COMPANY INVESTIGATIONS

Greymouth Evening Star, 6 September 1934, Page 7

COMPANY INVESTIGATIONS

MORE CONCERNS INVOLVED MR. COATES’S STATEMENT (Ministerial Favour) WELLINGTON, September 5. In the House to-night, after the supper adjournment, Mr. Coates secured permission to present the second interim report of the Commission that is inquiring into Company promotion methods, etc. In a covering statement, Mr. Coates said: — “In laying this report on the table I think it due to the House to give a short explanation of the purpose of the report and the action which has been taken on it. Members will remember that under Companies (Special Investigations) Act passed on August 5, power was given to the Governor-GJeneral-in-Coundil to appoint an Inspector to investigate the affairs of the Investment Executive Trust of New Zealond, Limited, and fourteen other Companies affiliated to the Investment Executive Trust through, common directors and reciprocal transaction. The names of these fifteen companies were specified in the schedule to the Act. The Act provided that its provisions should apply to these fifteen companies specifically named in the schedule, and, in addition, provided that the GovernorGeneral, by Order-in-Council, might add to the schedule, in certain cases, the names of otheir companies, and that on the making of such Order-in-Council, the Act should apply to the companies so added as if the names fo such companies had been specified in the schedule on the passing of the Act. One of these cases was if the Companies Commission, of which Mr. Barton, S.M., is chairman, in any future report made to the GovernorGeneral, recommended that an investigation be made of the affairs of any company. The report which is now* being tabled makes the recommendation that certain other companies (twelve in number) be added to the schedule to the Act. The necessary Order-in-Coun-cil was made to-day, and inspectors were appointed for the purpose of investigating the affairs of these twelve companies referred to in the present report, and these inspectors will commence their duties to-morrow morning. These inspectors are clothed with the wide powers given by the Act, and, as in the case of the Investment Executive Trust and other companies specified in the schedule to the Act, the companies in the present report which the Commsision recommends shall be added to the schedule of the Companies (Special Investigation) Act are twelve in number. Four of these companies are: — Liberty Motors Corporation, Limited, Auckland. Provincial Town Properties, Ltd. New Zealand Freeholders and Buildings, Ltd. Freeholds, Ltd.

REDWOOD FORESTS These four companies are in the Commission’s recommendation at the request of the Inspectors appointed under the Act to investigate the affairs of the Investment Executive Trust and its affiliates. These Inspectors consider that these four . companies should be added to the list in order to render their examination of the affairs of certain of other companies complete and effective. The remaining companies in respect of which "recommendation is made by the Commission are eight in number. The chief of these is New Zealand Redwood Forests, Ltd., and the other seven are Selwyn Timber Coy. Ltd., Wynsel Timber Coy. Ltd., Beuleh Land Coy. Ltd., Edgecumbe Forests, Ltd., Kotahi Lands, Ltd., Overana Land Coy. Ltd., Modern Homes, Ltd. These are companies associated through common directors and shareholders, or through reciprocal transactions with Redwood’ Forests Ltd. The Commission has given a detailed account of the organisation of Redwood Forests, Ltd. This Company was formed in 1925, with a share capital of forty thousand sterling, the managing director being J. W. S. McArthur, who, either as a direct shareholder, or by virtue of his shareholding in the Selwyn Company, practically controlled Redwood Forests, Ltd.

Redwood Forests, Ltd., issued a prospectus in 1925 for the issue of six thousand profit-participating forest debentures of £35 each. These debentures are not debentures in the usual acceptance of that term. They, in fact, constitute a contract between the holder and the Redwood Coy.,, the terms of which.are thus summarised: The holder undertakes to pay the sum of £35 to the Company. In consideration of this payment the company (1) warrants (a) that it has bought the land in question, and (b) that it has subscribed sufficient capital to pay the costs of the forestation and establishment of the company, and expenses of the debenture issue, including brokerage and commission; and (2) undertakes to plant that land with redwood trees; and (3) to maintain the forest thus planted; and (4) eventually to hand over the land and forest to a trustee for the debenture holders, or to a realisation board. The land and forest are then to be sold or otherwise disposed of to the best advantage, and the net proceeds are to be applied, firstly, in repayment of the amount of debenture, £35. Of the remainder, ninety per cent, is to go to the debenture holders and ten per cent, to the company. Unless the forest planting and selling venture is sufficiently successful, the debenture holders will not receive the return of their £35 per debenture. If the Redwood Company carries out its undertaking to acquire, clear and plant land, and tend the forest till it comes to maturity, it has done all it has undertaken to do. It is entitled to retain either as the cost of the foregoing processes or as profit, the whole of the £35. The question of whether the debenture holder will get back £5, £35, or £350, for his debenture, therefore, depends entirely on the commercial success of the afforestation scheme. Security by way of floating charge was security, to ensure the due performance of the company’s warranties and obligations with regard to the acquisition of land and the planting, care and supervision of forests. Mr Coates continued: “It would appear from the report that, although the prospectus sets out specifically that the £35, representing the pur- ■ chase price of each debenture, was to

be allocated in a certain way, namely, £2l to form an “investment fund’ and realisation reserve, £ 4/10/- to re-

coup the Company the cost of the purchase of the land, and the balance, £9/10/-, as costs of establishment of the nursery, clearing, and planting, land supervision, etc., of the timber lands —yet in fact, the Company has paid out of the debenture money subscribed by the public thousands of pounds by way of the brokerage charges in connection with the sale of the debentures. The report states: “This wrong use of debenture funds is, perhaps, the most potent single factor in bringing the Company to its present position. That position is that the Company cannot carry out its existing obligations to its debentureholders without the assistance of funds procured by the sale of further debentures. The forest lands acquired by the Redwood Company wer quired by the Redwood Company were purchased, partly, from Beulah Land Company, and partly from McArthur. “McArthur is the promoter, director and principal shareholder of the-Red-wood Company. He also held the controlling interest, as shareholder and managing-director, of the Selwyn Company, and the Selwyn- Company had 75 per cent, of the shares of the Beulah Land Company. The Wynsel Timber Company referred to in the report is the successor of the Selwyn Company. Edgecumbe Forests Ltd. and Kotahi Lands Ltd., the two other companies referred to were connected with the Redwood Fotests Ltd. by important transactions .during 1930. Modern Homes Ltd. is also connected with the group, and was used in 1930 by McArthur to facilitate important share transactions affecting Redwood Forests Ltd., Selwyn Timber Company, Ltd., and Edgecumbe Forests, Ltd. Overana Land Company, Ltd., is another company of the group. LIBEL SETTLEMENT. Members will read from the report

that evidence was given to the Commission' of payments out of the debenture holders’ moneys of large sums to McArthur as preliminary expenses; of expenses of visits to India to conduct a bond selling campaign there; and of how McArthur used his position as director to induce the Company to pay the sum of £5OOO, being the costs of a libel action instituted by him personally in India, despite the fact that the other directors had previously cabled him that he was to take the case at his own expense, and that they declined to allow him to use the Company’s name in a law suit. There is also evidence that when McArthur was unable to pay calls on his shares, he induced the Company to put him in funds for the purpose by paying him, as vendor of lands purchased by the Company, the balance of the purchase price.

The report also gives other examples of extravagance and mis-man-agement, and goes on to show how, when the financial position of the Redwood Company was becoming desperate, and it was being pressed for payment of the balance of the purchase money of the lands purchased, by its mortgagees, a reorganisation was effected, whereby the Company was to purchase additional lands, and each debenture holder was to become entitled to two acres for his debenture in place of one acre under the original scheme. This reconstriiction. wais approved by the debenture holders, but the methods by which such approval was obtained is shown to be open to strong criticism. The report also shows that additional lands to be purchased with the bondholders’ money were in the name of Kotahi Lands Limited, and that an option to purchase was granted by Elgecumbe Forests, Ltd., and that McArthur and his associates -were financially interested in such companies. This reconstruction scheme temporar-

ily lifted Redwood Forests, Ltd., out of its financial difficulties for, as a part thereof, the original scheme whereby £2l out of each debenture was allocated as an Investment Fund and a realisation reserve, was altered, and only £7 out of each debenture was appropriated for such investment, and the Realisation Fund and the other £l4 was handed over to Redwood Forests, Ltd. I will not go into further details as to the contents of tho report, but will content myself with saying that it discloses a state of affairs which, in my opinion, clearly demonstrates the need for further investigation. NEED FOR PUBLICITY. Mr Coates read the following concluding section of the report:— “The transactions detailed m the report begin in 1925. Most of them lie in the period between 1925 and 1930. Many of them have been the subject of inquiry by interested parties, and there have been several attempts to procure a further inquiry, and to secure a reversal of some of the transactions. Some of the points raised have been keenly debated, and strong feelings aroused. New interests have arisen, and older interests have tended to weaken. New trustees are earnestly endeavouring to maintain and improve the position for the debenture holders. These aspects of the situation suggested to us that there was much to be said for the policy of leaving the problem where it is and allowing the interested parties, if they wish, to seek their own remedies. Our minds have been exercised by these considerations, and a strong inducement to act on them was afforded by our desire to avoid even the appearance of victimising the principal party in the series of transactions. Certain contrary considerations have, however, led us to conclude differently. The first is that unchecked and undisclosed transactions lead to a gradual lowering of the standards of commercial morality. Their continuance in this case has been possible only by the fact that a policy of compromise and private settlement without publicity has been followed and in many cases, an inquiry has been successfully burked. It is possible that there are other companies whose affairs show transactions and policies as reprehensible as those of New Zealand Redwood Forests, Ltd,, but, if so, our . attention has not been directed to them.” “In the whole course of our inquiry we have found nothing at all comparable with the foregoing facts and transactions in relation to any existing company. The only comparable case is that of a group of companies which ended in liquidation in 1930, and which will be referred to in our final report. That inquiry culminated in a law suit, which would have exposed the whole scandal, but the matter was settled by a private compromise and did not reach a hearing in court. It is probable that, if the matter had then been properly ventilated in healthy publicity, the subsequent history of company promotion would have revealed higher standards and more honest methods. Secondly, it is desirable to safeguard the position of the existing debenture-

holders, while avoiding any necessity for the continued sale of debentures to other individuals, whose investments might be subsequently endangered. Some of the funds which appear to have been misapplied should be recoverable to the existing debenture holders without the necessity of drawing into the net new investors from India or elsewhere. Finally, certain of these companies ,are interrelated by their transactions with some of the companies listed in the schedule of. the Companies (Special Investigations) Act, 1934. In these circumstances we have no doubt as to where our duty lies. We have no discretion to compromise public interests, and we believe that such interests demand a full inquiry.” CIRCULAR “MESSAGE.” WELLLINGTON, September 5. Copies of “a message to debenture holders,” issued by the Investment Executive Trust of New Zealand, Ltd., were received by members of Parliament, including Ministers, to-day.- An attached circular states: “The Minister of Finance, yielding to pressure brought to bear upon him by our opponents, has effected a stranglehold on the Trust by refusing to allow it to pay interest to debenture-holders.” A.later circular states: “The only remedy for political evil is political cure. I suggest you write to the member of Parliament for your district at once and ask him if he will put the enclosed questions to Mr Coates, and demand an answer.” Nineteen quqestions are then set out. Presumably copies of the circular and the “message” have been sent to Members in anticipation of the debenture-holders in the Trust acting on the advice given. The circular is signed by W. A. Pilkington, Chairman of the Trust, while the message is signed by W. McArthur, managingdirector of the Trust.

INSPECTORS GET BUSY. AUCKLAND, September 6. The inspectors appointed to investigate the affairs of companies named in Parliament last night began work this morning. No other information is available, the inspectors being officers of the Court. A lengthy statement by M. H. Hampson, who was mentioned in the Commission’s second report, was issued to-day, and is being posted to all newspapers.

N.S. WALES ENQUIRY. WHERE THE MONEY WENT. [BY CABLE—-PBESB ASSN. —OOPYBIGHT.J SYDNEY, September 5. At the Companies Commission, Mr Monahan, K.C., asked Alcorn to explain what became of fifty thousand pounds that was paid by the Investment Executive Trust of New Zealand for debentures in the Sterling Company. Alcorn was also asked whether any of it went to reconditioning the Pacific Exploration Coy’s, yacht. Alcorn said that the Sterling Company took up ten thousand shares in the Pacific Exploration Coy., but when the Investment Executive Trust’s business grew so rapidly, McArthur recognised the impossibility of conducting exploration work. He, therefore, took over the yacht for his private use. The Commissioner: What did he pay for it? Alcorn: Judo not know. He bought it at cost price. Some of “our friends the enemy” insinuated that McArthur got the yacht for a song, but that was not true.

Mr Monahan: Considering that you do not know what was the price, you can’t dispute the insinuation! At a meeting on June 1, 1932, you resolved to execute a series of fifty debentures at one thousand pounds each. What were.they for? Alcorn: To finance the Sterling Investments Coy., which had fifty thousand pounds worth of assets, put in by McArthur. Mr Monahan: Then there was a real transaction?

Alcorn: Yes;, definitely. Sterling Investments purchased the assets of McArthur. There was the Goode Estate. There was the debenture payment from the Bank of New Zealand for the whole Selwyn assets. Mr Monahan: It was protected with debentures of the Investment Executive Trust? Alcorn: Yes. It was in the interests of the Investment Executive Trust. Mr Monahan: Was the debenture capital of the Investment .Executive Trust used to buy the assets of the Selwyn Timber Coy., which was insolvent? Alcorn: The bank had called up the company’s overdraft. Mr Monahan: What were the assets of the Selwyn Timber Company? Alcorn 1 We got a very up-to-date sawmilling plant, worth about thirtyeight thousand pounds, at McArthur’s estimate. Mr Monahan: Did you take his valuation without a check? Alcorn: We took it over from the bank for £llOO or £l4OO. The Commissioner: It appears to me that, towards the end of 1931 the company acquired 7500 fully paid up shares in New Zealand Redwood Forests, an interest in Modern Homes and twenty-two thousand shares, paid to £6/10/-, of Edgcumbe Forests, together with three thousand of the same Company’s shares from T. R. McArthur? Alcorn: Yes. The Commissioner; On December 23, it was resolved that the Company confirm the purchase of the interest of the late Mrs E. M. McArthur, and of Goode, her father? Alcorn: Yes. The Commissioner: Yet the Company did not confirm the Modern Homes purchase. Apparently, the business was done outside the directors, and received confirmation o» July 5, 1932, at a shareholders’ meeting? Alcorn: Yes. The Commissioner: These shares were simply handed over to the Company, which accepted and issued debentures to pay for them? Alcorn: There were some complaints about those shares. The Commissioner: The Investment Executive Trust took up the debentures of Sterling Investments Coy, and that is how these assets were paid for? Alcorn: Yes—out of debenture money. Replying to Mr Monahan, Alcorn said that all the entries of these transactions were in the Sterling Investments Coy. books.

Mr Monahan: I have received advice from New Zealand the only

| records consist of a few old cheques J and lodgment books. MCARTHUR’S “OTHER NAMES.” The Commissioner said it seemed to him that unless McArthur’s evidence threw new light on the position, that most of these companies were other names for McArthur, who controlled them absolutely, and Alcorn, though he was a director, did not know much about the transactions. Alcorn replied that if he had not approved of McArthur’s plans, he would not have consented to them. Mi" Monahan, K.C., proceeded to examine Alcorn regarding the payments of the Sterling Coy’s funds to various persons. Alcorn said that he remembered two hundred and fifty pounds being paid to Glover Clark for propaganda work, but it was not to get the New Zealand Company Commission’s report stifled. Mr Monahan asked Alcorn the meaning of certain code names. Who or what is ‘Polab’? Alcorn: I don’t know, except it may be an anti-propaganda association. Mr Monahan: Who is ‘Polecat’ who received ‘instructions’? Alcorn: I think that is a joke. Mr Moflahan: You will find it not a joke! Mr Monahan: Who is ‘Anchor?’ Alcorn: I don’t know.

Mr Monahan: Isn’t your company Sterling Investments known as ‘Vestment’? Alcorn: Yes. I think ‘Guidance’ is the code name of The New Zealand Sharebrokers Trust, which is another associated company. Alcorn added that the reason for the use of code names was to prevent his and McArthur’s names becoming public, as they were subject to propaganda attacks. He stated that, eight or nine thousand pounds was advanced to publish “The Investors’ Review” which was used to rebut propaganda against the Trust. Alcorn told Mr Monahan that the Sterling Investment Coy. loaned a person named A. H. Anthony £1250 to assist him with an agency for the importation of motor cars. Alcorn understood that this loan was made without security. Later, the Company advanced an additional £750. This money actually came from the Investment Executive Trust. Alcorn said that the First Mortgage Freehold Security Company of New Zealand was formed in 1924. He practically controlled it. The Investment Securities Association took up debentures to the value of nineteen thousand, and sold them again to the public. He (Alcorn) did not put in any cash, but he had a liability of about one thousand pounds. Mr Monahan: You have issued yourself nineteen thousand shakes! Has there been any profit? Alcorn: A very small profit. Mr Monahan: If there is any profit, it belongs to you? Alcorn: Yes, and if there is any liability, I have to pay it. He added that about nineteen thousand pounds worth of capital had been raised by sale of debentures, and the debenture holders received 61 per cent, half-yearly for six years. Mr Monahan: What have your profits been?

Alcorn: I do not know what they were last year. LOANS TO SELF. Questioned about Freeholders Limited, Alcorn said that he and Mrs Alcorn held most of the shares. Mr Monahan: In effect, you lent yourself and Mrs Alcorn the £6,400 capital? Alcorn: Yes. Alcorn then explained his association with the British Medical Trust. He said that Mclnnes and Major Jarvie, M.L.C., were also interested. He believed that Mclnnes sold' some shares to a man and his wife at Thirroul for'£2ooo, and he understood that £4OO brokerage was paid. Mr Monahan: The British Medical Trust invested fifteen hundred pounds in Amalgamated Buildings in a certain New Zealand town? Alcorn: Yes. The Commissioner: I understand that the fifteen hundred was for a picture theatre. Did you regard that as a proper investment? Alcorn: I was surprised. Alcorn was next examined in regard to the Transport Mutual Company. He said that it had not done any business so far, as the New Zealand legislation insisted upon a deposit of ten thousand pounds. Its capital of one hundred thousand pounds had all been taken up by the Investment Executive Trust, and about sixty thousand shares of one pound each had been taken up. Alcorn was then asked to explain the position of the Investment Transport Mutual Coy., which is a subsidiary company. He said that the Investment Executive Trust bought shares in this new company. The first director's were two girls, Miss Dunn and Miss Horley. They held office until a properly constituted meeting was arranged. Alcorn himself became a director. The Commissioner: This company had no assets. Did you think that, under .the terms and conditions of the debenture, you were keeping faith with the public by promoting a subsidiary company? Alcorn: Yes. It was quite advantageous. As a company it now has all assets and no liabilities. Mr Monahan: Was this company not another of the ‘dummies,’ and McArthur directed what was to be done? Alcorn: I think that the Investment Executive Trust had complete control of the company. Mr Monahan: While these two girls were on the board, this company laid out £21,525 in British National Trust ’ Debentures ? Alcorn: It would have been done at the direction of the Investment Executive Trust. The Commissioner: Now you cannot invest debentures. Nominally, you got fifty thousand pounds from the Investment Executive Trust, and of that you have put back twenty-one thousand pounds in the British National Trust debentures. Why? Alcorn: To enable the Investment Executive Trust to pay share capital in the insurance company. Victor Mclnnes was recalled, and was asked about a strictly confidential letter concerning which he did not desire to show his hand “upstairs.” He explained that “upstairs” meant the Trust. He denied that the need for secrecy was animated by the fact that another broker had put through a deal for 11 per cent., and he and McArthur had put another 32 per cent, into their pockets, and had put in a fictitious brokerage note showing 5 per cent upstairs. He declared he was not ashamed of anything. He also regarded the British

Medical Trust’s £l5OO investment in New Zealand as a proper one, despite the terms of the prospectus. The Commission adjourned till tomorrow. SALARY DRAWINGS ‘ (Rec. September 6,2 p.m.) SYDNEY, September 6. Mclnnes handed to the Commission a document relating to his salary drawings. x Mr. Monahan: To what extent did you deal with these companies in New Zealand; the old and the new series. Mclnnes: Approximately £400,000. ; Mr. Monahan: Your commission on that would be £40,000. Mclnnes: Yes, approximately. I did not get the extra 2| per cent, in New Zealand. All the earnings were left in New Zealand. Mr. Monahan later asked Mclnnes to what extent he had done business in Australia for the Southern British National Trust. ‘ Mclnnes: Approximately £200,000. Mr. Monahan: So you have had about £20,000. Mclnnes: Yes. Mr Monahan said he had been asked to* obtain a statement from Mclnnes to the effect that the British Medical Investment Trust had no connection with the British Medical Association. Mclnnes said he was not in a position to do so, as he had been told that the secretary of the British Medical Association had approved. No official information had been obtained on the point, but Major Jarvie had told him such was the case. Mr. Monahan: Who told Jarvie? Mclnnes: I think the name he mentioned was a Mr. Hunter, whom I was told was secretary of the British Medical Assn. Mr Monahan: Did it occur to you that such, a name would be objected to by the old reputable members of the medical profession? Mclnnes: No. The name was adopted because we intended to sell investments to medical men. Mr Monahan: 1 suppose you hoped unsuspecting people would associate the company with the British Medical Association. Mclnnes: No. Giving details of the brokerage paid by the British Medical Investment Trust, Mclnnes said his company had been unable to handle the business, and the brokers’ business had been conducted by the British Consolidated Investments Ltd. That company had received £4OO brokerage fees. Brokerage was paid as soon as the shares were applied for, even though only twopence had been paid to date on many shares. (Proceeding).