An official inquiry into the Olivia Hope and Ben Smart murders says failures by detectives working on the case "exposed the integrity of the investigation to justifiable criticism".
It also states police motives to convict Scott Watson of the murders could be seen with suspicion because detectives broke so many internal rules trying to tie him to Hope and Smart the night they went missing.
The report of the Independent Police Conduct Authority is the first official investigation into the way the police pursued Watson.
The IPCA was forced to release a press release about the report on Friday after questions from the Herald on Sunday. It sent a press release stating there were three areas of concern but that the investigation was conducted "reasonably and rationally".
However, the detail of the report - obtained by this newspaper - is in striking contrast to the press release.
The report reveals that IPCA head Justice Lowell Goddard was actually sharply critical of aspects of the investigation, led by present Deputy Commissioner Rob Pope.
It states that the photograph montages used by police breached so many rules it "exposed the integrity of the investigation to justifiable criticism and to the drawing of inferences about intention and motivation".
Watson has always maintained he is not guilty of murdering Hope and Smart, who disappeared in the Marlborough Sounds on New Year's Day in 1998. The pair were last seen getting on a yacht with a man after a New Year's Eve party at Furneaux Lodge attended by 1500 people.
The IPCA report followed a complaint from campaigner and documentary maker Keith Hunter, who critically dissected the prosecution case for a television documentary and a book called Trial By Trickery.
The draft report is highly critical of the way police got witnesses to identify Watson as the man seen with Hope and Smart on the night they disappeared.
And it states that the police failed to pursue leads as to the identity of the "mystery ketch" seen by many witnesses - including some who believe they saw a woman who could be Olivia Hope aboard.
Goddard stated that the inquiry was difficult and "some actions of police fell short of best practice, and at their most serious, had the potential to influence witnesses".
While the report is stinging, Hunter says the IPCA have failed to address a string of key issues which should see Watson released from prison and his conviction overturned.
He released the draft report to the Herald on Sunday, with a 20,000 word rebuttal sent to the IPCA.
Hunter said the IPCA - which states "it's our job to keep watch over police" - failed to answer clear questions about the way police conducted the inquiry. He said the report took a narrow view of issues raised in his complaint and relied on "internal" and "secret" police documents to clear officers of some complaints.
"I have been cheated," he wrote to Goddard. "Your arguments are false. Your 'facts' are edicts - facts only because you say so.
"They rely on allegations of support from unnamed, undated, unseen and previously unheard-of secret police documents by unnamed and unknown police authors."
Watson's father Chris said the IPCA report went further than he expected and was official condemnation of the police investigation.
He said police should be concerned about the issues raised over the way witnesses were handled to identify Watson.
"It goes right to the foundation of it - if they had done their job properly, would they have had enough for an arrest?"
He said there were avenues the IPCA could have pursued further but appeared to have chosen to interpret the issues in a different way than intended.
A spokesman from Police National Headquarters refused to comment on the draft report. Police Minister Judith Collins also refused to comment.
The police were forced to apologise to Watson's father Chris after taking four years to deal with an earlier complaint that Pope committed perjury when swearing affidavits to get search warrants.
The police inquiry found the errors were not deliberate - although the IPCA report was even more critical of the process used by Pope to get information for the applications.
Two other inquiries currently underway pose further embarrassment for those involved in the case which saw Watson convicted.
Prosecuting QC Paul Davison is under a police inquiry run by Detective Superintendent Rod Drew after allegations he named a string of suppressed witnesses in a speech to a professional organisation.
Another inquiry has been underway for 18 months after Watson made a case to the Governor-General for the royal prerogative of mercy. The plea led to Justice Minister Simon Power appointing QC Kristy McDonald to investigate claims of new evidence. It is expected to be complete at the end of this year.
Operation Tam blunders
The police used "highly undesirable" methods to identify Scott Watson when dealing with witnesses from the New Year's Eve party attended by Olivia Hope and Ben Smart.
Independent Police Conduct Authority head Justice Lowell Goddard said the number of people present and drinking at the New Year's Eve party in the Marlborough Sounds meant identification was "always going to be a difficult and critical issue for investigators".
She said this meant that police officers working on the case would have had to apply a "high standard" to their work.
Instead, Goddard found flaws in almost every aspect of the work done in police efforts to tie Watson to events that evening.
Officers working on the case created three photo montage boards to show potential eyewitnesses in a bid to identify Watson.
Goddard found officers were highly selective in choosing photographs to go on the board shown to 94 witnesses - of whom 35 testified at the 1999 trial.
Police also showed at least four "key" witnesses - including key witness Guy Wallace - a single photograph of Watson before asking him to pick Watson out of a line up, she said.
Further failures included an officer giving a "suspect profile" which was passed to members of the public long before the inquiry was even an official "homicide investigation".
The techniques were identified in a draft IPCA report into the Operation Tam inquiry.
The draft report said the techniques used fell "well short of best practice" and "exposed the integrity of the investigation to justifiable criticism and to the drawing of inferences around intention and motivation".
The three montages were divided and classified Montage A1, Montage A2 and Montage B. The first two were shown to more than 40 witnesses in the police hunt for an individual at the party described as a "sleazy man".
The photographs chosen showed Watson in jeans and the only person with visible tattoos - of the eight people who identified Watson, five had previously told police the "sleazy man" was tattooed and wearing jeans.
Montage B was shown to witnesses in March and April 1998 after a police decision to "make up a better montage using a more accurate photo of Watson". The decision to show it to potential witnesses came after an officer on the inquiry made the "careless" and "highly undesirable" decision to give a "suspect profile" with comments and a photograph of Watson to those involved in the search for Hope and Smart.
The IPCA report says the "composition of montages" "fell well short of best practice". The decision to use a photograph in which Watson was caught mid-blink, the decision to have Watson as the only person with tattoos and the fact Watson was the only person in the montages who was actually at Furneaux Lodge "are all factors with an inherent potential to influence witnesses".
Goddard found the construction of the montages, the way they were presented to witnesses and the police documentation meant to record witnesses responses "were all highly undesirable".
She said the lack of information in police files meant it was difficult to determine if there was a deliberate intention to influence witnesses inappropriately.
However, she said the techniques failed to "adhere to common law principle" and did not meet guidelines laid out in the police manual.
Goddard's inquiry also found water taxi driver Wallace and three other witnesses were shown a single photograph of Watson. She said the decision to do so was "highly undesirable" when considered against "legal principles in place at the time".
Two-masted ketch remains mystery
The "mystery ketch" has been a key question in the Scott Watson case - the one issue that has driven questions about police handling of the case.
Watson's single-masted sloop was singled out early in the inquiry by police as the scene of the murder of Ben Smart and Olivia Hope.
But the yachting fraternity could not get past repeated reports of a two-masted ketch being seen in the area - even in some cases carrying an unidentified young blonde woman.
Those raising questions were people not usually given to questioning police - a boating community of accountants, doctors and lawyers who failed to see a suspicious motive in Watson's actions.
Former detective Mike Chappell, who worked on the case, claimed in the Herald on Sunday officers had been told not to follow up sightings of the ketch.
The report by Justice Lowell Goddard said: "The authority's investigation has revealed that some reported sightings were either not investigated, or if they were investigated, police's actions were not adequately recorded."
There were delays in following up sightings, witnesses were not kept appraised of police inquiries and in some cases sightings were ignored because police had taken statements from witnesses who reported the same sighting.
Goddard stated there were sightings of a ketch compiled by Hunter and the Maritime Research Group (NZ) that had not been reported to the police. He believed the information had been passed to police for "possible further investigation".