John Key's lawyer criticised for sham trust

John Key's lawyer, Ken Whitney, was criticised by the High Court after creating a sham trust for a bankrupt property developer then failing to disclose it to authorities probing his client's insolvency.

When asked during cross-examination if he had concerns around setting up structures to allow a bankrupt to continue in business, Mr Whitney told the court: "No, not particularly. It's a common thing for people to do. It may not be morally as white as it could be but it's normal practice."

Mr Whitney's trust business has come into sharp focus over the past week following revelations he cited conversations with the Prime Minister when fronting lobbying by the foreign trusts industry to stop an embryonic crackdown by Inland Revenue on the sector.

The Herald has approached him for comment on the judgment.

The Prime Minister has previously defended Mr Whitney's connection with the trust industry saying his personal lawyer's conduct was "highly ethical".

This comes against a backdrop of the Panama Papers, which have shown the widespread abuse of foreign trust structures.

In an August 2014 ruling, High Court Justice Ed Wylie described Mr Whitney as the "trusted adviser" of Las Vegas-based property developer Rod Nielsen, but said the Rosebud trust created by him was a sham designed to avoid the restrictions his client faced from bankruptcy.

The ruling recounts that Mr Whitney acted for Mr Nielsen during insolvency proceedings which concluded in September 2009 with Mr Nielsen adjudged bankrupt owing $13.7 million. Some months later Mr Whitney conducted legal work setting up the Rosebud blind trust.

According to the judgment, Mr Nielsen used the trust to enter as a partner into Auckland's Albany Heights housing development. In negotiations Mr Nielsen wrote to his partners citing advice from Mr Whitney that said Rosebud was set up so he would "not show up on the trust deed".

According to Justice Wylie: "Indeed, Whitney accepted in cross-examination that this was done to maintain secrecy as against all parties, including the Official Assignee."

When approached by the Official Assignee, who was probing Mr Nielsen's bankruptcy, Mr Whitney twice failed to respond. Nine months after the initial request, and faced with a threat of summons if he failed to comply voluntarily, Mr Whitney said he had no information.

Justice Wylie, in commenting on the level of disclosure, said: "Whitney did not disclose the existence of the Rosebud Trust to the Official Assignee, notwithstanding the breadth of the initial request in October 2009, the further request in July 2010 and the more pressing demand on 19 August 2010. Nor did he volunteer that [Nielsen and his wife] had been appointed discretionary beneficiaries of that trust."

In 2012 a buyout was struck for Mr Nielsen's share of the Albany Heights development and he signed the agreement. Justice Wylie recorded some oddities around the signature.

"Whitney purported to witness Nielsen's signature. Whitney acknowledged in cross-examination that he was not present when Nielsen signed the document. Neilsen signed it in Las Vegas, and Whitney witnessed Nielsen's signature when the document was later returned to New Zealand."

The ruling records Mr Whitney, responding to what "in the presence of" meant in terms of witnessing signatures, saying he had "taken it to mean also if you know the person's signature and you've discussed it with them and they acknowledge it then that's fine".

Justice Wylie said of this explanation and behavior: "Again, this is far from satisfactory."

The court heard Rosebud was later used by Mr Nielsen to buy a Range Rover, Rugby World Cup tickets, rental for their home, and wine.

In December 2013 the Official Assignee successfully applied to extend Mr Nielsen's bankruptcy until November 2015, with their case partly relying on his abuse of the Rosebud Trust.

After the Herald broke the story this afternoon, Labour leader Andrew Little said Mr Key had some "explaining to do".

The Prime Minister said he no knowledge of the details which led to the Justice Wylie's criticism but he had "complete faith" in Mr Whitney.

"Lawyers ultimately in their careers deal with lots of people and lots of clients. But in my dealings with him, he's been thoroughly ethical, I've known him for a long period of time, sometimes lawyers do get criticised but in this particular case, I have complete confidence in him."

READ THE RULING HERE