Editorial: Taxpayers hit again in SFO's flawed case

From left, Edward Sullivan, Robert White and Lachie McLeod. Photo / Supplied

Justice Paul Heath's verdict in the South Canterbury Finance trial clearly represented a sharp rebuke for the Serious Fraud Office. After a sitting of 61 days, just one of the three accused, former director Edward Sullivan, was found guilty, on five of nine charges, including making false statements and misuse of a document for pecuniary advantage. A former SFO assistant director, Gib Beattie, was quick to attribute this outcome to an "inept" investigation. Justice Heath's 258-page judgment makes it clear, however, that much of the blame lies with a fundamentally flawed prosecution strategy.

The core question at the trial was whether South Canterbury Finance deceived the Government when it entered the Crown Retail Deposit Guarantee Scheme in November 2008. It was up to the Crown to prove beyond reasonable doubt that misrepresentation by the finance company in audited financial statements induced the Treasury Secretary to admit it to the scheme, a move that was ultimately to involve a $1.58 billion taxpayer payout to depositors.

Other significant factors were in play at the time, notably the importance of maintaining the confidence of public depositors in finance companies. That, in itself, may conceivably have been enough to clear South Canterbury Finance's entry to the scheme.

Given this, it should have been readily apparent that evidence from the then Treasury Secretary, John Whitehead, would be crucial to the Crown's case. Yet a deliberate decision was made not to call him. Instead, the Crown relied on the evidence of a Treasury official who had not been involved in the decision-making. Unsurprisingly, notes Justice Heath, that official had been unable to express a firm decision on what Mr Whitehead might have done if information the Crown asserted had been omitted from South Canterbury Finance's application had been included for analysis.

Mr Whitehead's absence was not explained. But during the trial it was seized upon by the defence, which suggested that he was not called because he would not have given the evidence the Crown needed. This would suggest South Canterbury Finance was allowed into the scheme with essentially no questions asked because the Treasury's overwhelming priority was maintaining public confidence. That seems unlikely. But if so, it suggests fears of a flight of capital prompted something approaching panic.

Either way, Justice Heath was strongly influenced by the Crown's errant approach. "In the absence of evidence from Mr Whitehead, I draw an adverse inference against the Crown on this point," he said. He could not, he added, exclude the "reasonable possibility" that Mr Whitehead would have signed the guarantee deed even if the Crown was right about the alleged material omissions. Thus saying, he indicated the failure to call a highly relevant witness had effectively torpedoed the Crown's case. Sunk with it was the sum spent on the investigation and the trial, a substantial addition to that previously paid out by taxpayers.

That seems to matter little to many people in Timaru who remain in thrall to the finance company's founder, Allan Hubbard. They should read the judgment. Justice Heath is strongly critical of Mr Hubbard's "archaic" business practices and the company's governance structures, which meant it was unable to cope when the market turned against it. His co-directors were also reprimanded for their inability to influence a change in his attitude.

Mr Hubbard died in a car accident in late 2011. Thus he did not have to face charges or answer in any way to the scale of his mismanagement. Taxpayers, however, have paid a heavy price. It is galling that a flawed prosecution has now rubbed further salt into the wounds.