When Grant Thornton (GT) partners were named as the statutory manager, Graeme McGlinn was in the garden of his Christchurch home. Within a day he was at Hubbard’s Timaru office, arming himself with current information. Among his first instructions to staff was that all of the mail was to be delivered to him, unopened. The Timaru Post Office Box 125 must have been the size of a coffin, for Hubbard used it for all his mail, involving some hundreds of entities.1
For years Hubbard arrived at work at 6 a.m. and opened all the mail, distributing it to partners and staff after he had examined it. One of his little secrets was that he applied a broker’s stamp on all SCF investment forms that had no broker stamp. This enabled him to siphon off brokerage to a private broking account, Aoraki Securities.2
McGlinn opened the mail and found in it cheques to a company he had never heard of, Hubbard Management Funds (HMF). McGlinn asked Hubbard Churcher accounting partners what HMF was. He recalls their facial expressions. They knew HMF was Hubbard’s unstructured, haphazard equity fund where his clients, family, and friends could send cheques for him to invest in any equities he chose. The partners would have known there was no trust deed, no guiding documents, no trustee, no auditor, and no structure around his investment choices. McGlinn had discovered that Aorangi was not the only ‘informal’ fund. HMF had to join ASL in statutory management, joined by Forresters Nominees, used by Hubbard as a nominee company.
In 2008 Hubbard remarked to me that he kept $250 million in the BNZ as an emergency fund if SCF ever needed it. The BNZ people I knew seemed unaware of this. Hubbard in his affidavits stated he kept $100 million on deposit with Southbury.3 The other $150 million might have been the bank facility SCF had, but never used. Or it might be that Hubbard regarded Aorangi and HMF as money he could lend to SCF or Southbury.
Hubbard was, in effect, the CEO of Aorangi and rarely sought depositor authorisation to use the funds in any particular way, whereas his partner John Stark did use standard forms authorising the use of money for first mortgage lending. Hubbard mostly confined the lending to first mortgages, but by 2003 mortgage lending opportunities at rates like 10–12 per cent were rare. He had the choice of using less formal ways to lend or closing the fund. It is fair to say Hubbard never liked turning away any investor money, so he allowed ASL to behave like a finance company, ultimately using investor money to fuel Southbury or SCF. Yet the fund always paid its quarterly interest, never defaulted on any repayment request and in Hubbard’s view was ‘kosher’. He undertook to underwrite any loan default and did this without fail. HMF was a less formal concept, carelessly managed by Hubbard, but made respectable by his guarantee.
Like Bernie Madoff and David Ross, the convicted Ponzi scheme fraudsters, Hubbard fabricated returns, but unlike Bernie Madoff, he actually used his own money to honour the false returns. The world may never have seen such a bizarre fund manager. One of his partners believed he glossed up returns in later years simply to avoid interrogation from clients. He had no time for 300 clients wanting an hour or two to chat about portfolio performance; certainly not in the years after 2007, when he was under stress. So he subsidised investors with millions of his own money!
McGlinn learned all of this when he began to examine HMF in his first days as statutory manager. One imagines his first days were full of surprises, with many of the contrivances building a picture of a highly irregular, indeed illegal, operation. McGlinn must have been amused to find evidence that Hubbard backdated his reports, once using a date that preceded the invention of the computer font of his reports. He could reach no conclusion other than that HMF was a maze of illogical and improper transactions.
McGlinn will probably never understand why Hubbard would fritter away his own money to enrich client share portfolios. There may never be another Allan Hubbard in a world that (rightly) is now heavily regulated. Yet both Aorangi and HMF had almost total client support. Aorangi’s files were well-kept, its ledgers were computerised and reconciled, its administration was well performed by Hubbard’s son-in-law Bob Linton. The HMF files were less formal but adequate, even if scraps of paper seemed to be filed haphazardly. Ironically, it was the statutory manager that lost many ASL and HMF files, after the Christchurch earthquakes. It took two years for them to realise that they had misplaced the files and that Hubbard should not have been blamed by them for having inadequate records.
McGlinn found all this evidence. In Hubbard Management Funds there was proof of falsification, maladministration and many illegalities. There was no proof that Hubbard sought to steal. As Linton notes, stealing from clients was not in Hubbard’s nature. McGlinn set about recovering all the assets, recalling loans, selling shares, establishing accurate records, solving conundrums, and finally repaying investors. That was his brief.
Grant Thornton charged ASL $13 million and HMF more than $9 million for this task and the costs of outside help. Ultimately Grant Thornton succeeded in repaying Aorangi investors dollar for dollar, and did likewise with HMF, despite being required to sell shares that would have had greater value if sold later. McGlinn was not required or competent to ‘time the market’ with his share sales. He was there to tidy up HMF.4 So, he sold Xero and Diligent shares at what would later be seen as rock-bottom prices. For various reasons he did not sell Besra shares, via the Canadian exchange. Those shares were worth more than $8 million at the start of the statutory management but became worthless.5 McGlinn figured he had to cash up HMF to relieve the cashflow problems of HMF investors. Selling Xero for a few dollars was sub-optimal. Today those million shares are worth at least forty million more than their sale price in 2010–11.
There are two obvious conclusions, each of great significance to investors.
Hubbard supporters are certain the outcomes would have been better if the statutory management decision had not been made. Some believe the statutory management ended all hopes of a satisfactory outcome for SCF investors. My view is that the Cabinet had no choice but to act when they were told that Hubbard ‘agreed’ with the fraud allegation. The option of doing nothing would have been wrong if he was operating an illegal finance company, as the authorities believed, and extracting the money for his private use.6 The problem was the error made by the investigators, exacerbated by the failure of the Companies Office, Power, and then Key, to verify the assumption that Hubbard was guilty of the fraud they specified. There was also a possible communication failure when McGlinn in July 2010 told the Companies Office that Hubbard had not borrowed ASL money to buy interests in some farms.
McGlinn began his task on 21 June, bombarded by media interviews of Hubbard, who was mystified as to why he had been put into statutory management and was pondering whether the government officials had made a mistake.7 By 5 July, McGlinn had reported to the Companies Office that he had found the journal entry. Mystery solved. Whoops! Yet on 10 July, Grant Thornton published a report continuing to allege that Hubbard owed Aorangi tens of millions.8 This report is hard to understand.
Power wrote a letter to a Hubbard supporter six months later, explaining:
I understand Mr Hubbard’s view on the financial position of the company (Aorangi) was well tested by experts before the Securities Commission made its recommendation to me. Unfortunately the statutory manager confirmed that as I understand it, the liabilities of the company exceed its assets.9
That advice to Power was not correct. The assets exceeded the liabilities by a margin of more than $38 million. Yet Power did not understand this in January 2011. News must travel slowly in Wellington.
Power had been wrongly advised on the fraud confession and on the ultimate value of ASL’s assets. There was no shortfall. The Securities Commission, so hopelessly ineffective in the years leading up to the finance company collapses, was not to blame for Hubbard’s shortcomings, his inefficiencies, his failure to structure the fund legally, and his unresearched and ad-hoc style of investing. But Power had made an unforgiveable error in not properly verifying the facts before he acted. His error will be a rare blemish on an otherwise impressive track record in Parliament.
McGlinn and his colleagues (Richard Simpson and Trevor Thornton) took on a tough task when they were asked to liquidate ASL and HMF. In some ways they performed admirably. Their reports were meaningful, detailed and fair, and contrasted greatly with the bland, vague reports that were to follow from McGrathNicol when it dealt with the more precise records kept by SCF. Grant Thornton’s men did what Cabinet instructed them to do, despite finding complexities everywhere and many examples of senseless investment by HMF. They are to be commended for discovering and highlighting the key error of the Companies Office investigators’ work. Thornton himself earned high praise, even in Timaru, for his work.
The regulators could hardly offset the reported irregularities with the unenforceable commitment of Hubbard to use his own assets to cover any shortfall. Sadly, Jane Diplock’s Securities Commission was guilty of so many other errors that her regime is now ridiculed, and represents a period that previous heads of the commission, like Peter McKenzie and Colin Patterson, must find excruciating to contemplate. Diplock, who had a lifestyle block in the Wairarapa near to one belonging to Paviour-Smith, perhaps never learned the art of gaining a heads-up by chatting across the fence to her neighbour. But the law is the law. Given the incorrect report of the Companies Office, those who made the decision that was ‘terminal’ for SCF had no other choice. But surely wise politicians should have verified the report before acting.
Grant Thornton’s selling process of HMF’s assets was strongly condemned by the Christchurch Press and others, particularly its timing of sales of various illiquid shares.10 GT was in a difficult position. Many HMF investors had reported that their daily spending relied on their ability to draw money out of HMF, forcing McGlinn to hasten his process. No such pressure was on the SCF receiver, McGrathNicol, as SCF’s debt investors were all paid interest on schedule and – bar a handful on 27 and 30 August 2010 – were repaid the capital ahead of the nominated maturity. The two processes of recovery were not comparable. The HMF investors needed urgent action.
McGlinn did make one serious mistake. Having decided to disregard the fabricated portfolios of each HMF investor, he had been authorised by the court to treat HMF’s money as a pool, and split all the assets and cash from sales on the basis of each investor’s share of the pool. Some HMF assets were liquid and saleable at fair prices, but some were illiquid and needed time, and luck, to achieve a fair price.
Where it was possible, he should have offered HMF investors the option of having their share of each illiquid asset returned unsold, allowing them to make their own timing decisions. The statutory manager instead chose to sell, claiming to have ‘expert sharebroking’ advice on timing. Mankind would be blessed to learn of this supernatural talent. There is no one who can forecast the rises or falls in ‘penny dreadful’ stocks, that are effectively playing roulette. McGlinn would have been much smarter to let investors decide whether to let him cash up, or to collect their individual share of the nonsense securities on which Hubbard had recklessly punted. As it happened, many shares rose sharply in value after McGlinn had cashed up. He had been unwise to believe a local sharebroker could advise on the best times to sell. He wore the criticism that could have been avoided by allowing investors to make their own decisions.
Any meaningful criticism of the awful ASL saga needs to take into account Power’s decision, the failure of any independent verification of the Companies Office investigation, and most damning of all, the failure to admit the error, noted by GT two weeks later, but left unpublished until Brand’s hearing in July 2018.
Below is a summary of what happened.
Power today might lament that no one in Cabinet had the experience, skills or attention to duty to commission an independent review of the startling and wrong information provided by the investigative team and later used by the Companies Office. An independent review did occur. Lawyers Russell McVeagh and Hubbard engaged a highly impressive and experienced investigator, Kerry Grass, to analyse the processes followed and the investigative team’s work. Her full report, sent to Key in 2011, is displayed in the bibliography on my website.11 She found multiple errors and conflicts of interest and was able to see the link between the errors and the consequential collapse of SCF, with its immense cost to taxpayers, to the preference shareholders and to Hubbard and his family. She did not analyse Hubbard’s own unwise behaviour and link the Crown errors to the negative attitudes in Wellington that Hubbard had created through his unorthodoxy and sense of being above the law. Nor did she link the errors to what I see as the ill-considered behaviour of Key, English and Cabinet when Saville’s offer was spurned, and when the SCF receiver was allowed to operate without oversight.
There were at least three outcomes that are undeniable: