Finance companies acted like 'Ponzi schemes,' registrar says

By Paul McBeth

Monday 23rd March 2009

The Registrar of Companies has issued a damning assessment of New Zealand's failed finance companies, saying many lacked adequate governance and ran their businesses "in a similar manner to Ponzi schemes".

Some 30 finance companies were in receivership, liquidation or moratorium as at last month. Investors were owed a total of $4.5 billion by such firms as at July last year. The finance company sector in total is worth about $22 billion.

A major factor in the collapse of the industry was governance which lacked the experience and skills needed to oversee the complexity of the operations, Registrar Neville Harris said in a report to the Commerce Select Committee as part of the Ministry of Economic Development's 2007/08 financial review.

The majority of companies rolled up non-performing loans into new debt, reducing the number of loans in default, and "masking the true performance of the loan portfolio," he said.

"In many cases, funds received for investment from new investors were used to repay the maturing loans of existing investors," Harris said in the report. "There is also a pattern of the company's CEO or directors having been involved in previous financial industry failures."

Related party lending was excessive, and in some cases, was entered into for the directors' personal benefit or to "prop up a poor performing investment," the report said.

The largest finance companies often relied on the success of one industry, or a small number of borrowers, such as Bridgecorp's $50 million investment in the yet-to-be-completed Momi Resort project in Fiji.

Harris was also critical of Perpetual Trust and Covenant Trustee, the appointed trustees of at least 25 failed companies, saying they "were slow to detect adverse financial issues developing and they responded too timidly".

The report raised concerns over trustee diligence and accountability.

The auditing of the finance sector "lacked the rigour and analytical depth one would expect for entities managing substantial public investments," Harris said.

The 'big-four' accounting firms, Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG, were uninterested in "finance company audit appointments", the report said. That left the task to second-tier accounting firms which lacked the capability and experience to review the "complex and elaborate company and business structures," the report said.

The Securities Commission will review corporate governance, assessing "the current level and quality of disclosure" to bolster investor confidence, it said in a statement to the stock exchange today.

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