New Zealand - Corruption High Finance Crime

Tony Molloy's book, Thirty Pieces of Silver. (Howling at the Moon Productions, 1998)

* EXTRACTS FROM PRESS NOTICES ON THIRTY PIECES OF SILVER WHICH WAS TOP OF THE BESTSELLER LIST IN NEW ZEALAND FOR 13 STRAIGHT WEEKS AND WHICH REMAINED ON THE LIST FOR MORE THAN HALF OF 1998

o The Dunedin Star Weekender:

"The book is riveting, reading at times like a whodunnit. Even though high finance is way beyond my ken I was captured by the plausibility and the logic demonstrated by Anthony Molloy in setting out his case. . . I was drawn from page to page like a puppet on a string. This is an extraordinary book and it will have a major impact on the legal fraternity. Much more will be heard of it in the coming months and years."

o North and South:

"An impassioned . . . consistently courageous attack on the role of legal megafirm Russell McVeagh McKenzie Bartleet & Co in the sham loans, inflated movie budgets and tax avoidance schemes of the 1980s. The book should be a recommended text in our law schools."
o Wellington City Voice:

"Tension mounts as one shocking allegation follows another in this fascinating legal exposé . . . worth its weight in silver."
o Napier Daily Telegraph:

"The most grave public allegations I have ever read . . . the legal profession must be, at the least, devastated by Dr Molloy's allegations and the public must seriously determine whether to trust their lawyers again."
o Waikato Times:

"The hardest hitting book ever published in New Zealand."

===== Amazon Review ====

Lawyers, Ethics, and Tax Fraud, February 8, 2009

By Andrew L. Cawston "vimaster" (New Zealand)

Well respected throughout the Commonwealth, Anthony P Molloy QC is New Zealand's leading authority on Tax Law. In "Thirty Pieces of Silver", Molloy examines the events surrounding New Zealand's infamous "Wine Box" tax frauds of the 1980's, and in particular he examines the legal ethics of one of New Zealand's premiere law Firms in setting up, administering, and then covering up the transactions that made up the "Wine Box".

Molloy pulls no punches, but instead makes serious allegations, challenging both the reader to understand the scope and nature of often complex transactions, as well as challenging the law Firm to respond. Molloy names names and makes specific accusations -- this would have been a very brave book to write, requiring Molloy to be absolutely dead-certain of each of his facts, at peril of finding himself on the wrong end of defamation suits. It is seldom that such books are written.

Despite the weighty subject matter -- tax law -- Molloy writes with entertaining charm and wit: evidently the product of an excellent Catholic education. He sets his book out in much the same way as a prosecution attorney would set out his case, building it carefuly from the ground-up, each brick of evidence building upon the previous ones, cementing them in place carefully with facts, legal precedents, quotations from leading legal authorities, and chapter-and-verse from the Law.

It is fast-paced reading, and it requires absolutely no knowledge of New Zealand Tax Law to appreciate. Molloy's writing is accessible to anybody with some spare reading time on their hands.

By the time the reader has finished this book, the reader is left with the clear impression that one of New Zealand's premiere law firms was complicit in planning and executing a series of very ambitious and illegal raids on the Revenue of countries around the world. These scams used fake transactions to produce fake tax receipts, which were issued by overly-compliant tax haven in the Cook Islands. The vehicles for these fraudulent transactions were B-Grade movies and thoroughbred horse bloodstock (often involving horses that did not exist).

As a matter of natural justice, it would be most interesting and instructive to read and review a similar work written by an author of similar stature and professional standing to present the case for the defense: however, we are not aware of such a book having been written. This is a pity because it is always disappointing to know only one side of a story -- however well presented that side of the story may be.

We must thereore be satisfied with Molloy's excellent work, and resolve to give equal time and attention to reviewing any such future response when and as it may become available.

In this book, Molloy's love and passion for the majesty of the Law in general and Tax Law in particular is obvious. It is also infectious: one leaves this book with a whole new Respect for the Law and for ethical Lawyers who serve the Law -- as well as for a deep and well-founded suspicion of and contempt for Lawyers who choose to be Client-Driven rather than Principled, and thereby sell their ethical birthright for Thirty Pieces of Silver.

This book belongs in every law library as a salutory lesson for Lawyers and Professionals worldwide.

=============

Issue 201 of Offshore Investment magazine features an explosive article by the highly acclaimed Anthony Molloy QC:

"Cuckoos in the nest in an otherwise promising trust and investment jurisdiction"

Anthony Molloy exposes New Zealand's lunatic proclivity for government by micromanagement and reveals astounding inadequacies in the way New Zealand's court system deals with trust matters. He argues that if New Zealand wants to back its claim to be a serious trust jurisdiction, it has much catching up to do.

The main feature of this month's magazine is Special Purpose Vehicles in which Prof. Charles Cain demonstrates evolving techniques in asset protection planning. He examines trust structures and identifies certain drawbacks in their use, not least the complexities of equity. He reveals how other forms of structure can be used, in particular, a Limited Liability Company. Frédéric Mege provides a detailed overview of the Tontine, an old institution which has been used, since the middle of the 19th century, as a scheme for raising capital which combines features of a group annuity and a lottery.

Jurisdictions in focus:

NEW ZEALAND - A new era of greater transparency is already with us. William Patterson elaborates on the considerable advantages, in the light of increased transparency, in using a country such as New Zealand as the place of administration of trusts for non-residents.

CURAÇAO - Xandra Kleine highlights consequences of the recent changes to profit tax legislation in Curaçao and discusses the soon to be operational Dutch Caribbean Securities Exchange.

ARUBA - Lincoln Gomez writes about recent amendments to Aruba corporate law, analyses Aruba tax law and explores aircraft registration in the jurisdiction.

LUXEMBOURG - Jean Schaffner identifies some interesting residency opportunities available in Luxembourg for high-net-worth individuals and Francis Hoogewerf promotes Luxembourg.s success in the financial world and provides an update on Luxembourg.s array of corporate vehicles.

ANTIGUA - Brian Stuart-Young contemplates how the combination of well-regulated financial service providers and the ability to offer modern financial services in a stable environment makes Antigua and Barbuda an attractive jurisdiction for global business.

Regular features include World Report, Dubai Digest and Latin Letter.

==============

Emeritus Professor Richard Sutton

I have been a member of this faculty since 1980, and before that I taught law at Auckland University for 15 years. During my time in the law, I have tried my hand at a lot of things - including conveyancing, opinion work, and law reform. I often draw on these experiences in what I do now. Yet for me the most important thing is still teaching and legal research. There is a fascination in the way the law works, and how lawyers go about everyday tasks. I want to get beyond the rule or principle I am studying, to find out how it really ticks! What kind of things make judges do what they do, and how does everything fit together? I find in this, not just more refined legal ideas, but also moral principles and pre-logical symbols. I am quite often surprised by what I come across.

My main interests have always been in private law, particularly the principle of "unjust enrichment". This is relevant most frequently in the law of contract, the law of restitution and in commercial law situations (such as bankruptcy) where there are conflicting claims to property. The basic idea is that if you are enriched as a result of something another person has done - often inadvertently, no-one is to blame - then you ought to give the benefit back. For example, if I pay money which we both think I owe to you, you have to give it back if it turns out later that I didn't owe the money in the first place. We don't need to worry whether you promised to give it back, or did anything wrong in order to acquire the benefit. There is a strict legal obligation to pay back the money.

In the last few years, I've also been thinking about how different legal systems work. On my leave in 2001, as well as working in England, I spent time South Africa, France, Quebec and the Czech Republic. I am also very privileged to have an association a project called "Te Matahauariki" at the University of Waikato, where they are looking at the fundamentals of law from a Maori perspective, and working towards a genuinely bi-cultural set of laws.

Although I'm now 'retired', I am still teaching Creditors' Remedies, as well as being a grandparent (by distance learning!), playing chess, being a member of the Anglican General Synod, and playing classical music on the piano (indifferently). Oh yes, and generally making myself agreeable around the place - so I welcome casual visitors!

Recent Publications

Richard Sutton, .Mistake: Symbol, Metaphor and Unfolding. (2002) Restitution Law Review 9.

This article asks the question, .Can someone be said to have paid money under s .mistake. if they could not have known the truth at the time of the payment?. The payment in question, and discussed in an important House of Lords. decision, was made at a time when no-one knew what the law was. People did not even think that there was a legal question involved. Later on, the courts ruled that the paying company had no obligation to pay the money. The payer could not have known that this would be the outcome, even if it had sought expert advice. Conventional wisdom would say that a .mistake. is something human, an error that could have been corrected.

My article probed more deeply into the nature of .mistake. as a head of legal liability. I argued that the term served symbolic purposes, at a highly abstract level of meaning. The symbol (or metaphor) of mistake is conceived at the abstract level. It .unfolds. as judges choose subheadings, from a variety of meanings that could grow out of the symbol. Only after that do they reach the framing of ordinary rules of law. The conventional view of .mistake. is aimed at the wrong level of legal discourse.

The judges who decided that there was a .mistake. in these circumstances, made a wise choice because the larger notion of invincible, inevitable .mistake. was more valuable as a symbol, than the narrower notion of human error. King Oedipus, for example, who unknowingly killed his own father and married his own mother, stands forever as an example of this larger kind of mistake. He had to bear the consequences even though he had no means of finding out the truth. So too does the payee of money, who receives it in a situation where his or her right to take the money cannot be known until later.

Richard Sutton, ..We Just Mislaid It.; The Great Project and the Problem of Order in Private Law. (2005) 11 Otago Law Review 97

This article, though supposedly my .valedictory lecture., has set me off on a whole new mode of enquiry. It explores the puzzle of order in private law . how did we stumble across our fundamental divisions of law, our basic notions such as .contract?, .unjust enrichment. and .tort.? What standing do these ideas now have in our law? Again, the question of symbols or metaphors comes up - should we expect our heads of law to have definite meaning, which are elaborated further by the subsidiary rules? Or are they more like beacons, good to steer towards (up to a point) but useless in mapping out the detail of the law?

I argue that conventional notions of .order. in private law tend to distort the reality, by looking too earnestly for meaning and not attentively enough for the symbolic function of headings such as .mistake., .undue influence. and .frustration.. A new .diagram. of the legal process is offered, which is sensitive to the dynamic process of movement from headings to legal rules and results.

Current work

My present work follows on from these two articles. I have been working on the idea that there is a dynamic structure in law, comprising three distinct discourses:

* .the actual. (the texts of the law, ie what is said in statutes and decided cases)
* .meaning., that is to say, the process of extracting some sensible set of legal principles from the actual
* .the possible., that is to say, an overview of the law which determines conclusively the way we look at the actual and give it meaning.

I am trying to show that these three modes of discourse are present in even the most rationalistic legal enterprise. There is also, at each corner of the triangle formed by these three modes of discourse, a .gap. which tends to undermine the rationality of the whole enterprise. It is here we encounter the .transcendental., that aspect of law which is beyond the reach of conventional, professional discourse, though possibly open to exploration by non-conventional means, and by interdisciplinary study.

Research Interests

Commercial Law, Bankruptcy and Creditors' Remedies, Unjust Enrichment, Law Reform, Estates and the Law of Succession, Maori Succession

Contact Details Tel 03 479 8845
Email richard.sutton@stonebow.otago.ac.nz

=====================

27 January 2005 Otago
Task Force on Regulation of Financial Intermediaries
P O Box 25-154 Panama St WELLINGTON Attention: Kathryn Gabites
Dear Ms Gabites
Thank you very much for the opportunity to comment on the work of the Task Force
at this early stage in proceedings.
My interest in your topic arose through my academic research. I have a particular
interest in the financial intermediary as a fiduciary. This interest relates less to the
detail of regulation, and more to the underlying duties of fiduciaries and others. In
particular, what duties do they have
(a) Not secretly to sell or buy property to or from the person whom they
are advising, or to take secret commissions;
(b) Not to use, to their own benefit or the benefit of others, information
which they have acquired in confidence from the person they are
advising; and
(c) Generally (in situations of conflict of interest) to disclose all
information in their possession which may be material to decision
being made by the person they are advising.
In 1990, Sir Alexander Turner and I updated an English text on the subject,
Actionable Disclosure by Mr George Spencer Bower, written in 1915. Our new
edition was published in London by Butterworths. Chapters 18 and 19 dealt with
company directors, promoters and prospectus requirements.
I have, by contrast, very limited knowledge of the business of financial
intermediaries, though I have had (for the last ten years) personal experience of
investing with the assistance of share-brokers. I have invariably been happy with the
service I received, though aware of the limits of my own abilities in investing and the
way in which a share-brokers may wear several "hats" in a given transaction.
The above caveats explain why I have chosen to confine myself to only a few of the
48 very pertinent questions your Initial Issues Paper raises, and to direct my
comments mainly at the end product of the exercise. The end is presumably
legislation which imposes new or clearer liabilities on persons defined as "financial
intermediaries".
faculty of Low
PO Box 56, Duneliin, New Zealand.
Tel 64 3 479 8857 . Fax 64 3 479 8855 . Email low@otogo.oc.nz
www.otago.ac.nz/law
DUNEDIN . CHRISTCHURCH . WELLINGTON . AUCKLAND

1. Including and excluding particular activities from the legislation.
It is inevitable that some activities will be excluded from the legislation which
logically might easily be there, and some activities will be included where those who
engage in them will find the additional liabilities uncomfortable. From the point of
view of legislative design, a lot depends on how different the new law is from the old.
If the basic underlying principles remain the same for both, but the policing or
enforcement is more specialized, there is less of a problem. There is a more of a
problem, which requires good policy justification, if the two sets of liability are
fundamentally different.
I have some difficulty (in practical terms) with the distinction you draw (in para 1.8)
between issuers and promoters. A good legal definition of "promoter" is "one who
undertakes to form a company with reference to a given project and to set it going,
and who takes the necessary steps to accomplish that purpose". Nowadays this task is
usually undertaken by the directors. But the term "promoter" was needed because, in
earlier times, promoters would often not become directors. On incorporation of a
company, they would slip back into the woodwork with a large profit, leaving it to the
directors to cope with the results of their handiwork. Similar duties had to be
imposed on them, as were imposed on the promoting directors. So it would be very
odd to impose obligations on promoters, but not on promoting directors.
I think the main concern should be a pragmatic one - is there a broad sector of the
public who is served, in a broadly similar way, by various groups of people who can
justly be made to shoulder the costs of a common investigation and redress system?
3. Should some activities be excluded from the preliminary definition?
I suggest that your preliminary definition may be too wide to be workable. This is
most apparent from the definition of "financial product", (para 1.4) Lots of things
are sometimes marketed with a view to "investment", ie long term capital gain. They
include not only houses, which are instanced in your paper, but also works of art,
antiques and collectibles such as stamps and Beatles tee-shirts. If you include all
these things, your legislation may become too wide and general (just like the general
law). The main advantage of legislation in the financial intermediary territory alone
is that it can be tightly focused and specific. Besides which, I doubt whether art
dealers would welcome sharing the cost of investigating company fraudsters!

16. The focus of the Task Force - accurate information
My suggestion would be that the most helpful starting place is the existing general
law, in particular the duty of those "in trade" not to make misleading statements
(which it appears can include omissions, at least where the omitted fact is known to
the adviser). (Fair Trading Act). This duty is imposed in the form of a general
standard of conduct, which is open to different application in different industries.
Traditionally the securities industry has been regulated by reference to "lists" of
things which must be correctly disclosed (going back to nineteenth century prospectus
requirements). But these are of limited value to the ordinary investor, who relies
(with justification, in my experience) on the wisdom of the financial intermediary to
sift through a mass of compulsory material to find the kernel.

More important are the "independent" reports on particular companies, which are
compiled for share-brokers, and which include estimates of companies' future
financial prospects. One is very much in the hands of one's share-broker as to
whether these are genuinely independent and reliable. But as long as the share-broker
has acted honestly and reasonably in advancing these reports, I don't think an investor
can complain. The greater difficult is how to get information if the report turns out to
be badly wrong, or isn't as independent as it purports to be. Perhaps there is a case
for an Investment Ombudsman who can look into such matters.
Maybe the independent report model is one which should be encouraged for other
financial intermediaries as well, eg as regards insurance. Of course, very long term
financial products like insurance policies always run the risk of change in
management - one of my own life policies seem to have run through about five
insurance companies so far, each one less effective and interested in me than the last!

But there we are.

18. The focus of the Task Force - conflict of interest.
In your para 2.3, subaras b), c) and d), you identify issues which are very close to my
own research concerns. To what extent are financial intermediaries who have
conflicts of interest, obliged to observe the general duties of fiduciaries?
This is a particular concern in relation to "tied" insurance and investment advisers,
and to share-brokers who act for buyers and sellers in the same transaction. As I
understand the general law, a fiduciary must do more than simply disclose the vague
possibility of such conflicted relationship. He or she may have to explain the
particular relationship and its nature (the mere "I get a commission from the AB Life
Co" may not be enough - what is the commission and on what basis is it paid?).
He or she must also dispel any possibility that the dual relationship has been misused.
This can be done, either
by referring the client on to another adviser (or firm) for independent
advice, or else
by undertaking the duty of full disclosure of all material information in
the possession of the intermediary, allowing the client to make up their
own mind whether to enter into the transaction.
By and large, in my limited experience, these obligations seem not to be observed by
financial intermediaries. One never knows the basis on which a life insurance
salesman is paid a commission. Contracts with share-brokers may notify you that the
share-broker may have interests conflicting with yours, presumably making it a tenn
(whether legally enforceable or not, I am unsure) that you will not insist on the
ordinary legal rights you would have against a fiduciary.
I have an open mind as to whether this is not (a) inevitable and (b) by and large a
good thing, as long as it does not affect the quality of the general advice I am getting.
It certainly has never troubled me personally. But I wonder whether financial
intermediaries need to trade something back in to the equation, in return for this
departure from the general law. Breach of one of these fundamental obligations would
normally be seen as a "flag" for a matter which needs investigation. Perhaps, in place
of the existing law, other markers should be established (eg, a sudden rise or fall in

the value of the investment, within a specified time of the transaction; or a subsequent
event occurring soon after the transaction, which makes a life policy quite
inappropriate) which would trigger an official investigation into trading in that
security.
In fiduciary law, if one of these rales triggers an investigation, the onus of proof
passes on to the fiduciary to show that he or she acted honestly and fairly. Might the
substitute statutory trigger raise a comparable presumption against the intermediary?
21. The focus of the Task Force - where things do not work well,
I have a general concern which is not limited to financial intermediaries. It is the cost
of legal proceedings, especially where groups of litigants are concerned and the
defendant is a substantial institution with the ability to drag things out interminably
and expensively. This tendency is encouraged by law firms which take pride in their
skill on exploiting the situation. See Tony Molloy's book, Thirty Pieces of Silver
(Howling at the Moon Productions, 1998), where the defendant was itself a large law
firm - though I am sure there is another side to the story. Investment history in New
Zealand has famous examples (eg the Omnicorp case in the 1980's) where on the face
of it something was seriously wrong, but nothing seemed to happen.
This concern is rightly foreshadowed in subparas 2 h), and i) and in my view
deserves serious attention. Normal litigation is cripplingly expensive, and "derivative
suits" brought by numerous shareholders don't seem to have taken off in NZ. There
is a risk that effective financial intermediary regulation will pick off the small
intermediary, without getting to the root cause of a more widespread problem. Yet the
fact that many shareholders will be involved and the total amount at stake large,
would seem to offer - through appropriate legislative facilitation - economies of scale
in the investigation.
What seems to be needed is an Investment Commissioner who can
(a) Educate the general public about what to expect, and what not to expect,
from investment transactions;
(b) Perform an Ombudsman role for minor, one-off problems between
financial intermediaries and their clients;
(c) Investigate, in the collective interest of all those affected, problems
occurring on a larger scale.
Probably I am sticking my neck out without proper support for it, but I am less
persuaded that either penal enforcement, or penal damage awards (eg, the US "treble
damages" claim) have a great deal to offer in our environment. These are likely to
attract "reasonable doubt" type of standards (in practice if not in law) which lead to
long drawn-out trials with the end result very much a matter of chance. But perhaps
the Task Force might commission work on the US scene, to see if such procedures are
effective, and if so why; and then ask, whether the things that make them work there
could operate here also.
You will no doubt be aware of the paper the Law Commission has written on the
structure of the courts, and the possible integration of other law application bodies
within that system. I hope that your own proposals will link in with the Law
Commission's suggestions.

I trust these comments will prove helpful, as the Task Force begins to develop the
shape of its investigation.
Richard Sutton

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