McARTHUR TRAIL

Dominion, Volume 29, Issue 264, 4 August 1936, Page 6

McARTHUR TRAIL

Supreme Court Hearing

Begins

RELATED COMPANIES’ TRANSACTIONS Six Charges of Issuing False Statements Six charges relating to the issue of false reports or prospectuses were preferred against John William Shaw McArthur, company director, formerly of Auckland, at the Supreme Court at Wellington yesterday. McArthur pleaded not guilty. The Acting-Chief Justice (Sir John Reed) presided. Yesterday was occupied in preliminary matters, and the opening of the Crown’s case. McArthur, was allowed bail overnight. The hearing will occupy all this week. Twenty-six jurors were called. Ten were stood down by the Crown and four challenged by the defence. His Honour directed that the jury should not separate until the case concluded. It mig£t cause jurors inconvenience, but was necessary in the interests of justice. Mr. V. R. Meredith, Crown prosecutor at Auckland, with Mr. 0. EvansScott as junior counsel, represented the Crown. For McArthur, Mr. H. F. O’Leary, K.C., with him Mr. R. E. Tripe appeared. Dr. Frank Louat, a Sydney, barrister, was associated with the defence, but, not being a member of the New Zealand Bar, could not take part. He represented McArthur in the commission and extradition proceedings at Sydney. Mr. Meredith explained to the jury the two types of concerns which would be mentioned in the case—interlocking companies and investment trusts. Interlocking companies were a class of companies with the same directors, controlled by the same people and with the same interests. Of the companies McArthur was concerned with he was either a director, attorney or controller, and it was alleged there had been a manipulation of the transactions of the companies or the debenture-holders’ funds.

The investment type of company was recognised and formed in various parts of the world. Legitimately run, it served a useful purpose, admirable in every possible way. The investment companies were mostly used by small investors. For instance, a man with £2OO to invest and putting it into one investment might be said to be placing all his eggs in one basket. If a small investor put his money into an investment trust, however, it all went into one big pool, which might total from £500,000 to £1,000,000. This common fund was invested in a variety of investments by the company trust managers, who were • financial specialists, so that the pool was spread in investments all over the world in all classes of sound security. The result was that, with investments so widely spread, any-fluctuation in any one country or class of security, would not affect the pool, and the'small investor, being one of the pool, would not have his investment subject to the same fluctuation as it would’he if he put his money into one particular investment of another class. The Investment Executive Trust of New Zealand, Ltd., of which McArthur was a director, set out to be such a company. The charge would be that by prospectus persons were Invited to invest on the guiding principle of diversification of subscribed capital, whereas the company was really masquerading as such and a large proportion of the funds subscribed was not diversified in the manner stated, but diverted into interlocking companies and embarked upon speculations in which they and McArthur particularly were interested.

Shares for Debentures. Records were. perused to ascertain those persons holding good investments, the idea being to get these, people to put their shares into the trust’s pool, and those who did were given, credit in exchange for their shares by. way of trust debentures, according to the value of the shares. Another; way in which persons got debentures was by.subscribing cash. The first prospectus stressed diversification of investments, and that not more than 10 per cent, of any debenture issue would be invested in any one security or investment. Sir. O’Leary interposed that this was to be when the total million had been subscribed. „ ~ . . Mr. Meredith: I’ll be perfectly fair about it. „ . . t Mr. O’Leary: Yes, but you have not said everything. Proceeding. Mr. Meredith said the principle of diversification of money into widespread world investments had been “stressed and stressed and stressed whenever literature was put out by the trust There was subscribed £2 <0,133, and of that £104,000 was in cash or converted into cash. There was, therefore, £104.000 for investment, and' there wa» the opportunity for the diversification principle publicised by the trust. Of the £104.000, £BB,OOO was invested in two companies of which McArthur was connected with or in control. The sum of £36,000 went into the Sterling Investments, Ltd., and £52,000 to the British National Investment Trust. McArthur was attorney of the former, and a director and attorney with one Alcorn of the latter. Actually, of £104,000 put up for investment “in the world’s soundest, securities,” £BB,OOO went into these two companies, and McArthur became the controller of large assets. In. inviting the public to subscribe to Investment Executive Trust it was stated that it had an authorised capital of £lOO,OOO. It did not mean it had that amount called up or paid up, and the actual amount put in by McArthur was £7/10/-. Again the /diversification principle was stressed.- , lhe cash or shares subscribed was £305,000. for which subscribers received debentures of an equivalent value. Of this there was £134,000 cash for the trust to invest m a diversified way. What happened wa“ that £114,000 was put into companies of which McArthur was the guiding star, to British National Investment Trust there went £53.000, and to British National •Trust £61,000. At- December 31 1933. the total subscribed was £415,000. of which there had been available in cash £215.000. Of this £182.000 was invested in companies controlled by McArthur £53,000 to British National Investment Trust and £128,000 to British National Trust Capital was again invited in 1934 At April, 1934. £418,000 had been received, of which there was £2BB 000 in cash.. Of this £221,000 was invested in companies controlled by McArthur. These facts were of themselves sufficient to show that the prospectus and reports were not only false in the words used, but that the- general impression given by concealing investments with interlocking companies was a false one, and constituted the documents false. Evidence would be given that the trust’s first auditor would not pass the balance-sheet without n qualifying report He refused to budge from bis stand, and resigned. That tagged balance-sheet was never published. Subsequently, another was published. One director objected to the position, and a resolution was passed that no director should divulge to any other than fellow-directors the internal workings of the trust. One director would not agree and resigned. As monev came into the trust it percolated through to the interlocking companies to the material advantage of McArthur. said Mr. Meredith. Mr. O’Leary objected that certain of

the opening statements?were inadmissible and merely introduced- to create preju.dice toward McArthur. His Honour ruled that they were admissible. The jury was entitled to know where the money went to. . ? Proceeding. Mr. Meredith explained the position whereby Alcorn, T. R. McArthur (accused’s son), and McArthur were in control of the interlocking companies. In June, 1933, £50,900 went from Investment Executive Trust to Sterling Investmeats, which gave debentures over its asseffi in return. Pacific Explorations was formed in 1932, with £lO,OOO capital. Sterling Investments signing for £JJJJ of it. The Pacific directors were Alcorn and McArthur. Sterling advanced £20,000 to Pacific and no debentures were given in return. Of this. £4165 were personal drawings by McArthur. Among 1 acme s assets was the ocean-going yacht: Morewa, on which it spent under £lO,OOO. Ultimately the yacht was taken over by McArthur. A big properly speculation bv McArthur and Alcorn was the purchase of the “Daily Telegraph’’- building in Sydney. There was a £ao,ooo mortgage on the building and £50,000 was required in cash. McArthur and Alcorn bought the building in October, 1932, as agents for British National Investment Irust. The day of the purchase it was resolved to issue 100 debentures of £lOOO eachThe £50,000 required was advanced • by Investment Executive Trust, which sent large amounts to Australia in October-November-December until £50,000 was reached. If the building was wisely bought the profit would belong to British National Investment Trust and it would, be in'a position to repay the £50,000 loan. It it was a bad speculation the security of the Investment Executive Trust would go back. This was apparently what people were led to believe was sound diversification of investments. In another transaction 2/- shares for which McArthur paid nothing were transferred to another company for a total consideration of £287,000, of which McArthur got £229,000. It was true this was a paper profit, but where there were interlocking companies it could be manipulated with the other companies, and large*assets representing a large sum of money secured in exchange. His Honour asked who now owned the “Daily Telegraph” building. Mr. Meredith said British National Investment Trust bought it and then gave a lease of 999 years to British National Trust at £7500 a year, so that the former owned it subject to a lease-in-perpetuity to the latter. ■ ■ On September 25, 1931, McArthur had submitted a statement to the Crown solicitor at Auckland showing his liabilities as £19,240, and assets _at £405, proceeded Mr. Meredith. From a helpless financial position he had acquired, it was alleged, valuable assets practically at the expense of the Investment Executive Trust debenture-holders. The court adjourned until this morning. Mr. O’Leary asked for bail for McArthur for last night and subsequent nights of the'hearing. He knew it was unusual for such an application to be granted, but in McArthur’s ease it ..as impossible to prepare the defence adequately without being in touch with him each evening. On Mr. O’Leary’s assurance he would grant bail but he would like the application to be reviewed at the close of each day's hearing, said his Honour. Bail was renewed at. £lOOO. with a surety for £lOOO.