MCARTHUR TRIAL

Evening Post, Volume CXXII, Issue 33, 7 August 1936, Page 11

MCARTHUR TRIAL

CASE FOR DEFENCE OPENED

OUTLINE OF- NATURE OF "EVIDENCE

The nature of the defence to the six charges against John William Shaw McArlhur, company director, formerly of Auckland, relating to the issue of allegedly false prospectuses and reports of the Investment Executive Trust of New Zealand, Ltd., was revealed for the first time today, when, at the continuation of McArthur's trial in the Supreme Court, Mr. H. F. O'Leary, K.C., his senior counsel, outlined to the jury the evidence he intends calling.

The last witness for the prosecution was Kenneth Curtis Aekins, an Auckland solicitor, who acted for the Sterling Investments Company and was its chairman of directors. He gave evidence regarding the granting of a power of attorney by the Sterling Company to. McArthur, the managing director of the Investment Executive Trust, as collateral security for debentures held by the trust. The power of attorney was dated January 12, 1932, and remained in force until December, 3932, when it was decided that it be revoked and a new one be given to C. G. Alcorn. That was at the request of the trust. McArthur saw the witness some time in January and requested that a separate bank account be opened with the National Bank in the name of the Sterling Company investments account, to be operated upon by the accused in pursuance of the power of attorney. The company's ordinary account and was at the Commercial Bank. The witness did not know that the accused was making personal drawings from either the investments account or the ordinary account, or that advances were being made by the company to the Pacific Company. There was no mention of those things in the minutes, as far as he knew. He knew nothing of the transfer of a large number of assets from the Sterling Company to the .Wynwood Company and the accusea Mr. O'Leary: The fact seems to be that you took no interest, in or concern with this company at all? The witness: I'm afraid I did not. You attended meetings when, requested, and so on?— Carried out the menial work. ; You were really more in it for the legal work than anything else?— That is so. I was-not being paid as a director. . . ! ' ■ .. : You gave similar evidence to this on three charges of theft laid against McArthur in respect of your company's transactions?— That is quite correct. Three amounts that he had drawn that you knew nothing about, -he was charged with stealing?— Yes. And you were in court when the Magistrate dismissed those charges?— I was not actually in court, but I know the charges were dismissed. And the evidence you have given today is practically the same as that you-gave on that occasion, with the addition of.some further minutes you have referred to?— That is so. Evidence for the Crown, which began on Tuesday morning, was completed at 11.5 a.m. today. MR. O'LEARY OPENS. Mr. O'Leary said he did not intend following the example of Mr. V. R Meredith, senior counsel for the Crown by addressing the jury at the same length because he considered it unnecessary and unwarranted. "You have already seen, gentlemen," contended Mr. O'Leary, "howJ the Crown has complicated the issue in this case by bringing forward a mass of details resulting from the investigations of the various McArthur companies by giving evidence of transactions connected with what are termed the interlocking companies, which has taken up a tremendous amount of time. It is submitted to you that, the issue in this case is a 1 comparatively simple one ana that it was unnecessary to clog it with the mass of details that you have heard."

The Acting Chief Justice'(Sir John Reed) said it might be as well to say that he would tell the jury that the Crown was entitled to go into these matters to show what the intentions of the accused were.

Mr. 0 Leary said he understood that was his Honour's view, but he still submitted he was entitled to place the view he had before the jury. "Your Honour just throws one out of his stride a little,;' added1 Mr. O'Leary His Honour replied that he had thought it, just as well to tell Mr O'Leary, that he did not agree with him. - ■: ■■■..■■ ;

"My submission is that all this detail is brought forward to cloud the issue," Mr. O'Leary continued, "and- to get you into this frame of mind: 'Oh, look at all these dealings. Look at the speculation. Look at the transfers. Look at the money going out and the money coming in. There must have been something wrong. 1 That is not the basis on which this.case has to be decided. • The charges against McArthur. are these, in general terms: That he made certain statements in reports and prospectuses which are alleged to be false, and that in these same documents he omitted to make certain statements which made the documents false. Gentlemen, you will see that is a rather extraordinary charge. You have heard,that there has never been a similar charge brought in this Dominion. There have, as his Honour has pointed out, been prosecutions in

England, the most notorious being the prosecution of a.member of the House of Lords, Lord Kylsant, in connection with the prospectus of a shipping company, and more recently the prosecution of certain men, in what is known as the 'pepper case.' For the first time in the Kylsant case it was laid down that it could be a criminal offence not to give information in a prospectus whereas prior to that it was considered you had to actually misstate the position before a criminal charge could be laid. In a case of this kind what is required to prove a criminal charge is set out in the summing up of the Judge who presided in what I term the 'pepper case.'" . THE PUBLIC'S INTEREST. Mr. O'Leary read from this judgment. What had to be done, said counsel, had to be done dishonestly to make the person charged criminally responsible. The chief witness to be called would be McArthur, and he was entitled to say this: that the business of McArthur and the business of the McArthur companies had been during the past t\vo years a matter of public property and notoriety. No transaction, counsel submitted to the jury, which had culminated in a criminal charge had received so much, publicity as had the McArthur transactions and the McArthur investigation. 'One effect of it had been to make McArthur almost a public figure whose every word, every act had been reported, chronicled, commented on, and criticised in the Press throughout- Australia and New Zealand. "It has, as I have said,": continued Mr. O'Leary, "made him a public figure, but I put him before you as a courageous public figure, one who has not hesitated to meet the attacks of those who are against him." Two years ago the authorities had come down on McArthur and his , companies, possessed themselves, and had been in possession since, of every document, every letter—everything that went to make up his own personal records, and the records of the companies he was associated with. N.Z. COMMISSION'S APPOINT- : MENT. ■ .-■... Mr. O'Leary next referred to the formation of the Investment Executive Trust. By 1933, he said, it was evident the Trust was going to be an immense, success. At that time, however, McArthur was finding not merely the ordinary competition of business, but opposition was entirely hampering his activities. He knew who was doing it and if anyone wanted to know who was responsible, McArthur, when he was in the witness-box, was prepared to say. McArthur, however, went on. His company was in no way embarrassed; business was increasing. He was so .successful that he increased his activities by extending. them to Australia, the South British National Trust coming into being and starting operations in Sydney. Al was going well until December, 1933, when • suddenly a Commission was appointed, the Barton Commission, to investigate the activities of trust and bond-holding companies in New Zealand, and particular reference was made to the M&Arthur companies. The Commission issued a report which was full of suspicion's or suggestions of veiled charges. Then suddenly in August, 1934, there was sensational legislation" passed in New Zealand contemporaneously with legislation in Australia which had this effect: What was the ordinary law for all other people ceased to be the law for McArthur and the companies associated with him. It was at that stage that all records were seized, and in pursuance of that Act four inspectors were appointed to investigate the affairs of the I.E.T, The inspectors investigated the activities of the company for months, and in November, 1934, under the legislation, the Public Trustee was appointed receiver and thereby an additional inspector was appointed, Mr. Anderson, of the Public Trust Office.

After a period of fourteen months, after all the investigation, after all the innuendo, the suspicions, the veiled suggestions of crime and so on, in October, 1935, the best that could be made of it was to lay a charge against McArthur in respect of the issue of an allegedly false prospectus away back in 1933 or 1934, a similar charge to which had not previously been made iri New Zealand. Anyone reading the reports, the evidence of the Commission, and so on at a distance must have been astounded that the only charge that could be laid against McArthur was in respect of an allegedly false prospectus, which had been followed when he came back* to New Zealand with three other charges, two arising out of reports and one from a prospectus. What must have been implied behind all the investigation? It must

have been that McArthur was defrauding the public; that whilst he and his companies had a liability of over £400,000 to the public who had subscribed for debentures there were no assets there to meet the liability. That was what must have been behind it. McArU/u would give evidence that' the position was, when "this ruthless legislation" was passed, that the money was there; that at the commencement of the proceedings there were ample assets and more to meet the debenture liability, and that there was no need for the alleged concern for the moneys of the debenture holders. What would be the result now McArthur could not say. If "there was not sufficient money now or when all the assets were realised he took no responsibility, because he said that if it had not been for the precipitate and drastic action taken against him and his companies there were ample assets to meet liabilities. If debenture holders did not now receive 20s in the £, McAr.thur would say that they were very much wronged. But he was not the man who had wronged them. He along with them was much wronged. He had been a persecuted nian for two years and now he was a prosecuted man on charges which McArthur submitted should never have been brought. THE CHARGES. Mr. O'Leary turned his attention to the charges, which he referred to. at some length. At no time, counsel contended, had McArthur in the documents which were the foundation of the first charge referred to English investments. Counsel contended in this connection that the statement produced, by one of the witnesses for the Crown, was calculated—he did not say deliberately—to prejudice the defence. After dealing with this aspect further, Mr. O'Leary stated that the allegation was made against McArthur that he had not disclosed certain information about the I.E.T. investments in associated companies. It was true he-had not, but he would say that it never occurred to him that it should be' disclosed. After what the jury had heard of the case he would ask them whether, if McArthur had prepared a report of 100 pages and a prospectus of 100 pages, he would have had in everything that could have been put in about the companies. There must be some limit and he would say that it never occurred to him that the information should be given or that it was necessary to give it. Even if the. jury, thought it might have been given, that did not make McArthur a criminal^ It had to be recollected that behind his activities and work was the justifiable fear, McArthur said, that powerful concerns, which were aiming at his destruction, should hot be, given information.

Wtien he got to the fourth charge, that relating to the alleged issue of the prospectus of April 3, 1934, Mr. O'Leary described this as the;?gem of ihe collection.. It was the first time in his experience in which it was alleged that' a man had committed a criminal offence which made him liable to a lengthy term of imprisonment as a result of what somebody else had done. McArthur had left New Zealand for Australia before a word of the prospectus had been printed. The reason for this prospectus' was the new Companies Act, which required considerably more statutory and general information to be given in prospectuses than hitherto. Before he left for Australia McArthur left instructions for a new prospectus to be brought out in compliance with the new legislative requirements. The prospectus had been prepared by the secretary of the company, Mr. Glasson, but proceedings were not taken against him. The charge was absurd, and a striking thing was that the prospectus was not only signed by McArthur but also others.

, After referring to various transactions, Mr. O'Leary dealt with and criticised the big chart prepared by the Crown of transactions up to February 28, 1934. Dr. Louat would explain in what way the chart was lacking in particulars. It was contended that the diagram as it stood was neither fair nor accurate.

In conclusion Mr. O'Leary said that in addition to McArthur and Dr. Louat he would be.calling one or two accountants and perhaps one or two minor witnesses. # ■ DR. XOUAT'S POSITION. Frank Louat,. a doctor of laws practising at the New South Wales Bar, was the first witness for the defence. He said he was engaged as counsel for McArthur's companies at the Sydney Royal Commission, which sat practically continuously for five months. He had an intimate, knowledge of the various companies. He had given close attention to the diagram exhibited in court and he considered it not to be fair and accurate.

Dr. Louat left the wltness-tiox and went to the diagram where he made his explanation. He said the diagram concealed a number of material facts and it was inaccurate in what it said, and he proceeded to explain his contentions in detail.

Mr. Meredith raised the question whether the witness was giving evidence or giving opinions on previous evidence.

• His Honour remarked that Dr. Louat was practically acting as counsel.

Mr. O'Leary replied that the witness was open to cross-examination. That was the difference between him and counsel. The plan had been put in by the Crown before any proof was offered. .

His Honour: I told the jury to disregard the figures on it until they were proved.

Mr. O'Leary: Can't your Honour tell the jury that in this case? •

Counsel explained that Dr. Louat was called to give evidence before McArthur was because the former was leaving for.Sydney today.

His Honour said that what Dr. Louat was saying was not regular evidence. He did not want to balls: the defence in any way but he thought that what the witness was doing was hardly admissible, because - there would be a difficulty in cross-examining him. . Mr. O'Leary said that Crown witnesses had given similar, evidence, and he had cross-examined' them, to which his Honour replied that they had had the use of documents in the case. Mr. O'Leary said that Dr. Louat had seen most of the documents. . Mr.'. Meredith said .that, .the documents were available in court to the witness. . . ' ' ' The witess made a short further explanation and returned to'the box. Mr. Meredith: Can you tell us where the books of the Sterling Company are? The witness: No.Did you.ever see them in Sydney? —NO. .' •.•■-.■■.■'.■■.- . . They would be the key to the position, would they not?— You mean the old Sterling books? The old Sterling books. Would not they provide the key to the questions of where the money came from and where it went to?— For some-periods they would be of great assistance. ACCUSED GIVES EVIDENCE. McArthur:then gave evidence. At the time the Acts of Parliament were passed stopping the company's activities about £415,000 in securities and money had been subscribed by the public, and the value of the ' assets over which the money, was secured was £490,000, without taking into consideration any increase in the value of the assets. The appreciation was £35,000. To trie time his operations had stopped, debenture holders had received a total of 26 per cent, interest spread over three years. In June, 1933, there was a conversion. The debenture holders in the first series sold their debentures to the Shareholders' Trust the legal medium for conversion, and with the proceeds subscribed for a second series of debentures. That would mean asingle amount of capital actually subscribed, though legally there were cash payments in each case. At the time of the legislation the investors were fully protected by assets, and there were big prospects for further remunerative business ahead of the company. The plan was to amalgamate the New Zealand and the Australian trust companies. Their total debenture issues were £5,000,000. At the time the business was smashed by the Government they were negotiating three important deals which would have meant an added profit of nearly a quarter of a million pounds to debenture holders of these two companies. The value of a £1 debenture today would have been from 25s to 30s. ..."..-.- :.-::

On the purchase and sale of the "Daily Telegraph" building it was not true that he hs.d made a profit' iof £287^000, continued the. accused. V His personal profit was £ 60,000! A question of income tax involving approximately £96,000 to be paid if the deal had been conducted by the Trust prompted him to act the way he did in regard to the building. He considered that he quite legally and properly saved that income tax, and he took that into consideration in taking his profit from the deal. .The balance of the profit of £270,000 [went to shareholders' account in the Investment Executive ■ Trust .and the Southern British National Trust for the benefit of debenture holders: The greater proportion had already been transferred' to the latter to meet establishment costs when the business was stopped. His position today was that he had nothing except ordinary shares in the, McArthur Trust Company, which he formed in Queensland to take over the Investment Executive Trust and Southern British National Trust debentures, to recoup; if possible some of the loss due to the action of the Government in. butchering the business. . : •'

His Honour: We don't want to introduce politics into this case.

■ Mr. O'Leary' (to the accused): You mean legislation?

McArthur: It was legislation designed to butcher our. business.

His Honour said he thought that required a protest, it appeared to him that the Governments hero and in Australia could see that the public:were being invited to. surrender -their perfectly good securities 'to take up shares in a companyJ rightly or "wrongly but for a profit. Upon that the Governments here and in Australia acted. He thought the less the Court heard about Governments "butchering business" the better. • . ■

Me Arthur: I maintain: with all due respect, your Honour, that that was a subterfuge. ••■■■■■

"NO PERSONAL RESPONSIBILITY."

McArthur said he took no' responsibility for the loss, personally. When the legislation was passed 37 policemen were put: into the building, and all the books, documents, and letters of all the correspondence were thrown into a heap in one room. From that heap he and his associates had to spend several cjays in rearranging the books and documents, which were then in the possession of the police. They never came back into his* (McArthur's) possession. From then on he had access, but Government officers had preference, and he had to ask them.' The Wynwood Company had nothing to do with the trust companies. Its assets were a portion pf those he took over from Sterling and were chiefly originally his own assets, and he held practically the whole of the shares and debentures. : All 'the papers of that company were taken with the rest.

Prior to- the creation of the Investment Executive Trust, said witness, he was in the New Zealand timber business for 22 years. He was originally a clerk in a timber office. By 1925 his- timber business had developed till he had a public company known as the Selwyn Timber Co. Its assets in 1925 were worth . approximately £70,000. There was very little public money in the company. The expansion of the company was due to a reinvestment of profits and he spent fourteen to sixteen hours a day on it in the early stages of the business. START OF THE TRUST. In 1929 he registered the Investment Executive Trust, having particularly studied that type of operation in the Old Country and the United States. The principle he adopted was to issue first mortgage debentures over the investments. The dilierence between those debentures and the usual was that the one he designed gave the investor 95 per cent, of total profits and 5 per cent, to shareholders, -The usual method was to give debentures a fixed low rate of interest,..:with- the shareholders taking the balance of the profit. The Trust actually commenced business in April, 1931. He was first apprised of the present charges when he was arrested in Sydney in October of last year. He had been attending the meetings of the Commission throughout, and there was no suggestion of a charge. He knew the allegations of falsity against him, and he said that the charges were entirely unfounded. His positive statements in,' the reports and prospectuses were correct. He believed in diversification, and was carrying it out but was not permitted to get to the stage where he could absolutely carry it into effect. The business was destroyed when it was not one-fifth of the way through, the plan for investment. None of the company's statements referred to the even spread of investments and it could not have done that advantageously to debenture holders. The Trust took either cash or scrip for debentures and immediately the scrip was taken over it became an investment of the com-

£39.000 in cash and securities.

(Proceeding.)

pany. Those investments'■ were not always retained, but in some cases sold to purchase other investments, usually at a profit. A large drop in the holdings towards the. end- of his period of activity was explained by the fact that for six months or more prior to the Sydney Commission there was- a fairly heavy expenditure on the building, and in -addition. Miere was i a very heavy claim made by" the Guardian Trust in connection with the Miss Smith transaction., -To rPie^t- the claim arid .the cost b'l. improvements to the building it was necessary to sell a portion of the investments. The - amount returned to the Guardian Trust on behalf of Miss Smith weis' about '