SFO puts Digi-Tech four in dock

By Deborah Hill Cone and Chris Hutching

Friday 15th March 2002

John Reid

The Serious Fraud Office this week laid criminal charges against four businessmen linked with the controversial Digi-Tech investment scheme following a three-year Inland Revenue investigation aimed at clawing back $100 million in tax.

John Anthony Reid and Peter Michael Connelly appeared in the Auckland District Court on Tuesday facing two charges of conspiracy to defraud and 11 charges of money laundering.

Another two people, who face the same charges, were granted name suppression on the application of the SFO to protect their rights as they have not yet been formally arrested.

The four will next appear in the Auckland District Court on April 16.

As The National Business Review has revealed, 110 investors, drawn from the cream of the local investing community, bought shares in small Wellington technology company Digi-Tech in a complex, supposedly tax-efficient, deal.

Mr Reid is a director of self-styled "merchant bank" Milloy Reid Wong (formerly Milloy Reid Tong), the majority shareholder in Digi-Tech whose shares were at the centre of the arrangement.

Investors bought preferential notes with a $3 face value converting in 2005 to shares in Digi-Tech but along the way generating tax losses that investors believed they could use.

But the IRD ruled the scheme was not tax-deductible a year into the investment and many investors defaulted on the payments.

When the scheme cropped up last August in a matrimonial property case, High Court judge Willy Young described it as "from the wilder shores of tax avoidance." In a convoluted series of transactions investors were slotted into loss-attributing qualifying companies (LAQCs) and their money was funnelled between Auckland trust accounts, a Hong Kong accounting firm, a Dutch insurer, a British Virgin Islands finance company and a Geneva-based bank.

Mr Reid has tried to distance himself from promotion of the scheme, telling NBR in December 2000 his company had sold some shares on a long-term deferred settlement basis but did not advise any investors of potential tax relief.

Accounting firm Gosling Chapman, which provided accountancy services for the scheme and whose own partners were stung by the scheme, laid the original complaint with the SFO about it.

Sources close to the scheme told NBR several weeks ago that charges against Mr Reid were pending, saying a former Gosling Chapman accountant had turned Queen's evidence and was to be a prosecution witness in the case.

Mr Connelly was described as a UK-based merchant banker who worked with Mr Reid and made introductions between investors and overseas partners involved in the scheme.

The SFO's case is likely to centre on a $75 million insurance policy guaranteeing the future value of the shares.

It was said to have been taken out with AP Underwriters Trust, a subsidiary of Amsterdam-based Epicharmus Vastgoed but some investors question whether the policy exists.

Meanwhile, a group of expatriate Sydney-based investors, who were paying $345,000 into the scheme every three months, is also taking a case against Milloy Reid Wong in the New South Wales Supreme Court, which is set down for trial in May.

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