McLeod v R [2016] NZHC 221 (19 February 2016)

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Hearing:	2 November 2015
Counsel:	J H M Eaton QC for Mr McLeod C R Carruthers QC and P W Gardyne for Crown
_Judgment:	_{19 February 2016}

The application [1] Context [2] Costs in criminal cases: legal principles [8] The investigation and the prosecution

Relevance of dismissal of s 347 application [63] My approach to the costs application [67] Category A charges

(b) Count 7 [81] (c) Category A charges: should costs be ordered? [87] Category B charges

[1] Mr Lachie McLeod, the former Chief Executive Officer of South Canterbury Finance Ltd (South Canterbury), seeks costs from the Crown, under s 5 of the Costs in Criminal Cases Act 1967 (the Act).¹The application is made in the aftermath of a lengthy and complex trial arising out of the financial demise of South Canterbury. Mr McLead was acquitted on all charges following a Judge-alone trial over which I presided in 2014.²

receivership on 31 August 2010. At that time, there was a deficiency to investors of about $1.6 billion. Those investors were paid 100 cents in the dollar out of taxpayers’ funds. The payments were made to meet the Crown’s obligations under a deed (the Guarantee Deed) by which certain deposits were guaranteed under the Non-Bank Retail Deposit Takers’ Scheme (the Guarantee Scheme) established in

[3] South Canterbury’s collapse was followed by an investigation by the Serious Fraud Office. Although incorporating the conduct of other officers and employees, it is fair to say that, at least initially, the investigation was focussed primarily on the activities of Mr Allan Hubbard, the chairman of directors. After Mr Hubbard died in a motor vehicle accident on 2 September 2011, the investigation continued.

[4] Mr Adam Feeley, the then Director of the Serious Fraud Office (the Director), decided to charge two directors (Mr Edward Sullivan and Mr Robert White) and three executives (Mr McLeod, Mr Terence Hutton and Mr Graeme Brown) of South Canterbury. On 7 December 2011, each was charged with offences involving dishonesty, arising out of their participation in the management and affairs of South Canterbury.⁴On 6 August 2013 and 2 December 2013 respectively, the charges against Mr Brown, Chief Financial Officer, and Mr Hutton, Group Accountant, were withdrawn.⁵

[5] The trial took place before me in the High Court at Timaru, over 71 sitting days, between 12 March and 18 August 2014.⁶On 14 October 2014, I delivered verdicts in open Court and read out a summary of my reasons for them.⁷Separately, I handed down full reasons for those verdicts.⁸I found Mr McLeod not guilty on

_{each of the five charges brought against him; two of theft by a person
in a special}

³The Guarantee Scheme is explained in some detail in R v Sullivan [2014] NZHC 2501 (reasons)

⁶A Judge-alone trial had been ordered on 7 August 2013: see R v Sullivan [2013] NZHC 1982 and

relationship, one of obtaining a benefit by deception, and two of false accounting. Mr McLeod was discharged on all counts.

[6] In seeking costs, Mr Eaton QC, for Mr McLeod, submits that there was “never any proper basis upon which the five charges should have been laid and a competent and objective investigation would have surely revealed as much”. I am invited to fix and an appropriate amount for costs. Mr Eaton relies, primarily, on s 5(2)(b), (c) and (d) of the Act.⁹

[7] Mr Carruthers QC, for the Crown, resists the application. While accepting that the charges were found not to have been proved beyond reasonable doubt, Mr Carruthers argues that the investigation was conducted in a competent manner, and there was a proper basis to charge Mr McLeod. To support the latter submission, Mr Carruthers reminded me that Mr McLeod had failed on an application to be discharged on all counts before trial.¹⁰

[8] The circumstances in which a successful prosecutor or defendant may obtain an award of costs in criminal proceedings are set out in ss 4 and 5 of the Act. It is instructive to compare the respective tests:

(1) Where any defendant is convicted by any court of any offence, the court may, subject to any regulations made under this Act, order him to pay such sum as it thinks just and reasonable towards the costs of the prosecution.

(2) Where on the arrest of that person any money was taken from him the court may in its discretion order the whole or any part of the money to be applied to any such payment.

(3) Where the court convicts any person and the prosecutor has not prepaid any fees of court, the court may order the person convicted to pay the fees of court.

(4) Any costs allowed under this section shall be specified in the conviction and may be recovered in the same manner as a fine.

(5) If subsection (1) or subsection (3) applies and the defendant or person convicted is a Crown organisation convicted of an offence against the Building Act 1991, the Building Act 2004, the Health and Safety in Employment Act 1992, or the Resource Management Act 1991, any costs and fees awarded must be paid from the funds of that organisation.

(1) Where any defendant is acquitted of an offence or where the charge is dismissed or withdrawn, whether upon the merits or otherwise, the court may, subject to any regulations made under this Act, order that he be paid such sum as it thinks just and reasonable towards the costs of his defence.

(2) Without limiting or affecting the court's discretion under subsection (1), it is hereby declared that the court, in deciding whether to grant costs and the amount of any costs granted, shall have regard to all relevant circumstances and in particular (where appropriate) to—

(a) whether the prosecution acted in good faith in bringing and continuing the proceedings:

(b) whether at the commencement of the proceedings the prosecution had sufficient evidence to support the conviction of the defendant in the absence of contrary evidence:

(c) whether the prosecution took proper steps to investigate any matter coming into its hands which suggested that the defendant might not be guilty:

(d) whether generally the investigation into the offence was conducted in a reasonable and proper manner:

(e) whether the evidence as a whole would support a finding of guilt but the charge was dismissed on a technical point:

(f) whether the charge was dismissed because the defendant established (either by the evidence of witnesses called by him or by the cross-examination of witnesses for the prosecution or otherwise) that he was not guilty:

(g) whether the behaviour of the defendant in relation to the acts or omissions on which the charge was based and to the investigation and proceedings was such that a sum should be paid towards the costs of his defence.

(3) There shall be no presumption for or against the granting of costs in any case.

(4) No defendant shall be granted costs under this section by reason only of the fact that he has been acquitted or that any charge has been dismissed or withdrawn.

(5) No defendant shall be refused costs under this section by reason only of the fact that the proceedings were properly brought and continued.

[9] The broad discretion conferred by s 4 (in favour of a successful prosecutor) can be contrasted with s 5(1) and (2) of the Act, which applies when an acquitted defendant applies for costs. Section 5(2) requires a balancing of relevant factors, when determining whether to make an order in favour of an acquitted person.

[10] Section 5(4) and (5) assumes some importance. No accused may be granted costs by reason only of the fact that he or she has been acquitted or discharged. Conversely, no accused shall be refused costs by reason only of the fact that criminal proceedings were properly brought and continued. Accordingly, while “success” in the proceeding is a jurisdictional pre-requisite to an application, the fact of “success” is neutral when the discretion whether or not to award costs (and, if so, in what amount) is exercised.

[11] The broad nature of the s 5(1) discretion was emphasised by the Court of Appeal in Solicitor-General v Moore,¹¹and reinforced by the Supreme Court in R v Reid.¹²Delivering the judgment of the Supreme Court in Reid, Anderson J said:

[23] Counsel for the Crown accepted that the verdicts of acquittal cannot be challenged by a collateral impugning of the costs orders. That constrains the ability of an appellate court to examine the relative strength of a prosecutor’s case. But, in any event, an appellate court cannot hope to capture the ephemeral but significant impressions which inform the assessments and discretions of the trial judge. That is why, of course, a challenge to the exercise of discretion must demonstrate what would be termed, generally, an error of principle.

[12] The Crown case was based primarily on a consistent failure to disclose the true extent of related party lending between 2004 and 2010. To support that

_{contention, the Crown relied on seven transactions into which South
Canterbury}

entered between 18 November 2004 and 9 February 2010. Two, in 2004, involved a company called Shark Wholesalers Ltd (Shark): the Shark 1 and Shark 2 transactions.¹³Another two were linked with (what can neutrally be described as) South Canterbury’s interest in the Hyatt Hotel in Auckland. They occurred between

_{2006 and 2009: the Hilltop and Quadrant transactions.}¹⁴_{The remaining three were}

discrete in nature. They were entered into in 2006 (the Woolpak transaction)¹⁵and

[13] These transactions were characterised by the Crown as related party lending that ought to have been disclosed to members of the public who invested on the faith of five prospectuses issued in the period between 2004 and 2010.¹⁸The Crown also relied on alleged misrepresentations in one of the prospectuses about a bank facility of $150 million¹⁹and a failure to disclose the true extent of impaired debt²⁰in another.

[14] In opening the Crown’s case at trial, Mr Carruthers submitted that “the directors and management of South Canterbury ignored or evaded important controls that should have regulated how the company was operated”. He added that “the hallmark of the offending was a series of related transactions that were purposefully structured to hide high risk lending”. I rejected the Crown thesis of an underlying culture of concealment.²¹

[15] On 18 October 2010, following receivership on 31 August 2010, the Director decided that there was reason to suspect that an investigation in the affairs of South

¹³R v Sullivan [2014] NZHC 2501 (reasons for verdicts) at paras [143]–[163] (Shark 1), [164]–

¹⁴_{Ibid, at paras [226]–[276] (Hilltop) and paras
[277]–[296] (Quadrant).}

¹⁹_{R v Sullivan [2014] NZHC 2501 (reasons for
verdicts) at paras [355]–[357].}

Canterbury may disclose serious or complex fraud. On that basis, he commenced an inquiry under Part 1 of the Serious Fraud Office Act 1990.²²

[16] Four days later, on 22 October 2010, the Director upgraded the investigation into a Part 2 inquiry, thereby extending the range of powers available to his Office. Part 2 inquiries are undertaken when the Director forms a view that there are reasonable grounds to believe that an offence involving serious or complex fraud may have been committed.²³

[17] The first witness interview took place on 26 October 2010. At that time, Ms Tierney was a “Case Manager” in the Financial Markets and Corporate Fraud team of the Serious Fraud Office. She had been assigned to the inquiry team when the decision was made to open a Part 1 investigation. As “Case Manager” Ms Tierney was responsible for directing and co-ordinating the investigation, and reporting to the Deputy Director.

[18] While I do not doubt the good faith and best endeavours of Ms Tierney, her lack of experience in investigating alleged financial fraud on this scale meant that the necessary level of supervision and co-ordination was lacking. In my view, the investigation team lacked an experienced leader capable of conducting regular reviews of work undertaken, co-ordinating the investigation team, reassigning tasks to complete before decisions to charge were made, and ensuring that all potential defendants were given an opportunity to comment on allegations that might be made against them in criminal charges.

[19] Regrettably, I find that the Serious Fraud Office’s investigation was deficient in material respects.²⁴Some of the deficiencies are relevant to the Director’s decision to charge Mr McLeod, but many are not. To the extent that the deficiencies are relevant to whether an order for costs should be made in favour of Mr McLeod, I consider later whether there is any nexus between those failures and Mr McLeod’s acquittals. The Court’s ability to award costs in favour of an acquitted defendant is

_{designed to compensate for the pecuniary loss suffered by having to
defend flawed}

charges; it is not a mechanism to punish a prosecutor for conducting a poor investigation or exercising an inappropriate prosecutorial discretion.²⁵

[20] The inquiry into the affairs of South Canterbury was initiated by the Serious Fraud Office itself. No formal complaints had been made. Nevertheless, on the basis of reports in the business press and the need for significant payments to be made under the Guarantee Scheme, I am satisfied that the decision to open a Part 1 investigation was justified.²⁶

[21] Although the Part 2 investigation was opened on 22 October 2010, Mr Hubbard was not interviewed before he died on 2 September 2011. Each of the three accused were interviewed only once before charges were laid on 7 December 2011. Mr White was interviewed on 26 May 2011, Mr McLeod on 30 September 2011 and Mr Sullivan on 18 October 2011.

[22] Surprisingly, under cross-examination, Ms Tierney said that Mr White was not interviewed after 26 May 2011 because “there were ... no other matters that we felt we needed to put to Mr White ... - after that time”. Ms Tierney accepted that there were discussions in October 2011 about the possibility of Mr White agreeing to a voluntary interview, as opposed to a compulsory interview under s 9 of the Serious Fraud Office Act. Under the s 9 procedure an interviewee cannot refuse to answer

questions on the grounds that his or her answers might incriminate the interviewee.²⁷

The Director was not prepared to undertake a further interview of Mr White unless what was said could be admitted in evidence.

[23] Ms Tierney was asked specifically about the interview of Mr McLeod which was conducted on 30 September 2011. She was not involved as interviewer, but did review what was being done by listening to what was said contemporaneously. She accepted that Mr McLeod was not asked any questions about the Guarantee Scheme or the Quadrant transaction. Questions were put to him about the Hyatt, Shark,

²⁵_{For example, see Solicitor-General v Moore [1999] NZCA 269; [2000] 1
NZLR 533 (CA) at para [20].}

[24] Given that steps were still being taken in late October 2011 to arrange a voluntary interview with Mr White, a decision to prosecute must have been made some time in November 2011, less than three months after Mr Hubbard’s death.

[25] Insufficient attention was paid to the need to provide a reliable narrative of the way in which South Canterbury’s business operated. It must have been apparent in the early stages of the investigation that any examination of the way in which (for example) related party transactions were undertaken required a full understanding of Mr Hubbard’s unusual management style.²⁸

[26] The Crown took the position at trial that Mr Brown was not a witness of the truth, notwithstanding that charges against him had been withdrawn. Nor did the Crown appear to accept Mr Hutton as a credible or reliable witness. To the extent that certain evidence was not challenged, I had the impression that was done somewhat grudgingly. But, even after an opportunity to re-interview both after Mr Hutton had been discharged, the Crown elected not to call either to give evidence.

[27] In contrast, the witness from whom the factual narrative was primarily led, another director, Mr Nattrass, did not live or work in Timaru and was not present on a day-to-day basis. Significantly, in opening, Mr Carruthers said that Mr Nattrass would give evidence that there was a “board within a board” operating in Timaru. That “board” was said to comprise Mr Hubbard, Mr Sullivan and Mr McLeod, but not, although resident in Timaru, Mr White. Mr Carruthers suggested that it was one from which Mr Nattrass was excluded. Mr Nattrass did not come up to brief on that point. When the “board within a board” theory collapsed, significant difficulties

[28] So far as the major charge concerning the Guarantee Scheme was concerned, the standard of investigation was poor. No documents were obtained (voluntarily or

_{under compulsion) from Treasury and the Reserve Bank to ascertain what
steps had}

²⁸_{See, generally, R v Sullivan [2014] NZHC 2501
(reasons for verdicts) at paras [26]–[51].}

been taken to analyse information in Prospectuses 58 and 59, being those on which the Crown relied to contend that material misrepresentations were made.

[29] Nor were any steps taken, prior to the charges being aid, to interview someone with knowledge of the internal decision-making of Treasury to ascertain whether the Guarantee Deed was likely to have been signed on the day that it was if material misrepresentations had been discovered. No attempt was made to ascertain whether the prospect of contagion as a result of offshore financial collapses, or the political reality of the time would have led to the Guarantee Deed being signed, irrespective of any misrepresentation.

[30] Two people prepared a paper for the Secretary of the Treasury, Ms Meares (the Treasury Solicitor) and Dr McCulloch (a senior Treasury official). Ms Meares was not interviewed. Dr McCulloch was interviewed on 10 December 2013, just two months before the trial was scheduled to begin. The decision-maker, Dr Whitehead, the Secretary of Treasury, was never interviewed. Instead, the Crown called as a witness, Mr Park. He was not at Treasury when the decision was made and was not privy to the investigative steps undertaken by Reserve Bank and Treasury officials. It was left to Mr Park to prepare his own brief of evidence. He was not interviewed by the investigation team.

[31] I do not need to dwell on these points.³⁰In the context of what the Director announced publicly to be the “biggest fraud in New Zealand’s history” and one that was “the most resource intensive and time consuming in recent history”,³¹the standard of investigation on this charge fell well below that which the public is entitled to expect.

[32] On 7 December 2011, the same day that the charges against Messrs Sullivan, White, McLeod, Brown and Hutton were laid, the Director issued a press release

In response to media reports and a statement by the Financial markets Authority (FMA) regarding charges filed today in the Timaru District Court, the Serious Fraud Office (SFO) has confirmed that it has laid charges following its investigation into South Canterbury Finance Limited (SCF).

SFO Chief Executive, Adam Feeley said that, following a fourteen-month investigation into a variety of transactions involving SCF, the SFO had laid

However, until such time as the charges are first heard before the Court, and any issues regarding suppression have been fully dealt with, it would not be appropriate to make any comment on which individuals have been charged.

Mr Feeley, however, confirmed that the charges allege a variety of offences, including theft by a person in a special relationship; obtaining by deception, false statements by the promoter of a company; and false accounting. The offences carry maximum penalties of between seven and ten years imprisonment.

“The collapse of SCF was one the most significant of all the failed finance companies. The value of the fraud alleged to have been committed exceeds anything in the history of white-collar crime in New Zealand, and the time we have taken to complete this matter is a reflection of that scale.

“It is not appropriate at this point to comment on details of the allegations, but the investigation itself has been one of the most resource-intensive and time-consuming in recent history.”

The SFO said that it could not confirm the details of the allegedly fraudulent transaction, or who was alleged to have been involved in each of them.

“However, the total estimated value of allegedly fraudulent transactions is approximately $1.7 billion, which includes an estimated $1.58 billion from entering the Crown Retail Deposits Guarantee Scheme (CRDGS).

“Given the number of commercial transaction SCF was involved with, we have not investigated all transactions concerning SCF.

“We have not ruled out the possibility of investigating other matters, but our priority will be to progress the current charges through the Court.”

Mr Feeley noted that, as with other investigations into failed finance companies, the SFO had worked closely with FMA on the case and that FMA would provide support in relation to some charges.

FMA Chief Executive Sean Hughes said FMA was also examining avenues to take civil proceedings in order to recuperate some of the money paid out to SCF investors under the CRDGS.

[33] On 16 January 2012, Mr McLeod appeared in the District Court at Timaru, together with Messrs Sullivan, White, Hutton and Brown. Each entered pleas of not

guilty. After a preliminary hearing, all five were committed for trial in the District Court. The trial was transferred to the High Court on 11 March 2013, following a contested hearing in which Mr McLeod did not actively participate.³²He abided the decision of the Court.

[35] The first call in the High Court took place on 6 August 2013. On that day, the Crown sought leave to amend the indictment, so as to remove Mr Brown as a defendant.

[36] Mr Hutton was subsequently discharged on 2 December 2013, when the Crown indicated that it did not intend to offer evidence against him. That discharge had the effect of an acquittal.

[37] Mr McLeod’s s 347 application was heard on 6 August 2013. I dismissed it on 8 August 2013,³³for reasons given on 21 August 2013.³⁴

[38] The trial began on 12 March 2014. Verdicts were given on 14 October 2014. A period of just under three years had elapsed from the date on which the charges were filed to the day on which Mr McLeod was found not guilty on all charges, and discharged.

[39] At trial, there were 12 counts for determination in respect of which 18 verdicts were required.

[40] I rejected the Crown’s “culture of concealment” contention. I did not consider that a suggestion of “an underlying culture of concealment between 2004 and 2010” withstood scrutiny. On 14 October 2014, when reading a summary of my reasons for verdicts in open Court, I said:³⁵

[13] In my view, the Crown’s suggestion of (what amounted to) an underlying culture of concealment between 2004 and 2010 does not withstand scrutiny. The conduct of which the Crown complains is more readily explicable by reference to two market phenomena and the way in which South Canterbury was governed and managed.

June 2008. During this period, corporate governance and management procedures used by South Canterbury proved inadequate to deal with significant increases in money received from investors who were subscribing for debt securities on the basis of the three prospectuses in issue, during this time.

[18] In this period, South Canterbury moved from being a company with total assets of about $750 million as at 30 June 2004, to one with almost $2 billion by 30 June 2008. The absence of a robust loan authorisation process and a less than orthodox approach to debt impairment were contributing factors to the problems that South Canterbury faced when a major financial downturn occurred in mid to late 2008.

[19] The corporate governance procedures adopted by South Canterbury during this period (and, indeed, beyond) were more nearly analogous to those of a closely held company than one which solicited funds from the public. That was due to Mr Hubbard’s historical influence over the company’s affairs. South Canterbury’s parent company, Southbury Group Ltd, was owned and controlled by interests associated with Mr Hubbard. Despite attempts from other directors to change his ways, Mr Hubbard was unable or unwilling to grasp the need to adapt the existing governance and management procedures to the contemporary business environment in which South Canterbury was operating. As one witness confirmed, Mr Hubbard regarded related party loans as the safest of all because he had more control over them.

[20] I have mentioned a “less than orthodox” approach to debt impairment. It was common practice for South Canterbury’s parent company Southbury to acquire “problem loans” from South Canterbury shortly before balance date. This had the effect of either removing or minimising the need for South Canterbury to provide for impaired debt, as the accounting records showed an injection of new funds by Southbury to replace the non-performing debt. Often, however, moneys advanced by Southbury would be repaid after balance date. As a result, the true state of the inter-company account was not transparently reported to investors. Indirectly, the way in which Southbury acquired “problem” loans operated as

³⁵R v Sullivan [2014] NZHC 2500 (verdicts and summary of reasons), at para [13].

[21] There was a special relationship between South Canterbury and Southbury. That manifested itself most clearly in lending arrangements by which Southbury could obtain finance almost at will from South Canterbury. No documents were produced to prove the nature of a facility to Southbury, or the basis on which moneys owed by that company to South Canterbury were secured. However, I cannot exclude the possibility that such documents did exist. There were deficiencies in the investigation by the Serious Fraud Office that could have resulted in documents of that type not being located. On the preponderance of evidence, I am satisfied that the directors and management of South Canterbury acted on the basis that Southbury could draw down to at least 35% of shareholders’ funds without prior approval from the board or a credit committee. That percentage was fixed by reference to a single entity exposure provision in the operating debenture trust deed.

[22] The second phenomenon arose from the impact on South Canterbury’s fragile business model of a downturn in the property market around mid June 2008, and what became known as the global financial crisis from about September 2008. On 24 July 2008, Mr McLeod was reporting to the board that only three finance companies were doing “limited lending” at that time, one of which was South Canterbury. At the same meeting, Mr McLeod reported that one of the “current challenges” for South Canterbury was “surviving”.

[23] When property values fell in mid to late 2008, it had an adverse impact on both Southbury and South Canterbury. Not only did the downturn impact on the value of securities taken for particular loans, but consequential problems for borrowers meant that many were rendered illiquid and were unable to maintain principal and interest payments. The ability for regular inter-company advances to be made from Southbury to South Canterbury was also compromised.

[41] Count 11 arose out of a cheque for $25 million that was drawn on South Canterbury’s bank account and paid to its parent company, Southbury Group Ltd (Southbury). Southbury was controlled by Mr Hubbard. The Crown alleged that, on or about 1 June 2006, Mr McLeod was responsible for creating a physical ledger card in the name of “Hilltop Hotels Ltd”. The Crown asserted that the entry of the payment of $25 million on that card was designed to mask the true nature of the

³⁶More generally, see R v Sullivan [2014] NZHC 2501 (reasons for verdicts) at paras [554]–[564].

[42] There was no evidence that Mr McLeod was generally involved in creating stock ledger cards of this type. Nor was there any documentary evidence to indicate any involvement by him in the creation of the particular card before 26 June 2006.

[43] I accepted the Crown’s position that someone with knowledge of the transaction must have given the instruction for the card to be created. In my view, there were two possible candidates; Mr Hubbard and Mr McLeod. I could not exclude the reasonable possibility that Mr Hubbard gave the necessary instruction. Nor could I be sure that Mr McLeod concurred in its making.³⁷I found Mr McLeod not guilty on this charge.

[44] Count 10 alleged that Messrs Sullivan, White and McLeod were complicit in providing false information to the Crown to obtain a favourable decision to allow South Canterbury, in November 2008, to enter the Guarantee Scheme.

[45] I found each accused not guilty on count 10. I did so on the basis that the Crown had failed to prove beyond reasonable doubt that any misrepresentation that may have been made to the Crown, when it was provided with Prospectuses 58 and

[46] While I made no express findings about whether any misrepresentation had been made, I had previously found that there was a material omission in

_{Prospectuses 58 and 59 in relation to what was known as the Woolpak
transaction.}³⁹

³⁷Mr Carruthers QC (correctly) pointed out, in argument for the Crown, that I had omitted to deal with the question of “concurrence” in my reasons for verdicts. Although I omitted to include it in my reasons, I had decided that there was a reasonable possibility that Mr McLeod did not concur, having regard to the test set out in R v Thompson (1996) 14 CRNZ 235 (CA). The same position pertains for Count 12, the circumstances of which are set out at paras [56]–[62] below.

³⁸_{More generally, see R v Sullivan (reasons for
verdict) [2014] NZHC 2501 at paras [609]–[639].}

[47] Count 7 of the indictment alleged that Mr Sullivan, Mr White and Mr McLeod committed the crime of theft by a person in a special relationship arising out of an alleged advance of about $39 million made by South Canterbury to Quadrant Holdings Ltd on 1 May 2009, as recorded in a loan agreement dated

4 May 2009. The loan was alleged to have been made contrary to the requirements of the Guarantee Deed. It was accepted that Quadrant Holdings and South Canterbury were related parties.

[48] I found that all three accused knew of the requirement in the Guarantee Deed that lending to a single entity could not exceed 1 per cent of shareholders’ funds without the written permission of the Crown. An advance of $39 million to Quadrant Holdings in May 2009 would have breached that requirement. No permission was sought or obtained.

[49] I had no doubt that Messrs Sullivan and McLeod were on notice of circumstances that may have required them to check whether the 1 per cent limit would be breached. However, I was not satisfied that their level of knowledge was sufficient to make them criminally liable. There was no evidence that they turned their mind expressly to the question whether a loan of the type made would breach the Guarantee Deed. For his part, Mr White did not appear to have played any active role in the implementation of the Quadrant transaction from 4 December 2008.

[50] I found that it was reasonably possible that Mr McLeod honestly believed that, in a circumstance where there was no outflow of funds, no permission was required. For that reason, Mr McLeod was found not guilty on count 7.

[51] Mr McLeod was charged under count 8 with theft in a special relationship arising out of a transaction involving Dairy Holdings Ltd.

⁴¹Ibid, at paras [722]–[725]. The nature of the relevant trust deed covenant are described

[52] In June 2009, it became clear that South Canterbury was in danger of breaching trust deed covenants involving single entity exposures. Around that time, a related party, Dairy Holdings, was seeking a loan facility from South Canterbury. South Canterbury was unable to advance further money to Dairy Holdings without breaching the trust deed.

[53] To meet that problem, a separate arrangement was put into place whereby South Canterbury loaned $12 million to Mr Armer, a director and shareholder of Dairy Holdings. The Crown alleged that Mr Armer was no more than a conduit and that, in reality, the loan was made to Dairy Holdings, and ought to have been disclosed as such. Mr McLeod’s position was that the transaction was legitimate and had been structured in that way to ensure it did not breach the trust deed.

[54] I accepted Mr McLeod’s position. There was no artifice about the transaction. That was demonstrated by the fact that, when the receivers of South Canterbury took steps to recover the debt, Mr Armer personally paid $3 million to them to discharge his liability.

20 July 2009, caused a false entry to be made (or concurred in its making) in the accounting system used by South Canterbury to record a fictitious transaction involving Kelt Finance Ltd, Southbury and South Canterbury. As well as being the parent company of South Canterbury, Southbury was wholly owned and controlled by Mr Hubbard.

[57] Kelt Finance was a company in which South Canterbury had a 75 per cent interest. In order to avoid advances to Southbury exceeding 35 per cent of

shareholders’ funds as at 30 June 2009,⁴³a “transaction” was recorded in South

[58] That “transaction” had the effect of bringing the amount advanced by South

Canterbury to Southbury below the 35 per cent threshold as at balance date, 30 June

[59] Mr Brown, the Chief Financial Officer, gave evidence that the Kelt transaction was his “brainchild” and that he was responsible for its implementation. He said he honestly believed that the transaction was legitimate, because it complied strictly with accounting standards.

2009. Mr McLeod’s first email was to Mr Brown on 24 July 2009. I considered that email was likely to have been requested by Mr Brown to confirm approval from the board to carry out the entries; as opposed to an instruction from Mr McLeod for them to be done. That is more consistent with the fact that the entries were made on

[61] I was satisfied that Mr McLeod was not involved in the creation of the entries that gave effect to this arrangement. Nor did he concur in the making of a false entry. He believed the entries were legitimate. Evidence given by both Mr Brown

⁴³A requirement of South Canterbury’s trust deed. The relevant terms of the trust deed are explained in R v Sullivan [2014] NZHC 2501 (reasons for verdicts) at paras [99]–[107]; in particular, at para [104].

[63] It is well settled that one of the factors to be taken into account on an application of this type is whether a Court allowed the charges to proceed, notwithstanding an application for discharge under s 347 of the Crimes Act 1961.

[64] Mr McLeod was always going to face a formidable hurdle in attempting to persuade this Court to rule that he should be discharged under s 347. Although his counsel at the time (not Mr Eaton) contended for a broad discretion to discharge Mr McLeod, the legal principles applicable to s 347 applications had been settled by two decisions of the Court of Appeal by which I was bound. Both R v Flyger⁴⁵and

Parris v Attorney-General⁴⁶made it clear that on an application based on alleged

evidential insufficiency, the question was whether a properly directed fact-finder could find an accused guilty on a particular charge.⁴⁷The same test applies whether the trial is to take place before a Judge sitting alone or a jury. Flyger is an illustration of the former. Parris is an example of the latter.

[65] When determining a s 347 application, the Court must assume that the Crown allegations are capable of proof at trial. In those circumstances, the likelihood of success on any s 347 application was slim.

[66] The fact that the charges did survive that application can be seen as a judicial endorsement of sufficiency of evidence at the time. However, while an unsuccessful s 347 application is a significant factor to be taken into account, on an application for costs by an acquitted defendant, it must ultimately be balanced against the way in which opposition to the s 347 application was advanced by the Crown and whether

⁴⁴_{Reasons for dismissing the s 347 application are found in
R v Sullivan [2013] NZHC 2126.}

⁴⁷In particular, see Parris v Attorney-General [2004] 1 NZLR 519 (CA) at paras [10]–[14].

[67] I received comprehensive submissions from counsel for Mr McLeod and the Crown in support of and in opposition to the present application. Both sets of submissions were cross-referenced to counsel’s much more detailed closing submissions at trial. I have considered all issues raised by the parties. However, too much of the ground that I covered fully in my reasons for verdict would need to be repeated if I were to examine the competing positions in detail.

[68] Intending no disrespect to counsel’s comprehensive submissions, I have identified three categories of charges against which I shall determine the application. Ultimately, having conducted a principled analysis of the facts and applicable legal principles in respect of each, I must stand back and determine whether it is right to

[69] submi	On ssion (a)	the question whether an order should be made, I deal with the s under three headings: First, those in respect of which I found Mr McLeod not guilty because
		the Crown had not proved the charges beyond reasonable doubt (Category A charges). The charges falling into this category are
		counts 7 and 11.
	(b)	Second, the charges on which Mr McLeod was acquitted in
		circumstances that more nearly resemble a conclusion of innocence (Category B charges). They were counts 8 and 12.
	(c)	Third, the major charge, in respect of the Guarantee Scheme, on which the greatest time for preparation was involved: count 10
		(Category C charge).

[70] Counts 7 and 11 were both linked to what was called the Hyatt transaction. There were two sub-categories: the Hilltop transaction and the Quadrant transaction. Count 11 was a charge of false accounting relating to the Hilltop transaction.⁴⁹

[71] The Hilltop and Quadrant transactions arose out of an attempt by directors of South Canterbury to secure repayment of a loan totalling about $65 million from Hudson Auckland Hotels Ltd and Hudson (NZ) Developments Ltd (Hudson) in

2004. Hudson were the owners of the Hyatt Hotel in Auckland. To repay the Hudson debt, it was necessary for the hotel to be sold. South Canterbury was alive to the “risk that the sale price would diminish significantly if the market became aware of the problems faced by South Canterbury, as a subordinate lender, in securing repayment of its debt”.⁵⁰

[72] Regency Auckland Ltd (Regency) was incorporated on 2 December 2004 as the entity to take title to the hotel. Messrs Sullivan and McLeod were appointed as its first directors. Shares in Regency were beneficially owned by Southbury. Shortly after incorporation, the board of South Canterbury acknowledged that the hotel would be sold to Regency for $48 million, and advised that $25 million of that purchase price would need to be sourced through South Canterbury.⁵¹

[73] Efforts were made to sell the hotel to a company nominated by Mr Neville Mahon, Hilltop Hotels Ltd. This was to be done by Hilltop acquiring shares in Regency, which would continue to be the registered proprietor of the land on which the Hyatt stood. That transaction did not proceed. Following legal proceedings initiated by interests associated with Hilltop against Southbury, Regency and South

_{Canterbury, the Quadrant transaction came into effect to enable another
party to sell}

⁴⁹The Hyatt transaction is explained in R v Sullivan [2014] NZHC 2501 (reasons) at paras [220]– [296]; the Hilltop transaction is discussed at paras [226]–[276], while Quadrant is at paras [277]–[296].

the hotel to repay South Canterbury. Settlement of the legal proceedings did not occur until December 2008.

[74] Count 11 alleged that Mr McLeod made (or concurred in the making of) a false accounting record in relation to an advance of $25 million made on 1 June 2006 to Southbury to facilitate the intended transfer of shares in Regency to Hilltop. Section 260(a) of the Crimes Act 1961 provides:

Every one is liable to imprisonment for a term not exceeding 10 years who, with intent to obtain by deception any property, privilege, service, pecuniary advantage, benefit, or valuable consideration, or to deceive or cause loss to any other person,—

(a) makes or causes to be made, or concurs in the making of, any false entry in any book or account or other document required or used for accounting purposes; or

[555] The entry relates to the advance of $25 million made by South Canterbury to Southbury on 1 June 2006. Mr McLeod is said to have caused a false entry to be made by authorising the creation of a C Stock ledger card in the name of “Hilltop Hotels Ltd”. In fact, there are two versions of such a card in evidence: the first in the name of “Hilltop Hotels” and the second in the name of “Hilltop Hotels Ltd”. The former only contains an entry recording the $25 million advance, whereas the latter includes entries referring not only to the initial advance of $25 million, but also to subsequent capitalisation of interest at a rate of 9.25% shown on the card. The address of the debtor has also been added. It does not appear that the “Hilltop Hotels Ltd” version of the card was originally sighted by the auditors because, in a memorandum to Mr Hubbard, Mr McLeod and Mr Davenport, following their review of the stock ledgers for the financial year ended 30 June 2006, they stated:

There has been no interest charged to this account for the month. We have also not yet seen the loan file in respect of this advance.

[556] The auditors’ memorandum indicates that they must have viewed the card after 30 June 2006. There was no reason for the auditors to comment on the absence of interest charged on the loan unless it was the “Hilltop Hotels” card at which they were looking. Mr Eaton QC, for Mr McLeod, submitted that it was likely that the card in the name of “Hilltop Hotels Ltd” was created after the auditors’ queries and was designed to meet their concerns.

[76] I accepted that Mr McLeod knew about the intended advance of $25 million. That knowledge was acquired in his capacity as Chief Executive Officer of South Canterbury and as a director of Regency.⁵³But, I was not satisfied that Mr McLeod was involved in creating stock ledger cards, or typing (or causing to be typed) transaction entries onto them. I referred to an exchange of emails between Mr McLeod and Mr Hutton on 26 June 2006, on which the Crown relied.⁵⁴

[77] The Crown relied on three pieces of evidence to establish its contention:⁵⁵

(c) The third was evidence from Ms Cowan, a receptionist employed by South Canterbury. She identified the need for anyone establishing a ledger card in respect of this loan to have had direct knowledge of the transaction.

[78] I took the view that there were two likely candidates who caused the entry to be made: Mr Hubbard and Mr McLeod.⁵⁶I continued:

[563] Although the three points raised by the Crown point to the possibility that Mr McLeod may have set up the ledger card and authorised the relevant entry, I consider that it is (at least) equally possible that Mr Hubbard, for whose benefit the card system had been preserved, authorised its creation. Mr Hubbard and Mr Sullivan were the persons responsible for writing the cheque. There is no evidence that, on (or in relatively close proximity to) 1

June 2006, Mr McLeod knew that the cheque had been drawn. I cannot exclude the reasonable possibility that the C Stock ledger card in the name of “Hilltop Hotels Ltd” (or, indeed, the one styled “Hilltop Hotels”) was created and an entry made for an advance of $25 million at the behest of Mr Hubbard.

[79] Although I neglected to deal with this issue in my reasons for verdict, similar considerations led me to conclude that I could not exclude the reasonable possibility that Mr McLeod “concurred” in the making of a false accounting entry. In Thompson v R, the Court of Appeal saw “no reason to construe the section so as to make it a crime to assent to an entry before or at the time it [was] made yet not a crime to come upon it afterwards and assent to it in circumstances where there is a

[80] Even if Mr McLeod had learnt of the entry when he communicated by email to Mr Hutton on 26 June 2006, there is a reasonable doubt about whether he relied on accounting staff at South Canterbury, as opposed to positively asserting to the making of the original entry.

[81] Count 7 alleged that Mr McLeod was guilty of the offence of theft by a person in a special relationship. The offence does not require proof of dishonesty. Section 220 of the Crimes Act 1961 provides:

(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person—

(a) to account to any other person for the property, or for any proceeds arising from the property; or

(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.

(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.

_{over the identical property received or in the person’s possession
or control.}

(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.

[82] Count 7 alleged that Mr Sullivan, Mr White and Mr McLeod committed the crime of theft by a person in a special relationship arising out of an alleged advance of just over $39 million made by South Canterbury to Quadrant Holdings Ltd (Quadrant) pursuant to a loan agreement dated 4 May 2009. Mr Sullivan, Mr McLeod and Mr Sullivan’s brother-in-law, Mr Symes, were appointed as directors of Quadrant. Both Mr Sullivan and Mr McLeod were aware that Mr Symes had no knowledge of the transactions they were undertaking and that his name was being used deliberately to distance Quadrant from South Canterbury.

[83] The circumstances in which this loan is said to have been made were alleged to have fallen foul of requirements of the Guarantee Deed concerning arms’ length transactions. I held that an allegation that the transaction breached the “conduct of business” provision of the Guarantee Deed could not succeed because it was too general to come within the scope of the term “requirement” in s 220(1)(b) of the Crimes Act.

[84] The Guarantee Deed restricted South Canterbury’s ability to lend to associated entities (to which the relevant clause referred) to 1 per cent of the company’s book. A decision was made by the board of South Canterbury, of which Mr McLeod was aware, to advance the sum of approximately $39 million to Quadrant as part of the restructuring arrangements that followed settlement with Mr

(a) Both Mr Sullivan and Mr McLeod were involved in decision-making in relation to Quadrant.⁵⁹

(b) Messrs Sullivan and McLeod were aware of the need to comply with the 1 per cent limit set out in cl 6.2 of the Guarantee Deed.⁶⁰

(c) Mr Sullivan and Mr McLeod knew that a sum in excess of 1 per cent of shareholders funds⁶¹could not be advanced to Quadrant without permission of the Crown under the Guarantee Deed.⁶²

[86] I acquitted Messrs Sullivan and McLeod on this charge because I could not exclude the reasonable possibility that they failed to turn their minds to the specific terms of the Guarantee Deed at the relevant time. I said:

[718] I have already explained the need for a temporal coincidence between the time at which control over specified property is exercised and the formation of an intent to deal with the property other than in accordance with the relevant requirement. I cannot exclude the reasonable possibility that Messrs Sullivan and McLeod did not turn their minds to the specific terms of the Guarantee Deed at the time the relevant payment was authorised. The advance to Quadrant was seen as a means of clearing existing debt.

[719] The absence of evidence as to whether Messrs Sullivan and McLeod were actually aware that the 1% limit would be breached when the payment was made leaves open the reasonable possibility that they neither knew the limit was being breached, or intended that it be breached. It was always the directors’ and Mr McLeod’s intention that the amount shown in the accounting records of South Canterbury as being owed by Hilltop Hotels would be shown as repaid when a fresh advance was made to Quadrant. On that basis, there was to be no additional outflow of funds from South Canterbury, something to which the 1% limit was designed to apply. While the true identity and creditworthiness of the new debtor would be relevant to the Crown (and a reason why the 1% limit might apply in these circumstances) there is no evidence to suggest that point was considered by either Mr Sullivan or Mr McLeod at the time the loan to Quadrant was made on 1 May 2009.

[87] The Hyatt transaction, from beginning (Hilltop) to end (Quadrant), was complex and was designed to keep information that might have affected market

_{perception of South Canterbury away from the eyes of potential investors
and the}

business press. Public knowledge that South Canterbury was the beneficial owner of a hotel in Auckland would have brought about concern in those quarters, as ownership of a hotel was contrary to its core business of lending. While that conduct did not give rise to a criminal charge, it was commercially unacceptable, and designed to mislead the market. Conduct of that type militates against an award of

[88] I consider that the prosecutor acted in good faith in bringing and continuing with both counts 7 and 11. In respect of each, the Crown had the benefit of a ruling adverse to Mr McLeod on the pre-trial s 347 Crimes Act 1961 application.⁶⁵In the absence of evidence to the contrary, there was sufficient on which the Crown could properly ask a fact-finder to infer guilt.⁶⁶

[89] While I am of the view that the prosecutor ought to have made further inquiries of the type that led to the discovery of two versions of the C Stock ledger card⁶⁷the nature and purpose of the transaction was such that it would be wrong to award any costs against the Crown as a result of Mr McLeod’s acquittal on counts 7 and 11.⁶⁸

[90] In those circumstances, I am satisfied that no order for costs is justified in relation to Category A charges.

[91] I found Mr McLeod not guilty on count 8 because I took the view that a lawful transaction had been entered into between South Canterbury and Mr Armer which required the latter to repay the amount lent to South Canterbury when it fell

⁶⁵_{R v Sullivan [2013] NZHC 2126 (reasons for judgment
(No 3)) at paras [29]–[41] and [55]–[60].}

[92] In making that finding, I rejected the Crown’s contention that the loan was in fact made to Dairy Holdings Ltd and that it amounted to a breach of a provision of the Trust Deed.⁶⁹

2009, caused a false entry to be made in the Great Plains accounting system used by

[94] The Kelt transaction was pure fiction. It had no underlying commercial or business purpose. I described its nature:⁷⁰

[95] Evidence was given by Mr Brown that the accounting arrangements put in place to facilitate the Kelt transaction came from his own ideas. Mr Brown had not been called by the Crown because, while having released him from the indictment, it did not accept that he was a witness of the truth. I summarised the Crown’s position in relation to Mr Brown’s evidence as follows:⁷¹

accounting entries to be made. Count 12 refers to false accounting entries made on or about 20 July 2009, the date on which Mr Hutton instructed Mr Taylor to process the relevant journal entries.

[743] Mr Brown gave evidence that the “transaction” was his brainchild and that Mr McLeod had not been involved in its inception or execution. Mr Brown believed that it was permissible to make journal entries of this type as there was nothing in the accounting standards to prevent that from being done.

⁶⁹_{R v Sullivan [2014] NZHC 2501 (reasons) at paras
[470]–[482] and [722]–[725].}

[744] Mr Carruthers submitted that I should reject Mr Brown’s evidence on this point. By consent, extracts from two statements made by Mr Brown to officers of the Serious Fraud Office were put into evidence. At his first interview, Mr Brown had alleged that Mr McLeod was responsible for the Kelt transaction but in his second (which took place after Mr Brown had been charged with false accounting and the charge had subsequently been withdrawn) he retracted his initial statement and said that he was responsible for what was done.

[96] Unlike count 8, my findings on count 12 did not amount to a positive exoneration of Mr McLeod from involvement in this transaction. I took the view that evidence given from Mr Brown and Mr Hutton tended to suggest that Mr McLeod had neither been involved in the making of the entries nor “concurred” with any entries that he knew to be false.

[97] When summarising my reasons for verdict in open Court, I also referred to problems that had arisen in relation to the evidence given by Mr Brown. I did so in the context of releasing a number of judgments given during the course of the trial. After explaining the background to those judgments, I concluded:⁷²

[98] I do not consider Mr Brown to have participated in any joint criminal enterprise. He should be regarded as having been absolved from such an allegation. Generally, I accepted his evidence, though in some respects (particularly in relation to the Kelt transaction and the “committed” banking facilities) I detected an element of reconstruction of evidence that tended to portray his actions more benevolently than when viewed objectively in light of contemporary evidence. Having said that, I found Mr Brown to be an honest witness.

[98] I consider that the Crown did not take adequate steps to investigate the Dairy Holdings transaction. In my view, too much weight was put on the appearance of the arrangement, as opposed to the evidence that Mr Armer actually gave at trial.

[99] My decision on the s 347 application not to discharge Mr McLeod was based on the possibility of “window dressing” at balance date and the potential for a fact-

_{finder to infer that there was an intention to deal with funds otherwise
than in}

accordance with South Canterbury’s Trust Deed.⁷³The evidence elicited from Mr

[100] Both the Dairy Holdings and Kelt transactions involved allegations of “window dressing” designed to hide a true financial position from outsiders. When I determined the s 347 application, there appeared to be support evidence available to the Crown to allow each to go to trial. Much was likely to turn on an evaluation of the transactions, in light of the evidence given by those involved with them.

[101] In the Dairy Holdings transaction, I determined that there was an arms’ length transaction which was designed to ensure that there was compliance with the relevant provision of the Trust Deed, whereas in the Kelt transaction I was satisfied that a fiction was invented to disguise the real position.

[102] The circumstances in which the Dairy Holdings charge was pursued, notwithstanding Mr Armer’s evidence, are sufficient to justify an award of costs in Mr McLeod’s favour. Mr Armer was interviewed by the Serious Fraud Office investigators on 4 October 2011, after Mr Hubbard’s death and about two months before informations were filed. He was not interviewed again. A more probing inquiry into Mr Armer’s likely evidence at trial could well have brought about a reappraisal of the decision to prosecute, notwithstanding my decision on the s 347

[103] I do not think that I can properly criticise the Crown for the way in which it approached the Kelt transaction, even after removing Mr Brown from the indictment and interviewing him for a second time. In those circumstances, I am not prepared to make any award of costs in favour of Mr McLeod on his acquittal on Count 12.

⁷³_{R v Sullivan [2013] NZHC 2126 (reasons for judgment
(No. 3)), at para [64].}

The Solicitor-General further charges Edward Oral Sullivan, Robert Alexander White and Lachie John McLeod on or about 18 October 2008 at Timaru or elsewhere in New Zealand by deception and without claim of right induced or caused Her Majesty the Queen in the right of New Zealand acting by and through the Minister of Finance to execute any document or thing capable of being used to derive a pecuniary advantage being the Crown Deed of Guarantee (Non-Bank Deposit Taker) dated 19 November 2008 namely by application for acceptance into the Crown Guarantee Scheme the value of which being in excess of $1,000.00 in favour of South Canterbury Finance Limited.

2008 together with audited financial report for the year ended 30 June 2008 and Prospectus 58 dated 17 October 2007 which was misleading in the following respects:

Failing to properly refer to the lending to Woolpak Holdings Ltd or to give proper emphasis to the nature of the lending associated with the Hyatt Hotel Auckland; Stating that the company had not entered into any other material contracts within the last two years not being in the ordinary course of business; Stating that “[a]ssociated company and related party transactions totalled $65,450,426.... All transactions were in the normal course of business and are fully secured.” (p32);

2. South Canterbury Finance Limited letter dated 3 November 2008 together with Prospectus 59 dated 17 October 2008 which was misleading in the following respects: Failing to properly refer to the lending to Woolpak Holdings ltd; Stating that the company had not entered into any other material contracts within the last two years not being in the ordinary course of business; Stating that “[a]ssociated company and related party transactions totalled $64,185,426... All transactions were in the normal course of business, are fully secured and, except for ..., are at rates not less than the company’s cost of funds.” (p32); Stating that the company was supported by an undrawn committed bank $150 million cash facility.

[105] My decision on the s 347 application and two rulings that I gave in the course of the trial are relevant to the question of costs on this issue. In particular:

(a) In dismissing the s 347 application, I relied on the Crown’s submission that the evidence suggested that Prospectus 58, which was sent to Treasury under cover of a letter from Mr McLeod dated 14

whether to admit South Canterbury to the Guarantee Scheme was to be made. During the trial it became clear that the analysis undertaken by Reserve Bank officials, on behalf of Treasury, focussed only on Prospectus 59 which was forwarded to Treasury by Mr Hutton on 3

(b) On 9 April 2014, I gave judgment on an application by the Crown for leave to amend count 10 of the indictment. Save in one minor respect, I declined the application.⁷⁶The issue was whether, having regard to the date on which the offence was allegedly committed (“on or about

[22] In determining whether it is necessary to amend the dates in the body of count 10, to reflect a period of offending between 14 October and 19 November 2008, it is necessary to explain the precise nature of the Crown’s case, as it presently stands.

[23] As Mr Corlett [for Mr Sullivan] correctly submitted, count 10 pleads two acts which form the basis of the Crown’s case. They are the letters of 14 October and 3

November 2008. They were forwarded to Treasury on behalf of South Canterbury, under the hands of Messrs McLeod and Hutton respectively. It is the (alleged) misleading information contained in the attachments to those two letters that forms the basis of the Crown’s charge under s 240 of the Act. Necessarily, any criminal intent on the part of an accused must be linked to the specific act in issue.

November 2008 make it clear that the phrase necessarily encompasses the period between those two dates. Further, it

November 2008 is a piece of evidence (in relation to post event conduct) that may be taken into account by a fact- finder in determining whether the requisite dishonest intent can be proved on the part of Mr White, and perhaps other accused.

⁷⁵Compare R v Sullivan [2013] NZHC 2126 (reasons for judgment (No. 3)) at paras [42]–[54] with

_{R v Sullivan [23014] NZHC 2501 (reasons for verdicts) at paras
[620]–[625].}

[25] It is not disputed that inferences of intent will need to be drawn (whether in favour of or against any particular accused) on the basis of evidence of the extent of their knowledge in the period leading up to the letter of 14

October 2008, as well as information gathered before the Guarantee Deed was executed on behalf of South Canterbury and forwarded to the Treasury on 17 November

[26] I am not inclined to allow an amendment to the dates identified in the body of the indictment. The term “on or about” is accepted as being sufficiently elastic to cover the times at which both the letters of 14 October and 3

November 2008 were sent to Treasury. It is accepted that evidence of conduct on the part of each accused after 3

November 2008 will be relevant to the question of intent. An amendment is unnecessary and does not justify the exercise

(f) Should a reference to the 17 November 2008 letter be added as a particular?

[27] Mr Carruthers expressly disclaimed that the addition of a particular referring specifically to the letter of 17

November 2008 was intended to add a new charge. That position was taken in response to a point raised by both Mr Corlett (and myself) about whether, if a new particular to

that effect were added, the count might both infringe against the principles set out by the Supreme Court in Mason v R

[[2011] 1 NZLR 296 (SC)] and (illegitimately) add a new charge to the indictment.

[28] Mr Carruthers contended that the proposed Particular 3 was justified, because it made clear the period during which the accused were alleged to have engaged in a course of conduct that led to misleading information being provided to Treasury in support of the application to join the Crown Guarantee Scheme. Further, he submitted, the dates more accurately reflected the period during which the alleged offending occurred.

[29] However, as Mr Corlett submitted, (by reference to the letter of 17 November 2008) the fact that Mr White confirmed information as being correct could be consistent with both an honest belief in the truthfulness of the information provided, or of knowledge of falsity. Of itself, the letter of 17 November 2008 proves nothing. In combination with other pieces of evidence it may assist me to determine what inferences can properly be drawn.

[30] In those circumstances, there is no need for a new particular to be added. I conclude that it would be inappropriate to exercise the s 335(1) discretion in the manner sought.

(c) On 15 May 2014, I ruled that evidence could not be called from Dr McCulloch. In giving reasons for that decision, I described what I termed “a subtle difference” between the Crown’s and the accused’s perception of the relevant legal test:⁷⁹

(i) On the Crown’s view, what must be proved is that, had Treasury known of any material false statements, the Secretary, Dr Whitehead, would not have signed the Guarantee Deed on 19 November 2008. On the Crown case, it does not matter whether South Canterbury would later have been admitted to the Guarantee Scheme. It is what would have happened on the day that the Guarantee Deed was signed that assumes paramount importance.

(ii) On the other hand, the accused contend that the Crown must prove not only that Dr Whitehead would not have executed the Guarantee Deed on 19 November 2008, but also that any proved false representations were such that the Crown would never have allowed South Canterbury to enter the Guarantee Scheme. The accused’s position is that South Canterbury’s size was such that, for systemic reasons, it is not realistic to suggest that it would be excluded from the scheme.

[106] Thus, if material misrepresentations were proved, the issue became (on the

Crown view, which I later accepted) whether the Guarantee Deed would have been signed on 19 November 2008 regardless.

[107] At the s 347 stage, the Crown alleged that Mr McLeod knew that Prospectuses 58 and 59 contained materially inaccurate statements about South Canterbury’s affairs, even though he was, as Chief Executive Officer, not someone required to execute the prospectus. The Crown relied on a letter dated 14 October

2008, signed by Mr McLeod, by which an application was made by South Canterbury to enter the Guarantee Scheme.⁸⁰Mr McLeod provided a certificate confirming the accuracy of the information provided and that no default event as defined in the draft Deed of Guarantee had occurred.⁸¹

[108] Copies of the audited financial statements for South Canterbury for the year ended 30 June 2008, and Prospectus 58, were attached to the application letter. Mr McLeod indicated that a further prospectus and investment statement were being prepared.⁸²Although Mr McLeod continued to have some contact with Treasury officials and to participate in discussions about the Guarantee Scheme at which directors of South Canterbury were present, he was not responsible for forwarding to

[109] On 16 October 2008, only two days after Mr McLeod sent the initial application to Treasury, the directors of South Canterbury resolved that Messrs Sullivan, White and Brown undertake a further review of the requirements of the Guarantee Scheme and make submissions on any aspects that, in their opinion, may

make it “difficult to administer” in the context of South Canterbury’s business.⁸³

Furthermore, Mr Hubbard prepared a detailed memorandum to which other directors responded. It is far from clear whether Mr McLeod had any material input into those discussions, save for the fact that, as Chief Executive Officer, he wrote to Treasury on 10 November 2008 asking whether cl 6.2 of the draft Guarantee Deed could be amended to mirror provisions in South Canterbury’s trust deed. Dr McCulloch made

3 November 2008. That prospectus formed the basis of an analysis by Mr Williams at the Reserve Bank and was considered by those who made recommendations to the Secretary about whether South Canterbury should be admitted to the Guarantee Scheme. To that extent, it is clear that reliance was not placed on Prospectus 58, being the document forwarded by Mr McLeod, at the time the initial application was made.⁸⁵

[111] Although I decided to find Messrs Sullivan, White and McLeod not guilty on count 10, I did so on a limited basis. I said:⁸⁶

[637] On the test that I must apply, the Crown must prove beyond reasonable doubt that the provision of false information by South Canterbury was a material operating cause of the Secretary’s decision to sign the Guarantee Deed. I am not persuaded beyond reasonable doubt that the Crown would inevitably have refused (or deferred a decision about) South Canterbury’s application to enter the Guarantee Scheme had the alleged false information been disclosed. While factors such as creditworthiness, related party exposures and business practices might have counted against South Canterbury, the importance of maintaining the confidence of public depositors in finance companies was also a weighty factor to consider. In the absence of evidence from Mr Whitehead, I draw an adverse inference against the Crown on this point.

[638] Given the overriding importance of the promotion of public confidence factor and evidence about the way in which the scheme was ultimately administered, I cannot exclude the reasonable possibility that the Secretary would have signed the Guarantee Deed on 19 November 2008, irrespective of the information received. While I suspect that it is very likely that a decision would have been deferred, that is not enough in the context of a criminal charge that requires inducement to be proved beyond reasonable doubt.

[112] During the course of closing submissions at trial, and those made on the present application, I expressed concern about the failure of the Crown to obtain a statement from Dr Whitehead and to call him to give evidence. The Crown position has always been that an inference that the Guarantee Deed would not have been signed on 19 November 2008 was always open on the evidence adduced, and that evidence from Dr Whitehead was unnecessary. But, that overlooks the point that Dr Whitehead could have told the Crown that he would have signed the Guarantee

inevitably have led to the charge either not being laid or pursued. Nothing has been put before the Court to state the position Dr Whitehead would have taken. I consider that the failure to obtain evidence directly from Dr Whitehead was a fundamental error on the part of the investigation team.

[113] In addition to my concerns about the absence of evidence from Dr Whitehead, there are other reasons why I do not consider that it was appropriate for the Crown to charge Mr McLeod with Count 10. In broad terms, they are:

(a) As Chief Executive Officer, Mr McLeod had no responsibility for confirming the accuracy of Prospectus 59, on which Treasury relied to make its decision to allow South Canterbury to enter the Guarantee Scheme. The directors of South Canterbury bore that responsibility. Also, the accounts contained in Prospectus 59 were audited.

(b) The Serious Fraud Office took no steps to gather documents generated by either Treasury of Reserve Bank for the purpose of analysing whether a decision to admit South Canterbury to the Guarantee Scheme should be made. The fact that the analysis was restricted to Prospectus 59 was elicited through cross-examination by Mr Corlett, for Mr Sullivan, who put documents to Mr Park that the defence had obtained other than through formal disclosure procedures.

(c) Mr Park’s brief of evidence was finalised within Treasury without critical oversight from the investigation team. An inquiring mind was not brought to bear on the “inducement” issue.

(d) Prospectus 59 formed the basis of Reserve Bank’s analysis. That evidential position contrasts with reliance on both Prospectuses 58 and 59 at the s 347 hearing. The position taken by the Crown at the s 347 stage is consistent with information about reliance on Prospectus 59 only emerging during cross-examination of Mr Park at trial.

(e) Mr McLeod was interviewed once, on 30 September 2011. In the course of that interview, Mr McLeod was not questioned about the Guarantee Scheme, and no documents relating to it were put to him for comment. The interview took place just over two months before charges were laid, on 7 December 2011.

[114] So far as Count 10 is concerned, I consider that the failure to interview Dr Whitehead meant that the prosecution did not have sufficient evidence to support a conviction of Mr McLeod in the absence of contrary evidence.⁸⁷In my view, an order for costs should be made in respect of Count 10.

[115] I have found that an order for costs is justified in relation to Mr McLeod’s

[116] The most serious failing, on the part of the prosecutor, was the lack of a proper investigation into the question whether the Secretary of the Treasury was induced to sign the Guarantee Deed by the alleged misrepresentations. While I have also held that the investigation was not adequate in relation to the charge involving the Dairy Holdings transaction, the costs to Mr McLeod in defending that charge pale into insignificance when compared with count 10. I propose to analyse the question of quantum by reference to Mr McLeod’s acquittal on count 10 and to provide a modest uplift to take account of my criticism of the investigation in relation to count 8.

[117] A decision about the amount to be awarded is quintessentially one of judgment. For appellate purposes, it is regarded as an appeal against the exercise of a discretion.⁸⁸It is generally accepted that a Judge who presides over a long and complex trial will have a good appreciation of the impact of any deficiencies in the

_{investigation on the costs that may have been incurred by a particular
accused.}

⁸⁸R v Reid [2007] NZSC 90; [2008] 1 NZLR 575 (SC) at para [23], set out at para [11] above.

[118] In some cases, Judges have awarded relatively modest costs. In others successful defendants have been compensated on a much more generous basis. A good example of the latter is Reid v R, in which the Supreme Court upheld a trial Judge’s decision to award a sum in excess of $500,000 in favour of defendants acquitted following a Judge-alone trial on charges involving tax fraud and money

[119] Mr Eaton presented a helpful summary of the costs incurred by Mr McLeod. They represent his share of the totality of costs incurred on behalf of the three accused, on the basis agreed among them. That approach is consistent with the way in which the defence conducted the trial. There was a common approach to almost all issues, with counsel for particular accused taking responsibility for issues that affected only his client.

[120] The maximum amount for which costs are sought is $1,389,264.82, made up of $1,041,892.24 (inclusive of GST and disbursements) and $334,068.82 (inclusive of GST and disbursements) for expert and consulting fees. A schedule of costs together with supporting invoices has been tendered in support.

[121] I do not propose to analyse the individual invoices in detail. Given the nature and complexity of the issues involved at trial, the Crown does not challenge the reasonableness of the costs incurred. Rather, I intend to take a broad-brush approach designed to compensate Mr McLeod in defending count 10, with a modest uplift to respond to the acquittal on count 8. That approach acknowledges that the Crown had sufficient grounds to prosecute Mr McLeod on the three remaining charges.

[122] Although I have levelled stern criticism at the standard of investigation on count 10, I am mindful that the detection and investigation of serious fraud in the context of a company such as South Canterbury is both time consuming and costly to undertake. An award should not, in my view, be made in a sum which may provide a

_{disincentive for the Crown to prosecute in appropriate cases in future.
But, the}

⁸⁹R v Reid [2007] NZSC 90; [2008] 1 NZLR 575 (SC). See also R v Connolly (2006) 22 NZTC 19,844 (HC) and R v Connolly [2006] NZCA 338; (2007) 23 NZTC 21,172 (CA). The amount ordered by the trial Judge had not been fixed at the time of the appeals. The Court of Appeal’s “best estimate” was that the Crown would be liable to pay not less than $500,000: R v Connolly [2006] NZCA 338; (2007) 23 NZTC 21,172 (CA) at para [4].

amount must be sufficient to compensate a successful defendant when the standard of investigation has fallen well below what should be expected by the community.

[123] The promotion of acceptable business standards is part of that overall evaluation. Observations that I made in the course of my reasons for judgment demonstrate that while some of the behaviour of the accused had not been proved to be criminal, it fell well below the standards to be expected of directors and executives responsible for the stewardship of funds provided by members of the

[124] Bearing in mind the totality of the costs incurred by Mr McLeod and the need to balance those considerations, I consider that an appropriate global award (to cover both costs and disbursements) in respect of Count 10 is one of $225,000. A modest uplift is justified in respect of Count 8. I award $15,000 in that regard. That makes the total award (inclusive of costs and disbursements) $240,000.

[125] I make an award of costs of $240,000 in favour of Mr McLeod, to be paid by the Crown out of the consolidated fund.

BETWEEN	LACHIE JOHN MCLEOD Applicant
AND	THE QUEEN Respondent

High Court of New Zealand Decisions

McLeod v R [2016] NZHC 221 (19 February 2016)

High Court of New Zealand

McLeod v R [2016] NZHC 221 (19 February 2016)