Lombard 'sturdier than peers': defence

Former National Party Cabinet minister Sir Douglas Graham is one of the directors charged by the Securities Commission. Photo / Sarah Ivey

Lombard Finance chief executive Michael Reeves made sure the failed financier didn't lend to related parties and only made loans on New Zealand property when he set up the firm nine years ago, the High Court in Wellington heard today.

In his opening address, counsel for Reeves, Stuart Henderson, told Judge Robert Dobson his client set up a conservatively run property lender that built up a capital buffer in what was a sturdier firm than its peers.

He rejected the prosecution's claim that Lombard Finance's offer documents were misleading, saying "they disclosed known material risks and didn't contain any untrue statement."

Directors Reeves, Doug Graham, Bill Jeffries and Lawrence Bryant yesterday pleaded not guilty to five counts relating to claims they made untrue statements in a 2007 prospectus, investment statement and advertising material.

The defence counsel for Graham and Bryant had told the court yesterday that the Crown's case was "a post-mortem of a failed business" that came in the worst economic conditions in living memory. Counsel for Jeffries said "there is no suggestion in this case of any actual dishonesty."

Michelle Peden, forensic accounting manager at the Financial Markets Authority, was called as the Crown's first expert witness today and told the court Lombard Finance's offer documents didn't set out the material risk to the firm's liquidity, particularly around the deterioration of its cash position.

By the end of January 2008, Lombard Finance's liquidity buffer, which had been as high as $36 million in 2007, had been eroded and it didn't have the funds to meet debenture maturities in February of that year, she said.

Yesterday, Crown prosecutor Colin Carruthers said a director's duty is to direct, and that they can't dump their responsibility on to management or other external parties, such as auditors, solicitors or independent advisers.

If the prospectus had reflected Lombard Finance's actual situation, it would have said it needed the funds for working capital, its loan book was underperforming, and it faced a cash shortfall, Carruthers said.

Lombard Finance raised some $12.7 million during the period these documents were available, the court heard.

Carruthers said Lombard Finance's lack of liquidity should have been disclosed to investors, who weren't able to make an informed decision from the amended prospectus and investment statement. Loans needed to be severely impaired after it failed to attract the required cash flow from its five major lenders, he said.

The over-exposure to lenders who made up the majority of the loan book breached the company's credit policy, as did repeated extensions granted on the loans when they were late.

Lombard Finance had followed standard practice of borrowing short-term from debenture investors and lending it to long-term property projects, in a system that gave investors similar risks to equity investments, but returns at debt rates, he said.

Last year, the then-Securities Commission laid civil and criminal proceedings against the directors.

Lombard went into receivership on April 10, 2008, owing approximately $111 million to about 3900 debenture holders, $10 million to 310 capital note holders, and $4 million to subordinated note holders.

It is unlikely that secured debenture holders will receive more than 24 per cent of their investment back. Unsecured creditors are likely to receive nothing.

The case is continuing and has been set down for six weeks.