Lombard Four avoid prison; destroyed reputations punishment enough
By Paul McBeth
March 29 (BusinessDesk) – All four directors of Lombard Finance & Investment have avoided prison sentences as High Court Judge Robert Dobson drew a line in the sand between the failed lender’s conduct and other cases where boards failed in their duties to investors.
In the High Court in Wellington, Judge Dobson today said the seriousness of the offending by the Lombard Finance directors, former justice ministers Doug Graham and William Jeffries, Lawrence Bryant and chief executive Michael Reeves, couldn’t be underestimated, but was a far cry from other cases involving failed lenders such as Bridgecorp, Nathans Finance and National Finance 2000.
That meant custodial sentences wouldn’t be appropriate for the non-executive directors, and he set the starting point at 400 hours community work. Reeves faced a custodial sentence given his hands-on role at the company and past conviction under the Securities Act, but was also given a community work sentence due to ill-health and family obligations, something the judge said he was hesitant to agree to.
Bryant and Graham were sentenced to 300 hours community work, which was reduced after they offered to pay $100,000 to investors who put their money with Lombard Finance during the period. Jeffries, who is appealing the decision, and Reeves were sentenced to 400 hours community work.
Judge Dobson said reputational damage to the non-executive directors couldn’t be underestimated as they had built their careers on the strength of their integrity, singling out the work Graham and Jeffries did as Cabinet ministers.
While their good character had to be taken into account, the judge said Graham’s involvement “was the single most important factor” in attracting investors to the lender.
The “crushing impact” of Lombard Finance’s collapse on investors “shouldn’t be underestimated,” Judge Dobson said.
Still, “the anguish and anger” in some of the victim impact statements probably wouldn’t have been so strong if people had sat in on the entire eight-week trial and seen how the company was governed, he said.
After sentencing Paul Wah, a Lombard investor, told reporters outside the court house the sentence was “in the order of what I expected or possibly a little more than I expected.”
“There’s no point in jailing old men.”
He welcomed the judgement because it would allow either the receivers or the trustee to launch a civil class action, which might give Lombard investors some redress.
“For two former justice minister to parade around with a number on their back, that wouldn’t be very appropriate, would it?”
Financial Markets Authority chief executive Sean Hughes welcomed the verdict, saying it highlighted the “obligation on directors to ensure that investors are properly informed and are kept informed.”
The Crown was seeking prison sentences for the directors given previous penalties handed down to finance company directors.
Paul Davidson QC, counsel for Graham and Bryant, told the court being labelled a criminal is the “ultimate humiliation” for his clients, and that “the law has created criminal liability for what may be nothing more than a material misjudgement.”
David Hurd, counsel for Jeffries, characterised the offending at the bottom end of the range, saying it was an “innocent error of judgement” and in a “different universe” from the Bridgecorp and Nathans Finance cases, which have both been cited by the prosecution as the benchmark for sentencing.
Davison said a sentence of community service or a pecuniary penalty was appropriate for the directors given the lack of dishonesty in their actions.
At the time of the verdict, Judge Dobson said the directors’ offences were a “material step away from the seriousness required for a custodial sentence” and that the law created “criminal liability for what may be no more than a material misjudgement about the accuracy and adequacy of the description of the state of financial health of the company, as directors authorise it in offer documents.”
Lombard Finance went into receivership in April 2008, owing approximately $127 million to about 4,400 investors. Some $10.5 million was invested or reinvested with the lender during the 100-day life of the misleading offer documents.