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Counting the cost

Finance king Allan Hubbard claims officials denied him the opportunity to explain his affairs before putting most of them in the hands of statutory managers.

Is Allan Hubbard a crook who has deceived his legion of supporters for decades in pursuit of his own agenda? Or is he simply a relic of a bygone business era, guilty of poor paperwork and a disdain for regulation?

Was the Government's extraordinary decision to put his interests into statutory management and turn the Serious Fraud Office (SFO) onto him and his wife, Jean, the only reasonable course of action in the face of suspected wrongdoing? Or was it a clumsy own-goal that greatly increases the risk that Hubbard's Government-guaranteed South Canterbury Finance (SCF) will collapse, leaving taxpayers to pay out its 30,000 investors under the retail deposit guarantee?

If putting Hubbard's little-known investment company Aorangi Securities into the hands of statutory managers was necessary to prevent wider economic damage (the purpose of the statutory management law), why did SCF itself escape the same fate last year when it came close to collapse? After four years of finance company failures and barefaced contempt of investors by their high-living principals, why are the regulators now moving with such ferocity against two octogenarians whose investors haven't lost any money?

Commerce Minister Simon Power's decision last weekend to put Aorangi, seven charitable trusts with which the Hubbards are associated, and the Timaru couple themselves into statutory management raises many questions to which there are, as yet, few answers.

Some facts are clear: Aorangi Securities was set up in 1974, has over 400 investors, and around $130 million out on loan. Its registered office is the accounting firm Hubbard set up in the early 1950s (formerly called Hubbard Churcher, now HC Partners). It seems to have originally operated like a typical accountants' nominee company, taking in money from clients of the firm, and supposedly investing it in mortgages. Investors earned a premium rate of interest.

Aorangi never issued a prospectus, and it wasn't audited.

The Government alleges many of its loans were inadequately documented, were unsecured, and were made contrary to investors' instructions. It's alleged that some of the funds were loaned unsecured to the Hubbards, who invested in their own right or through related entities such as trusts.

Hubbard rejects these allegations. He says he and his wife never borrowed from Aorangi, and that its loans were all secured (although he says some were secured against second mortgages or chattels). He says everything was documented, but because some loans were in the process of being renewed to conform with a new prospectus that had been demanded by the Securities Commission, he didn't have all the paperwork on hand when officials from the Companies Office wanted it. If they'd given him enough time, he could have provided it.

He believed Aorangi was exempt from issuing a prospectus on the grounds that it took money only from "habitual investors" and close associates. "We have never taken money from the public."

However, an investor complained to the commission in February that Aorangi did not provide a prospectus or investment statement. Hubbard says he put together a list for the commission showing 90% of its investors were personally known to him and therefore "within the parameter that doesn't require a prospectus". The commission wanted Aorangi to issue a prospectus, "and we were prepared to do that". He thought he had until the end of June or July to do so.

In order to strengthen Aorangi, he says he put some of his own debt-free assets - farms and commercial properties - into several new charitable trusts, which are mortgaged to Aorangi. The trustees are his close friends Albert Makary, a Timaru gynaecologist, and Edgar Bradley, a Timaru lawyer and former coroner. He says because the trustees are independent, these arrangements can't be classified as related-party transactions.

The oldest of his trusts, Te Tua, was set up in about 1960 and gives money to one of Hubbard's favourite charities, Presbyterian Support. It has also provided about 100 young farmers with interest-free loans to help them get started on the land. Six further trusts were formed recently, and he says they were intended to fund various causes, including scholarships for local students from low-income families.

All seven trusts are now under the control of statutory managers Trevor Thornton and Richard Simpson.

Hubbard claims officials denied him the opportunity to explain Aorangi's affairs. "The essential thing that has been overlooked is that we have $126 million in loans and $88 million in deposits, and the difference of about $40 million is money that my family and myself have invested over the years. We have always said to investors that if there was any [shortfall], we would suffer that first."

So far there has been no move against others who have been involved with Aorangi. Although Allan and Jean Hubbard are now the sole directors, various Hubbard Churcher partners have previously served on the board: Duncan Brand and Christopher Stark were directors from 1991 until a year ago; Bob White from 1991 until 2008; and Paul Hewitson from 1991 until 2007. White and Stark refused to comment this week, and hung up on the Listener. Brand could not be contacted. Hewitson (now retired from Hubbard Churcher) said Hubbard ran Aorangi, and the partners were directors only as a matter of form. "Why I was ever a director, I don't know."

Hubbard, known as a control freak among associates, now can't even write out a cheque - his bank account has been frozen by the statutory managers. "Theoretically, we haven't got any money to buy the groceries now," he says. The couple have been offered a monthly allowance, but "it's demeaning. I could live very modestly but I have commitments. For example, I sponsor, through my church, a youth [worker] and the salary comes out of my bank every month. They said, 'Well, you'll just have to stop doing that.'"

Edgar Bradley has known Hubbard for 50 years, and believes he is completely honest. "If he has done anything wrong, it will be purely technical ... if he's guilty of anything, it's poor paperwork."

Another source says the Aorangi mess is "garden variety Allan Hubbard - poor documentation, no transparency, it's 'trust me and I'll fix you up', and for 30 years he has paid out his investors ... There are faults, but is it deliberate defrauding of people? No way."

The Serious Fraud Office suspects other­wise. After travelling to Timaru this week, chief executive Adam Feeley confirmed an investigation into possible "serious or complex fraud". The SFO will look at whether there had been proper disclosure at Aorangi, and whether funds had been dealt with in a manner consistent with what investors had been told.

If the Hubbards are indeed found to have committed fraud, their famously frugal lifestyle and commitment to charity - Hubbard estimates he has given away $200 million over the years - suggest they have not profited personally. But that's irrelevant to the SFO: "Personal gain is not necessarily a requirement of fraud or theft," says Feeley. "If I take $100 from you and say I am going to put it in the bank, whether I give it to the IHC or bet it at the race track, either way that would be a fraudulent act."

In the meantime, whether the crackdown on Hubbard will cause irreparable damage to SCF's restructuring will become evident over coming weeks. Until a week ago, good progress was being made in rebuilding investor confidence in the stricken finance company before a "wall" of debentures falls due in October. Chief executive Sandy Maier says two-thirds of investors were rolling over their investments.

Progress was also being made towards finding an equity investor to recapitalise the company to the tune of up to $250 million.

Hubbard was sidelined from the chairmanship of SCF a month ago and given the title "chairman for life", and the Government was careful to spell out that SCF was excluded from the statutory management order. But any thought that it could be quarantined from the move against Hubbard was disingenuous - Hubbard remains SCF's biggest shareholder and his name is intimately linked with it. Within 48 hours of the news that statutory managers had taken control of Hubbard, Standard & Poor's had slashed SCF's credit rating by two notches.

Despite the obvious implications for SCF - and the Crown's exposure under the guarantee - Maier was informed of the statutory management decision just 30 minutes before the news was released.

But perhaps the evidence put before the Government by the regulators was too strong to delay action. Or perhaps, as one source put it, given Hubbard's tendency to be a law unto himself - no matter how pious his goals - the regulators saw Aorangi as the last straw.