Further Revelations in High Finance

Manawatu Times, Volume 59, Issue 213, 6 September 1934, Page 7

Further Revelations in High Finance

Extravagance and Mismanagement Alleged Affairs of a Timber Company

Per Press Association. WELLINGTON, Last Night. Tho second interim report of tho Companies’ Commission refers to New Zealand Redwood Eorests, and says: “This company is one of the numbor of companies which will bo referred to in the final report under the general description of “Land Utilisation Companies.” It is one of the class which raises the bulk of its capital by the issue of so-called “bonds” or debentures. The prospectus contains the statement that the Now Zealand Redwood Company had, at the date of tho prospectus, purchased three valuable properties and a locality plan showed the site as being close to Putaruru on the Auckiand-Kotorua railway and having a total of approximately six miles of railway frontage. The prospectus states that McArthur, one of the vendors, had applied for and had been allotted 10,150 shares in the company and that the Selwyn Timber Co., Ltd”, one of the vendors, had applied for and had been allotted 12,500 shares in the company. The statement is made that the directors had allotted 30,000 shares paid up to 10s a share. The company had authorised capital of £40,000 in 40,000 shares of £1 each and the prospectus states that preliminary expenses of and incidental to the formation and establishment of the company and until the company should commence business, were estimated to amount to 2$ jer cent, of the nominal capital of the company. Calculation shows this estimate of the preliminary expenses. We have pointed out that, the Eedwood Company has subscribed sufficient capital to pay (inter alia) the •expenses of this debenture issue, including brokerage and commission, and that under the heading, “purposes of this issue,” it sets out the allocation of £35 of each debenture with no refer#nce to “brokerage.” Nevertheless, the company has made substantial payments by way of expenses of dcbcntuie issue brokerage and commission,, and has paid these out of debenture money, treating these payments as a first charge upon debenture moneys as received. These payments amount in the aggregate to many thousands of, pounds being, according to evidence submitted to us, over 15 per cent, of the debenture mAney received. This is a wrong use of debenture .funds and is perhaps the most potent single factor in bringing the company to its present position. “That position is r.hat the company cannot carry out its existing obligations to its debenture-holders ■without assistance of funds procured by the sale of further debentures.

nursery were in arrears. It is true that lapses of debentures by non-pay-ment of instalments were heavy, and this was a substantial contributing cause to the trouble. “On the other hand, however, substantial sums paid by debenture holders in Australia and India seem to have been wasted by extravagance, mismanagement and unjustifiable payments, whilst heavy brokerage had been made a first charge upon debenture holders’ money.” Ecferring to tho present position of the, Eedwood Co., the report reads: “Finally wc have evidence that in order to carry on its present work and complete its present commitments, the company must either sell more debentures or, if possible, borrow. It has made arrangements to sell debentures through Sterling Investment Co. (New Zealand) Ltd., and has sold many debentures in this way in the last two years. From tho point of view of New Zealand’s credit overseas it is an exceedingly regrettable iact that most of these have been sold in India. We arc of opinion that this is a most reprehensible policy having legard to the present position of the company. Arrangement with Sterling Co. made on Ist. September, 1933, for the sale, of Eedwood Co.'s debentures gives selling rights to Sterling Co. and permits that company to buy debentures from Eedwood Co. at a substantial discount. As Redwood Co. had no capital or other funds to pay this discount or commission, it is obviously deducted from debenture money. “We recommend an investigation into the affairs of this group of companies because we consider firstly, that it may reveal the necessity and means of protecting the debenture holders in future and secondly, because there is strong presumptive evidence that money which may be recovered for the benefit of the debenture holders, has been wrongly disbursed from the company’s funds.”

Air. Alonahan: Was the debenture capital of the Investment Executive Trust used to buy lho assets of the Sclwvn Timber Company which was insolvent? Alcorn: The bank had called up the company’s overdraft. Air. Alonahan: W’hat were the assets of the Selwyn Timber Company? Alcorn: W’e got a very up-to-date sawmilling plant, worth about £38,000 at McArthur’s estimate. Air. Alonahan: Did you take his valuation without a check? Alcorn: We took it over from tho bank for £.llOO or £I4OO. 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 Atodcrn Homos and 22,000 shares paid to £6 .10s of Edgcumbc Forests together with 3000 of the same company’s shares from T. E. AlcArthur. Alcorn: Yes. The Commissioner: On December 23 it was resolved that the company confirm the purchase of the intorest of the late Airs. E. AI. AlcArthur and of Coodc, her father. Alcorn: Yes. The Commissioner: Y"ct the company did not confirm tho 'Alodcrn Homes purchase. Apparently the business was done outside the directors and received confirmation on July 5, 1932, at a shareholders’ meeting. Alcorn: Y'es. 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 and that is how these assets were paid for. Alcorn: Yes, out of debenture money. Replying to Air. Alonahan, Alcorn said all entries of these transactions were in Sterling Investments’ books. Air. Alonahan: I have received advice from New Zealand that the only records consist of a few old cheque and lodgment books. In Oother Words, McArthur’s The Commissioner said it seemed to him that unless AlcArthur’s evidence threw new .light on the poistion, most of these companies were other names for AlcArthur who controlled them absolutely and Alcorn, though director, did not know much about the transactions. Alcorn replied that if ho had not approved AlcArthur’s plans lie would not have consented to them. Air. Alonahan proceeded to examine Alcorn regarding payments from Sterling’s funds to various persons. Alcorn said he remembered £250 being paid Clover and Clark for propaganda work but not to get the New Zealand Commission’s report stifled. No Joke, Says Counsel. Air. Alonahan asked Alcorn the meaning of certain code names. Who or what is “Polab”? Air. Alonahan asked. Alcorn: I don’t know except it may be an anti-propaganda association. - Air. Alonahan: Then who is “Polecat” who received instructions? Alcorn: I think that is a joke. Air. Monahan: You will find it is not a joke. Who is “Anchor”? Alcorn: 1 do not know. Mr. Alonahan: Isn’t your company Sterling Investments known as “Vestment”? Alcorn: Yes. I think “Guidance” is the code name of the New Zealand Shareholders’ Trust which is another associated company, Alcorn added that the reason for the use of codo names was to prevent his and AlcArthur s names becoming public as they were subject to propaganda attacks. Eight or nine thousand pounds was advanced to publish the Investors Review which was used to rebut propaganda against the tru3t. Alcorn said the First Alortgage Frcehold Security Company of New Zealand was formed in 1924. He practically controlled it. Investment Securities Association took up debentures to tho value of £19,000 and sold them again to the public. Alcorn said he did not put in any cash but he had a liability of about £IOOO. Air. Monahan: You have issued yourself 19,000 shares. Has there been any profit? Alcorn: A very small profit. Afr. Alonahan: If there is any profit it belongs to you? Alcorn: Y'cs, and if there is any liability I will have to pay it. He added that about £19,000 worth of capital had been raised by the sale of debentures and the debenture holders received 6} per cent, half-yearly for six years. Air. Alonahan: What have your profits been? Alcorn: I do not know what they were last year. Questioned about Freeholders Limited, Alcorn said he and Airs. Alcorn held most of the shares. Air. Alonahan: In effect you lent yourself and Airs. Alcorn £O4OO capital? Alcorn: Yes. £4OO Brokerage on £2OOO. Alcorn then explained his association with British Alcdical Trust. Ho said Mclnnes and Alajor Jarvie were also interested. He believed Melnnes sold some shares to a man and his wife at Thirroul for £2OOO and understood £4OO brokerage was paid. Air. Alonahan: The British Medical Trust invested £ISOO in Amalgamated Buildings in a certain New Zealand town. Alcorn: Yes, The Commissioner: I understand the £ISOO was for a picture theatre. Did you regard that as a proper investment? Alcorn: I was surprised. Alcorn was next examined in regard to Transport Mutual Company and said it had not done any business so far as

“We refer to statements relating to t.lie preliminary expenses and estimating their total at £IOOO. The statutory report and balance-sheet Tiled with the Registrar of Companies show that bv June, 1926, the preliminary expenses of the company had been paid to the amount of £5095, whilst it was estimated that there was a. further sum of £2OOO to be paid under this heading. "It is difficult to understand the necessity for this expenditure for (with negligible exceptions) the only shares subscribed for were those allotted to subscribers of the memorandum and to Seiwyn Timber Company and its nominees in exchange for land taken over by the Redwood Company. “We have evidence that this £7OOO preliminary expense includes substantial payments to McArthur out of money paid in by debenture holders, and that McArthur’s claim to this money is in respect of travelling and other expenses incurred by him (prior to the formation of the Redwood Company) on visits to America and Australia to procure information and make arrangements preparatory to the formation of the company. “There is no disclosure of this alleged claim in the 1 prospectus. “On the issue of the prospectus of the Redwood Forests, the three parcels of land to bo acquired and planted were subject a mortgage of over £II,OOO, and McArthur was personally liable for this sum. There is no disclosure of this fact in the prospectus. The parcels of land described in the prospectus were all contiguous, and it was fairly heavily encumbered. The boundaries to be conveyed to the Redwood Company by Beulah Company were not defined, and the block in McArthur’s name was native land, the title to which required a great deal of legal work and consideration by the Native Land Court before any dealing with it could be registered. Nevertheless, Redwood Company straightway exchanged cheques totalling over £15,000 with Seiwyn Timber Company. These represented payments of instalments on land on the one hand and payment of 10s shares on about 31,000 phares of £1 each allotted to Seiwyn Timber Co., Ltd., and Its nominees on the other hand. With no change in this position other than the receipt of debenture moneys, treeplanting on a large scale Was undertaken on this land and a substantial amount of purchase money was paid in cash to the Seiwyn Company to enable it to pay calls on shares held in McArthur’s name. “During 192 S and 1929 the Redwood Company’3 financial position became desperate. The balance of the purchase money had fallen due as had the riiortgage on the lands. Neither the Redwood Company nor. the Seiwyn Company could raise the money. The mortgagee was threatening to exercise his power of sale, the bank had stopped the company’s- credit, anil the wages of the workmen at the company’s

How McArthur Acquired His Yacht

COMMISSIONER’S CAUSTIC CRITICISM United Fress Association— By Electric Telegraph —Copyright. Received Wednesday, 7 p.m. SYDNEY, Sept. 5. Further questioned to-day before the Royal Commission into Trust Companies, C. C. Alcorn said that £125 had been paid out of the accounts of the Southern British National Trust to Major jarvie M.L.A., on McArthur’s instructions. ’ Jarvic was to have gone on the staff of this trust and had helped in connection with the opening of the Trust Building in Sydney, when he had supplied a list of guests to be invited to the function. 'Alcorn also said that the yacht purchased by the I’acific Exploration Company had been sold to McArthur in consideration of a transfer of debentures through some of the associated companies. It had been Pacific Exploration’s idea to go in for exploration in the Pacific, but the company had been unable to do that. Replying to Mr. Monahan, who. is assisting the Commissioner, Air. Justice Hal so Rogers, Alcorn said that a cheque for £60,000 had been drawn on Sterling Investment Company in February, 1934, in favour of McArthur. It had been in payment for debentures McArthur had held in the Sterling Company. McArthur had transferred his interests, in the various companies to tho Sterling Company to counteract attacks being made on him by outside companies. Air. Monahan: So you were redeeming your own debentures) Alcorn: Yes. Mr. Atonahan asked Alcorn to explain what became of the £50,000 that was paid by the Investment Executive Trust of New Zealand for debentures in the Sterling Company. He also asked whether any of it went to reconditioning the Pacific Exploration Company’s yacht. Alcorn said that the Sterling Company took up 10,000 shares in Pacific Exploration, 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: I don’t, know. I know ho bought it at cost price. Some of our, friends the enemy insinuated that AlcArtliur got the yacht for a song, but that was not true. Air. Alonahan: Considering that you do not know what was tile price you cannot dispute the insinuation. Juggling Shares. Mr. Alonahan: At a meeting on June J, 1932, you resolved to execute a series of 50 debentures at £IOOO each. What were they for? Alcorn: To finance Sterling Investments which had £50,000 worth of assets put in by McArthur. Afr. Alonahan: Then there was a real transaction ? Alcorn: Yes, definitely. Sterling. Investments purchased the assets of AlcArthur. There vns the Goode estate. There was the debenture payment from the Bank of New Zealand lor tho whole of the Selwyn assets. Air. Alonahan: It was protected with debentures of the Investment Executive Trust?

Alcorn: Yes, it was in the interests of the Investment Executive Trust.

New Zealand legislation insisted upon a deposit of £IO,OOO. Its capital was £IOO,OOO and all had been taken up by Investment Executive Trust and about (10,000 shares of £1 each bad been taken up. Alcorn was then asked to explain the position of Investment Transport Alutual Company which was a subsidiary company. He said Investment Executive Trust bought shares in this new company. The first directors were two girls, Aliss Dunn and Aliss Horley. They held office until a properly constituted meeting was arranged. Alcorn himself became a director. The Commissioner: This company has no assets. Did you think under the terms and conditions of the debentures you were keeping faith with the public by promoting a subsidiary company? Alcorn: Yes. It was quite advantageous as a company. It now lias all assets and no liabilities. Air. Alonahan: Was this company not another of the dummies and AlcArthur directed what, was to be done? Alcorn: I think Investment Executive Trust had complete control of the company. Air. Alonahan: 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 Investment Executive Trust. The Commissioner: Now you cannot invest debentures. Nominally you got £50,000 from Investment Executive Trust and of that you have put back £21,000 in British National Trust debentures. Why? Alcorn: To enable Investment Executive Trust to pay share capital in the insurance company. Alcorn told Mr Alonahan that Sterling Investments loaned a person named A. H. Anthony £1250 to assist him with nn agency for the importation of motor-cars. Alcorn understood the loan was made without security, Later Anthony was advanced an additional £750. This money .actually came from Investment Executive Trust. Not Ashamed

Victor AlcTunes, recalled, was asked about the strictly confidential letter concerning which he did not desire to show his hand “upstairs.” He explained “upstairs” meant the trust. He denied that tho need for secrecy was animated by the fact that another broker had put, through, a deal for 1-i per cent, and he and AlcArthur had put, the other 3| into their own pockets and put in a fictitious brokerage note showing 5 per cent, “upstairs.” He declared ho was not ashamed of anything. He also regarded British Aledical Trust’s £ISOO investment in New

Zealand a proper one, despite the terms of the prospectus. The Commission adjourned till tomorrow. Trust Complains of Political Pressure QUESTIONS FOR AIR COATES Per Press Association. WELLINGTON, Last Night. Copies of a “Alcsage to Debentureholders,” issued by Investment Executive Trust of Now Zealand, Ltd., were received by members of Parliament, including Ministers, to-day. An attached circular states: “The Alinister of Finance is yielding to pressure brought to bear upon him by our opponents and has effected a stranglehold on the trust, by refusing to allow it to pay interest to dcbcnturcholders.” Later the circular states: “The only remedy for the political evil is a political cure. I suggest you write the member of Parliament for your district at once uud ask him if he will put the enclosed questions to Air Coates and demand an answer.’’ Nineteen questions arc then set out'. Presumably copies of the circular and [“message” have been sent to members in anticipation of debentureholders in the trust acting on the advice given. The circular is signed by \V. A. Pilkington, chairman of the trust, while the message is signed by W. AlcArthur, managing director of the trust.