Potential exists for NZ Inc 'own goal'

Murray Sherwin

Fonterra chief executive Andrew Ferrier would have cringed to see the white-board on the eighth floor of the Auckland District Court this week.

Scrawled in black vivid marker, next to the room number for the "Powdergate" hearing, were just two words: "Fonterra matters."

Ferrier - a Canadian who had never been to New Zealand when the alleged illegal milk powder exports took place - believes the issue is ancient history.

He doesn't see why Fonterra should be dragged into a mess which pre-dates its existence.

But this month's depositions hearing has made it clear that - whether Ferrier likes it or not - "Powdergate" still matters to Fonterra.

Others are more equivocal.

One senior Fonterra executive conceded the case was a discomfort and could hamper Fonterra's bargaining position with international competitors and customers.

"It has the potential to blow up into an own-goal for New Zealand Inc," the executive said.

However, the damage should not be over-estimated. The executive said that, ultimately, the trial was a minor element in the scale of Fonterra's global activities.

The company is certainly not taking any chances. It has engaged its law firm Russell McVeagh to keep an eye on proceedings.

The fact that all Fonterra employees (and ex-employees) called as witnesses were pre-briefed by a Russell McVeagh legal team is something that defence lawyers have been at pains to highlight.

But Russell McVeagh's input has failed to prevent key prosecution witnesses condemning Fonterra's own internal inquiry process.

Commercial lawyer Richard Mehrtens was one and, by the end of his testimony, it was the defence that was smiling.

The two most senior "Powdergate" defendants - Paul Marra and Malcolm McCowan - looked ready to burst into applause as the former head of the Fonterra inquiry described it as a biased, politically driven process.

Marra, McCowan and fellow Kiwi Dairies executives Stephen Wackrow and Sean Miller had been "flambéed" in a politically expedient process, he said.

In a highly charged environment before the industry merger, Mehrtens said, a committee of Fonterra directors deliberately ignored similar allegations against Kiwi's rival (the Waikato-based Dairy Group) and against the Dairy Board itself.

The committee was ultimately responsible for the inquiry in late 2001 and included present Fonterra chairman Henry van der Heyden and directors Greg Gent and Graeme Hawkins.

Mehrtens' testimony must surely have sounded warning bells at Fonterra.

The defence witnesses have yet to be called but, based on its cross-examination of the SFO's witnesses so far, it's a good bet that more embarrassing allegations will be laid before the court.

Of the seven "Powdergate" defendants, Marra and McCowan were in court for every day of the depositions hearing. And they have made no attempt to hide their disdain for Fonterra and some of its senior directors.

Sitting side by side, the duo appeared to be an integral part of their defence team.

They worked on laptops, examined every document, took notes and regularly passed on topics for cross-examination to their respective lawyers.

They chuckled, snorted and grumbled through testimonies they believed to be unfair or incorrect.

Between them, they have employed a defence team of formidable experience.

Paul Davison, QC, represents Marra and two more junior Kiwi executives, Stephen Wackrow and Sean Miller.

John Haigh, QC, represents McCowan.

John Billington, QC, representing Terry Walter, Ross Cottee and Geoff Winchester, has followed proceedings closely, working with Haigh and Davison at times, but has taken a lesser role in the cross-examination of witnesses.

Davison and Haigh tag-teamed the cross-examination process.

Any intriguing threads left hanging by one lawyer were revisited by the other as they fished for material that might aid their clients either at the hearing or at a trial.

Employing the withering tones of old-style headmasters, they grilled witnesses who baulked at giving information they wanted to hear.

During one particularly classroom-like incident, Davison called on an incredulous Fonterra employee, Kelly Fleming, to explain a home-brewed beer operation that had been run out of his garden shed.

Fleming admitted to supplying home brew to Dairy Board staff. How this might be used as defence was unclear.

The full extent of the defence strategy will not be disclosed until the trial - but one obvious prong emerged.

Haigh and Davison have tried to paint a picture of an industry in which exporting outside the Dairy Board system was commonplace.

Marra, McCowan and their colleagues were scapegoats sacrificed by the industry in order to bring a politically embarrassing issue to an end, they said.

Time and time again, the defence has questioned witnesses about illegal exporting by Kiwi rivals.

The clearest evidence for their "everybody else was doing it too" argument can be found in the document that Mehrtens and his inquiry team presented to Fonterra's board of directors.

It showed eight separate examples of alleged illegal exporting.

Kiwi, Dairy Group and the Dairy Board were all implicated by the report.

To quote Mehrtens, operating outside the system was "Tom Jones. That is to say: not unusual."

During a terse exchange with Davison, even former Dairy Board chief executive Warren Larsen was pushed to admit that he had been involved in the direct exporting of milk powder without a permit.

It had occurred during his time at Bay Milk before 1992. Larsen said the Dairy Board was well aware of the exporting.

Larsen took an aggressive stance in cross-examination, doggedly putting responses in his own context despite defence calls for "yes" and "no" answers.

He argued that while "cheating" of the old Dairy Board system might have been commonplace, the offending in the "Powdergate" case involved much more valuable products and was, therefore, much more damaging to Dairy Board strategy.

How serious fraud office case against executives unfolded

MONDAY, MAY 2 The Serious Fraud Office opens its case with an aggressive attack on Paul Marra, the most senior executive of the seven defendants. He is described as a bully boy with a vendetta against the Dairy Board. Co-accused Malcolm McCowan is described as his able lieutenant.

TUESDAY, MAY 3 SFO witness Max Parkin - now director of Fonterra operations - told of two occasions in 2000 when he raised concerns about Kiwi's milk powder operations. He also tried to investigate an incident in 2001 when its product was found on sale in Italy with packaging that suggested it was Australian. The Fraud Office produces an email, allegedly sent to Parkin by Malcolm McCowan, telling him to be quiet about the exporting.

THURSDAY, MAY 5 Prosecution witness Sandy Williams said an "option of fabricating documents" for a June 2001 audit was discussed - theoretically - and then discarded. Williams worked as a logistics co-ordinator for Cottee Dairy Products, an Australian subsidiary of Kiwi Dairies.

MONDAY, MAY 9 The court is told how former Kiwi Dairies boss Craig Norgate allowed Powdergate defendants Marra and McCowan to draft their own terms of reference for a 2001 inquiry into illegal exporting. That inquiry followed the first "irrefutable evidence" of illegal exporting, said SFO witness and former Dairy Board executive Grant Waterhouse.

* It is alleged that milk powder may have also been illegally exported by Kiwi Dairies' rival, Waikato-based New Zealand Dairy Group.

THURSDAY, MAY 12 During a fiery cross-examination, former Dairy Board chief Warren Larsen concedes that in the early 1990s as chief executive of the Bay Milk company, he was involved in the direct export of milk powder without the involvement of the board. He describes the lead-up to the Fonterra merger in 2001 as a time when dairy companies were "cheating" and inflating the value of assets.

MONDAY, MAY 16 A Fonterra board committee is accused of a "tribal" mentality and bias in its handling of the Powdergate affair. Commercial lawyer Richard Mehrtens, who managed Fonterra's 2001 internal Powdergate inquiry, said the committee he reported to steered investigations away from rival NZ Dairy Group.

MONDAY, MAY 23 New Zealand Food Safety Authority executive director Andrew McKenzie says illegal milk powder exporting could seriously damage the country's $14 billion agricultural export industry. McKenzie told the court that trading partners would expect breaches of export law to be dealt with.

THURSDAY, MAY 26 Craig Norgate testifies that milk powder exports would have added no value to profit at Kiwi Dairies and may even have cost the co-operative. Norgate said he had no knowledge of alleged illegal milk powder exporting by his staff until falsely labelled bags were discovered in Italy in 2001.