Q.D. AND H.P. COMPLEXITIES

Evening Star, Issue 20322, 2 November 1929, Page 20

Q.D. AND H.P. COMPLEXITIES

ATTACK BY GOVERNMENT ACTUARY AN IMPUDENT SWINDLE MAGISTERIAL DECISION RESERVED Described by the Government Actuary as an “ impudent swindle ” and by an ex-secretary as “one of the world’s greatest swindles,” the Quarterly Dividends Company, Ltd., and the National House Purchase Company, Ltd. _ were the subject of an exhaustive investigation in the Invercargill Police Court yesterday, when the hearing of the six charges of false pretences levelled against the secretary of the two companies (David Neilsou Johnston) was concluded. The registered office of the two concerns is in Dunedin, but its activities extend from Auckland to the Bluff Originated in England some years ago, the scheme was introduced into New Zealand about 1923, and since then has been the subject of much interest and criticism. The prosecution followed an exhaustive inquiry by the authorities, and, as most of the evidence was collected in Southland, the case was heard in Invercargill. Expert financiers and accountants have devoted considerable attention to the scheme since its inception, and widely divergent opinions have been expressed concerning its worth.

The hearing yesterday concluded with a strong denunciation of the company by the Government Actuary, who had analysed the scheme and presented a remarkable opinion on it in a report to the Commissioner of Police, this report being read in court. A large number of witnesses were heard in support of the prosecution, several of them being members of the Salvation Army. One of these, an old lady, was the only one to profess any faith in the scheme. She declared that she was_ perfectly satisfied with the comEanies, although neither she nor her usband was in a position to keep up the nccessar.y payments She had every confidence _in the accused, who conducted religious services in Rive.ton. The case continued until 6 p.m., the magistrate (Mr W. H. Woodward) reserving his decision r lhe Crown Solicitor in Invercargill (Mr H. J. Macnlister)) conducted the prosecution. Mr 0. J. L. White represented the accused. During the hearing the magistrate stated that he saw no reason to alter the decision he had come to not to deal with the case summarily himself. Mr White said that he would like to have the case disposed of in that court, as he considered that it was far too intricate and involved to be placed before any jury of twelve laymen. He would prefer to have the lower court dispose of the case summarily so that it could later be dealt with by a judge alone. The Magistrate said that he was not prepared to adopt that course. The case would have to be_ taken to the Supreme Court if a prima facie case was established by the Crown. DEPOSITORS’ EVIDENCE. The first witness in the afternoon was Andrew Lindsay Wilson, farmer, of Waihango, who said that ho attended a meeting in the Salvation Army Hall at Riverton. Altogether he bad put the sum of £36 3s into the scheme on behalf of himself, his wife, and son. To Mr White he stated that the receipts for his monthly payments were received from England. Adeline Horsham, fifty-seven years of ago, a member of the Salvation Army in Riverton, expressed complete satisfaction with the scheme to Mr White. She thought the scheme was a “ real good thing ” She was only sorry that there were not more members. To Mr Macalister. witness said that neither she nor her husband could afford to keep up the monthly payments. She had heard Johnston preach at an Army service and was quite satisfied that'he would not mislead her. William Forbury Sutton, commission agent, of Invercargill, stated that he met the accused in March. He did not go fully into the scheme, but invested the preliminary £2 Is. He made three monthly payments and then discontinued. “ Too good not to have a gamble with ” was his description of the scheme. Thomas James Henry, accountant, and Robert Pringle Inglis, mechanic, gave similar evidence. The _ latter stated that the accused told him that he might reach the £5.000 _ class in fifteen years by paying £1 into each company. He was also told that this period might be shortened to 7J years by the payment of £1 monthly. ‘ Laurence Flaus, farmer, of Eamscleugb, stated that he was one of the earliest members in the scheme in New Zealand. He joined in 1923 and put £25 into the Q.D. and £SO into H.P. He received certificates entitling him to a loan of £SOO, and received advice that the loan had been allotted him in 1927. He thereupon invested £250 in each company. It was four years, two months from the time he originally invested his money until he was notified that the.loan was due.

To Mr White, witness said that his mother and brother were also members of the company. His brother, A. W. 0. Flaus, was one of the honorary directors in New Zealand at the present time. Witness had no idea as to whether the companies had paid off two mortgages on behalf of his nlbther. Louis John Anderson, hairdresser, of Cromwell, said that he put £1 in Q.D. ■and £5 in H.P. in 1923. He was allotted a loan of £SO in 1928—four and a-half years later. Of this loan, £25 was placed in each company again. He had not had any cash dividends out of Q.D., in fact, nothing out of either company. To Mr White witness said that he had never applied for any dividends. He did not know' that the companies had been registered in New Zealand to obviate delays. To the magistrate, said that he had no option but to re-invest the £SO loan.

SCHEME DENOUNCED BY EX. SECRETARY. Daniel Moir, an employee of the Otago Harbour Board, said that he first became acquainted with the companies in 1926, and was later appointed honorary local representative in Dunedin. He held this position until July, 1928. He then resigned, and the accused was subsequently appointed in his place. Witness went and saw him and tried to prove to him the true nature of the companies. He told the accused that a large amount of reserve fund money had been transferred to H.P. without security. This fact appeared in the publication issued by the company. In 1926, £8,889 was trans-

ferred from the reserve fund of Q.D. to H.P. In 1928 the balance-sheet showed a total transference of £57,563. Notwithstanding these transfers, the waiting period for loans was not decreased. Witness pointed this out to Johnston and told, him that the companies could no do what they claimed to. Witness also told him that, in his opinion, the scheme was one of the world’s greatest swindles. Witness himself was an investor at one time, but had been expelled because he advised people not to give money to the concern. There was a statement in the rules that depositors could withdraw 50 per cent of their money in Q.D. on giving fourteen days’ notice.

To Mr White; Witness agreed that other people were quite entitled to their views. Witness allowed his name to be used in connection with lue scheme until he became suspicious of it. At one stage he did have considerable confidence in it. He tried to convince Johnston that he was wrong about it, but could not get him to agree. To the magistrate witness stated that when he was expelled he forfeited all his deposits. To Mr White: Witness strongly denied a suggestion tli£tt he had £214 belonging to the companies. He admitted that be had been instructed to pay- off a second mortgage for a Mrs Wheeler. He had £205 for this purpose, but the mortgage necessitated a clearage of three months During that time he became suspicious of the scheme and refunded the money to people who had contributed to the scheme. He was acting as their agent at the time, and in paying them their money back told them plainly that the scheme was a fraud. Witness then indicated that he wished to make a further statement. The Magistrate: I quite understand your position and appreciate that your, reason for acting as you did was very honest. TRANSFER OF ACCOUNTS. Detective-sergeant Nuttall, who has been in charge of the investigations, produced a statement made by the accused to him. Witness had gone through the companies’ gazettes since 1923, and the waiting list in June of this year showed a total waiting list of 13,041 in H.P. The total number of loans granted for the whole period was, 8,640. Assuming that each application was worth £lO, the minimum liability of H.P. to-day was £130,410. Witness was convinced that the waiting period was going to lengthen, and not shorten. “AN IMPUDENT SWINDLE.” Cyril Gostelow, the Government Actuary, then submitted his report, made to the Commissioner of Police. At the outset, he said, the two companies were a single entity, since the latter was simply machinery designed to stimulate the flow of capital into the former. He pointed out that one of the greatest faults was that the membership (in units) would require to be increased 10 times in 5.1 years, 100 times in 10.2 years, 1,000,000 times in 30.6 years, and 100,000,000 times in 40.8 years to maintain a dividend rate of 4 per cent. No concern could hope to increase its membership at such a rate The first loan could not be got in less than four years, the second in loss than forty years, and the third in less than 400 years. In summing up ho said that the scheme was of the- get rich quick ”or bubble type, qnd must eventually come to an untimely end, with disastrous results to thousands of poor people. It was not too much to describe as an impudent swindle for the benefit of the promoters and original members, the latter having received their dividends at the expense of the later members. The companies’ books and pamphelts teemed with ridiculous statements, such as “ the more you borrow the less you, owe.” The worst feature of the National House Purchase, Ltd., was that it could have no real assets, since the capital was utilised for drawing, and, in general, l|(ilf the amount of each drawing was paid to Quarterly Dividends, Ltd., and 45 per cent, of this was divided as dividends. There were already signs of a falling rate of dividend, and this was being stopped by inroads into the reserves, a very improper proceeding, since the reserve fund represented the one chance depositors had of getting their money back when the bubble burst. Then there was the further fact that the promoters and original members had everything to gain and nothing to lose by paying dividends out of reserves. It was also clear that the waiting period for loans must increase with the age of the company, which was financially rotten and unsound, but which was at the same time a gold mine to the promoters and original depositors. The weakness of the scheme lay in liie fact that if there were no new depositors there could be no dividends.

The question of a prima facie case being established was raised by Mr White. Mr Macalister held that a prima facie case had been established by the evidence of the witnesses and the accused’s own statements. It was quite impossible to carry out the extravagant claims made by him —the Government Actuary’s statement had conclusively established that. Mr White did not know whether the scheme was sound or not. But it was in operation all over the world, and the first occasion in which it was the subject of a criminal prosecution was at the world’s end. He contended that the Crown would have to advance definite proof of a criminal offence, the representation of an existing fact, that it was false, and that the accused knew it was false. The Crown case was with respect to future premises, and had nothing to do with existing fact. In no case was there a straight-forward representation. After both counsel had (juoted authorities, the Magistrate intimated that he would give his decision on Friday.