The Importance of Good Governance - 21st Mar 2014

Sth Canterbury Finance: Simpson v. Jenks

The chaotic state of Alan Hubbard’s investment empire was laid bare when a US investor sued to prove her entitlement to $5.5 million. Hubbard’s accounting records were called unorthodox and chaotic and he was described as taking a paternalistic attitude towards his clients without consulting them.

Timaru-based accountant Alan Hubbard had strong local support with his philanthropic activities, but enthusiasm has waned following publicity about the loose way in which he ran his businesses. Government-appointed receivers took control of his business empire in 2010. Mr Hubbard died subsequently in a road accident.

Hubbard’s business activities had two arms: Aorangi Securities Ltd (ASL) which invested primarily in first mortgage securities and Southbury Group Ltd (SGL) which made riskier equity investments in what were perceived to be growth companies.

Receivers’ investigations indicate both ASL and SGL were insolvent by early 2009. They are in the process of realising all assets. Indications are that ASL investors will get back most of their investment; SGL investors very little.

US investor, Susan Jenks was told that her $5.5 million was with SGL. This was a surprise. All the paperwork she held referred to her status as an ASL investor. High Court action followed to clarify where she stood.

The court was told that Mrs Jenks and her husband (who has since died) met Mr Hubbard in 1987 through a mutual connection. On Hubbard’s advice they purchased a Methven farm and made subsequent investments in Christchurch real estate. These investments were rationalised as Mr Jenk’s health deteriorated. The properties were sold and funds left with Mr Hubbard for investment. In October 2009, Hubbard wrote to the Jenks advising their funds had been placed with ASL. Subsequent letters to Mrs Jenks stating the ongoing value of her investment made no reference to the funds having been moved from ASL.

When receivers took control of Hubbard’s business records they found a handwritten journal entry transferring across to SGL Mrs Jenk’s $5.59 million investment in ASL. Justice Dobson said it was extraordinary for a business with $160 million in assets to record the transfer of such an investment with a barely legible handwritten journal entry. The receivers treated this accounting record as proof that Mrs Jenks was a SGL creditor. They refused to accept attempts by Mr Hubbard to reverse the journal entry several months after their appointment. Mr Hubbard claimed the investment had been reversed earlier but he had not completed the paperwork at the time.
Justice Dobson ruled that Mrs Jenks is an ASL investor. As investment adviser to the Jenks and as their agent, Mr Hubbard had no authority to move their funds without their informed consent. Mr Hubbard’s close association with ASL meant the company was liable for his wrongdoing and ASL had to accept that Mrs Jenks was still a creditor.

The court was told that including Mrs Jenks as a creditor of ASL would reduce the payout otherwise available to ASL creditors by about five to six per cent.
Simpson v. Jenks – High Court (20.12.13)

Thanks to Mike Ross Law for this article

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