SENSATIONAL REPORT

Nelson Evening Mail, Volume LXVI, 10 August 1934, Page 5

SENSATIONAL REPORT

SITUATION REVIEWED COMMISSION’S OBSERVATIONS INVESTMENT TRUSTS IMPORTANT DISCLOSURES, In yesterday’s issue main features in the Company Promotion Commission’s report were given. Further details arc as follows: “In our enquiries we have gathered much information relating to a group of companies which includes investment trusts and affiliates of various types,”! states the report. “These companies, mostly being registered in Auckland, have’ been formed and operated by a comparatively small group of persons. The names of these persons appear freely in the lists of members and directors of these companies, and there is little room for doubt that the common ownership and control thus evidenced lias made possible and lias facilitated developments and transactions that call for close scrutiny.” After sketching the definition and economic function of investment trusts the report continues: “A comparison of the constitution and policy of the Investment Executive Trust of New Zealand, Ltd., which exemplifies the contractual type of trust, with the British type will serve to reveal the structural weaknesses which have made possible (or at least facilitated and encouraged) the dangerous and objectionable practices referred to in greater detail in parts 111. and IV. of this report. CAPITAL COMPOSITION “The capital resources of investment trusts are procured by means of ordinary shares, preference shares, and debentures. The ordinary rule in trusts of the British type is that at no time should the debenture capital exceed the share capital. The total capital of 63 such trusts is distributed as follows:

Ordinary shares 34,550,000 'Preference shares 36,324,000 Total share capital 70,884,000 Total debenture capital 45,192,000 “From this it wiil be seen that in practice the debenture liability is substantially less than the total share capital. The capital composition of the Investment Executive Trust of New Zealand, Ltd., is in marked contrast with the British practice. The nominal capital is £100,000; but the prospectuses so far issued provide for debentures totalling £4,000,000. The total nominal capital is one-fortieth of the total nominal value of the debentures which may be issued. The paid, up share capital, as at 17th October, 1933, totalled approximately £30,000 (ordinary £24,000, preference £5675); but the debenture issue totalled £493,290, or more than 16 times the share capital. Of the ordinary capital of £24,000, two individuals—J. W.*S. McArthur and C. G. Alcorn—hold £22,575. The control of debenture funds totalling nearly £500,000 is in their hands. “In the. same way., other contractual trusts operating in New Zealand show a small ratio of share capital to debenture liability. SECURITY “In case of trusts of the British type, the security to debenture holders consists of the total assets of tho under-

taking. The debenture capital is backed by the whole of the paid-up share capital of the company, and this is normally in excess of the debenture capital. A debenture carries a fixed rate of interest, and ' is mortgagesecured against the whole of the resets of the trust. “A debenture of the Investment Executive Trust of New Zealand, Ltd., is a contract to pay over a certain proportion of the net revenue proceeds derived from investments made with the debenture funds. These appear to bo reduced before investment by capital charges in respect of brokerage and administration costs, which' have totalled up to 10 per cent, of the nominal value of the debentures. Debentures holders may require the repayment of their debentures if the average interest over any two successive years falls below 3 per cent, per annum, or on the winding-up of the company; but the assets of the company are not charged by debentures of any series. The share canital of the company is free from liability in respect of the debentures, hence the | security behind- the debentures in any | series consists simply in the securities and funds held to the credit of the series, and arising front transactions with the funds provided by the deben- , ture holders themselves. “A further essential difference having relation to the question of security is the appointment of trustees. Many, if not all, British trusts appoint trustees with power to inspect security portfolios, and power of audit. While the power of the trustees will be cir--1 cumseribed by the conditions of the trust deed, ilrtir appointment does provide an additional safeguard against abuse. The Investment Executive Trust of New Zealand appoints no trustee, and the 'debenture holders have no powers of audit. “An essential bearing on the facts which are disclosed in parts 3 and 4 of the.report is this: By the provision of a small share capital, a small group of individuals has obtained control over a large volume of funds, and used i these unhampered by trustees or by incurring any risk of loss of their own ' capital. There is nothing to prevent them from manipulating the funds to their own advantage; but even apart from such possible manipulation they stand to gain a very high rate of rei turn on their own capital, while avoidj ing any loss which may result from using debenture funds in speculative investments. .In such circumstances it becomes all the more imperative that tliose who direct the policy should be men of undoubted integrity. INVESTMENT POLICY “Two basic canons of investment policy should bo diversification of investments and avoidance of speculative investments. As a general principle, securities should not be purchased save in established undertakings witii ample assets, and which have been proved by experience to be sound investments. The Executive Trust of New Zealand, Ltd., violates both these canons. Its debentures certificates provide that on the completion of the issue of debentures, not more than 10 per cent, of the funds contributed shall bo in any one security; but this provision does not apply until the issue is completed. Hence it can be deliberately evaded by lenabling from completing the issue, and the appearance of security through diversification is illusory. The existence of a large number of subsidiary or related companies facilitates such evasion, for it is possible to placo investments in several such concerns, and then divert them to a particular object which may be selected primarily because it furthers the interests of the directors themselves. The interests of the debentureholders are subsidiary. “Investment trusts which are mindful of the interests of those who invest with them and are anxious for their own reputation should refrain from the I

establishment of subsidiary or interlocked companies, except for such ancillary purposes as the marketing of their debentures. The Investment Executive Trust group comprises at least 15 companies, winch are connected by common shareholders or directors, share holdings in each other, or other forms of financial interdependence. No elaborate argument is required to demonstrate the openings which this gives to the use of the funds of the debenture-holders to serve the personal ends of those in control, or to obtain profits by way of commission; or the danger that the security of the debenture-holders may be steadily whittled away. “The second basic canon—avoidance of speculative securities—has also been flagrantly violated, for it will be shown that a considerable proportion of the funds of the debenture-holders has been used in the purchase and renovation of a building. This is certainly neither an established concern nor a proven enterprise ; but is definitely a speculative investment. It will be shown that the device of subsidiary or related companies has been used to facilitate this investment. At the same time, it has enabled the transaction to he undertaken in sucli a way as to throw the burden of risk on the debenture-holders, while leaving it open to the directors to enjoy any exceptional profits which might conceivably he realised. The de-benture-holders have no means of_ obtaining knowledge of the transactions directed to the purchase of this building, because they have no powers in regard to inspection of the portfolios of securities.” ORGANISATION OF COMPANIES Under the heading, “Organisation of Companies in the Investment Executive Trust Group,” Part 111. of the report says: “In this section we describe tne organisation of the 15 companies which comprise the Investment Executive Trust of New Zealand, Ltd., and its affiliates. We desire to point out that the respective lists of shareholders are not complete lists. We have chosen names that are common to most of the companies for the purpose of showing the intermeshing ownership and control. Concentration of control is effected through the holding of shares by one company in another: — (I)—The Investment (Executive Trust of New Zealand, Ltd.

“This is a public company incorporated in New Zealand in May, 1929. It is an investment trust following fairly closely the lines of what is known as a contractual trust company. Its present authorised ' capital is £IOO,OOO in 250,000 ordinary shares of 2s each and 75 ; 000 preference shares of £1 each. A prospectus, dated April, 1934, states that the paid-up capital is £29,970. According to the same document, its directors are J. W. S. McArthur, W.- A. Pilkington, and H. H. Pollard. In addition to the directors, its shareholders include G. G. Alcorn, Stanley Grange, Katherine I. Grange, Richard GloverClark, V. B. Mclnnes, Alcorn, Trower and Co., Ltd., the Investment Securities Association, Ltd., and Sterling Investments Company (N.Z.) Ltd. The prospectus referred to above offers ‘First, mortgage perpetual income debentures’ to a total of £4,000,000.” (2) —The Sterling Investments Company (N.Z.), Ltd. “This is a public company incorporated in October, 1930. It is an investment company of the kind which is hard to classify. Its- memorandum of association gives it power to carry out all kinds of financial operations. Its nominal capital is £50,000 in shares of £1 each. Its paid-up capital as at 28th March, 1934, is shown as £2350 14s. Its directors are shown as Charles Graham Alcorn, and Kenneth 0. Aekins. Its largest shareholder is the Investment Securities Association, Ltd., which holds 20.801 shares, whilst other shareholders hold, in the aggregate 206 shares. Its latest return filed at the Registrar’s Office on 28th March, 1934, shows the amount of debt due under mortgages as nil; but it has had at times mortgages and charges registered up to a maximum of £165,000.” (3) The Investment Securities Association, Ltd.—

“This is a private company incorporated in December, 1930. The capital is £IOOO, divided into 750 shares of £1 each, and 5000 shares of. Is each. According to its latest' return, its. shareholders are C. G. Alcorn, Elizabeth Roberta Alcorn, and Katherine Isobel Grange.” (4) British Nationallnvestment Trust,"Ltd'/ (Neiv "Zealand)— “This • was incorporated in November, 1931, under the. name of , ‘the Stock Exchange Corporation of New Zealand, Ltd.’; hut it subsequently changed' -its name- to the‘ above. This company is formed to..act as broker or trustee for any person or company, and as a promoter or founder of companies; also to take'full control or take part in the management of companies or undertakings. The latest return, filed in December, 1933, shows that Stanley Grange is the sole director. Its capital is £IOO,000 in 250,000 ordinary shares of 2s each, and 150,000 preference shares of 10s each. Of this, there is paid up £3185. Its shareholders include 0. G. Alcorn, S. Grange, J. W. S. McArthur, V. B. Mclnnes, R. Glover-Clark, T. R. McArthur, Investment Securities Association. Ltd., British National Trust, Ltd. (Canberra, New South Wales), and Southern British National Trust, Ltd.; of Sydney, New South Wales. . The maximum amount of charges registered by this company at any time was £IOO,000.” (5) The New Zealand Shareholders Trust, Ltd.— “This company was incorporated in December, 1931 Its objects include those which are common to investmenttrust companies; hut its primary purpose was nominally to act as an association of investors throughout New Zealand to provide information and protect their interests. Its capital is £60,000, divided into 100.000 ordinary shares of 2s ear,)], and 50,000 cumulative preference shares of £1 each. Its paid-up capital at April 9, 1934, is returned as. £lO7l. At the same- date it registered its total indebtedness in respect of debentures and charges at £264,000. The maximum of charges registered at any time is £500,000. Its directors are C. J. Lovegrove, R. S. Abel, and R. Glov-er-Clark. The largest shareholder is the Sterling Investment Company (New Zealand), Ltd., which holds 8779 out of 10.476 ordinary shares. Other shareholders are S. Grange and R. GloverClark.”

(6) Wynwood Investments, Ltd. — “This company was incorporated as a private company in August, 1930. Its capital, originally £IOO9, was increased to £IO,OOO in October. 1933. Its shareholders in April, 193i'2, were C. G. Alcorn 1. J. W. S. McArthur 1, Sterling Investments Company (New Zealand), Ltd., 988, and the Investment Securities Association, Ltd, 10. The latest return is dated March, 1934. and gives the shareholders as Stanley Grange 100, J. W. S. McArthur 9900. In December, 1933, this company registered as a charge a. debenture, issue of £100,090.” (7) Pacific Exploration Company, Ltd. “This is a. private company incorporated in May, 1932. Its original subscribers were Sterling Investments Company (New Zealand), Limited, 9,999

shares, and 31. Gregory, 1 share. The latest list gives Sterling Investments Company (New Zealand), Limited, 9,979, M. Gregory 1, C. G. Alcorn 10, and T. R. McArthur 10. There is evidence that the object of this comoany was to procure and finance the building of a somewhat luxurious seagoing ,yacht.” - i (B)’Farms and Farmlets, Ltd. '".7.L

“This was incorporated in August,1928, as a private company. The subscribers are W. C. Hewitt, solicitor, shares and his wife, Flo liewitt, 500' shares. The authorised capital was £I,OOO in shares of £1 each. Its objects are, in the main, those which one wouldexpect to find prepared for a small farming company; but it also has powers to deal in money, investments, securities, and property. Its capital was. increased;' in June, 1933, to £25,000, in shares- of £1 each. In May, 1934, the Registrar of Companies wrote to the office of the company at our request asking if any. of the shares in the increased capital had ' been subscribed, and received a-- reply* that information could not he given‘because the managing director was in Syd- • -ney. This company first gave ordinary chattel security to the National Bank of New Zealand over its farming assets. In June, 1933 it registered as charge £IOO,OOO in 500 hearer debentures of £2OO each. This company now ap-, pears as the principal shareholder - -in - the British National Trust-, Limited,. in-. eorporated in Canberra, Australia.—lt' holds 51,200 shares of £1 each in that. company.” •

(9) First- Mortgage Freehold Security Company of New Zealand, Ltd.

“This is a private company registered• in November, 1924. Its objects are tjie... carrying on of the business of financiers, ■ • financial brokers, issuing of debentures,., and receiving of money for investment. Its original capital was £I,OOO in shares of £l. each; but it was increased in March, 1930, to £IO,OOO in 6,000 sharesof £1 each and 80,000 shares of Is each. The principal shareholder is C. G. Alcorn, who holds 19,800 shares,.,The remaining 500 shares are. held by the Investment Securities Association,-,.-Limited,. Elizabeth R. Alcorn, Alcorn, j Trower, and Company. Limited, and R, S. Abel. In March 1925, this company, filed notice of charge by way of mortgage debentures to the amount of £109,000.”. : ,

(10) Tiie Transpbrt Mutual and General Insurance Company, Ltd,

•“This company was incorporated -inNovember, 1933, as a public company. The authorised capital is 100,000, in--100,000 shares of £1 each. The subscribers rto the memorandum were seven nominees or dummies' who " subscribed for one share each. In February, 1934, 60,000 shares of £1 each- wets' allotted to the Investment Executive Trust of New Zealand, Limited, and the statutory report filed on 21st February, 1934, showed that the Investment Executive Trust had naid up 10s a share-on these shares, or £30,000 in all, and lia'd also -laid up cash in advance of calls £1,500. Further reference will be''made later in this report to the use of, ‘duin-> my’ subscribers and ‘dummy’ directors in this company.” - (11) Southern British National Trust, Ltd.

“This'company was registered in Sydney, New South Wales, in January, 1933. It has a . nominal .capital of £500,000 and a paid-up capital of £97,500. It lias issued a 'prospectus-in New-South Wales offering for subscription debentures to the amount of £5,000,000. The principal shareholders in-the latest'annual list filed are W. A. Pilkington, 11. 11. Pollard, 11. C. Glasson, Madgc'Gregory,. Richard Glover-Clark, and J. W. S. ■McArthur,- the latter holding’l7,ooo- - The,, objects may be -statedbriefly as being to acquire and‘deal inall forms of securities and investments.The company, may be adequately described for our present purposes as being the equivalent, in Sydney of the Investment'' Executive - Trust- of New Zealand in Auckland. Its directors are W. A. Pilkington, 11. H. Pollard, and J. 1 W. S. McArthur. The close correspondence • between the directors and shareholders in the two companies shoiild.be noted.” (12) The British National Trust, Ltd. “This company was incorporated in January-,. 1933, at-Canberra, -Australia. The nominal capital- is £1,000,000 in shares of £1 each'. .-Of these 65,007,Jiave; been subscribed and £1 a share, called ,up, and the return at the r<?gistj»jfs ; office in May, 1933. shows these-shares as fully paid up. The seven subscribers to the memorandum of association this, company are again “dummies,” being clerks and secretaries in the offices“df; the above companies or their brokers and solicitors. These signatories ,arc fill, resident in. Auckland, and are therefore out -of tlieV.jurisdiction of the. and the state in which the 'company is; registered. The principal shareholders in the company are Thomas R. McArthur, O. G. Alcorn, J. IV. S. McArthur, and Farms and Farmlets, Ltd.” (13) V. B. Mclnnes and Company, Ltd. “This company was incorporated in New Zealand as a private company in May. 1932. Its capital is £IOOO, in shares of £1 each, the subscribers being;" V. B. Mclnnes 900 shares and the Investment:-, •Securities Association, Ltd.; 100 shiires.' Its objects ,are ..to act as broker, trustee, and agent,,also to ex''ercise many of the objects of investment trusts, and to act as director or '.njana? ger and to take'full control or part con* trbl of another company or business.” , r .(14) Alcorn, Trower and Ltd. “This company was incorporated in Wellington as a private company on June 24/1914. The solicitor registering the company was William C. Ilowittr Its capital is £3090 in shares of £1 each. The-subscribers were C. G. Alcorn and A. S. Trower, with 1500 shares each. On January 11, 1923, the share j, holders were returned as C. G.- Alcorn 1500, and Eliz. R. Alcorn 1500. On June 30, 1931, the company registered as barge three hearer debentures of £2OO each. It is a shareholder iti the Investment Executive. Trust of No\y eZaland, Ltd., and th e First. Mortgage Freehold Security Company of New, Zealand, Ltd; (15) Financial Publications,'Ltd. “This company was incorporated n,t Auckland as a public company in May; 1933. Its capital- is £SOOO, in. sharps ol £1 each. Tile" promoters and present directors are G. J. Lovegrove, R. S. Abel, and R-. Glover-Clark. This com; pany owns and publishes the ‘lnvest* it Review.’ a; monthly financial magazine published in Auckland.” TRANSACTIONS OF THE GROUP Part IV. of' the report deals with some transactions of the Investment Executive. Trust, group. ", " ,'/ “(1) The Sterling Investments-Com-pany (N.Z.), Ltd.,, seems to'fiave lrien for years a kind of clearing-house for transactions in which J. W. S. McArthur and companies controlled; by him are interested. We have, direct evidence of several transactions whereby threatened litigation or other adverse action against McArthur or olio of the other companies has been averted by a settlement effected by , payment by the Sterling Company. Several sugh transactions /relate td.'McAHJhurls .perT soilal liabilities- in relation vifr*

wyn i’i.'plbea-. Gonipany, Ltd.,; in. liquidation ahd New Zealand Redwood ,ForLtd. At a time when the paidto capital, of i the Sterling Irivestaients Ltd., was only £50,-it lent several "thousands bf pounds to the Selwvn .Tiinlier Conipany, Ltd., in liquidatiori. /During .1931. and 1932, the Sterling Company’s -paid-up capital was £SO 145,-whilst ori Ist September, 1932, it had registered with the Registrar oi Companies as mortgages or charges deVenture issues totalling £165,000. The Mest; filed return of the Sterling In.yestmerits Company (N.Z.), Ltd., shows its paid-up capital as £2350; but it has subscribed for shares of a nominal value ,of £10,883 in other companies included in the foregoing list. Of these £9979 is;in the Pacific. Exploration Company, Ltd.,.a company formed to finance the building of a luxurious yacht which : is now registered in the name of J. W. S. McArthur as owner. / “(2) The Transport, Mutual, and General Insurance Company, Ltd., illustrates the typical methods of the group. It was incorporated in November, 1933, and its memorandum of association and articles of association were signed by seven most obvious “dummies.” Four of., them are .girl clerks in the office of .companies in the foregoing group. The articles bf association provide that' the first three subscribers to tlie memorandum-, shall be. the first’ directors. They are, Margaret Muriel Duhfij- Marjorie jdawdey, and Henry Davenport .Williamson; who each signed a l ’, memorandum for one share. Then in February, 1934, the-Investment Executive Trust of New •Zealand,- Ltd., was allotted 60,000 shares of j£l each ,in the capital of the Transport, 'Mutual, and. General Insurance Company/ Ltd;,..and paid up 10s a-share, or £30,000 in all; The three ‘directors’ named above filed.their statutory report a month later, showing receipt of this £3o,ooo.from the Investment Executive Trust, together with a further £ISOO as advance in anticipation of calls, and they-showed as an approximately corresponding asset ‘sundry investments £30,500.’

'..YOUTHFUL “DIRECTORS”, . /.“We summoned, these three ‘director's’ to appear before us on 6th June, 1934. . Margaret Muriel Dunn deposed that she was 21 years of age. and that she had no experience of the requirements and forms of an insurance company; that ;Mr Glover-Clark had asked her .to sign a memorandum for one share, and to act as a director pro tern; that at a ‘meeting bf ' directors’ the solicitor of the company, Mr M. G, McArthur (brother of J. W. S. McArthur) brought a list of investments, and the -‘directors’ were asked to sign their approval. and did so, exercising no choice or judgment of their own; and that later Glover-Clark, C. G. Alcorn, and T. H. Macky became directors and took over.

i! “Marjorie Hawley is 19 years of age, and corroborated Miss Dunn’s evidence. She simply did what she was told by Glover-Clark and McArthur. Henry Davenport Williamson, described himself as an agent, 61 years of age. He admitted his signature to the filed documents) including the statutory declaration that he had made reasonable investigation and enquiry as to the requirements of the company, and was of the opinion that the capital subscribed Was, sufficient to. justify the company in commencing business; but he disclaimed all responsibility and said that he-had no voice in the matter, and that lie was not in any sense in charge, nor was he at any time asked his opinion on. any point. “Taking tlie least, serious view of this whole transaction, it enables the comition : controllers of the two companies, by intermediate investment in the snares of the Transport- Insurance Com-

pafiy, to invest the funds of the Investment Executive Trust in investments which the auditor of the latter company would not pass. A more, serious possibility is that the funds may be used for speculative purposes designed to secure collateral advantages to the directors of. the companies. , We have m this connection ascertained facts which demand,close enquiry. . “{3) Various investment trust companies—the focal centre of this group in New, Zealand lias been the Investment Executive Trust of New Zealand, Ltd., of which J. W. S. McArthur is managing director. It may be repeated here that this company has a paid-up capital of £30,000/and hits .issued a prospectus for tlie issue of mortgage debentures to a total of £4,000,000, COMPANY’S- “FANTASTIC” OBJECTS “(4) Pacific, Exploration, Ltd.—Tlie ‘objects clause’ of this . company’s memorandum of association can only be described as fantastic. The main object is ‘to seek for and secure openings for the employment - of capital inthe Pacific or in aiiy other part of the world.’ Its other objects include subsidising laboratories and experimental work, scientific and techniciil research, supplementing the remuneration of scientific or technical professors i r teachers to carry-on as farmers, dairymen, and as butchers and sausage-manu-facturers, and to produce, construct, charter, or lure wharves, ships, and, etc. It has been extremely .difficult to get any information about this company, although it is commonly reported that it was formed to finance the building of a yacht which McArthur lias used as his own. . “(5) Farms and Farmlets Ltd.—-This is a private company. The shareholders are W. C. Hewitt, solicitor, and his.wife. Hewitt is largely occupied in legal work for McArthur and his companies. He is now in Sydney with McArthur. The company has registered with tlie Registrar of Companies nt Auckland an issue of bear -r debentures, 500 of £2OO each, total £IOO,OOO. It is the largest shareholder in the British National Trust, Ltd., ,<ff Canberra, by virtue of its holding of 51,200 shares of £1 each. “(6) Financial Publications, Ltd.This company publishes the monthly magazine ‘lnvestment Review’ to give financial advice to investors and to disseminate information oh financial matters. Its directors are C. J. Lovegrove, R. S. Abel, and Richard Glo/erClark. One or <?ther of these men is interested in each of the New Zealand Investment Trusts described he<\iin. Its balance-sheet as at 6th March, 1934, shows a paid-ujj capital of £54; but its ‘sundry creditors’ appear .is £6lOl. The year’s' profit and loss account shows that its total revenue from ■ ‘subscriptions, sales, and advertising and enquiry fees was £161.’ It nevertheless completed its year with veven u; disbursements of £5739, including £350 ‘directors’ fees,) the result being a her loss of J 85568. - “(7) Transfers of. Shares in Affiliated Companies.—Transfers of shares between the member of the foregoing group are fairly frequent and sometimes for large parcels.” . In Part V., under., the heading J. W. S. McArthur: the Personal Factor,” the report says: “This man controls the four main investment trusts of the group, two in New Zealand and two m New South Wales. In the year 1930 he was financially embarrassed. He was interested in and controlled a group ol timber and afforestation and allied companies as intermeshed in proprietorship and transactions as the group _ of, investment trust companies described in the report. He owed £3OOO to the State Forestry Department. Legal proceedings were instituted and judgment was

obtained against him. He wrote admitting inability to pay and suggested paying off £350 per annum out of his director’s fees. A bankruptcy notice was issued against him. In July, 1932, at the latest moment possible if bankruptcy were to be averted, he paid the whole amount in cash.

“The foregoing lias revealed the extent to which J. W. S. McArthur, is involved in tho control and operations of the Investment' Executive. Trust of New Zealand, Ltd., and its affiliates. In this connection it is, in our opinion, an important and disquieting fact that many of tlie liquid investments of the Investment Executive Trust of New Zealand, Ltd., are held either in the name of J. W. S. McArthur personally or in the name of vendors from whom McArthur holds power of attorney. This power of attorney is full and unqualified, and permits McArthur to effect transfers-of -the shares and investments of such vendors when and to whom he pleases. It is true that holding companies like the Investment Executive Trust of New Zealand, Ltd., are compelled to appoint a trustee or trustees to hold in their own names shares, stock, and other forms of security issued by corporations which will not place the names of other corporations on their share ledgers, or stock and debenture registers. The recognised safeguard is to appoint" at least two directors or officers of known integrity to act »» trustees, and to adopt for safe custody of tho scrip checks devised and required by an experienced auditor. No effective audit of the companies controlled by J. W. S. McArthur and his associates is possible unless it is a comprehensive and contemporaneous audit of all these companies made at common date.” COMMISSION’S POWERS Part IV. of the report says: “Our powers are limited. All timber plantation and bond-issuing companies have assisted us in our enquiries, and ha> o given us all the information we require except the group controlled by J. vV. S. McArthur and his associates. All investment trusts have responded io pur invitation to co-operate with us and give us information except the McArthur group. The New Zealand Investment Trust, Ltd., of Wellington instructed its solicitors, secretary, and a director to appear before ns. They gave us all the information we required, ami offered to disclose all the details oi their portfolio of investments to any independent auditor of standing whom we chose to nominate, and to permit him to report to us; We approached the Investment Executive Trust of New Zealand, Ltd., in the same spirit with the same request for amicable co-opera-tion, and we received from their solicitors, Hampson and Wiseman, of Auckland, a letter containing the following, under the heading, ‘New Zealand Redwood Forests, Ltd.’—‘Tlie fact that this inquisition is sought by your commission compels us to state in clear and unequivocal terms that our client company will not disclose to a hostile, biased, and interested commission which has been declared to be not a judicial tribunal the business of this company of four yeai’s ago or to-day.’ Under the heading ‘lnvestment Executive Trust of New Zealand, Ltd., in the same letter tlie writers say: ‘lt is clear that as your commission desires to discredit McArthur as chairman of directors of New Zealand Redwood Forests, Ltd., different treatment cannot be expected to be accorded to McArthur as managing director of the Investment Executive Trust of New Zealand Ltd. We are instructed by this company that it adopts the same attitude as New Zealand Redwood Forests, Ltd.’ The \vriters of this letter are the solicitors who acted for tlie parties who made application to the Supreme Court recently for a writ of prohibition against this commission of enquiry. “Our present order of reference does not authorise us to enquire into the nature and effect of transactions we have referred to herein, except to establish general principles. After the judgment of the Full Court was delivered, counsel for the Crown (Mr J. B. Callan, K.C.), advised us, inter alia, that the commission is a commission set up merely for the purpose of searching for and suggesting remedies to evils which the Government believes to exist; that it is not the purpose of the commission to ascertain which companies or individuals have been following undesirable practices, or alternatively, which companies or individuals have entirely clean hands. “It does not, however, follow that the commission is not to enquire into the doings or misdoings of individual companies. On the contrary, no commission can intelligently suggest remedies unless it knows sufficiently tin nature of the evils and abuses to be prevented, and it cannot know the nature of the evils or abuses in .abstract. It has to make their acquaintance in concrete facts and happenings. For this reason, and this reason only, it is forced to enquire into the affairs of individual companies.

“A DIFFICULT TASK” “In these circumstances we have had a difficult task in shaping our policy and procedure toward the affairs of the two groups of companies referred to. These companies have, through _ their solicitors, refused to co-operate with us on any amicable basis, and have in our opinion watched every move wo made with a view to attacking our procedure and securing at least delay by a further application to the Court. In the affairs of these companies, the line between the enquiries which lie within the limits of a proper exercise of our power, and enquiries which transgress those limits, cannot be drawn with precision. In many instances it seems to us that their .propriety could be determined only by reference to the motives and objects underlying each particular line of enquiry. Furthermore, we submit that the matters properly within the scope of our order of reference tend, as to moral gravity and urgency, to be overshadowed by the issues raised by the facts herein set out. These issues, in our opinion, call for immediate further enquiry and action in the interests of the debenture-holders in particular, and of the community in general. Our legal position under the Commissions of Enquiry Act, 1908, as interpreted by the Full Court, is so delicate (in relation to disaffected companies) that we | are reluctant to prusue such further I enquiries under our existing powers.” In part VII. headed “Need for Urgency,” the report says: “There :s evidence that the financial and administrative control of the investment trusts of New Zealand are being transferred New South Wales. “(1) Financial control.—By the transfer of the shares of Alcorn and McArthur to the British National Trust, Ltd. (Canberra), the share control ol the British National Investment Trust, Ltd. (New Zealand), is transferred to New South Wales. The Canberra company now holds 249,000 out'of 250,000 ordinary shares in the New Zealair company. In May, 1934, Alcorn and McArthur transferred to the Southern British National Trust Company, Ltd. (Sydney, New South Wales), 194,000 shares in the Investment Executive

Trust of New Zealaid. Ltd. The Syd- £ ney company now holds 194,000 out ol 1 250,000 shares in the Investment Exo- 1 cutive Trust of New Zealaid, Ltd. t PROMOTERS LEAVE DOMINION “(2) Personal control.“ln the last few months, the following persons have left 1 Zealand for New South Wales: J. < W. S. McArthur, managing director i of the Investment Executive Trust of * Now Zealand, Ltd., the British National ; 1 Investment Trust, Ltd. (New Zealand), j 1 the Southern British National Trust of : Sydney, New South Wales, and of the ! ] British National Trust (Canberra); 11. j > C. Glasson, secretary of the Investment j <' Executive Trust of New Zealand, Ltd., j ! and several other companies controlled j 5 by McArthur; M. C. O'Neill, auditor i : of the Investment Executive Trust of j | New Zealand, Ltd.; W. C. Hewitt, j i solicitor to several of the companies i i herein referred to; and one of two shareholders in Farms and Farmlets, ] Ltd. > “(3) Daily Telegraph Building, Syd- j ney.—This building seems to be the s financial kernel of the whole group of ! McArthur’s financial companies, and the - work of reconstruction is being pushed ' oh rapidly. The financial scheme of all } the companies seems to be a gamble on ; this speculation, the money of innocent bond-holders being committed to it. j ' “(4) Possible financial readjustments j ! and ‘doctoring’ of records.—The desir- ; ability of urgency is strengthened by • the possibility that certain financial ar- ; rangements .and documentary adjust- j ments are now in train, or contemplat- ; ' ed. These may take the form of financial rearrangements and the manipulation of records, with a view to placing certain transactions or the general position in a more favourable light. The Investment Executive Trust and its affiliated companies are still operating actively. It is because we believe that our conclusions will commend themselves to your Excellency and your advisers that we are submitting this interim report.”