controversial investment schemes on both sides of the Tasman based on products owned by Wellington firm Digi-Tech, faces trial on Serious Fraud Office charges in the High Court in Auckland in September.

As he and three co-accused prepare to defend the fraud and money laundering charges in this country, an earlier win by Mr Reid in a civil case brought against him by disgruntled Australian investors has been overturned by a three-judge bench of the Appeal Court.

The key finding was a criticism of Digi-Tech's projections estimating the potential profit to be made by its products, Freerider and Terminal Adapter.

A report prepared by Deloitte put the value of the products at $78 million to $86 million figures that look particularly silly in hindsight, given only 33 units of the Freerider gizmo were ever sold, but supporters say at the time the technology looked truly revolutionary and Telstra and Telecom seemed to be falling over themselves to buy it.

The valuation depended on a projection of 50% market penetration but in the Appeal Court judges' opinion Digi-Tech and Mr Reid did not show reasonable grounds that this figure was achievable.

In Australian law, if a corporation makes a claim about the future of a product without reasonable grounds, it is deemed to have been misleading which is what the Court of Appeal found in this case.

Now the issue that goes back to the lower court is: did the investors rely on Digi-Tech's representations about the product?

"The answer is yes, yes, yes," one investor said.

Speaking to The National Business Review this week, Mr Reid said he expected the Australian court action could take "easily another two years, or even longer" to resolve.

Asked about the cost of funding the litigation, on top of his SFO case, Mr Reid said: "It's something we cope with."

He declined to answer questions about whether he was continuing to work, but his so-called merchant bank Milloy Reid Wong & Co was still in existence. "Obviously litigation takes up a lot of time."

Despite going through lengthy depositions on the fraud charges, Mr Reid has not yet revealed the flavour of his defence but it is expected the handling of the case by the IRD will come under less than flattering scrutiny in the High Court trial.

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