Judge rules Crown failed to prove central charge after former Treasury Secretary not called to give evidence.

There are big questions that beg answers arising from the Serious Fraud Office's failed action in what was billed as the biggest alleged fraud in New Zealand's history.

A key witness, whose evidence it now appears was crucial to the trial of three former South Canterbury Finance players on a $1.58 billion fraud charge, was missing in action during the lengthy fraud trial.

That witness was not South Canterbury Finance's commanding founder, the late Allan Hubbard, despite the occasional black humour during the lengthy trial over the presence or otherwise of a cantankerous ghost within the courtroom.

Hubbard was killed in a car accident two months before charges were laid in late 2011 but it is a certain bet that if still alive he would also have faced charges and would likely have been found guilty on the lesser ones with former director Edward Sullivan.

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The missing witness was former Treasury Secretary John Whitehead who agreed to South Canterbury Finance joining the guarantee scheme in the first place as the global financial crisis morphed into an international credit crunch.

Justice Paul Heath delivered his verdict yesterday finding three defendants - Hubbard's former chief executive Lachie McLeod and two former fellow directors, lawyer Sullivan and accountant Robert White - not guilty on the central charge of deceptive conduct to enable the finance company to join the Crown Retail Deposits Guarantee Scheme.

Justice Heath said the Crown had failed to prove beyond reasonable doubt that misrepresentation (via a particular South Canterbury Finance prospectus) induced Whitehead to sign the guarantee deed on November 19, 2008.

Whitehead was not called to give evidence, leaving Justice Heath to opine he was left in the position of determining whether the Crown had proved the central charge beyond reasonable doubt on the basis of relevant documentary evidence and oral evidence by a Treasury official who was not involved in the decision to allow South Canterbury into the scheme.

"As a matter of law, a Court is entitled to draw an adverse inference against a party if a witness is not called and evidence of a fact is exclusively within the knowledge of that party," the judge wrote. "In the absence of evidence from the Secretary, I could not exclude the reasonable possibility that he would have signed the guarantee deed on 19 November 2008, even if the Crown was right about the alleged material omissions. That is why I found Messrs Sullivan, White and McLeod not guilty on count 10."

Tellingly, Justice Heath went on to observe there were a range of prevailing factors that may have led the Treasury (irrespective of the finance company's position) to allow it into the scheme, such as the need to maintain public depositor confidence (this was mentioned in the preamble to the agreement), avoid capital flight to Australia where a similar guarantee scheme had been introduced and, notably, that no applications by finance companies to join the guarantee scheme had been refused in its first few months on grounds such as creditworthiness or poor business practice.

The absence of Whitehead to provide explanations is unsatisfactory.

When the SFO confirmed on December 8, 2011 it had laid fraud charges against five unnamed defendants, then director Adam Feeley said: "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."

While possibly unintentional - or the upshot of the prevailing public relations culture at the office - the SFO's comments gave the impression that the five had set out to bilk the taxpayer out of $1.58 billion through fraudulently gaining access for South Canterbury Finance into the Crown Retail Deposits Guarantee Scheme.

But as Justice Heath illustrates in his perceptively layered judgment, the relevant issues were at once more complex yet anodyne.

While the trio of defendants were argued to have been complicit in deceiving the Crown to enter the scheme, an alleged "culture of concealment" did not stand up in his view.

Instead the judge gave weight to two other factors: the finance company's rapid growth and the GFC. Governance was inadequate to deal with South Canterbury growth from $75 million deposits in 2004 to nearly $2 billion by 2008.

The corporate structure was more like a closely held company than one issuing money to the public. Hubbard also regarded related-party lending as safer as he had more control over it. It was also common practice for South Canterbury's parent company to acquire loans that were not performing before balance date then sell them back.

"As a result the true state of accounts was not properly reported to investors," Justice Heath said. He did not absolve former director Stuart Nattrass, a Crown witness, from criticism. He was satisfied the directors made sincere but unsuccessful attempts to convince Hubbard to change his ways. "By allowing Hubbard to continue to operate as he had historically done, they contributed to South Canterbury's downfall, as the existing governance structures were unable to cope with problems that surfaced."

The outstanding and vexed issue is the failure of the Crown to call Whitehead to give evidence and the inferences the judge has drawn from that.

It's notable that Treasury's management of the scheme has been strongly criticised by Auditor-General Lyn Provost.

Finance companies were dropping like flies by late 2008 when the scheme was widened to cover eligible non-bank deposit-takers. After South Canterbury Finance was admitted, its deposit base grew by 25 per cent on the back of the guarantee. It also continued to expand its loans book in a risky fashion.

When it went into receivership in August 2010, the taxpayer subsequently picked up the tab for $1.58 billion of the $1.7 billion outstanding to creditors.

Treasury has glossed over Provost's criticism.

The South Canterbury fraud case has chewed up much resource and cash.

There have also been some deficiencies in the SFO's investigation and processes which Justice Heath highlighted when he said there may have been documents that showed transactions were being concealed but the "deficiencies in the investigation by the SFO office meant that evidence did not exist".

The SFO dropped charges against two other defendants before trial. One of those - former CFO Graeme Brown - said it had cost him his marriage and career. McLeod is considering legal action against the SFO.

For the SFO's part, director Julie Read says the office is assessing the position as to whether there have been errors of law in the judgement. The SFO has not indicated if it will appeal, but the post-mortem on the case will be a long one.