Bublitz pulled strings in Viaduct, Mutual Finance deals, High Court hears

Investors in collapsed finance companies Viaduct Capital and Mutual Finance along with the Treasury were misled over related party transactions designed to get Paul Bublitz's property company out of financial strife, the Crown has alleged at the start of a 12-week trial in the High Court at Auckland.

Bublitz, who owned various property assets under the Hunter Capital group and faces 49 charges, and his associates Bruce McKay and Richard Blackwood, have pleaded not guilty. The charges following the collapse of the two finance companies include theft in a special relationship, making false statements in a prospectus, and making false statements to a trustee.

Charges against Lance Morrison and Peter Chevin related to Mutual Finance only and while Morrison pleaded not guilty, Chevin pleaded guilty to 10 theft charges. Charges against a sixth defendant, Nick Wevers, were withdrawn following his sudden death in March 2014.

Both Viaduct Capital and Mutual Finance held deposits insured by the government's retail deposit guarantee scheme when they collapsed in 2010, owing a total of about $17 million.

In his opening address, Crown prosecutor David Johnstone said Bublitz acquired the two finance companies after the global financial crisis to support his various property investments and the other defendants assisted him.

Johnstone said Hunter Capital was "asset rich but cash poor" and alleges Bublitz and his co-conspirators deliberately misled investors and potential investors in the finance companies over the extent of related party transactions for their direct benefit and to the detriment of the companies.

"Mr Bublitz and Mr Wevers were aware of the negative sentiment the public and regulatory agencies held towards related party transactions," Johnstone said.

A plan was hatched in early 2009 to acquire a finance company that would either buy Hunter Capital's distressed property assets or help fund their development and increasingly onerous debt burden, the Crown alleged. It was critical that the finance company was covered by the Crown retail deposit guarantee scheme.

Emails between the accused indicated Hunter Capital had "no wriggle room left to pay creditors". The alternative of renegotiating with the banks over loans which Bublitz had supplied a personal guarantee was rejected because it would cause a loss of credibility with the lenders.

The February 2009 purchase of Viaduct Capital, formerly known as Priority Finance, was structured in such a way that it wouldn't alert investors, regulatory authorities and the trustees, to the related party transactions or breach the trust deed. Priority was chosen over other finance companies at the time because it was said to have a more "flexible" trust deed, Johnstone said.

The structure involved setting up a shelf company, Phoenix Finance, which was lent $2.15 million by Hunter Capital to buy the finance company and Viaduct, in turn, then bought six Hunter Capital loans and part of its Dockland shareholding in Auckland for $2.55 million in cash and $2.35 million in capital notes. Hunter Capital's assets were split into chunks using off balance sheet special purpose vehicles. They were held by third parties associated with the accused, with loans to the third parties to finance the transfers.

The Crown said Viaduct's trustee signed off that the purchase complied with the trust deed and three outside experts also didn't raise concerns. However, the Crown alleged these parties were all misled about the true extent of the related party deals.

Bublitz was not a named director of Viaduct but he was said to have effective control. Under a management consultancy contract, he was paid $240,000 a year, the same as Wevers, then chief executive.

The Crown alleged that four prospectuses and investment statements issued by Viaduct during 2009 also misled investors about the related party transactions, the quality of its assets, and trust deed breaches. Even after the Securities Commission expressed concern about the non-disclosure of various assets and the involvement of Bublitz, the following two prospectuses still misled investors over how arms' length the deals were.

Investors were also not informed about a draft CCC- credit rating from the Standard & Poor's ratings agency, which indicated it was financially vulnerable.

The Treasury withdrew the retail deposit guarantee from Viaduct in April 2009 because of its concerns that the benefit extended to Hunter Capital and Bublitz.

The Crown alleged Bublitz and his associates then decided to purchase Mutual Finance which was also covered by the retail deposit guarantee scheme. It was revised in early January 2010, tightening up on related party loans. Half of the Crimes Act charges relating to Mutual Finance cover breaches of those provisions and the other half to breaches of its trust deed.

The Treasury was assured there would be no related party lending between Viaduct and Mutual, and if there was it would be arm's length and an independent expert report would be made. Bublitz, a director of Mutual Finance, told the Treasury there would be no mutual support between the two companies or transactions other than arm's length, at odds with email traffic between the accused, the Crown alleged.

Immediately after Mutual Finance was bought through a special purpose vehicle, it purchased a $500,000 loan from Viaduct to help alleviate its precarious financial position. A total of nearly $4 million of Viaduct loans were bought by Mutual from December 2009 to August 2010, the Crown alleged. Independent expert reports were only done after the loans had already been sold.

A December 2009 prospectus issued by Mutual didn't refer to its transactions with Viaduct, despite them being highly material, high risk, and in breach of its trust deed, the Crown alleged.

The trial, which is continuing before Justice Mark Woolford, is the last of the finance company cases brought by the Financial Markets Authority although it still has a civil claim, where it stands in the shoes of investors, due to be heard next year against Viaduct's trustee, Prince and Partners.

The charges filed in 2014 said the FMA had serious concerns about Prince's conduct and was the first claim filed by the regulator against a trustee. It had also rejected Prince's application to be a trustee in 2012 under new legislation covering trustee and supervisors.

(BusinessDesk)

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