Cheating rife before merger, court hears

Former Dairy Board chief Warren Larsen with Gus Andree-Wiltens of the SFO. Picture / Paul Estcourt

In the lead-up to the merger that created Fonterra, dairy companies were cheating and inflating the value of their assets, former Dairy Board chief Warren Larsen said yesterday.

Larsen told the "Powdergate" depositions hearing at the Auckland District Court that the board knew for some time about isolated instances of illegal exporting during the 1990s.

"We knew the two bigger players sold product somewhere."

But there had been no specific evidence of the exporting and it had generally involved low-grade surplus product that did not threaten the integrity of the industry.

He said in the days before the merger "the level of cheating escalated dramatically".

Fonterra was formed in October 2001 when the board merged with the two big dairy companies - Waikato-based New Zealand Dairy Group and Taranaki-based Kiwi Dairies.

Four former Kiwi executives and three associates are charged by the Serious Fraud Office with illegally exporting $45 million of milk powder between 1997 and 2001.

"Dairy company directors had said things to shareholders about the value of certain assets and then had to justify that value one way or another," Larsen said.

Just before the merger the board was on a "knife-edge" as disagreements flared over the value of assets that both big companies were bringing to the table.

Kiwi Co-operative was believed to have inflated the value of its specialist ingredients business, Food Solutions Group (FSG).

"That value was being challenged by New Zealand Dairy Group as being unrealistic," Larsen said.

A short time after Fonterra was formed it was forced to write down the value of FSG.

Larsen was asked by the defence why earlier allegations of illegal exporting had not been reported to board directors and vigorously pursued.

He said he had not been prepared to follow up cases based on rumour.

When, in May 2001, allegations emerged that a high-value New Zealand product called rennet casein had been found in Italy with Australian labels, he told his staff to produce some hard evidence.

He was presented with a number of bags. One was stamped with the "cipher" belonging to a New Zealand dairy company.

"Taped over the words 'New Zealand' was a very crude white sticker which said: product of Australia."

At that point, Larsen advised his staff to take the matter further.

He said there was a vast difference between the export of low-grade surplus product, which was largely redundant to the board, and "the falsification of origin of New Zealand product".

The latter was significantly more serious and threatened to undermine the integrity of a $7 billion industry that had been built up over 50 years.

Larsen was presented by the prosecution with evidence of another alleged illegal sale by the defendants - this time of a high-tech calcium-rich product called Alamin.

He said if that transaction had occurred then "it was a diabolical cheat.

"If I had been aware of it, the intervention would have been swift".