A prominent Napier law firm operated its trust fund illegally in the red for at least five years before being shut down during a Law Society audit in 2010, a jury was told in Napier District Court yesterday.

And when McKay Hill partner Gerald George McKay heard the investigators were coming it is alleged he told long-time staff member and trust funds administrator Anne McAllister: "We're done for."

"I do remember him being a bit horrified at the thought of an audit coming at that stage," Ms McAllister said.

She admitted she repeatedly filed false reports on the McKay Hill trust position but that they were approved by McKay and while she highlighted the deficits she undertook her role out of loyalty and fear that she and others would lose their jobs if the trust's position was revealed.


The evidence was given yesterday as McKay, 74, went on trial pleading not guilty to one representative charge of criminal breach of trust between June 2005 and June 2010, five charges of theft by a person required to account and five of dishonestly using a document with intent to obtain a pecuniary advantage.

The charges involve attempts to misuse or actual misuse of client funds totalling $1.581million.

McKay, a lawyer in Napier for 42 years, is alleged to have stolen a total of $566,900 by using funds from five client trust funds other than in accordance with the requirements of the trusts, and to have directed invoices totalling just over $1 million to five other trusts and businesses he faked as he allegedly tried to conceal deficits in the accounts of McKay Hill Lawyers Trust Fund.

Crown prosecutor Chris Lange, of Christchurch, told Judge Colin Doherty and a jury, lawyer trust funds were for the purpose of holding client funds, that such funds were not to be utilised without approval of the clients, and that the lawyer trust fund was not to operate in deficit. It was a requirement that monthly reports declaring the positions of such funds had to be made to the Law Society.

The Crown alleges McKay used funds to prop up the firm's account.

Victims deny they gave approval for their funds to be used in the ways alleged, or that they had ever received the invoices McKay is alleged to have ordered after learning of an imminent audit in 2010.

Mr Lange said in his opening address that the day before Law Society auditor John Hicks arrived McKay dictated to Ms McAllister the five invoices to be backdated to 2009.

Napier barrister Scott Jefferson said in a short opening address for the defence that McKay's position was "simple".

"There is a situation where client funds have gone, and that it was at the direction or with the knowledge of the defendant," he said. "That is simply not accepted."

He said the defence position was that Ms McAllister was in charge of the funds day-to-day and she used funds she did not have, and that McKay, only becoming aware of the situation in 2009 agreed with her "remedial plans".

"He says he did not know of any unauthorised transactions," Mr Jefferson said.

In evidence, Ms McAllister said she had raised the issue of law firm trust fund deficits almost every week at Monday meetings with McKay, and that he knew the position and approved all transactions.

Ms McAllister, who did lose her job when McKay Hill was shut down, told Mr Jefferson she had not been prosecuted, and she denied she had been offered any form of indemnity for giving evidence.

The trial continues.