Monday, July 4, 2011

Allan Hubbard Saga: 7th Grant Thornton Report - Hubbard Management Funds

The Seventh Grant Thornton Reports (there are two separate ones for HMF & Aorangi) into Allan Hubbard's Aorangi Securities Limited and Hubbard Management Funds which are the investment vehicles that Allan Hubbard has been charged with fraud over makes for grim reading for Hubbard and investors in the two failed entities which are now in statutory management.

These latest reports cover off some of the detail of fraud charges that have been brought to the Timaru High Court by the SFO just a few weeks ago after over a year of meticulous investigation.

We will cover off HMF here after drilling into Aorangi Securities yesterday in a previous posting.

First word of caution from me in relation to Grant Thornton managing this fund and in the process buying shares to "add value to the investors". While I don't have a problem with the statutory managers continuing to operate the fund as an ongoing concern - in fact they are legally obliged to - I do have a small problem in relation to disclosure as to which shares the managers might be buying. While I know the process of statutory management means they have considerable control over the company they have under management and can operate how they see fit - within the bounds of statutory management laws - I think it might be wise for Grant Thornton to disclose in their reports to the public the number of shares, what prices were paid and what shares are being purchased so people like myself and investors in HMF can follow their fortunes. I dont think it is enough to say the shares being purchased are "Blue Chip".

OK, enough of the barbs!

Lets take a look at the main points contained in the report.

As stated in earlier Thornton Reports there is a $31 million shortfall in the fund as has been stated in investor statements (another possible fraud charge of the 50 Hubbard has been charged with) so the outcome for investors and their payback is still uncertain and will rely on a recovering sharemarket, (which is unlikely given the current state of the economy) a court case in 2012 that will unlikely see an outcome until at least midway through that year and the order in which investors rank for payback depending on who they are and what they have invested in - or increasingly what they think they have invested in.

As with investments in Aorangi Securities, investments in HMF have more than one claim of ownership made on them:

"As part of our work we have established that certain shares may be subject to claims by third parties, in competition with HMF investors. We have not included these shares as part of the portfolio value until we have resolved the issues associated with the claims and can establish whether or not the HMF investors can receive the benefit of those shares. Some of the shares subject to claim have been pledged as security to financiers for borrowings made by Mr Hubbard or businesses related to him". 7th Grant Thornton Report - Hubbard Management Funds

Another issue no doubt that the Serious Fraud Office was concerned about when they laid fraud charges against Mr Hubbard and symptomatic of so much of Hubbard's latter investing practices right across his collapsed business empire.

Like other parts of Mr Hubbard's vast business empire, HMF has lax, missing, misleading and in some cases fraudulent paperwork. Grant Thornton is spending considerable time trying to put the paperwork jigsaw puzzle together and this is partly to blame for the delay in filing papers in the High Court to then allow the distribution of funds to investors out of pocket. This kind of sub - par financial reporting has been going on for at least 5 years.

Perhaps the most glaringly abysmal case of either lax, omitted, misleading or fraudulent parts of book-keeping carried out by Mr Hubbard is his treatment of the cash position of HMF:

"We have been able to complete our work on the cash elements of the portfolio and have continued to find a shortfall in the amount of cash held in prior years. Our assessment of the shortfall in the cash position for 31 March 2010 has altered since our last report due to the finalisation of our investigation to a number of transactions. As a result, the total of cash holdings noted on investor statements has increased by $6.5 million". 7th Grant Thornton Report - Hubbard Management Funds

In the years from 2007 to 2010 there were shortfalls in cash ranging from just over $12 million to almost $25 million. These shortfalls were not entered into HMF accounts and were only uncovered after the Grant Thornton audit. This is likely to be one of the scenarios that the more serious charges of fraud were based on, brought by the SFO against Mr Hubbard.

Hubbard supporters have made suggestions to Grant Thornton that Hubbard's assets could be used to offset losses investors have been subject to thus far but as the Thornton Report points out many of the assets that Hubbard "personally" owns are either subject to promises made to other parties as security or are compromised in some other way either in value or the ability to realise cash easily. In short it is complicated and any promise made by Hubbard to use his own assets to offset loses must be put in the context of other promises made in similar circumstances across other parts of the Hubbard empire that have thus far failed to live up to (because of the impaired nature of the assets), well, his promises.

This 7th Grant Thornton Report on HMF continues along the lines of prior GT reports and uncovers yet more detail as to what has been going on at HMF specifically and adds to the larger picture of a man who was clearly out of control, reckless with others money and willing to do just about anything to dig himself out of the hole he had dug for himself.

I am surprised there have only been 50 charges brought by the SFO.

Allan Hubbard Saga

Full SFO Statement on SCF Fraud Investigation

Hubbard Letter to Simon Power

Download Grant Thornton Report 1
Download Grant Thornton Report 2
Download Grant Thornton Report 3
Download Grant Thornton Report 4
Download Grant Thornton Report 5
Download Grant Thornton Report 6
Download Grant Thornton Report 7 - Aorangi Securities
Download Grant Thornton Report 7 - Hubbard Management Funds

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c Share Investor 2011