Directors can’t absolve themselves through delegation, says prosecutor
Prominent Auckland financial advisor Roger Moses, on crutches, hobbled out of the courtroom after the first morning of his trial on charges of breaching the Securities Act over contributory mortgage misdemeanours.
It had been a painful experience, listening to prosecutor Brian Dickie and Judge JD Hole work through proposed amendments to the charges which would have extended the mortgage allotment periods covered by the charges.
In the end, the judge refused the amendments, finding the changes would make little difference to the prosecution but could be prejudicial to the defence. If only Mr Moses and fellow Reeves Moses director Gary Stevens had been that particular back in 1999, when the investors’ money was lent, and the court case wouldn’t have been needed.
Regulations don’t permit mortgage brokers to opt out of responsibility, says prosecutor
Mr Dickie said the two men, as directors of Reeves Moses Hudig Mortgage Brokers Ltd and Reeves Moses Hudig Nominee Co Ltd, were obliged by the Securities Act to know what happened in their companies, and to know when their employees were not acting properly with contributors’ funds.
“The regulations do not permit the defendants to absolve themselves of their obligations by delegating responsibilities to employees,” Mr Dickie told Judge Hole in opening the Official Assignee’s case against the two men.
They face 16 charges of breaching the Securities Act in 1999 in relation to development loans to four projects. Their Auckland District Court trial has been set down for a fortnight, but should be over by early next week.
The trial was supposed to start on Monday, but the judge was called across to handle criminal cases on the North Shore so the start was postponed. Likewise, the separate trial of their mortgage manager, Peter Van Nieuwkoop, on similar charges is delayed without a trial date set because the court didn’t appoint a judge.
Judge Hole should be safe from further callout because the trial is in courtroom 14, farthest corner of the district court building, behind the gathering place for jurors.
Replacement manager spotted irregularities
Reeves Moses Hudig, one of Auckland’s busier financial advisory houses, was taken over by Sovereign Assurance, which itself became an ASB Ltd subsidiary. The advisory and mortgage firm was then sold to Harts of Australia.
Irregularities were spotted by new mortgage manager Ken Taylor, who joined the firm in August 1999 and took over after Mr Nieuwkoop’s departure in November 1999.
When Mr Taylor had calculations done in early 2000 on the four projects the charges relate to, the total loss or risk potential on them was $3.64 million, or just over $4 million if a loan from one mortgage to another property apparently not secured by any documents was taken into account.
Mr Dickie said in his opening the exemptions to the Securities Act meant mortgage brokers did not have to register a prospectus before allotting a security interest in a contributory mortgage. But he said that under section 58 of the act, they were criminally liable for misstatement in an advertisement or registered prospectus.
Penalty could be a few months’ jail
On indictment, they would be liable to five years’ jail or a $25,000 fine. On summary conviction (their liability on charges that stay within the district court), their liability would be a maximum of three months’ jail or a $15,000 fine.
Section 59 imposes criminal liability for offering, distributing or allotting securities in contravention of the act, with the maximum penalty on summary conviction a $15,000 fine.
Mr Dickie said the charges against Messrs Moses and Stevens were based on the “statutory information” documents distributed to investors. He said several breaches of the contributory mortgage regulations could occur in respect of a single mortgage, because every time a contribution was drawn down without the requisite statutory information being given an offence would occur.
Mr Dickie said one of the keys under the regulations was that, at the time of any drawdown, the broker must have sufficient funds in the form of contributions waiting to complete the project.
Charges relate to four developments
The charges relate to loans to Pauanui Lake Resort Ltd, 14 Dewhurst Place Ltd (Gregory Douglas Robbins, Ian Geoffrey Singleton & Ronald Wayne Singleton), 32 St Stephens Avenue Ltd (Mr Robbins & Ronald Wayne Singleton) and Country Concepts (Chch) Ltd (Russell David Robinson).
The Pauanui resort is a golfcourse project developed by Gary MacDougall inland from Hopper Developments’ Coromandel waterfront Pauanui. His company went into receivership on 1 August this year.
Pauanui Lake Resort drew down $3 million on 24 August 1999 and a further $1 million on 27 September 1999.
Interest for contributors paid to borrower
Mr Dickie said essential deficiencies were a wrong claim that the servicing of interest was prepaid interest for the full term of the mortgage, and a claim that the funds would be advanced on the valuer’s completion certificate.
Interest to be paid to contributors over the life of the mortgage was supposed to be retained by the nominee company, set aside exclusively for that purpose. “By definition, it can’t be advanced to the mortgagor,” Mr Dickie said.
But, he said, at the time of the first drawdown, no prepaid interest was withheld — it was paid to the borrower. Nor was a valuer’s certificate of completion obtained before the funds were advanced.
He said no mortgagor’s statement was sent to contributors disclosing the means of the borrower to repay the loan, and the valuation report contained no opinion about the modified land value.
From the outset there was not enough money in the nominee company’s trust account to complete the project. Mr Dickie said $4.3 million was required, on the basis of the valuation report.
Third Dewhurst drawdown went on new property — unsecured
The 14 Dewhurst Place loan was for a 30-house development in Mangere, Auckland. There were to be three drawdowns — $900,000 on 7 August 1999, $100,000 on 7 September and $800,000 on 7 October.
The first two drawdowns were made — and again prepaid interest went to the borrower –but $670,000 of the third drawdown was applied to buying 24A Kingsview Rd, Mt Eden (Messrs Robbins & the Singletons) without security being executed in favour of the contributors. “The purchase is absolutely inconsistent with the information provided to the contributors in the introductory letter and the statutory information form,” Mr Dickie said.
He said this charge was particularly serious “as it discloses a significant deficiency in the internal governance of the broker.”
Again, insufficient funds were available to complete the project and the loss/potential risk was estimated at just over $880,000, taking security over the Kingsview Rd property into account, or $1.358 million excluding that property.
Loan:valuation ratio 92%
For the St Stephens Ave development there were to be two drawdowns — $1.6 million on 3 September 1999 and $2.25 million on 3 October — but the second drawdown was not made. Even so, Mr Dickie said there was a further default in that the loan to valuation ratio, said to be 60.16%, was actually 92.35%.
The borrower estimated completion cost at $3.558 million but only $15,000 was retained in the nominee company trust account and the estimated loss at March 2000 was just over $700,000.
The fourth project, the second stage of the Country Concepts retirement village development at Merivale in Christchurch, was to build 26 units.
Mr Dickie said two drawdowns totalling $2.4 million were to be made in July and August 1999, but the actual amount drawn down was $1.647 million in four lumps, including two sums to different parties on one day. On no occasion was there enough money in the account to complete the job.
A March 2000 valuation report showed a forced-sale value of $600,000 and a completion cost for stage 2 of $3.55 million, on top of the $1.647 million already handed over. At that time, the trust account contained $466,000. The March 2000 estimate of loss to contributors was just under $1.4 million.
Mr Moses is represented by Raynor Asher QC and Mr Stevens by Chris Morris. They are expected to open their defence on Thursday or Friday.