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R v Connolly HC Auckland CRI 2004-004-988 [2004] NZHC 1226; (2004) 21 NZTC 18,844 (22 October 2004)

Last Updated: 4 May 2024

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI 2004-004-000988

REGINA

v

PETER MICHAEL CONNOLLY JOHN DONALD CURRIE JOHN ANTHONY REID PETER WILLIAM RUSSEL

Hearing: 12-17, 20-24 September, 27 September - 1 October, 4-9, 11-14

October 2004

Appearances: JA Farmer QC, M J Ruffin and J L Mullineux for Crown H Fulton for P M Connolly

J Haigh QC and PF Wicks for J D Currie M A Gilbert and NCZ Khouri for J A Reid J R Billington QC for P W Russel

Judgment: 22 October 2004 at 15:20

REASONS FOR JUDGMENT OF FOGARTY J

R V PETER MICHAEL CONNOLLY And Ors HC AK CRI 2004-004-000988 22 October 2004

INDEX

Paragraphs

Introduction [1] – [4]

Conspiracy Counts [5]

The Digitech and NZIL Investments [6] – [44]
The future prospects of Digitech and NZIL [7]

The components of the scheme [8] – [17]

How the scheme was marketed [18] – [19] The legal opinion supporting the Digitech scheme [20] – [21] The tax advantage [22] – [26]

Implementation of the transaction [27] – [37] Intended performance of the obligations in year 10 [38] – [42] The use of the cash payments by the LAQCs [43] – [44]

The complaints leading to the prosecution [45] – [48]

The need for proof of dishonest agreement [49] – [59]

The Crown case [60] – [69]
As pleaded [60] – [64]
The Crown case as presented at trial [65] – [69]

Were the transactions entirely fictional? [69] – [116]

The consequences in a criminal conspiracy case

of inept implementation of a tax driven structure [106] – [116]

Did the accused represent the scheme as using real money? [117] – [195]

Did the accused make representations to the investors

in correspondence? [118] – [182]

Did the contract term promise a real insurance premium? [183] – [195]

Conclusion as to whether there was a dishonest conspiracy Among any of the accused in respect of the Digitech Scheme,

Against the investors [196]

Is the position different in respect of the NZIL scheme? [197] – [199]

Proof of conspiracy against the Commissioner of Inland

Revenue [200] – [205]

General conclusion [206] – [208]

Introduction

• [1] On 14 October last I acquitted all the accused of all counts that they were facing. The recent decision of the Court of Appeal in R v Eide CA77/04, 8 September 2004, at paragraph [21] requires that the parties are entitled to know the key elements of the reasoning behind the verdict. That includes laying out the key facts in the case. The judgment has to be capable to being read as a stand alone document. After delivering my verdict Mr Ruffin for the Crown intimated that he was intending to make an application under s380 of the Crimes Act that the Court reserve for the opinion of the Court of Appeal one or more questions of law, with a view ultimately of seeking a directed verdict. Inasmuch as paragraph [21] of Eide may fall short of requiring a full judgment, Mr Ruffin’s intimation requires that my reasons should be full, in the manner of a judgment in civil proceedings.

• [2] The charges which the accused faced were two counts of conspiracy to defraud against all of them, and 19 other laundering counts against various of them.

• [3] At the start of the trial the Crown made a formal concession as follows:-

If an accused is acquitted on a conspiracy count the Crown accepts it could not prove beyond reasonable doubt an antecedent offence for the purpose of money laundering counts arising from that conspiracy count.

• [4] Accordingly, the acquittals on the laundering counts followed immediately upon the acquittals on the conspiracy counts. Because of the concession it is not necessary to give reasons for the acquittals on the laundering counts. However, the conduct which the Crown says was laundering is relied on by the Crown as also being evidence in support of the conspiracy counts and where appropriate I will refer to it.

The conspiracy counts

• [5] The two conspiracy counts are as follows:-
  1. The SOLICITOR-GENERAL charges that between the 30^th of September 1994 and 1 April 2000, at Auckland and elsewhere, PETER MICHAEL CONNOLLY, JOHN DONALD CURRIE, JOHN ANTHONY REID and PETER WILLIAM RUSSEL conspired by deceit, falsehood and other fraudulent means, to defraud both members of the public investing through a loss attributing qualifying company and the Commissioner of Inland Revenue in relation to an investment in DIGITECH COMMUNICATIONS LTD.

2. The said SOLICITOR-GENERAL further charges that between the 21^st of March 1996 and the 1^st of April 2000, at Auckland and elsewhere PETER MICHAEL CONNOLLY, JOHN DONALD CURRIE, JOHN ANTHONY REID and PETER WILLIAM RUSSEL conspired by deceit, falsehood and other fraudulent means to defraud both members of the public investing through a loss attributing qualifying company and the COMMISSIONER OF INLAND REVENUE in relation to an investment in New Zealand Investments Ltd.

The Digitech and NZIL investments

• [6] The charges which the accused face are conspiracy to defraud investors who expended directly a total of about $16 million investing in two investment schemes. Digitech came first and then NZIL.

The future prospects of Digitech and NZIL

• [7] Both Digitech and NZIL were companies whose future prospects were quite uncertain. Digitech, as the name suggests, was a company with expertise in digital products. In particular the company was developing products designed to be sold to persons who leased circuits from telephone companies. These products were designed to enable the lessors of the circuit to maximise the capacity leased by

inserting data transmissions into existing traffic. The particular exciting prospect of Digitech was a project known as “Free Rider”. NZIL was a holding company. Of its assets only one was likely to drive significant growth in the future. That was an invention extending the life of car batteries. If the invention proved commercial and generated very large sales the value of NZIL would have been considerable. In brief, both companies would only be worth considerable sums of money in the future if their unproven products were successful. Mr Chapman, the senior partner at Gosling Chapman, an investor in the Digitech scheme, summed it up by saying that Digitech would either be worth a lot of money in the future or nothing. The prospects for NZIL were slightly different, as it did have one orthodox asset, a company called Fruehauf which manufactured heavy road trailers. It was common ground between the parties that both Digitech and NZIL were worth nothing like the consideration being promised in the investments. So that the investments were speculative in nature, in the vernacular to buy their shares was a “punt”.

The components of the schemes

• [8] Both investment schemes had a similar core structure, of three components. Apart from different detail the NZIL scheme was on the same template as Digitech. The trial focussed on the Digitech saga. And following the trial, I use this scheme to explain the components. The first component was an agreement by the investor to purchase the shares of Digitech over a ten-year period; structured so that the bulk of the purchase price was payable in year 10.

• [9] The second component, designed to de-risk the speculative character of the investment, was a loss of profits insurance policy in the event that in year 10 the shares were not of a particular value. The second component of the structure was optional. The third component was a loan to the investor to pay the bulk of the insurance premium. This was a non-recourse loan. The financier took security in the form of a mortgage over the purchasers’ rights to the shares and the proceeds of the insurance policy. All the investors bar one took up the insurance policy and loan.
• [10] These three components are most easily understood by taking the standard Digitech investment. Digitech had 100 million shares of a nominal value of $1 on issue. The asset backing of Digitech on day 1 was nominal. It was not capable of earning a profit and depended on financing by its owner, N-Tech. N-Tech owned all the Digitech shares. Most of the purchases of the Digitech shares from N-Tech were to purchase 1 million shares for $1 million. Where a parcel of 1 million shares was purchased an initial deposit of $95,000 was payable upon signing the agreement (at various dates in 1995) with further deposits of $10,000 each payable annually from 1 April 1988, up to and including 1 April 2004. Final settlement ($835,000) of the balance of the purchase price was to take place on 31 March 2005.

• [11] The insurance policy provided that in the event that the share purchase was completed at the end of year 10 and the shares sold on the open market for less than

$3 million, the insurer would pay the insured the difference between the value of the shares realised and 3 million. So if the shares were worth nothing the insurer/investor would receive $3 million.

• [12] The premium for this insurance policy was $1 million payable at the time of entering into the investment in year 1. (The premium was in US dollars but for simplicity I am expressing it in New Zealand dollars.) The premium was funded by a cash contribution of NZ $40,000 and a loan of NZ $960,000. This loan bore interest, so that by year 10 the total indebtedness would be $2.8 million. The loan was a non-recourse loan. The investor assigned absolutely to the insurer the right to complete the purchase of the shares in year 10, and the benefit of the insurance policy. In return the lender promised not to sue the investor in the event that the securities did not cover the amount of the indebtedness.

• [13] The investor was a $100 LAQC incorporated by the “member of the public” investing.

• [14] Superficially these three elements make it look as though the insurance policy will enable the LAQC to complete the purchase in year 10 in any event. So even if the shares are worthless the maximum loss will be of the deposits paid and the

$40,000 to the insurance premium.

• [15] In fact the interacting terms of the various agreements and policies led to the consequence that a claim could only be made on the insurance policy after the share purchase had been completed, and then after the shares had been resold for a value less than $3 million. But the share purchase could only be completed by repaying the loan. So before a claim on the insurance policy for $3 million could be made the LAQC had to repay a loan of $2.8 million and purchase the shares for $0.85 million, a total expenditure of $3.65 million. This meant that the LAQC would only break even at some value of the shares above $3.6 per share in year 10. There were competing estimates of what that value was. The value fluctuates depending on what additional costs one loads into the calculation, such as recovery of the deposits and the cash portion of the insurance premium and loss of interest on the use of money, and tax payable on the proceeds of the claim.

• [16] Superficially the Digitech deal presented as a no risk investment in a speculative company. Nonetheless the LAQC still parts with a reasonable sum of money in cash in year 1. On the example given it is the sum of $135,000 ($95,000 deposit and $40,000 contribution to insurance premium). For practical purposes of course that sum is found by the LAQC’s shareholder(s). They are the persons referred to as the “members of the public” in the conspiracy counts.

• [17] There were over 70 shareholder investors in the two schemes. Only a few of them gave evidence at the trial.

How the scheme was marketed

• [18] The Digitech scheme was introduced by Gosling Chapman to their clients. These clients were taken to MRT for a presentation of Digitech’s commercial products. These events took place in January, February and March of 1995 in respect of the first tranche.

• [19] Gosling Chapman “introduced” the Digitech investment to their clients. An apparently typical letter was one dated 25 January. It is appropriate to set it out in full:

DIGI-TECH COMMUNICATIONS LTD

Further to our recent communications with you in regard to the proposed investment in the above company, pleased find enclose the following:

1. A confidentiality deed prepared by Milloy Reid Tong & Company Ltd (“MRT”) which you need to execute and return to MRT.

2. A full information memorandum in regard to Digi-Tech Communications Ltd, which includes various appendices, including a draft sale and purchase agreement, together with various financials.

3. A copy of the “Loss of Profits” insurance policy together with the loan documentation and Mortgage of Personal Property Agreement, should you wish to avail yourself of these facilities.

As discussed with you previously, we would rate this investment as high risk and to this extent we ask you to proceed with caution. We stress that our firm is not expert in the telecommunications field and that a company that is in the innovative side of communication technology is very difficult to value.

In discussions with John Reid of MRT, it is obvious the company with its “Free Rider Project” is at the forefront of the communication technology and this we think will put the company in a very good position in the future. We must qualify this again by saying that this industry being innovative is full of risk and this is why we ask you to please consider the investment very carefully.

In the early stages of looking at this investment, we requested MRT to look at ways of minimising the potential exposure and in this regard to seek, if possible, a loss of profits insurance policy and we also requested MRT to see if finance could be obtained for this policy up to a minimum of 90%.

MRT through contacts in the United Kingdom and the United States, have been able to locate companies overseas that will provide such cover and finance. The main term of the policy is that for every $1M invested, the policy will cover three times the increase in share price (i.e., $1 to $3). The

$1M premium will be financed 96% by a United States bank at an interest rate of 11%. You may wish to avail yourself of this insurance facility.

The bank will require as security the assignment of the loss of profits insurance policy and also the agreements for sale and purchase of the Digi- Tech communications Ltd shares.

We note that although Castle Brown, Barristers and Solicitors, have reviewed the sale and purchase agreement and loss of profits policy together with the loan document and Mortgage of Personal Property Agreement from a general legal prospective for ourselves, and are reasonably happy with their contents, we believe you should seek independent legal advice in regard to these contracts. This opinion is a privileged document and was prepared for Gosling Chapman only.

Generally if you invest in shares and it is not your normal business, and you do not at the outset have an intention of resale, and the investment is

intended to be a long-term investment, then any subsequent profit arising out of the future sale of the shares is not taxable. If you have acquired the shares in this company with the intention or purpose of selling, then the profits or gains are generally taxable.

We also enclose for your reference an opinion from Denham Martin & Associates, Barristers and Solicitors, to ourselves, in regard to the taxation issues arising out of the proposed investment. This opinion is a privileged document and was prepared for Gosling Chapman only.

The initial deposit for this investment must be paid on or before 15 March 1995 and the cashflows on present day dollars (excluding final settlement of

$835,000) from 15 March 1995 up to 31 March 2005 are as follows:

With Insurance Without Insurance

Deposit on Shares 95,000 95,000 Insurance Premium

(net of loan) 40,000 -

Further Deposits on Shares

(1998 – 2004 inclusive) 70,000 70,000

$205,000 $165,000

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

If you decide to form a company for this particular investment, Gosling Chapman can arrange this for you at a cost of $850 plus GST. There are various other costs, but these should not amount to any more than $500, and the remainder of Gosling Chapman’s fees will be paid by MRT.

Finally, we urge you to seek independent legal and taxation advice prior to entering into this transaction.

Yours sincerely

PW Russel

GOSLING CHAPMAN

The legal opinion supporting the Digitech scheme

• [20] The opinion from Denham Martin and Associates is also dated 23 January 1995. This opinion offers the view that if it could be established that the investor had acquired the Digitech shares as part of “share dealing” activity or that the shares had been acquired for the purposes of resale or as part of a profit making undertaking scheme then any profits or gains arising from the sale of the shares would be

assessable income. To ensure that was the case the concept was that the shareholder investor would establish an LAQC whose stated business would be to acquire the Digitech shares for the purposes of resale. In that situation the Denham Martin opinion was to the effect that in this particular scheme the insurance policy paid (the

$1 million) would be fully deductible in year 1, as an “expenditure” by the shareholder investor.

• [21] The deductibility was for a number of technical reasons, one of the most important of these was that under the terms of the insurance deal the insurer would set up a purpose trust and fund it so as to enable the trust to meet potential claims in ten years time. Having set up the trust the insurer would have fully discharged its obligations under the policy. The investor would not be entitled to sue the insurer. Nor would the investor be a beneficiary of the purpose trust. The investor would have no rights against the trustee of the purpose trust:-

The most an investor can expect under the arrangement is the payment of the money at a future time in accordance with the terms of the purpose trust and money is clearly excluded from the operation of section 104A.

The tax advantage

• [22] Apart from enclosing the Denham Martin letter, in none of the documentation provided by Gosling Chapman to their clients is the tax advantage referred to, let alone quantified. Obviously Gosling Chapman explained this orally. Although several partners gave evidence I was never told what would have been said. But it is not hard to surmise from these consequences. The tax advantage from this typical $1 million deal is that the shareholder of the LAQC is entitled to claim in year 1 an expenditure of $1 million in his tax returns. At the then prevailing tax rate of 33% it followed that if that person would otherwise have had an assessable income of $1 million and a tax liability of $330,000, his annual income would reduce to nil and thereby his tax liability vanish. In cash terms he would have expended $135,000 in year 1 to get into the scheme but avoided having to pay tax of $300,000 and so his cash position would be improved in the sum of $165,000. I was left in doubt as to whether this was explained as a tax timing difference, for the proceeds of the insurance policy would be taxable. But a number of the investor witnesses expected

they could leave the policy with the lender and walk away if it was not worth their while to complete the purchase.

• [23] All the investor witnesses called at the trial accepted that they did understand the tax advantage at the time they entered into the transaction and the presence of the advantage influenced their decision to invest. I am quite satisfied that the tax advantage was the immediate attraction for entering into these investments. Throughout the trial I was never won over by the notion appearing in the information documentation and advanced by some of the witnesses that these investments were a speculative punt into the future, comforted with an insurance policy, incidentally offering a tax shelter.

• [24] All the investors in the scheme were by definition high income earners. The Court presumes that they were either themselves smart and astute or capable of taking smart and astute advice. Absent the tax advantage the arithmetic made nonsense of the insurance policy. This is if they bothered to read the small print. The predominant impression I obtained is that clients were impressed that Gosling Chapman partners were themselves investing. They were told that by the partner they dealt with. Therefore those investors who took out the insurance policy (all but one) did so either because they did not bother to look at the small print of the documents they were signing and/or because they knew the only way to get the $1 million tax deduction was to take out the insurance policy. In substance then there is no doubt that the investors took out the insurance policy package in order to obtain the tax advantage.

• [25] The purpose trust was and is an unusual concept, unknown then and now to New Zealand law. It is a trust without beneficiaries. It is quite plain from reading the Denham Martin opinion that it is placed into the structure solely in order to ensure the tax advantage.

• [26] It was also apparent from the documentation sent with this Gosling Chapman letter that the insurer would be a Netherlands company. The insurer was not named in the documents circulated on 25 January but simply described as “Netherlands

insurer”. The lender was named as Bank of New York – Intermaritime Branch Geneva (BNYIMBG).

Implementation of the transaction

• [27] Conceptually all the transactions were intended, to be implemented in this following fashion. Each person investing in the scheme would each or in combination incorporate an LAQC. This meant that for tax purposes the expenditure and the income of that company could be incorporated into the tax return of the shareholder. Each LAQC was incorporated for a nominal sum, $100. The LAQC would immediately sign a memorandum indicating that its business was to trade in shares.

• [28] Then the LAQC would execute an application to purchase shares in Digitech Ltd, an application for insurance and an application for loan funding. After notification of acceptance of these, the LAQC executes the agreement for sale and purchase, and pays to N-Tech the deposit. The LAQC then executes the loan agreement and the mortgage of personal property to the lender to secure to the lender the benefit of the agreement for sale and purchase and the insurance policy. The LAQC provides the 4% of the $1 million insurance company. The LAQC authorises Mr John Currie, a solicitor in Hong Kong to receive the cash portion of the insurance premium and from the lender the advance for the balance of the insurance premium and to pay the insurance premium from these proceeds. In due course the investors received back the share purchase agreement, a copy of the certificate of insurance, a copy of the loan agreement, a copy of the mortgage personal property and acknowledgment of receipt that the insurance premium had been paid. They made these documents to support the entry of the expenditure of $1,000,000 in their tax return.

• [29] From these documents the investors know there is an offshore leg to the scheme. But they do not know what happens there. There is no evidence before me that any of them asked, or wanted to know. Some of the witnesses said they were reassured that an American Bank was involved.
• [30] The draw down of the loans and payment of the insurance premiums were through Mr John Currie, a solicitor and accountant, being a member of the firm of Grant Thornton Byrne in Hong Kong. It was always intended, at least by Mr Currie and Mr Reid, that the loan draw down and payment of the insurance premium would be effected by a circular transaction. The lender on the face of the loan agreement to the LAQC was intended to be a fiduciary lender, though that was not disclosed on the loan documents. By a fiduciary lender I mean that the lender would be on lending funds received from a principal who would be unnamed. The unnamed principal was a company called Asian Growth Fund Ltd or AGFL. AGFL would advance the loan to the fiduciary lender. The fiduciary lender would immediately on lend the money to Mr John Currie as agent for the New Zealand borrowers. He would immediately pay the Netherlands insurer (Digitech Epicharmus Vastgoed BV). The insurer would then endorse the payment in favour of an entity called Swiss Underwriters Group Ltd, who would endorse the payment in favour of AGFL. It was a circular settlement, which did not need cash, as each liability to pay in cash a certain sum was matched by a counterpart obligation.

• [31] All the entities in this transaction other than Mr J Currie were corporate entities, lawfully incorporated according to the law of the jurisdiction of their residence. According to their local law they all had directors and shareholders (often themselves limited liability companies) and duly authorised signatories. The intention was to settle each transaction by a negotiable instrument endorsed by one party in favour of the other so that the complete set of endorsements transferred a certain sum between all the parties. Then the accounts of each entity would record receipt of that sum and then the ongoing advance of it. So the lender would record the advance to J Currie as the draw down of the loan in favour of the New Zealand borrowers. The record of the advance would be broken down into accounts per individual borrower, Mr Currie merely being the agent for receipt of the borrowed funds. Similarly the insurer, Epicharmus, would record as a credit the receipt of the premium in accounts for each individual insurer. Epicharmus the insurer would instruct Mr Currie to pay the cash component of the insurance premium to Swiss Underwriter Group. This company held no bank account. So the cash component was held by Mr Currie as solicitor acting as settlement agent for the parties. With one exception the cash component was not included in the amount of the endorsed

negotiated instrument. As Mr Currie acted for both the insured and the insurer’s nominated recipient, Swiss Underwriter, it appears the latter’s right to the sum transferred by the acknowledgment of receipt by the insurer.

• [32] This circular transaction is clearly set out in a handwritten diagram of the settlement circuit and explanations for each step prepared by Mr Reid and sent to Mr Currie on 29 March 1995. It is quite clear that Mr John Currie and Mr Reid understood the circle for the first tranche of the first Digitech transaction. It can be safely inferred they both understood and Mr Currie supervised the circular character of the settlement of each tranche thereafter.

• [33] The particular settlements did not always go to plan and nor was the documentation complete. It had been originally intended to use BNYIMBG as the fiduciary lender. But on the eve of the intended settlement of the first tranche before 31 March 1995 (the end of the tax year for the LAQCs) not all the documentation required by BNYIMBG was available and the bank refused to participate until it was. Another Grant Thornton Byrne shelf company, Mei Shing Trading Limited, was inserted. A document entitled “transferable certificates of deposit” was drawn up. Although that was its title there was no underlying bank deposit. The terms of the document though were by way of promissory note:-

MEI SHING TRADING LIMITED

TRANSFERABLE CERTIFICATE OF DEPOSIT

HK 4398 DUE 29 March 1995

Mei Shing Trading Limited will pay to John Donald Currie of 13B Haven Court Discovery Bay Hong Kong being the Registered Holder the sum of Twenty million and eighty nine thousand six hundred United States dollars

US$ 20 089 600

ON THE 29^TH DAY OF March 1995 upon presentation and surrender of this certificate to Mei Shing Trading Limited at its office at 1^st Floor New Henry House No 10 Ice House Street Central Hong Kong by way of bank Cheque

Signed for and on behalf of Mei Shing Trading Limited by its duly authorised signatory

MEI SHING TRADING LIMITED TRANSFERABLE CERTIFICATE OF DEPOSIT ENDORSEMENT SCHEDULE

PLEASE PAY EPICHARMUS VASTGOED BV Officia 1, 2^nd Floor

De Boelelaan 7 1083 HJ Amsterdam

Authorised Signatory ...............................................

PLEASE PAY SWISS UNDERWRITERS GROUP LTD 1^st Floor

New Henry House 10 Ice House Street Central Hong Kong Authorised Signatory ...............................................

PLEASE PAY ASIAN GROWTH FUND LTD Level 40 Lippo Tower

Lippo Centre 89 Queensway Hong Kong

Authorised Signatory ...............................................

PLEASE PAY MEI SHING TRADING LTD 1^st Floor new Henry House 10 Ice House Street Central Hong Kong

Authorised Signatory ...............................................

• [34] Although this document is entitled the “Transferable Certificate of Deposit” it functions as a promissory note, and was intended to be endorsed by successive promisees, back to Mei Shing.

• [35] Not all the TCD/promissory notes were discovered by the SFO. At least some were incorrectly endorsed by the wrong person e.g. the first endorsee should have been Mr Currie. On the first and other TCDs it was not. And some were endorsed out of time sequence. I will be returning to these gaps and deficiencies, later in the analysis.

• [36] In a substantial sense there was never intended to be and never was any “real” money loaned and any “real” premium paid. Here I use the word “real” as meaning an asset being a sum of money which was capable of being used for any other purpose. If I have a credit in my trading account for a $1,000 it is real in the sense that I can withdraw it to buy a TV set, some airline tickets to Australia, or simply as spending money. There was no such reality here. The assets and liabilities in these endorsed instruments were created, passed on and accepted, strictly on the understanding that they would be neutralised by the complete set of

endorsements on the instrument. That was made clear by Mr Tuyll, responsible for the conduit companies of Insinger de Beaufort in Hong Kong. It is obvious as well.

• [37] It is also clear from the evidence that the persons authorised to transact business on behalf of these corporates did, however, regard these circular transactions as being real, and lawful, and justifying entering appropriate entries in the corporate books of account recording the transactions as having taken place. In the case of loans they were then seen as being the draw down of the loan and justifying the charging of interest during the term of the loan. In the case of the insurance premium they were seen as justifying issuing a solemn receipt of payment of the premium and thus satisfaction of the insured’s obligations under the insurance policy. I will return to this topic later, and illustrate by examples of correspondence.

Intended performance of the obligations in year 10

• [38] All the obligations in Digitech are due to mature on 31 March 2005. It will be recalled it was intended that in the event of a claim on the insurance it would be met by a payment from the purpose trust. At the time the first Digitech transaction was entered into in March of 1995 there were only two jurisdictions in the world which recognised as lawful a purpose trust having no beneficiaries and not being a charity. They were Liechtenstein and one of the tax havens in the Caribbean. The first purpose trust was set up based in Hong Kong, but found on close examination not to be the sort of purpose trust intended by Denham Martin in its opinion. A replacement purpose trust was set up in the British Virgin Islands at a time when that jurisdiction had legalised the entity.

• [39] It is and always was obvious, if any investor or their advisers bothered to read the terms of the agreements, that it was very unlikely that there would ever be a claim made under the insurance policy. There was no evidence led of any investors scrutinizing year 10. Mr Chapman took the simple view, he was an investor as well, that if the shares were not valuable he would leave the transactions with the Bank. Remember the loan is a non-recourse loan to a valueless LAQC.
• [40] Mr Denham Martin said he did not examine how the transaction would unwind. Commercial investors usually do. In tax driven structures that I have examined when in private practice the unwind at the end is often not worked out, at the outset. It can be tricky. This is because of the arithmetic set out above. The cost of making a claim would be more than the net benefit. If the shares at the year 10 are simply not worth $3 million the $100 LAQC companies will simply not bother completing the transaction. It will be a waste of time for the lender to collect the debt against the LAQC. The shareholders of the LAQC are not liable on the debt. Shareholders have nothing to gain by funding the LAQC to repay the loan and complete the purchase because they would be spending nearly a million dollars more than they would receive.

• [41] However, in the unlikely event that a claim was made the thinking of Mr Reid was that there would then be funds in cash in excess of $3 million available to the related entities, ensuring the honouring of the insurance policy. The principal lender, AGFL, would have cash of $2.8 million and N-Tech cash of $850,000 from which sums could be advanced totalling $3 million to the insurer, Epicharmus, for on-sending to the special purpose trust which would make the payment to the insured.

• [42] In sum, Mr Reid said, in a voluntary interview to SFO investigators, that the shareholders of the LAQC got what they contracted for.

The use of the cash payments by the LAQCs

• [43] The deposits on the purchase of the Digitech shares were paid to N-Tech. Both companies were owned by the merchant bankers, Milloy Reid Tong, later Milloy Reid Wong. These receipts went into a general treasury account of that firm. Mr Reid personally had no greater benefit from the receipt of those funds than did any of his other partners in the firm. Those cash deposits amounted to about $7.5 million in the case of Digitech. Gosling Chapman had negotiated a “brokerage” fee for placing the Digitech deal to investors at 1.67%. This netted about $1.2 million, including I think the NZIL placement.
• [44] The cash portion of the insurance premiums remained under the control of Mr Currie. They were used to reward Mr Currie, Mr Paul Darvell, Mr Connolly and Mr Russel. Mr Currie took substantial fees for his role, being in effective control of transactions in the offshore leg of the scheme. Mr Connolly was paid £40,000 for his role, pretending to be a third party between Mr Reid and Mr Currie arranging for the establishment of the insurer and other associated corporate entities. In fact this task was done by either Mr Reid or Mr Currie, or both of them in combination. Mr Paul Darvell, now deceased, had a role in the refinements of the design of the structure and was rewarded with the sum of at least $600,000 New Zealand. Mr Russel received a payment of $600,000 or thereabouts also from these funds. That last payment to Mr Russel was in addition to his share of the brokerage payment to Gosling Chapman for obtaining the investors. This additional payment appears to be the reason he was arrested and charged with being a conspirator.

The complaints leading to the prosecution

• [45] It was always anticipated by Gosling Chapman and Denham Martin that these investments would be scrutinised by officers of the Inland Revenue Department. Such an investigation would obviously be triggered by the sudden elimination of all, or substantially all, of the tax liability of the shareholders of the LAQC in year 1.

• [46] It was originally perceived that the IRD scrutiny would be directed to the proposition as to whether or not the full amount of the insurance premium could be expended in year 1 or whether it would have to be accrued across the life of the policy. Indeed it was the latter issue rather than avoidance as such which was the focus of the intention of an IRD investigator for some years before the Department began to address the possibility that the whole scheme was an avoidance.

• [47] As the IRD scrutiny continued the partners of Gosling Chapman developed a perception that they may be exposed to claims by their clients in the event that their clients suffered a loss consequent upon the tax deductibility of the insurance premium being set aside. (They would not suffer a financial loss otherwise, as explained above.) Mr Rowan Chapman, the senior partner, made a complaint to the SFO. His evidence in this respect was as follows:-

Notes of Evidence page 29 line 31 through to page 30 line 6.

q. You are the person who laid the fraud complaint, is that correct?

a. That’s correct

q. And the essence of your complaint was that the investors, of which you are one, were deceived into believing that they were dealing with a substantial lender and a substantial insurer with no link between them and no circularity of funding. Is that fair?

a. That’s correct.

q. And your basic position is that Gosling Chapman was mislead by the accused on these matters and as a result its investor clients were similarly mislead.

a. That’s correct.

• [48] A second complaint was made by the Commissioner of Inland Revenue Department at a later date. No witnesses were called by the prosecution from the Inland Revenue Department. At one point the Department appeared to be taking the view that no loan or insurance transactions took place. That appears to have been the Department’s officer’s view at the time the complaint was made to the Serious Fraud Office. But at a later date when dealing with those of the investors who had not settled, the Department’s officers changed their view. The current IRD position, to the limited extent that it is before me, is that the transactions did take place, but the structure was avoidance. For at least one LAQC, the Commissioner has allowed a reconstruction whereby the premium is deductible in year 11 if a claim is made on the insurance policy, at least for some of the shareholder investors.

The need for proof of dishonest agreement

• [49] It is obvious, and was common ground, that dishonesty is essential to each of these conspiracy counts, being conspiracies to defraud by depriving persons of property. In such frauds the onus is on the Crown to prove that each accused was acting deliberately and with knowledge that his conduct was in breach of his legal obligation. Counsel were agreed that the most apposite of the many authorities on this point was the decision of the Privy Council in Adams v R [1994] UKPC 38; (1994) 12 CRNZ 379. The subject of those proceedings were four conspiracy counts that the accused did conspire with one or more of the others by deceit, falsehood and other fraudulent

means to defraud various entities of the Equity corp group. In Adams their Lordships adopted part of the advice in the decision Wai Yu-Tsang v R [1992] 1 AC 269, where Lord Goff of Chieveley delivering the judgment of the Board said of the expression “intent to defraud”, that:

In broad terms, it simply means an intention to practise a fraud on another, or an intention to act to the prejudice of another man’s right.

• [50] Lord Gough also said at pages 279, 280 as follows:-

The question whether particular facts reveal a conspiracy to defraud depends on what the conspirators have dishonestly agreed to do, and in particular whether they have agreed to practise a fraud on somebody. For this purpose it is enough for example that, as in Reg v Allsop and in the present case, the conspirators have dishonestly agreed to bring about a state of affairs which they realise will or may deceive the victim into so acting, or failing to act, that he will suffer economic loss or his economic interest will be put at risk.

• [51] On the subject of whether or not a person can be guilty of fraud by concealment the judgment in Adams says at page 391:-

In Their Lordship’s view a person can be guilty of fraud when he dishonestly conceals information from another which he was under a duty to disclose to that other or which that other was entitled to require him to disclose. ...

• [52] In this case the Crown has to prove that at least two of the accused have dishonestly agreed to bring about a state of affairs which they realise will or may deceive one of the shareholder investors into acting or failing to act so that he will suffer economic loss or his economic interests will be put at risk, and also consequently defraud the Government.

• [53] Where, as here, the Crown goes on to say that a significant part of the conduct was dishonest concealment of information, it is necessary for the Crown to show that one or other of any conspirators was under a duty to disclose information.

• [54] There is no doubt on the facts that a large group of persons, including but extending beyond the accused, were all working with a common intention of obtaining a significant tax advantage and persuading the IRD it was not by avoidance. That group included the shareholder investors themselves, the partners of Gosling Chapman, Mr Denham Martin and Associates, Milloy Reid Tong, Insinger

de Beaufort, Mr Paul Darvell, and arguably the solicitors doing minor work enhancing the commercial “look” to the documents. All of those persons must have known that it was a venture full of risk, but offering substantial financial reward.

• [55] As Mr Fulton stressed in his submissions, it is important not to lose sight of the need to prove not just an agreement upon a course of conduct but that it is a dishonest agreement by at least two conspirators. That is why it is necessary for the Crown to prove against each of the accused before that accused can be convicted that the accused had a subjective belief that its conduct was in breach of his legal obligations.

• [56] It is not possible to prove directly a person’s state of mind. Conclusions as to any person’s state of mind are derived by inference. I have discussed this process in an earlier judgment that I delivered in a civil conspiracy case earlier in the year: EIL Brigade Road Limited v Brown and Ors (CIV 2001-409-000733, High Court, Auckland, 5 August 2004). Proof of a state of mind is not displaced by the subject person denying the state of mind or by failing to make any statement. It has to be inferred, from that and other persons’ conduct. It is important to look at the whole pattern of conduct before forming a judgment. For example, a particular act may be capable of being explained as a mistake or as a deceit, but when that particular act is put into the whole pattern of events it becomes much easier to judge whether it is a deceit among other deceits or a mistake among other mistakes or has some other characterisation, such as being an exceptional event.

• [57] In his closing submissions Mr Ruffin urged upon me that the Crown case depended upon all of the overt acts including the money laundering conduct canvassed during the five week trial, as to be taken into account when forming a judgment as to whether there was a dishonest agreement. I agree. The problem for the Crown, as I will endeavour to illustrate by example, and it can only be by example, is that there is a persistent pattern of conduct by the accused which presents behaviour very explicable as being persistent efforts to act within the law of the jurisdiction of the transaction. Persistent lawful conduct does not rule out a significant breach of legal obligation sufficient to found conspiracy. The facts of Smith New Court Ltd v Scrimgeour Vickers [1996] UKHL 3; [1997] AC 254, 276, a case discussed in

the EIL Brigade Road Ltd judgment, is illustrative of this. There the critical illegal conduct of the brokers was plainly a lapse, but a crucial lapse.

• [58] I reminded myself at the time, but have been asked to record in the judgment by Mr Ruffin as a record, that the onus in this case is on the Crown and that it must prove the counts beyond a reasonable doubt. That means that I had to be sure before I could have convicted the accused. It was because at the end of a five week trial I was quite sure that the Crown had not discharged this onus that I perceived I had a duty to immediately acquit the accused and deliver my reasons later.

• [59] I now consider myself under a duty to set out in this judgment the reasons for the acquittal verdict, so far as possible as they were in my mind at the time I made the decision. This is not the occasion, after the event, of finding reasons to justify the verdict. I direct myself accordingly to guard against that in the course of preparing what has to be a reasonably lengthy judgment. However, to illustrate and explain my reasons, I have selected examples from the documents, and quotations from the cases, since the acquittal.

The Crown’s case

As pleaded

• [60] The core particulars for both conspiracy counts were the following propositions:-

What might have been a legitimate (if marginal) tax scheme was however rendered a fraud on the investors by the fact that the insurance and loan transactions were entirely fictional. The transactions comprising them were circular. The so-called financier or bank and insurer were beneficially owned and controlled by Messrs Reid, Currie and Connolly, who together established, maintained or participated in implementing the structure. The true beneficial ownership and circularity of the underlying transactions were concealed from the investors and from the Commissioner of Inland Revenue. (Count 1)

(Amended particulars, Digitech, page 5, paragraph 8. The identical particular in the NZIL count 2 is paragraph 13.)

• [61] Under the heading “Defrauding the public and any person” there are a number of particulars but the substance of them is gathered together in two paragraphs, 20 and 21 of count 1 as follows:-

20. There were thus several fraudulent acts involved in establishing and implementing the template. At the heart of these were the dishonest representations to the investors that the underlying loan and insurance transactions were real, because if they were not (and they were not):

• the investors’ LAQC would not have the cash contribution (4% of the premium) used for the purpose of paying loss of profits insurance policy premium.

• the bottom line benefit to the investors (the tax relief) would be disallowed, and

• without the downside protection, the agreements for sale and purchase would not have been entered into and the deposits not paid.

21. These representations that the underlying loan and insurance transactions were real were made by the accused both in the template documents and other letters, memoranda, contracts including deeds which they wrote or directed to be written or arranged for others to write for the purpose of being shown to the investors and/or their professional advisers. These representations were a fraud against the investors as the investors’ claim for deductibility of the insurance premium and deductibility of interest on the loan would unwittingly be false if there was no genuine insurance premium and no genuine loan. This would consequentially defraud the Commissioner of Inland Revenue who, in the absence of further investigation to unearth the true position, would be obliged to allow deductibility in appropriate years for the insurance premium and payments of interest pursuant to the loan.

(The identical paragraphs in the NZIL count are paragraphs 26 and 27)

• [62] It is appropriate to refer further to particulars of the overt acts from which the conspiracy to defraud can be inferred. There are four general clauses as follows:-

1. The accused and Mr Darvell participated in varying degrees in the design of the template documents, the discussions with the various professional advisers both representing Gosling Chapman & Co and independent investors, to refine a total wording of the template documents.

2. The accused and Mr Darvell all participated in telephone discussions including the instruction of other professional persons to take steps to form new or acquire existing companies and/or trusts; directing or

inducing persons to take consequential steps so that ultimate a paper trail existed which ostensibly showed that there was a real contract of insurance and an entity or entities available to meet the obligations under the policy of insurance forming part of the template and a real bank which provided a real loan for the purpose of paying the premium to the insurer.

3. Meticulous and intricate documentation was generated by way of a manufactured paper trail and kept by the accused to provide as appropriate evidence to investors and their professional advisers; and to the professional colleagues in Gosling Chapman and Milloy Reid Wong & Company Ltd that the structures underlying the template were legitimate and real and being implemented as required by the template; and provide an audit trail for any possible examination by investors and/or the Commissioner of Inland Revenue.

4. More specifically, the file notes, communications, the draft letters, letters, memoranda and actual documents prepared by various accused are identified generally in the following evidential volumes. Each act and/or declaration of each accused set out in such documents is relied upon.

• [63] The same four particulars are repeated in the NZIL count with the variation that paragraph 1 deletes the words “and Mr Darvell” and adds the words at the end “to the NZIL investment proposal (the NZIL template)”. Paragraph 2 deletes the words “and Mr Darvell”. Paragraphs 3 and 4 remain the same.

• [64] As is apparent from paragraph 4 the particulars rely on all of the conduct of the accused.

The Crown case as presented at trial

• [65] Mr Ruffin for the Crown opened and closed on each occasion focussing on these pleaded particulars which I have just set out.

• [66] In his opening, and repeated in his closing, Mr Ruffin said:-

15. The essence of Counts 1 and 2, being the conspiracy charges, is that there was an intention to defraud both the investors and consequentially the Commissioner of Inland Revenue as:

• If there was no genuine loan, there could be no genuine interest deduction claimed in appropriate years by the investor nor allowed by the Commissioner as a deduction.
• If there was no real insurance premium paid to an insurance company that could meet the policy obligations from its own funds, then the investors could not deduct a premium in the appropriate years nor the Commissioner allow such a deduction.

• The 4% cash contribution by each investor LAQC made in respect of the insurance premium was never used for that purpose

(Paragraph 36 of opening, paragraph 15 of closing)

• [67] This submission is complemented by the following submission, made both in opening and closing, as follows:

18. It is assumed for the purpose of this prosecution that if the template had been implemented as documented and represented and:

• a real loan obtained to pay 96% of the premium
• a real payment of premium had been made (from the 4% cash provided by the investors LAQC and the 96% borrowed from the bank), to an insurance company not directly or indirectly associated with the bank, and

• there was no circularity of funds between the lender and the issuer.

then (although this is not binding on the Commissioner of Inland Revenue) there could have been an effective arrangement giving rise in appropriate years to deduction of the insurance premium and deduction of interest payments.

(Paragraph 52 of opening, paragraph 18 of closing)

• [68] To me, during the trial the Crown case separated out into three separate contentions. These are:

1. That the insurance and loan transactions were entirely fictional, because they were circular and were not real loans and real premiums. The meticulous and intricate documentation was a deliberately manufactured paper trail made to pretend that the structures underlying the template were legitimate and real and being implemented as required by the template.
2. The insurance and loan transactions were entirely fictional because the instruments used to settle the loan were defective or did not exist.

3. Members of the conspiracy made dishonest representations to the investors that the underlying loan and insurance transactions were real:

(a) The representations were made in letters, memoranda and by concealing the truth; and

(b) Were made in the contractual terms of the agreements executed by the investors.

In each case (a) and (b) so that the circular transactions without using real funds was dishonest conduct.

Were the transactions entirely fictional?

• [69] An inevitable conclusion from the mountain of paper before me was that Mr Currie and Mr Reid, and their associated staff in legal offices and accounting offices in Hong Kong, and Insinger de Beaufort staff in various jurisdictions, acting as managers or directors or signatories to the various companies, all thought that they were creating legal rights or obligations in these circular transactions. I reject completely the notion that the meticulous documentation by the professional firms in Hong Kong, the Netherlands, and elsewhere, such as the British Virgin Islands, was intended to be just a paper trail. Likewise I do not think that Mr Currie or Mr Reid thought that either.

• [70] I did not apprehend Mr Ruffin to be seriously pursuing the proposition, which the Crown pleaded, that all the meticulous paper was simply a false paper trail. Certainly, the correspondence to and from Mr Connolly was a charade. I will address that fact later in the analysis. Nonetheless, Mr Ruffin’s opening and closing arguments pursued the notion that because the settlement of the insurance and loan transactions were circular and did not use funds they had to be a fiction. Implicitly

he appears to have been inviting the conclusion that professionals such as the accused had to know that. So there were two parts to the proposition. The proposition focussed on the accused not on the conduct of the Dutch professionals and other functionaries in the offshore jurisdictions. Mr Russel is a chartered accountant and former employee of the Inland Revenue Department. He is tax wise. Mr Reid has no formal tertiary qualifications. He got into merchant banking via a career starting out in the more traditional parts of the financial sector. Mr Currie is both a lawyer and an accountant, and a former partner of one of the major international accounting firms, formerly based in Melbourne. Mr Connolly has no formal tertiary qualifications. He has had some experience working in the financial sector. IN broad terms I think it is a fair enough proposition that all of these men, for one reason or other, can be presumed to know the difference between doing a sham transaction and doing a transaction which is intended to have legal effect.

• [71] I gained the impression, rightly or wrongly during the trial, that one of the goals of this case was to establish some new jurisprudence as to the notion of sham, extending the concept. It seemed to me that a conspiracy trial was hardly the occasion to do this when the conspiracy trial depends upon proof of an active dishonest agreement to do something in breach of legal obligation.

• [72] In the course of the opening I was puzzled by the concept of sham being advanced before me and sought more authority, which was provided. In the closing Mr Ruffin developed the proposition that there was authority that said that where no real money was involved a circular transaction was a sham. In particular Mr Ruffin ended up relying upon a famous decision of the House of Lords being that of W T Ramsay v IRC; Eildeck (Inspector of Taxes) v Rawling [1981] UKHL 1; [1982] AC 300.

• [73] Keeping in mind Mr Ruffin’s intention to pursue an application under s380, taking the case to the Court of Appeal on a point of law, it seems appropriate to me give in this judgment a full account of the reasons why I rejected the wider concept of sham which underpinned the heart of the Crown’s case.
• [74] It appeared to me that the Crown were seeking in this case to establish a broader conception of a fictional or sham transaction than hitherto recognised by New Zealand authorities, when examining schemes pursuing tax advantage.

• [75] The Crown opened on the subject of ascertaining the legal character of the template transaction that it actually entered into and the steps that are followed by citing the decision of the Court of Appeal in Peters v Davison [1999] NZCA 376; [1999] 2 NZLR 164 and those passages of the majority judgment referring to the decision of Richardson J in Mills v Dowdall [1983] NZLR 154, 159. The Crown also relied on the judgment of Thomas J at page 193 which also refers to Mills v Dowdall. The Crown counsel analysis concluded with this proposition:-

As was noted by Thomas J, the form of a particular step in the transaction will be a sham where the form merely conceals the fraudulent reality.

• [76] That itself is a summary of a dictum of Thomas J at page 193 where he says:

Whatever one’s view of a doctrine of form over substance, it does not apply to instances where the transaction is a sham, that is, where the form merely conceals the fraudulent reality.

• [77] But it was never clear to me how the Crown moved from Peters v Davison and Mills v Dowdall to the proposition that the circular transactions were fictional. It did appear in the opening that the Crown was arguing they were fictional because they were a dishonest implementation of the template documents. So they were fraudulent conduct and as a consequence of that they were fictional.

• [78] In an effort to grasp the Crown’s proposition in this respect, during the opening I recorded Mr Ruffin as saying that these transactions were “fictitious because they were dishonest transactions”.

• [79] It was also my understanding that that proposition depended in part on the notion that if there had been no close relationship between the insurer and the bank and real funds had been used and the settlement had not been circular there might have been a legitimate (if marginal) tax scheme.
• [80] It will be recalled that the relevant particular as to fiction or sham is framed in this sentence:

What might have been a legitimate (if marginal) tax scheme was however rendered a fraud on the investors by the fact that the insurance and loan transactions were entirely fictional. The transactions comprising them were circular ...

• [81] Without submitting expressly, the Crown case seemed to be that anyone who puts in place a circular transaction in a tax scheme does so with the intent to defraud. The Crown in its case, whether in submission by counsel or through its witnesses may great play with the word “circularity”. Mr Ruffin emphasised that the Denham Martin opinion of 23 January recorded an assumption:

This advice has been prepared in the light of certain assumptions, namely:

... a real payment of premium is made by the investors and the proposal does not involve the circularity of funds.

• [82] At the start of his closing address I put it to Mr Ruffin that for any transaction to be a sham there must be a common intention by the parties to the transaction that it be a sham.

But one thing, however, is clear in legal principle, morality and the authorities that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations with which they give the appearance of creating.

(See Diplock LJ (as he then was) in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, 802)

• [83] Secondly, I said that there is no case that says that a circular transaction renders what might have been a legitimate tax scheme a fraud. Mr Ruffin accepted there was no such case but argued the decision of Ramsay v IRC [1981] UKHL 1; [1982] AC 300 led to that conclusion. Inferentially he seemed to be arguing that had there been no real money in the transaction in Ramsay the Court would have held it to be a fiction. Mr Ruffin cited the opening paragraph of Lord Justice Templeman’s judgment in the Court of Appeal:

The facts as set out in the case stated by the Special Commissioners demonstrate yet another circular game in which the taxpayer and a few hired

performers act out a play; nothing happens save that the Houdini taxpayer appears to escape from the manacles of tax.

The game is recognised by four rules. First the play is devised and scripted prior to performance. Secondly, real money and real documents are circulated and exchanged. Thirdly, the money is returned by the end of the performance. Fourthly, the financial position of the actors is the same at the end as it was in the beginning save that the taxpayer in the course of the performance pays the hired actors for their services. The object of the performance is to create the illusion that something has happened, that Hamlet has been killed and that Bottom did done an asses head so that tax advantages can be claimed as if something had happened.

[1979] 3 All ER 213 at 214

• [84] This same passage is expressly referred to by Lord Templeman when delivering a majority judgment in Challenge Corporation v CIR [1986] 2 NZLR 513, from 562. There he said:

Most tax avoidance involves a pretence; see the analysis in WT Ramsay Ltd v Inland Revenue Commissioners [1979] 1 WLR 974, 975 (CA).

• [85] Yet in the same judgment Lord Templeman has earlier distinguished between sham, evasion, mitigation and avoidance. As to sham he said at page 560-561:-

In the present case Barker J pointed out that the transaction was not a sham. It was not so constructed as to create a false impression in the eyes of the tax authority. The appearance created by the documentation was precisely the reality. In other words Challenge purchased the shares of Perth; Challenge did not pretend to purchase the shares of Perth. The question is whether that purchase was also an arrangement under s 99.

• [86] Under the express terms of the loan agreement the loan could be satisfied by a cheque or negotiable instrument. A promissory note is a negotiable instrument. It does not depend on there being real money in the hands of the promissor when the promise is made. It is often overlooked that the Ramsay decision in the House of Lords was in respect of two different schemes, Ramsay and Rawling. In the Rawling scheme at first instance Donaldson J held:-

There is no suggestion that the transactions with which we have been concerned were shams. Of course, it is common ground that collectively they constituted a tax avoidance scheme. Indeed, they may reasonably be described as choreographed, stylised or contrived. They may have lacked all point, if the judgment under appeal is right. But they were real transactions, which had real results in terms of altering rights and obligations. By the time that they had been completed, the taxpayer was £925 out of pocket. By

then too the financial position of the various Jersey companies had changed, both individually and collectively, no doubt to their profit. And it is nothing to the point that the only outward and visible signs of the transactions were some pieces of paper and associated book entries. This is the normal machinery of banking and finance.

• [87] Mr Ruffin observed that in the House of Lords judgment Lord Wilberforce said:-

In some cases one may doubt, whether in any real sense, any money existed at all. It seems very doubtful whether any real money was involved in Rawling; but the facts as to this matter are for the Commissioners to find. ...

(See page 322-323)

• [88] Mr Ruffin also relied upon Lord Fraser’s speech where he said at page 338D in respect of Rawling:

There was apparently no evidence before the Special Commissioners that Thun actually possessed the sum of £543,600 which they lent to the taxpayer to set the scheme in motion ... and it might well have been open to the Special Commissioners to find that the loan, and all that followed upon it, was a sham. But they have not done so. In Ramsay “real” money in the form of a loan from Slater Walker was used so that the finding of a sham in that respect would not have been possible. (Page 338D)

(It was, however, agreed that it went round in a circle.)

• [89] In my view the judgment of the House of Lords in Ramsay amounts in part to a decision not to widen the concept of sham beyond the narrow definition appearing in the dictum of Diplock LJ in Snook set out above. The authorised report of the House of Lords records that the Court was invited by counsel for the IRC to take the view that paper transactions without any objective economic reality should be treated as being incapable of having fiscal consequences (see page 314 A-B). The House of Lords was invited to take the more robust approach taken in the Federal Courts of the United States and to adopt a wider use of the word sham, dismissing circular transactions of a self-cancelling character as being without any objective economic reality. The House of Lords was particularly invited to adopt the approached of Judge Learned Hand in Gilbert v Commissioner of Inland Revenue [1957] USCA2 262; 248 F 2d 399,

411 (see page 317, line G). Lord Wilberforce indicated in his judgment substantial

sympathy with the approach in the United States (see page 326 F 227d). In Gilbert

Judge Learned Hand said:-

If, however, the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it;

• [90] The report indicates that the US Supreme Court decision of Gregory v Helvering [1935] USSC 5; (1935) 55 S.CT 266 was cited. That judgment affirmed a Second Circuit Court of Appeals’ judgment delivered by Judge Learned Hand, arguably one of the greatest common law Judges of the twentieth century. In his judgment[1935] USSC 5; , 69 (1934) F2d 809, Judge Learned Hand uses the word sham in the way in which I think Mr Ruffin for the Crown was urging me to use it in this case. Mr Ruffin did not cite Gregory v Helvering, but the case is well known to me, and I suspect Mr Ruffin. In a recent Privy Council decision Miller v Commissioner of Inland Revenue [2002] NZCA 202; [2001] 3 NZLR 316, their Lordships adopted the legal method of Judge Learned Hand, via an adoption to New Zealand of their decision in MacNiven (Her Majesty’s Inspector of Taxes) v Westmoreland Investments Limited [2003] 1 AC 331.

• [91] The facts in Gregory are quite simple and are set out clearly by Judge Learned Hand as follows:-

The taxpayer owned all the shares of the United Mortgage Corporation, among whose assets were some of the shares in another company, the Monitor Securities Corporation. In 1928 it became possible to sell the Monitor shares at a large profit, but if this had been done directly, the United Mortgage Corporation would have been obliged to pay a normal tax on the resulting gain, and the taxpayer, if she wished to touch her profit, must do so in the form of a dividend, on which a surtax would have been assessed against her personally. To reduce these taxes as much as possible, the following plan was conceived and put through: The taxpayer incorporated in Delaware a new company, organized ad hoc, and called the Averill Corporation, to which the United Mortgage Corporation transferred all its shares in the Monitor Securities Corporation, under an agreement by which the Averill Corporation issues all its shares to the taxpayer. Being so possessed of all the Averill shares, she wound up the Averill Company three days later, receiving as a liquidating dividend the Monitor shares, which she thereupon sold. It is not disputed that all these steps were part of one purpose to reduce taxes, and that the Averill Corporation, which was in existence for only a few days, conducted no business and was intended to conduct none, except to act as conduit for the Monitor shares in the way we have described. The taxpayer’s return for the year 1928 was made on the theory that the transfer of the Monitor shares to the Averill Corporation was a “reorganization” under section 112 (I) (1) (B) of the Revenue Act of 1928

... being a “transfer by a corporation of ... a part of its assets to another corporation” in such circumstances that immediately thereafter “the transferor or its stockholders or both are in control of the corporation to which the assets are transferred”.

• [92] The Judge concluded:-

... we cannot treat as inoperative the transfer of the Monitor shares by the United Mortgage Corporation, the issue by the Averill Corporation of its own shares to the taxpayer, and her acquisition of the Monitor shares by winding up that company. The Averill Corporation had a juristic personality, whatever the purpose of its organization; the transfer passed title to the Monitor shares and the taxpayer became a shareholder in the transferee. All these steps were real, and their only defect was that they were not what the statute means by a “reorganization”, because the transactions were no part of the conduct of the business of either or both companies; so viewed they were a sham, though all the proceedings had their usual effect.

(My emphasis)

• [93] So we can see that Judge Learned Hand accepted that all the transactions were real. But they were not what the statute meant by reorganisation because they were artificial, being no part of the conduct of the business of either or both companies. So viewed they were a sham.

• [94] In this case all the transactions between the insurer and the lending conduit companies were intended by the juristic personalities and their managers to be real. They were nonetheless artificial. They were designed to support a contention in the LAQC tax returns that the companies had expended $1 million on an insurance premium in year 1. The first of these transactions was done in March of 1995, the last month of the life of the Income Tax Act 1976. Section 104 provided:-

In calculating the assessable income of any taxpayer any expenditure or loss to the extent to which it:-

(a) Is incurred in gaining or producing the assessable income for any income year; or

(b) Is necessarily incurred in carrying on the business for the purpose of gaining or producing the assessable income for any income year –

may, except as otherwise provided by this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred.

• [95] Section 104(A) dealing with accrual expenditure, of relevance to this case, builds on s104 but uses the same concept of expenditure.

• [96] If a New Zealand Court were to apply the legal method of Judge Learned Hand in Gregory it could say on the facts of this case that the Digitech and NZIL transactions did not result in to the sort of expenditure contemplated by Parliament in s104. Therefore, although the transactions were intended to be real, and if carried out according to intent would have been real, they were, for the purposes of endeavouring to amount to “expenditure”, artificial and so a sham.

• [97] The New Zealand Courts and the Commissioner never reasoned in this way at the time the Digitech and NZIL schemes were developed and put into effect.

• [98] At that time the classic passage which governed the law appears in the judgment of the Court of Appeal in Mills v Dowdall [1983] NZRL 154 at 159:-

The legal principles governing the ascertainment of the true legal character of a transaction are now well settled and for recent discussions in this Court it is sufficient to refer to Re Securitibank Ltd (No 2) [1978] 2 NZLR 136; Buckley & Young Ltd v Commissioner of Inland Revenue [1978] NZCA 22; [1978] 2 NZLR 485; Marac Finance Ltd v Virtue [1981] 1 NZLR 586; and Commissioner of Inland Revenue v Smythe [1981] 1 NZLR 673. It frequently happens that the same result in a business sense can be attained by two different legal transactions. The parties are free to choose whatever lawful arrangements will suit their purposes. The true nature of their transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out. Not on an assessment of the broad substance of the transaction measured by the results intended and achieved; or of the overall economic consequences to the parties; or of the legal consequences which would follow from an alternative course which they could have adopted had they chosen to do so. The forms adopted cannot be dismissed as mere machinery for effecting the purposes of the parties. It is the legal character of the transaction that is actually entered into and the legal steps which are followed which are decisive. That requires consideration of the whole of the contractual arrangement and if the transaction is embodied in a series of inter-related agreements they must be considered together and one may be read to explain the others. In characterising the transaction regard is had to surrounding circumstances: not to deny or contradict the written agreement but in order to understand the setting in which it was made and to construe it against that factual background having regard to the genesis and objectively the aim of the transaction. The only exceptions to the principle that the legal consequences of a transaction turn on the terms of the legal arrangements actually entered into and carried out are: (i) where the essential genuineness of the transaction is challenged and sham is established; and (ii) where there is a statutory provision, such as s 99 of the Income Tax Act 1976, mandating a broader or different approach which applies in the

circumstances of the particular case. A document may be brushed aside if and to the extent that it is a sham in two situations: (a) where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition given to their common intentions (as happened in Marac Finance Ltd v Virtue); and (b) where the document was bona fide in inception but the parties have departed from their initial agreement while leaving the original documentation to stand unaltered

• [99] It will be seen from this passage that the Court of Appeal has adopted the classic definition of sham in Snook and furthermore, it separates out the application of s99 of the Income Tax Act from the application of sham.

• [100] For these reasons I do not think that under the law as it was during the time of the Digitech and NZIL transactions it could have been seriously contended that s99 of the Income Tax Act 1977 brought into play a broader meaning of sham, broader than the narrow definition in Snook.

• [101] It may be possible today to contend for such a broader meaning of sham since the recognition by the House of Lords in MacNiven of the importance of reading concepts in statutes in the sense intended by Parliament. But Lord Hoffman in MacNiven used Judge Learned Hand’s judgment, without using the latter’s concept of sham.

• [102] Lord Hoffman said at paragraph [35] of his speech:-

35. My Lord, it seems to me that what Lord Wilberforce was doing in the Ramsay case [1981] UKHL 1; [1982] AC 300 was no more (but certainly no less) than to treat the statutory words “loss” and “disposal” as referring to commercial concepts to which a juristic analysis of the transaction, treating each step as autonomous and independent, might not be determinative. What was fresh and new about Ramsay was the realisation that such an approach need not be confined to well recognised accounting concepts such as profit and loss but could be the appropriate construction of other taxation concepts as well.

...

36. Lord Wilberforce, while cautioning against the facile transposition of American statutes on different statutes, approved the approach of Judge Learned Hand in one of his many judgments dealing with tax avoidance schemes: Gilbert v Commissioner of Inland Revenue [1957] USCA2 262; (1957) 248 F2d 399. Perhaps the seminal judgment was in Halvering v Gregory [1935] USSC 5; 69 (1934) F2d 809, affirmed [1935] USSC 5; (1935) 293 US 465, which concerned a scheme of great simplicity. The taxpayer was a stockholder in a corporation which held some shares which she wished to realise without paying tax on the gains. Instead of having the corporation sell the shares directly to the buyer, she

caused it to incorporate a subsidiary and exchange the shares for an allotment of shares in the subsidiary. The subsidiary was put into liquidation and distributed the shares to the stockholder as a dividend. She then sold them to the buyer. She claimed that the exchange of shares fell within the tax exemption for a “reorganization” of capital. On the other hand, the exchange was real enough to constitute a realisation of the gain, so that no further gain was realised on the distribution to her. In the Court of Appeals (Second Circuit) Judge Learned Hand said, at p.811, that the transfer to the subsidiary did not fall within the terms of the statutory exemption:

“we cannot treat as inoperative the transfer of ... shares by [A] [or] the issue of shares by [B] of its own shares ... [B] had a juristic personality... All these steps were real, and, their only defect was that they were not what the statute means.” (My emphasis).”

• [103] Lord Hoffman delivering the opinion of the Board of the Privy Council in Miller at 326 applied the same reasoning to New Zealand statutes and in the context of s99 said:-

[10] It may be more fruitful to concentrate on the nature of the concepts by reference to which tax has been imposed. In many (though by no means all) cases, the legislation will use terms such as income, loss and gain, which refer to concepts existing in a world of commercial reality, not constrained by precise legal analysis. A composite transaction like the Russell scheme, which may appear not to create any tax liability if it is analysed with due regard to the juristic autonomy of each of its parts, can be viewed in commercial terms as a unitary arrangement to enable the company’s net profits to be shared between the shareholders and Mr Russell. (Compare MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] UKHL 6; [2001] 2 WLR 377.) Their Lordships consider this to be a paradigm of the kind of arrangement which s 99 was intended to counteract. On the other hand, the adoption of a course of action which avoids tax should not fall within s 99 if the legislation, upon its true construction, was intended to give the taxpayer the choice of avoiding it in that way.

• [104] This is a case alleging a criminal conspiracy. In my view there can be no suggestion at all that in 1995 through to 1997 the defendants in this case should have understood the ramifications of the Ramsay decision as it was more fully understood in 2001. There were no decisions saying that circular transactions were shams. However, there was room for these defendants to believe that what they were doing was real and not a sham. And I think that this is what they did believe.

• [105] Accepting in the course of the trial that it was inevitable that this was the view that I was taking, Mr Ruffin for the Crown then fell back upon the argument that the transactions were fictitious or did not take place because they were ineptly carried out.

The consequences in a criminal conspiracy case of inept implementation of a tax driven structure

• [106] As I have already indicated when introducing the investment, a number of the tranches were settled in Hong Kong in a way in which it can be very seriously argued that there were deficiencies in the endorsement of the promissory note instruments. This can be usefully illustrated by the very first “TCD” endorsed on or before 25 March 1995. The total US dollar premium being paid by the LAQC investors in that tranche was $21,760,000. The cash portion was $870,400. The balance funded by the loans was therefore US $20,889,600. As I have explained, BNYIMBG withdrew at the last moment and a Grant Thornton Byrne company, Mei Shing Trading Co Ltd, was inserted as fiduciary lender. That company and all the other companies endorsing the instruments never at any time had the sum of US $20 million odd or indeed anything like it. For practical purposes one can assume there were no funds there at all, other than the investors cash portion of $870,400. As previously explained the TCD was in truth a promissory note. The TCD used the figure of only $20,089,600. The working papers at the time indicated there was an appreciation that the balance to be funded by loans was $20,889,600. The TCD was endorsed using the figure of $20,089,600 but the bookkeeping used the figure of 20,889,600. Plainly, there had been a typing mistake where an 8 had been read as a

0. The fact that there was a mistake in the number on a negotiable instrument does not void the entire transaction. It was open for the parties to the transaction to obtain rectification of the instrument. No one seems to have bothered. But that does not make the transaction itself a fiction. Nor is it by itself sufficient to justify an inference that the transaction was being entered into dishonestly.

• [107] The error was picked up by the firm Equity Trust Co which was the firm that operated the insurer, Epicharmus. On 11 April (a Mr Niezing) wrote a detailed letter to Mr Currie at Byrne Corporate Services noting the errors on the TCD. The letter is illustrative of the way in which Equity Trust Co operated Epicharmus. The ensuing correspondence also illustrates the way in which Equity Trust operated with Mr Currie and Mr Connolly, in the offshore leg. I set out the correspondence on the subject:

PER FACSIMILE: 00-852-2838 0211

John Currie, Esq.

Byrne Corporate Services Limited Hong Kong

Your ref: Our ref: DN/OW/10-f2.04 date: 11 April 1995 Dear Mr Currie,

Re: Epicharmus Vastgoed BV

Reference is made to your telefax of 7 April last.

We received a copy of the Transferable Certificate of Deposit which was used in order to effect the payment of the insurance premiums. Pursuant to the Master Policy, Schedule A, clause 6, the premium amounts to USD 320,000 per 500,000 shares of DigiTech Communications Limited. Certificates of insurance were issued in connection with the acquisition of 34,000,000 shares which results in insurance premiums due amounting to USD 21,760,000. The Transferable Certificate of Deposit represents a value of USD 20,89,600. We should appreciate it if you would inform us when we can expect to receive the last payment of insurance premiums amounting to USD 1,670,400, which we will then pay to Swiss Underwriters Group, minus the margin as discussed in previous correspondence.

Furthermore, we would appreciate receiving from Swiss Underwriters Group Ltd a confirmation that they have received from Epicharmus Vastgoed B.V. the insurance premiums amounting to USD 20,089,600 pursuant to the Undewriting Agreement.

Referring to the letter which you requested us to send to Westpac Banking Corporation, please note that the involvement of Epicharmus Vastgoed B.V. in this respect is not clear to us. As we understand, in order to settle the payment of the insurance premiums from the New Zealand investors to Epicharmus Vastgoed B.V., you borrowed, as agent for the New Zealand investors, the necessary funds from Mei Shing Trading Limited.

Now that the banks are willing to enter into the proposed agreements it seems to us that the banks will take over the claim from Mei Shing Trading Limited on you, as agent for the New Zealand investors, which requires no involvement from our side.

If the involvement of the banks will occur by taking over the receivable on the New Zealand investors, Epicharmus Vastgoed B.V. will not be any party in the loan agreement and/or the assignment.

In the event the monies from the banks are considered to be insurance premiums, Epicharmus Vastgoed B.V. is only in a position to pay these monies to the Swiss Underwriters Group Ltd pursuant to the Underwriters Agreement and the Master Policy, and not to Asian Growth Fund Ltd.

We look forward to hearing from you.

Kind regards,

EQUITY TRUST CO. N.V.

Dick J.C. Niezing

c.c. John Reid, Esq.

FAX COVER SHEET

DATE: 11^TH APRIL 1995

TO: MR DIRK NIEZING FAX: 010 31 20 642 7675

FROM: PETER CONNOLLY

Number of pages including cover sheet: 1 MESSAGE

Dear Mr Niezing,

1. I confirm that I am the beneficial owner of Swiss Underwriters Group Limited.

2. On behalf of Swiss Underwriters Group Ltd I confirm that all insurance premiums in respect of 24 million Digi-Tech Communications Ltd shares due under the underwriting agreement as between Epicharmus Vastgoed BV and Swiss Underwriters Group Ltd being received by Swiss Underwriters Group Ltd.

3. We confirm that there is no further liability for Epicharmus Vastgoed BV under this transaction.

Yours sincerely

Peter Connolly

FACSIMILE TRANSMISSION

Equity Trust Co.nv

Date : 28 April 1995 Full fax no. of addressee: 00-852.2838.0211

Number of pages : 1

To : Byrne Corporate Services Limited Attention / reference : John Currie, Esq.

From : Onne van der Weijde Our reference / matter : OW / DN / 28f07 / pe Copy to :

Dear Mr Currie,

Re: Epicharmus Vastgoed B.V.

We refer to the fax of 11 April 1995 of our Mr Niezing in which he requests you to inform us when we can expect to receive the last payment of insurance premiums amounting to USD 1,670,400.

Since then we have been informed that a typing error occurred in the transferable certificate of deposit, which could explain the difference.

Further, we have received a confirmation of Swiss Underwriters Group that Epicharmus Vastgoed B.V. has paid all insurance premiums in respect of the 34 mio. Digi-Tech Communications Ltd. Shares, due under the underwriting agreement. We therefore assume that the Company has received and paid USD 21,716,480. Could you confirm this?

Further, the Company should still receive the difference between USD 21,760,000 and USD 21,716,480 = USD 43,520.

Since the bookyear of the Company ends on 30 April 1995 and we would prefer to close the deal in one bookyear, we kindly request you to transfer this amount to the bank account of the Company prior to the end of this month.

Yours sincerely,

EQUITY TRUST CO. N.V.

Onne van der Weijde

RE EPICHARMUS VASTGOED BV

1. Further to your telefax dated 28 April 95 (received 1 May 95), I have arranged a remittance of USD 49 000 to the bank account of Motiva BV by TT.
2. The purpose of this remittance is both to cover the Epicharmus profit on the transaction of USD 43 520 and to cover your fees to date.

3. We estimate that after providing for tax at the rate of 40% there should be cash remaining in the account of USD 26 110.

4. We understand that a dividend from Epicharmus to Motiva BV will be free of withholding tax in the Netherlands and that a dividend from Motiva to B De Jong Holdings in the Netherlands Antilles will attract withholding tax at 7.5% (ie about USD 1960) and that a further dividend from there to Byrne will attract further tax of 3.5% (ie about USD 850). This means that there should be net cash available to return to Byrne of USD 23 300.

5. Please confirm that my calculations and understanding are correct.

6. Please arrange for the net dividend of USD 23 300 to be remitted to the shareholders account as follows:

0. Marine Midland Bank New York USA

for account of Hong Kong & Shanghai Banking Corporation Hong Kong Head Office

account No 000 – 0 4441 – 5

CHIPS UID 075995

for credit of Grant Thornton Byrne Client Account

USD Call Deposit Account no HK 567024419

by order of

Message re Epicharmus Vastgoed BV

Under telex advice to HSBC Hong Kong

7. Please let me know if you have any queries arising from the foregoing.

• [108] The correspondence continues. But I think I have set out enough to illustrate the way in which the parties were behaving. On the evidence before me the letter Mr Connolly wrote would have been written either on the instructions of Mr Currie or on the instructions of Mr Reid. Mr Connolly may have been in truth Mr Reid’s nominee.

• [109] Mr Ruffin also endeavoured to argue that the promissory note was invalid because it did not contain any endorsement by way of acceptance on the part of Mr Currie. But in the case of a promissory note the drawer is deemed to be the acceptor.
• [110] It would also appear that the persons endorsing the TCDs were doing it out of order. In short the signatures were not collected in any particular order. That, however, does not go to validity. The evidence was quite clear that the signatories would not be signing the instrument unless it was self-cancelling. In that event they were essentially signing in escrow on the assumption their particular company would only be bound when all the signatories were complete.

• [111] There were at least some TCDs in which there was no proof that all the signatures were obtained and in some cases no TCDs were found.

• [112] However, there is no doubt that Equity Trust Co NV was satisfied that all the transactions were properly settled. In the course of the taxation enquiry a Mr RDA Schutter, a duly authorised of Equity Trust Co NV, the managing director of Epicharmus Vastgoed BV signed under oath a bulky document of some hundreds of pages being entitled:-

Certification of matters in relation to the loss of profits insurance policy set up by Epicharmus Vastgoed BV trading as AP Underwriters Trust, as certified by Equity Trust Co NV.

• [113] This confirmed the incorporation of Epicharmus, that the managing director of Epicharmus is Equity Trust; that Equity Trust is a member of Insinger Equity. Insinger Equity is itself part of the Insinger de Beaufort group. An exhibit to the letter explains:

The Insinger de Beaufort group provides a comprehensive, integrated range of services to international companies, individuals of high net worth, professionals and institutions worldwide. Its overriding priority is the maintenance of uncompromising one-on-one service.

The group’s operational framework incorporate five key units: private banking; asset management; securities trading; corporate advisory and trust & fiduciary services. ...

Insinger de Beaufort has its origins in an asset management business set up in 1985. ...

In early 1998 Insinger de Beaufort acquired the Equity Trust group of companies, located in the Netherlands and Curacao.

Insinger S.A., the parent company, is listed on the Luxembourg Stock Exchange. The group as a whole employs some 500 staff in 10 countries, and has offices in Amsterdam, the British Virgin Islands, Brussels, Curacao,

Guernsey, Hong Kong, Jersey, Johannesburg, London, Luxembourg and Rotterdam.

...

Equity Trust is a Dutch trust company. For international companies seeking to take advantage of the favourable Dutch taxation environment, it is ideally placed to act as a local representative to control corporate records, to interface with the Netherlands authorities, to keep the books and to produce the annual report. An independent division of the Insinger de Beaufort private banking and trust group, its principle seat of business is in the Netherlands.

• [114] Under the “Quality and Control” one reads:

The services provided by Equity Trust depend for their effectiveness on built-in quality of the highest order and on meticulous control of deadlines, administrative and legal details and money transfers.

• [115] I am quite satisfied that the entire modus operandi of Insinger de Beaufort is to operate at all times within the laws of the various jurisdictions within which the transactions are done. A principal executive of the group who was involved in the transactions at the time was called as a witness for the Crown. He is Mr van der Rhee. I have referred to him before. He would have signed this notarised document but for the fact he was out of the office at the time.

• [116] At the very least for the purposes of a conspiracy charge, arguing that the transactions were a complete fiction, I am satisfied that this notarised voluminous document is substantial evidence to the contrary. The responsible persons sought to remedy any deficiencies that were noticed, or accepted them as inconsequential, for the purpose of establishing that the insurance premiums were validly paid and justifying the issue of the certificate of insurance by Epicharmus Vastgoed by an officer of Insinger. That is how all the certificates were issued. Here is a sample certificate:

AP UNDERWRITERS TRUST

CERTIFICATE OF INSURANCE NUMBER 5919

This Certificate of Insurance is issued by Epicharmus Vastgoed BV trading as AP Underwriters Trust (Insurer) pursuant to Master Profit Guarantee Policy Number SWISS/SF 1479 (Master Policy) and confirms that the Insured specified below is insured under the Master Policy in the amount

specified below. All terms used herein have the meaning ascribed to them the Master Policy.

The Insured Killington Limited

C/- Mondray Holdings Ltd PO Box 34144 Birkenhead

1. Date of Share Sale Agreement March 1995
2. Shares in Digi Tech Communications Limited to be acquired under the

Share Sale Agreement 1,000,000

3. Sale Price (being the minimum sale Price of the Shares insured under

This Certificate NZ$1,000,000

4. Limit of Liability NZ$3,000,000 Dated 29 March 1995

SIGNED by EPICHARMUS VASTGOED BV

Trading as AP UNDERWRITERS TRUST by SYTSKE KIMMAN pursuant to a Power of Attorney. By signing this document the attorney Confirms that she has received and holds a valid Power of Attorney to execute this document and Has not received any notice of revocation by notice,

Liquidation of Epicharmus Vastgoed BV or otherwise:

Witness Lusan Hung Chartered Accountant

10B Kanfield Mansion 44-49 Sun Chuen Street Tai Hang

Hong Kong

Did the accused represent the scheme as using real money?

• [117] If the transactions were real, then in the course of exchanges between myself and Mr Ruffin in closing he agreed that the core proposition at the heart of the Crown case was:-

... it is clear from the template documentation and surrounding correspondence that the investors bargained for a real loan thereby giving rise to real payments of interest and bargained for the cash portion of the insurance premium plus the borrowed portion of the insurance premium to be used to effect a real payment of premium to the insurer.

(Closing paragraph 25)

Did the accused make representations to the investors in correspondence?

• [118] It is convenient to deal first with the proposition that in the surrounding correspondence the investors bargained for a real loan. This argument relates back to the core pleading under the heading: “Defrauding the public and any person”:-

At the heart of these were dishonest representations to the investors that the underlying loan and insurance transactions were real.

These representations that the underlying loan and insurance transactions were real were made by the accused both in the template documents and other letters, memoranda, contracts including deeds which they wrote or directed to be written or arrange for others to write for the purpose of being shown to the investors and/or their professional advisers. These representations were a fraud against the investors as the investors claimed for deductibility of insurance premium, deductibility of interest would unwittingly be false if there were no genuine insurance premium and no genuine loan.

(See above paragraph [61])

• [119] There was no evidence put before me that any of the accused, other than Mr Russel, discussed or wrote to the clients of Gosling Chapman or any other investors about the structure. Mr Reid did attend some presentations at the offices of his firm of the commercial products of Digitech.

• [120] This part of the pleading has to depend on the correspondence that Mr Reid wrote to Gosling Chapman. In cross-examination, which if I may say so was conducted superbly, Mr Gilbert for Mr Reid, exposed the likelihood that there was complicity by partners of Gosling Chapman, apart from Mr Russel, in the production of certain letters now relied upon by the Crown as deceiving Gosling Chapman.

• [121] Before going to this correspondence it is important to appreciate the knowledge and role of Gosling Chapman. Gosling Chapman were, and are, a firm of chartered accountants. From time to time they made a practice of introducing to their clients potential investments. In 1994 they had introduced to quite a number of their clients an investment known as the Salisbury scheme. The Digitech and NZIL schemes were copies of the Salisbury scheme. The Salisbury scheme had been devised by a prominent tax practitioner whose name has been suppressed in other

proceedings. The only difference that I can discern here from the Salisbury scheme is that the purchase was for a future contract of cutting rights for timber and there was a promise in the loan documents that 325% of the premium would be set aside in a sinking fund of the purpose trust so as to be in a position to pay out a claim on the insurance policy if it was made.

• [122] In support of the Salisbury scheme Gosling Chapman had commissioned an opinion from Denham Martin and Associates. That opinion is very similar to the opinion written on 23 January for the Digitech scheme. The Denham Martin opinion for Digitech was largely written by Mr Sidnam, a senior associate of Mr Denham Martin. An analysis of the correspondence and timesheets suggest that he first got instructions on 17 January, started work on 20 January, and produced the opinion three days later. I am satisfied there was very little for Denham Martin to do.

• [123] When introducing the Salisbury scheme to their clients Gosling Chapman as a firm got no more than ordinary accountancy fees for the incorporation of the LAQC companies, in the order of about $100,000.

• [124] Gosling Chapman were approached by Milloy Reid Tong to see if they would have clients interested in purchasing Digitech shares on a long term settlement contract. It was Gosling Chapman who suggested to Milloy Reid Tong turning the proposal into a Salisbury like scheme. The original discussions were between Mr Russel for Gosling Chapman and Mr Reid for Milloy Reid Tong. The insurer in the Salisbury scheme was a company operated by Insinger de Beaufort in the Netherlands. That was apparent on the Salisbury documents.

• [125] I have already previously noted [43] that as part of the discussions Mr Russel and Mr Reid agreed a fee for the placement of the Digitech scheme to Gosling Chapman’s clients. The fee negotiated was a “brokerage” fee of 1.67% of the investment. Looking ahead, Gosling Chapman earned about $1.2 million.

• [126] Gosling Chapman made only a vague disclosure that they were receiving some other fees. See the last sentence of the letter of 23 January 1995 set out above [19]: “and the remainder of Gosling Chapman’s fees will be paid by MRT”.
• [127] Some time in 1994 Milloy Reid Tong (MRT) arranged for Grant Thornton Byrne in Hong Kong (Mr Currie) and Insinger de Beaufort in the Netherlands (Mr van der Rhee) and some other professional firms in Hong Kong to assist putting in place the loan and insurance offshore. MRT took advice from a specialist, Mr Dobson, and later from Mr Paul Darvell, an Auckland practitioner, with a history of setting up offshore deals. By 19 January Gosling Chapman had a template of the proposed insurance policy which referred to a Netherlands insurer.

• [128] In his evidence-in-chief a partner of Gosling Chapman, Mr Terrence McGrath, said that he had been to the premises of Insinger de Beaufort. But he said he could not recall when. His partners, Mr Chapman, Mr Richardson and Mr Russel and Mr Sidnam of Denham Martin all recalled various versions of discussions with Mr McGrath where he essentially said that he had been to the office of the Netherlands insurer. Mr McGrath was cross-examined on this and his evidence was confused. Mr Sidnam said that his discussions with Mr McGrath on the subject at the time in early 1995 were several and were confused.

• [129] Mr Sidnam was asked about a meeting he had with Mr McGrath on 21 February. Here are the questions and answers:-

Page 658 going on to 659

q. Did Mr McGrath tell you at that meeting that he had been to the premises of Epicharmus earlier in the month while he was on Amsterdam on other business?

a. I recall discussions on this issue, whether it occurred at that meeting or not I can’t verify that.

q. Do you recall Mr McGrath’s advice that what he found when he went to the premises was something a little more than a post box but less than a fully fledged office. Do you recall that description from him?

a. I seem to recall him saying there was a post box there. I don’t recall what else he mentioned was there but certainly there was not a fully fledged office there. In fact I had several discussions on this issue with Mr McGrath which puzzled me a little bit because on one discussion he told me he never went to the place yet in a separate discussion he told me what I just said. So that’s always confused me as to what in fact happened.

• [130] There is no doubt that Mr McGrath was at least in the United Kingdom in early February 1995. Gosling Chapman’s phone records record Mr Richardson as phoning him in Holland on 9 February. I am satisfied on the evidence that he was telling his partners and Mr Sidnam of some visit to the office of Epicharmus in February 1995 before he returned to New Zealand later that month.

• [131] The name of Epicharmus was not reported by Mr Reid to Gosling Chapman until late March, in fact on 22 March, when he forwarded a letter by Epicharmus signed by Mr van der Rhee. In his evidence Mr van der Rhee explained that under Dutch law his office is not obliged to display the limited liability companies which they manage. This evidence was confirmed by Mr Bartlett who visited Insinger de Beaufort who said there were no names of the companies operating out of those offices displayed. Mr McGrath can only have learned that the Netherlands insurer was an Insinger de Beaufort company either from Mr Reid or from Insinger de Beaufort. He may well have learned the name from both.

• [132] It is possible Mr McGrath learned that Insinger de Beaufort would be operating the company via Mr Russel. But the important fact is that Mr McGrath on the probabilities visited the offices of Insinger de Beaufort in early February 1995 knowing at the time or learning while he was there that those offices would be providing the insurance company for the Digitech scheme. Even if he did not learn the name of Epicharmus at that time the fact he knew that the insurer would be an Insinger de Beaufort company was very informative information for a man like Mr McGrath. Insinger de Beaufort is a specialist company. As already appears from this judgment, it is a company which manages trust transactions across tax havens around the world for wealthy corporations and individuals. It operates at all times lawfully, but taking advantage of the quite different laws in different jurisdictions. Any person who goes into Insinger de Beaufort’s office on business, is by definition a worldly-wise investor, to put it mildly. Mr McGrath was either in Insinger de Beaufort’s office for some other business and/or to enquire about the scheme. To have a meeting at Insinger de Beaufort means you know what their business is. He can have had no illusion but that there was a real likelihood that the insurer would be a paper company engaged in a paper transaction. The transaction would be lawful and intended to have real economic consequences, but may not have involved more

than shuffling commercial paper as that concept is discussed by Lord Fraser in Ramsay, set out above. The transaction was likely to be utilising conduit companies located in any one of the number of tax havens that Insinger de Beaufort had offices in.

• [133] Further there is no doubt that Mr McGrath discussed his visit with his partners. I am not sure when but probably on his return in February or in March. Given the Crown’s onus of proof, and the likelihood of that fact, I proceed hereafter on that basis. He may well have done so in an obtuse or elliptical or even confused fashion. This is because he must have known that he was on notice as to the character or potential character of the scheme. This was potentially comprising information.

• [134] The other telling aspect of all of this is the very fact that Gosling Chapman partners were discussing the insurer’s identity. There was an obvious question mark in their mind as to whether or not it would be a real insurance premium, and consequentially backed by a real loan.

• [135] It is quite safe to presume, and I do, that by early 1995 if not well before, Gosling Chapman would know of the attitude likely to be taken by the Commissioner of Inland Revenue to schemes engineered to obtain tax advantage, which were devoid of economic reality. This is principally because they regularly took advice from Denham Martin, and particularly because they had taken advice from Denham Martin in the Salisbury and in the Digitech schemes.

• [136] In the mid 1990s, before the Wine Box enquiry, the evidence of Mr Denham Martin was that the Commissioner of Inland Revenue had a reasonably benign approach to the application of s99, but would react adversely to any scheme where there was no real loan or no real insurance premium, particularly if it was part and parcel of a circular transaction. This needs to be explained. In February of 1990 the Commissioner of Inland Revenue released a tax information bulletin (TIB) announcing his policy on the interpretation and application of s99.
• [137] Section 99 is a general anti-avoidance provision in the Act which renders void against the Commissioner any arrangement entered into for the purpose of avoiding tax.

99. Agreements purporting to alter incidence of tax to be void –

(1) For the purposes of this section –

“Arrangement” means any contract, agreement, plan, or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect:

“Liability” includes a potential or prospective liability in respect of future income:

“Tax avoidance” includes –

(a) Directly or indirectly altering the incidence of any income tax:

(b) Directly or indirectly relieving any person from liability to pay income tax:

(c) Directly or indirectly avoiding, reducing, or postponing any liability to income tax.

(2) Every arrangement made or entered into, whether before or after the commencement of this Act, shall be absolutely void as against the Commissioner for income tax purposes if and to the extent that, directly or indirectly, -

(d) Its purpose or effect is tax avoidance; or

(e) Where it has 2 or more purposes or effects, one of its purposes or effects (not being a merely incidental purpose or effect) is tax avoidance, whether or not any other or others of its purposes or effects relate to, or are referable to, ordinary business or family dealings, -

whether or not any person affected by that arrangement is a party thereto.

• [138] When Mr Denham Martin, a very experienced tax lay practitioner gave his evidence, he said:

... around the time of the original advice there was a reasonably benign approach by the Inland Revenue. They had a policy statement out which uhm was quite beneficial I would have thought from a taxpayer’s perspective.

Mr Denham Martin confirmed later in answer to a question from me that the policy statement he was referring to is the February 1990 policy statement.

• [139] That Taxation information bulletin draws upon the judgments in Challenge Corporation. Under the heading “Pretence” it says:-

Many tax avoidance arrangements involve an element of pretence. Section 99 will be applied to counter this. The Commissioner expects that the provision will be mainly applied to those taxpayers who follow a course of action to achieve a manufactured tax advantage which is essentially void of any economic reality. However, economic reality is not of itself the sole determinant of whether s99 applies. The degree of economic reality associated with a given transaction will be contrasted to any artificiality, contrivance, or exploitation of the Act while in direct pursuit of tax benefits. This analysis will focus on the determining whether the underlying scheme or purpose has been frustrated.

(My emphasis)

• [140] More significantly it went on to examine a number of structures by way of example to see whether they amounted to avoidance or not. Implicitly the underlying premise seemed to be that structuring or engineering business transactions in a particular way in order to achieve different tax outcomes can be okay. Though the examples indicate that the Commissioner was looking for a borrower incurring real expenditure and transactions which were not economically neutral but involved genuine commitments (see example 3A, 3D and example 5). The bulletin gave some comfort for the continued use of tax havens. In example 8 it cited Europe Oil New Zealand Limited v CIR [1976] 1 NZLR 546 on this point. It said that that case remained good law for the proposition that:

Section 99 is not concerned with the fiscal consequences of the disputed arrangement in another tax jurisdiction. Section 99 was only concerned with the avoidance of New Zealand income tax.

• [141] All this meant that the fact that there was an offshore leg did not ring the alarm bells. The biggest concern had to be that the structure was not void of economic reality.

• [142] Lest it be possibly thought that this analysis of the TIB is with approval of it, I comment, only by way of parenthesis, that I do not regard this TIB bulletin as a sound interpretation and application of s99. Section 99 was enacted by Parliament as a reform of the earlier general avoidance provision, s108 of the Land and Income Tax Act 1908. When s99 was enacted it was the hope of Parliament, reflected in the

Hansard speeches, that the Courts would be guided by the Newton predication test. This proposition is reflected in the introductory portion of the TIB policy statement which I set out:-

In addition certain broad interpretative principles have also evolved. The Newton predication test, for example, is regarded as fundamental to the process of s 99 application. In Newton v FC of T [1958] UKPC 14; [1958] AC 450 the test was set out by Lord Denning:

“In order to bring the arrangement within the section you must be able to predicate by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax.”

(My emphasis)

• [143] Looking at the insurance policy loan agreement, mortgage etc as being the overt acts by which the Digitech scheme was implemented, including the provision for the purpose trust, one can be left in no doubt that the insurance policy made no commercial sense but was there in order to generate an “expenditure” to satisfy s104 and thereby to reduce the incidence of the tax otherwise to be paid by the shareholders of the LAQC. In short applying the Newton predication test the scheme was avoidance whether or not there was a real loan or a real insurance premium.

• [144] With hindsight the problem seems to have been that Lord Templeman drew into the reasoning in his judgment in Challenge, the jurisprudence developing in the UK of ignoring artificiality designed to have the form but not the substance of events anticipated by statutes. That jurisprudence was developed by the UK and US Courts in the absence of the presence of a general avoidance provision like s99. It is of narrower scope than that intended of s99. The Newton predication approach should be, and is in Australia, applied to transactions which involve real money and no circularity. The Newton predication approach, of simply ascertaining objectively whether there is an avoidance purpose, was re-enacted in Australia in their legislation. It can be usefully illustrated by reference by the decision of FCT v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404. There the fact that an investment was structured to utilise the Cook Islands tax haven predicated the dominant purpose of obtaining a tax benefit, see pages 416, 422-423. Europa Oil does not support the proposition for which it is cited in the TIB. See [1976] NZLR 545, 557.
• [145] That, however, was not the world that Gosling Chapman and Denham Martin were operating in in 1995. Mr Martin built his s99 analysis around the judgment in Challenge commenting:-

In that case the Privy Council characterised tax avoidance as cases involving “circularity”, “artificiality” and the “incurring of no real expenditure”

and he took the same view in his opinion on 29 October 1996 in respect of NZIL.

• [146] It was his opinion that there were arguments against the application of s99. He expressed it this way in both opinions (I quote from the Digitech):-

... I believe highly persuasive arguments against the application of s99 could be advanced. I say this for the following reasons:

• 39.1 When viewed as a whole the proposal is not “circular” and involves “real expenditure” (ie the payment of the insurance premium and the payment for the Digitech shares);

• 39.2 Legitimate commercial reasons can be advanced in support of the proposal. It should not be overlooked that this is potentially an excellent investment, albeit one that is speculative in nature and an investor has on the basis of existing forecasts a real prospective of making considerable gain under the proposal given the undoubted potential of the “Free Rider” technology. The proposal also involves real risks and real obligations to third parties which will need to be honoured by an investor.

40. A significant consideration in any section 99 analysis is the commercial significance and appropriateness of the Policy. It would need to be clearly evident that this was a commercially sound thing for investors to take up vis-à-vis other hedging or risk-management options, and that the investors had discussed the Policy and other risk-management options with independent advisors and made an informed decision about it.

• [147] In his evidence Mr Martin made two important explanations of the language in his opinion. Firstly, he explained that his opinion of 23 January was in the nature of a tax ruling. In other words, it should not have been read as verifying the facts in a particular scheme. Secondly, he explained the reference to persuasive argument. He said it was important that a taxpayer be able to defend the tax return. If a taxpayer could do that with reasonable arguments then, at that time, a taxpayer may be able to avoid penalties should the Department take a different view.
• [148] Mr Denham Martin said:

... a taxpayer only needs to have an arguable filing position to meet its statutory requirement

(Notes of Evidence page 512, line 12-14)

q. So what had been started as [the Salisbury tax lawyer’s] initial also well thought through opinion which you had ticked off for lack of a better word by January 1995 you had concluded as a result of your firm’s own legal research there was a tenable deductible position.

a. There was a tenable deductible filing position correct.

(Notes of Evidence page 516, line 5-9)

Mr Martin also said:-

q. The opinion to put it in a sort of colloquial sense was effectively a green light for Gosling Chapman, yes the proposal that comes in the information memorandum you can run with. Do you agree?

a. I would have seen it as an amber light in my opinion.

q. That’s probably all I need to know unless you want to give a –

a. Yes I do. I think the opinion was a conservative opinion. I think it is a reasonable assessment of the technical issues as the law then stood and in paragraphs 40 and 41 in particular I think it raises some significant concerns or points to be addressed. Paragraph 40 was particularly signalling that a due diligence on the policy had to be taken with independent advisers and an informed decision made about it.

q. And what happened as your file discloses is that both Mr McGrath and Mr Russel wrote to your office with draft letters that were subsequently sent out asking the sort of questions that needed to be asked, as you said previously?

a. Mr McGrath clearly was undertaking some kind of due diligence.

(Notes page 517, line 7 - 35)

• [149] There is no evidence that Mr Reid ever saw this opinion or any of the opinions from Denham Martin. There is some evidence that Mr Sidnam from Denham Martin talked from time to time to Mr Reid. Mr Sidnam gave no evidence that Mr Reid assured him that there would in fact be a real payment of premium and

no circularity of funds. On the contrary, and most significantly, Mr Sidnam was interviewed by the director of litigation at the Inland Revenue Department and others from the Department under oath. He was being questioned upon why questions were not being asked about the insurer. He said:-

When I was first told about the arrangement, I understood we were dealing with a financier which was beyond repute, namely the Bank of New York. It turns out that, and we were told it was the Bank of New York, we weren’t told it was the Bank of New York Intermaritime Branch Geneva. Not to say that isn’t a reputable bank but we understood we were dealing with one of the US’s biggest banks which gave a lot of, a lot of the investors a lot of comfort on the arrangement. So that’s one, if you like, one issue which I think, there was a fundamental misunderstanding on and a lot of the investors said well, if a major commercial bank like the Bank of New York’s prepared to loan on the terms, on the limited recourse terms to investors then there must, and they’re prepared to do so to, and forward those funds to Epicharmus, then Epicharmus must be reputable. And there was some suggestion, I think, from what John Reid was saying that, that you know, there was some link between the Bank of New York and, cause he never told us it was the Bank of New York Intermaritime branch at that point, and you know the, some of the other parties, I think he might have mentioned insurer or the, some kind of relationship. Armour Fidelity hadn’t reared its head at that point at all so the substitution of a second financier wasn’t an issue at that time. I’m trying to think. I suppose, I mean, in hindsight, the parties could have and should have, made a lot more enquiries. Certainly a lot of advisors were contacted and I know a lot of investors engaged their own advisors and Gosling Chapman pooled all the comments of all those advisers together to make sure that all the concerns of respective advisers were met. So I don’t think it’s fair to say, you know, that nothing was done, you know in relation to verifying the arrangements, and I think, I think through all that, I think there was probably, people felt reasonably comfortable, you know, I think a number of lawyers have looked at it including Rudd Watt Stone, from memory, obviously Castle Brown have looked at it, Denham Martin and Associates have looked at aspects of it. There’s a major bank involve din it, which is clearly reputable or that’s what we thought. You know, just, I think, you know, because of that perhaps people didn’t go further and ask questions about some of the other parties and the way things were put together. That’s not to say those issues weren’t raised but, I suppose to some extent I do have some sympathy, I don’t mean I agree, but have some sympathy with the fact that, you know, what was done, didn’t go as far as perhaps it should have done.

(My emphasis)

• [150] Mr Sidnam could not remember the time he was talking about. But for the purposes of this trial it seems to me the best way to proceed is that the evidence he gave then, on 15 June 2000, is correct. The detail underlined places the conversation in January 1995, possibly before the opinion dated 23 January. “Hadn’t reared its head”, means he is talking about the Digitech scheme. Armour Fidelity was the

lender on the NZIL scheme. Secondly, the fact he is referring to only Bank of New York and not Bank of New York Intermaritime Branch may place the conversation prior to 17 January 1995. On that date Mr Sidnam received from Mr Russel a draft term loan agreement between Bank of New York Intermaritime Branch Geneva.

• [151] All of this suggests that right from the outset or near to the outset Mr Reid had told Mr Sidnam that there would be some kind of relationship between the lender and the insurer.

• [152] I doubt that that would have been a surprising piece of information. Knowing nothing but the components of the scheme, it does not look like the sort of scheme that you would expect to see a normal insurance company take the risk on. There was never suggestion that the insurance company would be an established insurance company with AA credit rating etc. Any kind of reflection of the scheme would indicate there was likely to be a circular arrangement.

• [153] Mr Reid took advice from an accountant and lawyer, Mr Dobson, at the very early stages of the proposal. He was asked on 9 January, for advice as to the taxation position for an investor undertaking to acquire shares in Digitech, taking out a loss of profit policy and receiving a loan funder premium.

• [154] In the course of his advice, although he was not asked to do, he speculated on how it could be funded. He said:-

For the Insurer to generate the $30 million required to be paid out in year 10 (subject to the value of the shares in Digi-Tech) it will need to earn an after tax interest rate of 11%. Initially I thought the Insurer was merely buying a deep discounted security but I doubt that such a security would provide an after tax earning rate of 11%. Instead it would seem to me that both the insurer and the bank need to be in the same jurisdiction (a tax haven jurisdiction) where they could match the interest receipts by the Bank against the liability of the Insurer under the Loss of Profits Insurance Policy. Fees or taxes of any magnitude will erode the return on the investments and leave the Insurer actually exposed to a risk of having to fund a payout under the Loss of Profits Insurance Policy.

• [155] Those all seem to me to be simple observations, obvious to Gosling Chapman or any person of any commercial experience looking at this transaction. The chances of earning an after tax rate of 11% consistently over ten years seems to my mind to

be remote. That is even if the interest could be booked in a tax haven free of income tax. There was no evidence of 1995 ten-year bond rates before me, but some from March 1994 indicating about 6.5%.

• [156] Mr Walker made a file note on the subject of risks on 5 February 1995. He identified 11. Number 10 was as follows:-

Denham has assumed there is no circularity in cashflows. We are not aware of any. Can Milloy Reid, who have arranged both the insurance and the loans, also confirm this?

• [157] There was no evidence that Milloy Reid were asked to confirm this information. Mr Walker did not give evidence.

• [158] Indeed Mr Gilbert cross-examined Mr McGrath on the basis that this is a question that was deliberately not asked. Rather he put a theory of the facts to Mr McGrath that the latter upon his return to New Zealand sought to obtain letters from Mr Reid designed to be placed on the Gosling Chapman file as evidence that the insurer was a firm of some substance. The correspondence shows that the letters were prepared in note form, typed up in draft, sent to Mr Sidnam for evaluation, and then the final version sent to Mr Reid for a reply.

• [159] The replies of Mr Reid were, and had to be, a key part of the Crown case as to deception.

• [160] On 22 February Mr McGrath received a vague letter from Mr Reid saying the insurer had been referred to Mr Connolly via initial discussion he had had with the bank. But Mr Connolly did not understand fully the ownership structure of the insurer but was advised the bank would be happy to accept the risk of the insurer as part security under any loan the bank may help fund any insurance premium. It said the bank confirmed (Connolly) the insurer operates on a conservative basis.

• [161] Mr McGrath then prepared a draft letter in reply and after amendment from Mr Sidnam sent a letter back to Mr Reid on 23 February saying inter alia:

Thank you for the above letter. Unfortunately, it does not enable our clients to form an opinion as to the relative strength of the insurance company to

whom they will be paying the premium. It is absolutely crucial that we know who the insurance company is and whether it is substantial enough to be able to meet potential claims which may arise in the future. Obviously, anyone taking out insurance needs to be satisfied as to the insurance company’s ability to meet such claims.

• [162] Mr Reid replied on 24 February saying:-

I have received further information from Mr Connolly. I understand the insurer is associated with the Chase Manhattan Group.

I have referred to the telerate book which I have and copied information relating to this Group. They are very large and diverse. However, this information was from the 1991 issue and may not be strictly correct.

• [163] This information is false. Mr Bartlett, for Mr Reid, tried to suggest in cross- examination that it may be referring to the entity to be used in Hong Kong to manage the purpose trust. That letter and the enclosures was sent by Mr McGrath to Mr Sidnam with the following fax coversheet message:-

Please find attached further information received. Is this enough?

• [164] On 27 June Mr McGrath sent another draft letter to Mr Sidnam for approval, being a proposed letter to Mr Reid seeking more information on the insurance company.

• [165] On 2 March Mr McGrath received a letter from Mr Reid which contained the following information:-

Thank you for your letter of 27 February 1995. I have received further information from the UK on the insurer and am able to respond as follows.

I can confirm that the insurer is controlled and operated in the Netherlands and that it is an insurance company. The obligations which the insurer is undertaking in year 10 are fully covered and able to be met by the insurer. This is largely achieved by virtue of the insurer “quarantining” its risk by the establishment of the purpose trust which is adequately funded to meet these claims in year 10. The trust purchases assets such as “A” rated reinsured mortgages, government bonds or other such investments which have maturity values enabling it to cover the obligations it takes on, in this case the insurance of the Digi-Tech shares. These asset purchases are generally in US$ denominated investments and to cover any interest or foreign exchange risks, the insurer uses interest rate and currency swaps, so as to hedge, in this case, a NZ$ exposure in the year 2005.

It is through undertaking the above and the use of the “quarantine” method that the Bank of New York receives the necessary comfort levels to take risk on the insurer.

The insurer is a private company and therefore does not disclose its financials nor does it have public profile documents available as one would normally expect from a general purpose insurer – such as Lloyds of London. It is a specialist purpose insurer with its gross 1995/96 revenues expected to be eleven to twelve times the size of this current proposed insurance transaction (i.e. some NZ$900 million).

• [166] From the perspective of Mr Reid the information here was strictly speaking correct if one assumes that the investments in A rated reinsured mortgages would occur in year ten with the proceeds form the repayment of the loan pending the claim on the policy. But on any view of it, the last sentence is incorrect.

• [167] But they are being written to Mr McGrath who has been in Insinger de Beaufort’s offices. There is no evidence that Mr McGrath used any of this material to reassure or advise investors. Mr Russel provided the 2 March letter to Mr Davison, an investor. Mr McGrath and Mr Reid were also corresponding at the same time on the advantages of the New Zealand / Netherlands double tax treaty so that no New Zealand tax is paying in respect of the insurance premium.

• [168] There was further consideration by Gosling Chapman and Mr Sidnam as to the adequacy of the information. Consideration was given to asking whether the insurance company was registered. In the end the letter which went was as follows:-

Dear John

DIGI-TECH COMMUNICATIONS LTD

Further to your letter of today’s date, as discussed with you, we still required on the insurance company’s letterhead, confirmation of the follows:

1. It is an insurance company.

2. It operates in the Netherlands.

100. Confirmation the shareholding is a private matter.

4. Funds will be set aside in the manner described in your letter.

We also require confirmation from the insurance company, evidence that once set up, the special trust does exist and has been set up correctly in regard to the Netherland’s law. We would also require confirmation that it has been correctly funded.

Thank you for your assistance. Yours sincerely

PW Russel Gosling Chapman

• [169] That resulted in a reply on 22 March as follows:

22 March 1995

Dear Mr Reid,

Re: Epicharmus Vastgoed B.V.

Upon request of Mr John Currie, please find herewith a copy of a letter by Epicharmus Vastgoed B.V. duly signed by Equity Trust Co. N.V. in its capacity as Managing Director of the company.

Kind regards

EQUITY TRUST CO. N.V.

“D.J.C. Niezing”

Dick J.C. Niezing

And also:

TO WHOM IT MAY CONCERN

Dear Sir

DIGI-TECH SHARE PRICE INSURANCE POLICIES

This is to confirm that the company, which is owned and operated as a private company in The Netherlands, will establish a Special Purpose Trust or enter into reinsurance arrangements to meet any obligations arising under the policies issued in respect of the Digit-Tech Share Price Insurance Policies.

We confirm that this Special Purpose Trust will have sufficient funds available, or that pursuant to the reinsurance arrangements sufficient funds will be available, at the maturity of the policies to meet any liabilities under these policies. Appropriate investments and security arrangements will be in place to ensure all obligations will be met. Any surplus cash generated will only be invested in prime assets of the highest credit rating, including US Treasury deposits, prime bank deposits and “A” rated reinsured mortgage

investments.

Yours Faithfully Equity Trust Co. N.V.

“F van der Rhee”

F VANDER RHEE

Managing Director

For and on behalf of AP Underwriters Trust March 22, 1995

• [170] Given the unsatisfactory character of Mr McGrath’s evidence, and the fact Mr Reid elected not to give evidence, it is difficult to be sure whether Mr McGrath and Mr Reid understood that they were together preparing letters to show on the file of Gosling Chapman an exercise of due diligence in respect of the insurer, sufficient to bluff an IRD investigator. There is at the very least a reasonable doubt in my mind as to whether these letters were truly written to deceive Mr McGrath. The final letter signed by Mr van der Rhee is written with great care and is correct.

• [171] If these letters were overt acts by Mr Reid pursuing an agreement with Mr Russel to deceive the investors by concealing from the investors the fact that there was no a real loan or real insurance premium, why did Mr Reid tell Mr Sidnam there was a kind of a relationship between the two? Mr Sidnam was the last person that the conspirators would have told, on the Crown’s theory of the case. For the opinion from Denham Martin and Associates was crucial to maintaining a defensible argument for claiming the full expenditure in year 1 against the IRD.

• [172] Secondly, there is no other evidence that indicates that Mr Reid was in any state of mind to the effect that he was breaking the law in putting the structure into place. In that respect there was what I consider to be a telling round of correspondence between Equity Trust, Mr Currie and Mr Reid, leading ultimately to an indemnity by Mr Reid, of a most confidential character, given to Equity Trust.

• [173] After Epicharmus had settled the Digitech transactions Insinger de Beaufort / Equity Trust mounted a campaign over more than a year, by correspondence, arguing that there should be a special and direct release by the investors of any liability of the

insurance company, as distinct from the purpose trust. Equity Trust were concerned about operating a Dutch insurance company exposed to multi million dollar risk on the policies, notwithstanding it had assigned the risk to the purpose trust. Notwithstanding considerable pressure being brought to bear by Equity Trust both Messrs Currie and Reid resolutely refused to agree to this or to any document even indirectly providing that comfort. The reason given was to maintain the legal integrity of the scheme. In the end Mr Reid gave a personal indemnity to Equity Trust. This was to cover any possible exposure. Currie and Reid’s main argument against the need for a release was the explanation that it was extremely unlikely that any claims would be made under the policy because of the lack of commerciality, the cost of making a claim exceeding the benefit that would be obtained.

• [174] In the background behind the correspondence between Reid and McGrath there were letters written between Connolly and Reid. These letters purported to be Mr Reid passing on Mr McGrath’s queries to Mr Connolly and receiving Mr Connolly’s replies and then forwarding them on by way of an MRT letter to Gosling Chapman. Mr Connolly and Mr Reid both said in their voluntary interviews to the SFO that this correspondence was essentially a façade. All the letters that Mr Connolly wrote were dictated to him or the gist of them given to him in advance by either Mr Reid, Mr Currie or perhaps Mr Darvell. Mr Connolly spoke to nobody else and knew only as much about the structure as these gentlemen told him. I accept those statements are true. Mr Reid said that he had been advised by Mr Darvell to introduce Mr Connolly as an apparent intermediary in order to make it more difficult for investors to sue Mr Reid if anything went wrong. This correspondence stayed on the Milloy Reid Tong files, and was not passed directly over to Gosling Chapman, though Gosling Chapman was informed that there was this other party.

• [175] I am satisfied that this façade of correspondence was written either as a pre- emptive paper trail to protect Mr Reid from any future claim by investors (as claimed) or to mislead the Commissioner of Inland Revenue. I will deal with that possibility later. But in this context, I am satisfied that there is more than a reasonable doubt and it was essentially not proved that these letters were written to deceive the investors into entering into the scheme. There are a large number of

these Currie / Reid / Connolly letters. For example as Castle Brown sought amendments to the documentation, the amendments purported to be sent to Mr Connolly for approval on behalf of the insurer.

• [176] There is no evidence in any of this material to satisfy me on any criminal standard of proof that Messrs Connolly and Currie were party to any dishonest agreement to deceive the investors via correspondence.

• [177] Messrs McGrath, Richardson, Russel and Chapman were obviously talking among themselves about who the insurer was and probably who the bank was. Mr Ruffin agreed, properly, that on the totality of the evidence Gosling Chapman was squarely on notice that there could be a close relationship between the insurer and the bank and thus that there be a circular transaction between two paper companies.

• [178] Mr Ruffin submitted that in that context there was a positive obligation on Gosling Chapman to disclose notice of that risk. Accepting for argument that such a duty did arise, it is only relevant in this case if there is evidence that at least Messrs Reid and Russel were party to a dishonest agreement to deceive the investors. I turn again to the sworn testimony of Mr Sidnam to the Inland Revenue Department investigators. On the strength of that there has to be, at the very least, a reasonable doubt as to whether Mr Reid had entered into any such agreement with Mr Russel.

• [179] In support of that are some more general considerations about pretence in avoidance schemes. It will be recalled that the Denham Martin opinion when addressing s99 exposure called in paragraph 40 for the scheme to have a commercial appearance. It will be recalled there was never anything in writing in the information material or open correspondence about the tax advantage. It will be recalled that when the Denham Martin opinion was circulated to the investors the Gosling Chapman letter said it was a privileged document. The Denham Martin opinion itself with the sentence saying it is prepared solely for advice to Gosling Chapman. An instruction memorandum was prepared within Gosling Chapman requiring the investors to be taken to a presentation at Milloy Reid Tong of the commercial products of N-Tech. Gosling Chapman retained Castle Brown as a firm

of commercial solicitors to review the documentation for its commerciality and tighten it up. Denham Martin and Co took advice from a commercial practitioner, a Mr Reece, as to whether the scheme looked commercial. He made a series of critical comments. They were passed on to Gosling Chapman who reactivated Castle Brown to tighten the documents further. A note was written on the Reece opinion suggesting it be shredded. No one identified who wrote the note.

• [180] For anyone with any knowledge of tax avoidance schemes all of this behaviour has one obvious reason. It is to disguise from the Inland Revenue Department the fact that the parties had entered into the arrangement for the purpose of avoiding tax. The investors are trouped along for a commercial presentation of the Digitech products whether they are interested in them or not. Why? Because there will then be evidence of them having taken a commercial interest in the Digitech products.

• [181] Of the 70 or so investors who entered into these schemes about 30 or so bought into the Salisbury scheme, Digitech and the NZIL scheme. Did they all just coincidentally have an interest in timber futures, highly specialised tele- communications equipment and an invention to save the life of batteries? But the documentation had so far as possible to make it appear the transaction was for a commercial, albeit speculative, investment in shares.

• [182] Mr Reid may have understood that he was being asked to “play the game” in the correspondence he was having with Mr Reid as to the commerciality of the insurer.

Did the contract terms promise a real loan and a real insurance premium?

• [183] Arising from this evidence Mr Ruffin abandoned, at least for the Digitech structure, trying to persuade me that any of the accused (implicitly with the exception of Mr Russel) had made any representations to the investors in the scheme. That drove Mr Ruffin back to having to find the representations as to real funding and no circularity from the text of the commercial documents signed by the investors. Mr Ruffin found the assurance principally in the following terms of the

insurance policy. The two terms relied upon by Mr Ruffin are the “NOW” clause and clause 9 of the insurance policy which I now set out:-

NOW: the Insurer agrees, subject to the terms, clauses, conditions, limitations and memoranda contained herein or endorsed hereon, to establish a special purpose trust (“Trust”) and procure and fund the Trust which will give the Trustee on behalf of the Insured an undertaking to satisfy the obligations of the Insurer hereunder in accordance with the operative clause hereof on the happening of an Event of Insurance stated in Schedule “A”:

And Clause 9:

9. Status of Trust: The Insurer will provide sufficient funds to the trust in order that it may meet its obligations under the event of insurance and will procure the Trust to issue to the Insured no later than 30 days after the date of this Policy an unconditional undertaking in deed form to meet all payment obligations of the Insurer hereunder. The delivery to the Insured of such a deed shall extinguish the obligation of the Insurer hereunder to the Insured which shall thereafter have a claim solely against the Trust.

• [184] Mr Ruffin argued that both clauses required the insurer to fund the trust before the trust would give to the trustee on behalf of the insured an undertaking to satisfy the obligations of the insurer.

• [185] This construction had to be relied upon as reasonably obvious to be proof by the Crown that relevant persons of the accused did believe that the NOW clause and clause 9 of the insurance policy required the insurer to fund the trust or believed that that is how they would be understood by the investor. For if the accused or a relevant member of the conspiracy does not have this belief then the subsequent failure to fund the purpose trust ab initio could not be dishonest.

• [186] As a matter of commercial contract law the terms of the insurance policy fell to be construed reading the insurance policy as part of a set of documents all signed on the same day by the same person participating in the structure.

• [187] As a package the investor executed the memorandum of loan, limited power in favour of Mr Currie to collect the proceeds of the loan, and subscribed to the above insurance policy. The LAQC also entered into the agreement for the sale and

purchase of the shares and entered into a mortgage with the lender which, amongst other things, assigned to the lender the investors’ interest as purchaser of the Digitech shares by way of a first fixed mortgage. The assignment was absolute and deprived the investor of the ability to complete the purchase of the shares in year 10 without first repaying the bank. Then before the purchaser could make a claim on the policy it had to sell the shares and achieve a price of less than $3 per share. That effectively meant that the purchaser of say a million shares had to repay the loan debt of $2.8 million in year 10, pay N-Tech $1 million for the shares (expending

$3.8 million) and then make a claim on the insurance company for $3 million.

• [188] The immediate problem Mr Ruffin faced is that neither clause says explicitly that the undertaking follows after a funding of the trust. Second, the parties to the transaction know that the reason for the trust is not to secure payment, but rather to secure the tax advantage. Third, the transaction is so structured as to give the “real” investor, the LAQC’s shareholder, the ability to walk away if the shares are valueless. Fourth, it is inherently unlikely that a claim would be made because the cost is more than the benefit. These are all facts known to all the parties before the documents are signed.

• [189] Finally, at the time the documents were being executed and before they were dispatch to Hong Kong, the insurance as funding, which was received from the insurer, made it plain that the insurer would either fund or arrange reinsurance. The letter of 22 March from Epicharmus signed for Equity Trust by Mr van der Rhee, upon a close reading, conforms with an understanding that the policy did not require the funding from year 1 of the purpose trust. It was sufficient if there were funds in the trust in year 10 to meet any event of a claim being made.

• [190] That letter of 22 March could only be written by Mr van der Rhee if he had had explained to him the logic of the documentation which required the repayment of the loan and purchase of the shares, costing in excess of $3 million before a claim could be made after a three month interval against the insurer.

• [191] As at 22 March Gosling Chapman, as the adviser to all the investors, including themselves, were they pursuing this question in truth, which I doubt,

would not be reading the now clause and clause 9 and the letter written by Mr van der Rhee as an assurance for the funding of the special purpose trust ab initio.

• [192] For the purpose of a conspiracy trial I do not think that the Crown has proved that the accused person’s would have believed that they were promising to fund the trust ab initio (that is confounded by Mr van der Rhee’s letter of 22 March) nor that they would be believing that that would be the understanding of Gosling Chapman.

• [193] Mr Gilbert pointed out, in his closing submissions, that on 14 December 1995, Mr Adrian King (of the Hong Kong Trust Company Limited) sent all investors in tranches 1 to 4 Digitech a copy of the Hong Kong trust deed which was intended to meet the obligations under the policy for a special purpose trust. Clause 2.1 of the deed provides that the insurer “will transfer to the trustees as and when required sufficient funds ... to cover ... claims under the policies”. None of the investors, including the Gosling Chapman partners, took issue with this expression of the obligation.

• [194] Mr Gilbert also pointed out that Messrs Paterson and Wilkinson from Rudd Watts Stone, looking at this in 1997, both reach the opposite conclusion to that now argued by the Crown. It was their view that “after ... the trust assumes the liability of the insurer ... the insurer continues to have a real risk in respect of the insurance contract by virtue of its obligation to put the trust in funds.”

• [195] There is no evidence at all to suggest that Mr Reid ever understood that he had arranged for the transaction documents to require cash payments to fund the purpose trust in year one. All the evidence exists to the contrary. He spent a considerable amount of time explaining to Mr van der Rhee the complete opposite, in 1995 and later when Mr van der Rhee was seeking to have a document completely releasing Epicharmus.

Conclusion as to whether there was a dishonest conspiracy among any of the accused in respect of the Digitech scheme, against the investors

• [196] From the preceding analysis I am satisfied that the Crown has failed to prove a dishonest agreement by any two or more of the accused to defraud the investors. On the evidence that I have seen all the accused thought they were participating in putting in place transactions which did have legal validity. None of them made any promise or misrepresentation to any of the investors that the transaction would not be circular. Only one of them had an obligation in law to pass on any knowledge that the transaction may be circular. That was Mr Russel who was in a client relationship with the investors. Whether or not he was in breach of duty does not fall to be decided in this case. The same applies to his partners. The matter only becomes relevant if I had decided there was a dishonest agreement between he and one of the other accused, it could only be Mr Reid. It would have to be a dishonest agreement by he and Mr Reid to deceive the investors as to the presence of a real loan and a real premium and the absence of a circular transaction. There is no proof that the two of them had such a dishonest agreement. Later in 1995 Mr Reid persuaded Mr Russel to accept $600,000 or thereabouts in addition to his share of the brokerage fee. That is a significant fact pointing to a special relationship. But it is countervailed by Mr Reid’s statement to Mr Sidnam. At the very least, such an agreement is not proven beyond reasonable doubt. There was no proof at all against Messrs Currie or Connolly.

Is the position different in respect of the NZIL scheme?

• [197] At the very end of his closing address, when Mr Ruffin could see where I was going, he ventured to suggest that Mr Reid’s position was different in the NZIL scheme. He proffered and extract from an opinion from a firm of solicitors, to Gosling Chapman, that they should be less involved in the marketing of the NZIL scheme, now that the Digitech scheme was under investigation by the Inland Revenue Department, and suggested that Mr Reid should be more involved. That amounted only to an opinion by solicitors. I did not have placed in front of me any evidence which suggested that Mr Reid gave any assurances to the investors in the

NZIL scheme on these critical matters. Mr Ruffin confirmed my understanding that Gosling Chapman continued to receive the benefits of their brokerage fees on the placement of the NZIL investments.

• [198] The trial was based, as this judgment reflects, on a close examination of the conduct of the parties putting in place the Digitech scheme and the first tranches of the Digitech scheme. It was on the basis that the NZIL scheme was on the same template.

• [199] Looking at the big picture it seemed to me that Gosling Chapman were on even greater notice in the NZIL scheme of the potentiality of a close relationship between the insurer and the lender. The Bank of New York Intermaritime Geneva branch had dropped out. A new lender called Armour Fidelity Fund Limited had come in. Documents were littered with the address of Insinger de Beaufort. The insurer’s name had changed to a different insurer. But it still had the address of Insinger de Beaufort. None of this appeared to disturb Gosling Chapman. For these reasons I do not think any conspiracy has been proved in respect of Count 2 against the investors, for I can see no material difference in the facts vis-à-vis the accused, from the Digitech scheme.

Proof of conspiracy against the Commissioner of Inland Revenue

• [200] About the same time as Mr Ruffin and I explored whether a distinction could be drawn between Counts 1 and 2, I threw out what I thought might be a lifeline to Mr Ruffin, having previously mentioned it once before, that there might be a conspiracy against to deceive the Commissioner of Inland Revenue though not to deceive the investors. Mr Ruffin did not pursue that comment.

• [201] When Mr Gilbert rose to reply, he being the first and, in the end, the only counsel to make an oral address in closing, I put the question to him as to whether or not on the facts there may not be an evidence of a conspiracy to deceive the Commissioner of Inland Revenue.
• [202] He pointed out immediately that this was simply not the way in which the trial had been run. He referred to particular 21 of Count 1 (see [61]) and replicated in Count 2 which contended that the representations were a fraud against the investors and then:-

This would consequentially defraud the Commissioner of Inland Revenue who, in the absence of further investigation to unearth the true position, would be obliged to allow deductibility in appropriate years for the insurance premium and payments of interest pursuant to the loan.

(My emphasis)

• [203] I think both points are fairly made. As will be apparent from this judgment, there were efforts by all concerned, including, to a degree, by all the investors, to present these investments as a commercial transaction with only an incidental tax benefit. As I have also observed, this, to an extent, is a behaviour the Commissioner comes to expect in this sort of investment. When Denham Martin Associates gave advice to Gosling Chapman on the Salisbury investment on 22 March 1994 he said, under the topic of tax avoidance:-

22. While I could not totally dismiss the possibility that section 99, the general anti-avoidance provision, would be held to apply to the proposal, I believe that the risk of it doing so is of a very low order, particularly given that credible commercial reasons can be advanced in support of the proposal and the prospects of investors who see the real profits at the time the relevant trees are sold.

23. However, I note that the tax advantages of the proposal should be downplayed as much as possible in the materials which are provided to investors by Salisbury Securities Limited. Obviously, the greater the emphasis on tax benefits in the proposal and any materials which are provided to investors, the greater risk of there being a challenge under section 99 of the Act.

• [204] Finally, I note that no witness was called by the Department and, as already recorded, it would appear that the Department now takes the view that the transactions were real. This is a proposition completely at odds with the main premise upon which the case was run for the Crown by the SFO.

• [205] For these reasons, I was of the view that the submission of Mr Gilbert was correct and that the Crown had presented its case on the grounds that proof of

conspiracy against the Commissioner of Inland Revenue was consequential upon first proving a conspiracy against the investors.

General Conclusion

• [206] Before finally reaching my verdict I stepped back and looked at the big picture. I thought that one of the most critical pieces of evidence was Mr Sidnam’s testimony to the Inland Revenue Department as to the warning that Mr Reid gave of a relationship between the lender and the insurer. As I observed in argument with Mr Ruffin, in situations like this, investors in such schemes often do not want to know what goes on, on the other side of the scheme out of their sight. It could well have been the case that Mr Reid said enough to enable Mr Sidnam and/or Gosling Chapman to pursue the issue if they wanted to. Once I had taken that view of the evidence I considered that the Crown would not be able to prove beyond a reasonable doubt any agreement between Messrs Reid and Russel to dishonestly deceive the investors and put their assets at risk. I was not in anyway sure that these two had conspired dishonestly. I thought there was no proof at all against Messrs Currie and Connolly.

• [207] In his closing submissions, Mr Haigh said this was a case in which the Court should take the opportunity to reaffirm the basic difference between evasion conduct, which is criminal and avoidance conduct, which is not criminal.

• [208] There was never any doubt in my mind throughout the trial that I was looking at the development, implementation and ultimate collapse of avoidance structures. But I was never persuaded that before me were conspirators to defraud the investors. Some of their correspondence was false and a charade. As Mr Reid acknowledged in his interview, the charade between himself and Mr Connolly was totally unnecessary. But, in the end, those falsities did not bite in terms of deceiving any of the investors. The case was not pursued independently of deceit of the investors against the Commissioner. I was also influenced throughout the trial by the fact that the insurance scheme was obviously artificial, whether there was a real loan or premium or any circularity. Investors such as these are sophisticated people who know they are taking a risk. If they, or their advisers, do not ask penetrating

questions in order to fully understand the whole arrangement, that is at their risk. To the promoters of the scheme it may reasonably appear that they do not ask, because they do not want to know how it is done.

J G Fogarty

Signed at on 22 October 2004

Solicitors:

Meredith Connell, Auckland, for Crown McCabe & Co, Auckland, for First Defendant Haigh Lyon, Auckland, for Second Defendant Chapman Tripp, Auckland, for Third Defendant Castle Brown, Auckland, for Fourth Defendant