Mutual Finance's relationship with Viaduct Capital faces probe in SFO investigation

By Gareth Vaughan

A Serious Fraud Office (SFO) investigation into Mutual Finance is set to probe the firm's relationship with fellow government guaranteed failed property financier Viaduct Capital.

The SFO opened an investigation into Mutual Finance "and related companies" on December 23. In his first report Viaduct Capital receiver Boris van Delden of McDonald Vague said many of Viaduct Capital's loans were exposed to security sharing deeds (SSDs) given by the company in return for funds received.

McDonald Vague had verified that this money was paid to Viaduct Capital. However, the SSDs meant Viaduct Capital’s priority in the security over which the lending was made was leapfrogged by the new funding provider. Mutual Finance was the recipient of some of the SSDs.

Asked about Mutual Finance's relationship with Viaduct Capital, SFO chief executive Adam Feeley told interest.co.nz that with the investigation into Mutual Finance, there were "some fairly obvious additional companies that create obvious questions."

"It’s likely we’ll be looking at aspects of that," Feeley said.

However, he said the investigation hadn't yet got past the initial assessment stage and remained in the "very early" days.

The SFO says after considering information obtained from Mutual Finance's receiver Covenant Trustee KordaMentha and the National Enforcement Unit of the Ministry of Economic Development, it decided there was reason to suspect an investigation into the affairs of Mutual Finance and related companies may disclose serious or complex fraud. 

"An investigation under part II of the Serious Fraud Office Act was commenced on December 23, 2010."

Treasury said in December it had paid out NZ$7.5 million of taxpayers' money to 88 Viaduct Capital investors and NZ$9 million to 329 Mutual Finance investors under the Crown retail deposit guarantee scheme.

Covenant Trustee managing director Graham Miller pulled the plug on Mutual Finance last July after "forming the view" the company may have breached its minimum capital ratio. Mutual Finance's receivers are Grant Graham and Brendon Gibson of KordaMentha. At the time Miller said the company owed 340 depositors NZ$9.3 million.

Mutual Finance was run by former Strategic Finance founder Paul Bublitz, who was also involved with Hunter Capital, which was behind Viaduct Capital, whose directors were Bruce McKay and Richard Blackwood.

After the Mutual Finance receivership was announced Bublitz issued a statement saying the board was extremely disappointed with the trustee's actions.

"The Company was working to address the technical breach and considers that the trustee has taken an extremely conservative view of the cash flows of the company," Bublitz said at the time, adding the trustee had "acted in his own interests" rather than those of the investors by tipping Mutual into receivership.

Viaduct Capital was dumped into receivership by its trustee Price & Partners Trustee Company last May. Prince & Partners said it made the move to protect investors' interests through an orderly realisation of the company's assets.

Van Delden's report said a total of 110 Viaduct Capital secured depositors were owed NZ$7.8 million, including accrued capitalised interest. Under the Crown retail deposit guarantee scheme 94 depositors owed NZ$7.3 million were covered. However, 16 depositors who invested NZ$515,455 after the Treasury withdrew its guarantee from Viaduct Capital in April 2009 weren’t covered. Treasury said it withdrew the guarantee after deciding Viaduct had used it inappropriately, without specifying details.

Van Delden's report also said the receivers had sought legal advice on the validity of the SSDs and on the priority issues that had arisen. The collapse of Mutual Finance would likely hit returns to Viaduct Capital because Mutual Finance had been the recipient of some of the SSDs and had, at the time of McDonald Vague’s appointment, expressed interest in providing further money to securities in which Viaduct Capital and Mutual Finance were involved.

“As there is now no hope of that further funding, some securities have gone from our initial assessment of potentially providing some funds to the company, to having no chance of recovery for the company,” van Delden's report noted.

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