McArthur Investment Trust
In New Zealand the first investment trusts were established about 1930. They had originated in the United Kingdom during the late part of the nineteenth century and provided a means whereby investors large and small could spread risks and receive an efficient and economical handling of their investments. The pooling of moneys so received gave a large amount of capital which could be spread over a range and number of securities beyond the scope of the average investor. These trusts were of various types, but in New Zealand at the time the two principal were the British or management type and the contractual type. In the former the debenture capital did not exceed the share capital, and in addition the debenture holders' security was the total assets of the company. In the second the debenture was merely a contract to pay over from investments a certain proportion of the net revenue derived from the investment of the debenture funds. There was no liability on the share capital, though in certain circumstances repayment of the debentures could be required.
In 1933 there were complaints about one of the trusts. Indeed, in October 1932 a legal action had been taken which resulted in the return of debenture moneys. Consequently when a commission was set up early in 1934 to inquire into the promotion, financial methods, control, and operation of companies, the question of the financial structure and regulation of financial investment and trust companies was included. The Commission was asked to report in April, but nothing was heard until the night of 8 August 1934 when an interim report of the Committee was laid on the table of the House. This outlined the activities of the Investment Executive Trust of Auckland and a group of interlocking companies organised by John William Shaw McArthur. It detailed the activity of the groups of companies and believed that a case had been made for the investigation of the group. It was stated that, while all the other companies concerned had assisted the Commission in their inquiries, the group had refused bluntly to cooperate. In addition it appeared that without proper authority the directorate and the financial and administrative control had been transferred to Sydney. As a result of the report the Companies (Special Investigations) Act was passed through both Houses of Parliament and became law before midnight. Similar legislation was passed by the State Parliaments of New South Wales, Victoria, and South Australia, while the Commonwealth Government issued a special order authorising each State to conduct an investigation into the affairs of the company and its subsidiaries. Queensland refused to cooperate and for some time provided an area where McArthur could operate. There were 14 New Zealand companies in the first two lists and two Australian, while a month later 12 more New Zealand companies were added. In New Zealand four public accountants were appointed inspectors to investigate the companies and in New South Wales a Supreme Court Judge, Mr Halse Rogers, conducted the investigation as a Royal Commissioner holding a public inquiry.
Reports were produced in March 1935 and revealed a long tale of dishonesty and sharp dealing. McArthur had been a timber merchant for many years, operating a business called the Selwyn Timber Co. (capital £50) which by 1930 was in liquidation with debts of £19,240 and assets of £405. He had registered the Investment Executive Trust in 1929, but it was not until early 1931 that it began to sell debentures through brokers, receiving 90 per cent of the proceeds.
The Government was about to proceed against McArthur for moneys owing by the Selwyn Timber Co., but at the last possible moment the account was paid and he avoided bankruptcy. Later Justice Rogers stated that in its early stages the money received through the sale of debentures was devoted to McArthur's own purposes and that the first £60,000 subscribed was used for the salvage of his assets. To cover the transfer he floated a company, Sterling Investments, which issued debentures to the trust for cash. Companies for all types of activity were formed, most with more or less the same directorates and owing money to others paid for in debentures. In January 1933 a similar company, the South British National Trust, was established in Sydney with a subsidiary in Canberra. These two companies were concerned with the main assets of the group, the old Daily Telegraph Building in Sydney, which by various means McArthur had purchased privately with trust funds and then transferred by other means to various companies in the group after its value had been suitably inflated.
One of the more interesting companies was Pacific Exploration. This company had a capital of £10,000 in 1 shares, Sterling Investments holding all but one share. The aim of the company was “to seek for and secure openings for the employment of capital in the Pacific or in any other part of the world”. The real object was the financing of the building of a luxurious yacht, Morewa.
The minimum of records of the various transactions of the companies seems to have been kept and the early Sterling Investment books were destroyed. At least they were never discovered. Between the various companies there were many and involved transactions which, Judge Halse Rogers concluded, were purposely designed to hamper inquiries. The involved nature of the capital dealings between the various companies can be shown from Farms and Farmlets, a small private land company. This owned all the shares in Sterling Investment and was in addition an unsecured creditor of Sterling for about £90,000. Just before the Government took action Sterling took over all the shares in Farms and Farmlets and so completed the circle. There was also a tangle over the ownership of the building in Sydney. McArthur's most adudacious action was in March 1935 when, through the Transport Mutual and General Insurance Co., he obtained a controlling interest in the Trustees, Executors, and Agency Co. of New Zealand, a company with £3 million in trust funds, largely deceased estates. McArthur told the Royal Commission that it would add to Investment Executive Trust capital a large amount of funds. Again, the Government had to pass special legislation to prevent the takeover. In April 1935, as a result of the report, legislation was passed empowering the Public Trustee to wind up the companies, in line with similar legislation in Australia. Some debenture holders were against this as they felt that, if the former directors were removed, the company could continue, but expert opinion held that the company affairs were too involved. The winding up took many years and was not completed till 1940. The trust building in Sydney was sold in 1937, two-thirds of the proceeds going to the shareholders of the Investment Executive Trust.
McArthur had managed to avoid legal proceedings until October 1935, when his extradition was sought. After the longest fight in Australian legal history he was finally sent to Wellington, where he was arrested in April 1936 and brought for trial three months later. Three charges of theft, amounting in all to £1,075, were dismissed. He was then charged with issuing false prospectuses and after a long trial was fined £500. A civil case by the Public Trustee for the return of the Morewa or £10,000 was won on appeal, when Sterling was awarded £8,931. Finally, the Public Trustee for the Investment Executive Trust received judgment for £19,340 for misfeasance. There was an appeal, disallowed in this case, but McArthur, though he threatened to do so, did not take the case to the Privy Council. Over £300,000 was distributed to the debenture holders, who eventually received 12s. 4d. for each £1 debenture.
It has not been possible to give more than the briefest outlines of the companies' activities—the parliamentary reports take 270 pages to do it—but it should be mentioned that the Investment Executive Trust had an authorised capital of £100,000. Actually 30,175 had been paid up, mostly through payments to the shareholders “for services rendered”. Only £7,563 was paid in cash, but the company intended to borrow £4 million on first mortgages. McArthur himself paid in £7 10s.