The High Court's criticisms of the Serious Fraud Office (SFO) in its judgment last year finding former South Canterbury Finance chief executive, Lachie McLeod, not guilty on all charges was probably quite enough for the SFO. However, the costs judgment released in February went a step further.

Costs may only be obtained against a prosecutor in a criminal case in circumstances where the court considers it to be just and reasonable. Factors the court will have regards to is, where the prosecution acted in good faith, whether there was sufficient evidence at the commencement of the proceeding and whether the investigation into the offence was conducted in a reasonable and proper manner.

While McLeod had sought a significantly higher sum for costs in relation to five charges which he says "should never have been laid", the court awarded costs in respect of two charges only. The first, Count 8, alleged theft in a special relationship arising out of a transaction with Dairy Holdings Limited. This related to a loan given to the director of Dairy Holdings Ltd, Mr Armer. Justice Heath said that the dismissal of those charges resembles "a conclusion of innocence".

The second, Count 10, alleged that the defendants provided false information to the Crown to obtain a favourable decision to allow South Canterbury Finance to enter the Guarantee Scheme. Heath J found that the Secretary (Dr Whitehead) would have accepted South Canterbury Finance's entry into the Guarantee Scheme regardless.

In his judgment, Justice Heath criticised the SFO describing the standard of investigation as 'poor':

  • The SFO did not obtain documents (either voluntarily or under compulsion) from the Treasury and the Reserve Bank of New Zealand to ascertain what steps had been taken to analyse information based on what the Crown contended were material misrepresentations
  • The key decision-maker, Dr Whitehead, the Secretary of the Treasury, was never interviewed. Nor were any steps taken to interview someone with the knowledge of the internal decision-making of the Treasury
  • There was no attempt "to ascertain whether the prospect of contagion as a result of offshore financial collapses, or the political reality of the time, would have led to the guarantee deed being signed, irrespective of any misrepresentation."
  • As CEO Mr McLeod had no responsibility for confirming the accuracy of the prospectus. The directors bore that responsibility
  • Mr McLeod was interviewed once and he was not questioned about the Guarantee Scheme and no documents relating to it were put to him for comment.

Justice Heath commented that "in the context of what the Director announced publicly to be the 'biggest fraud in New Zealand's history' and one that was 'the most resource intensive and time consuming in recent history', the standard of investigation on this charge fell well below that which the public is entitled to expect". Justice Heath said that Dr Whitehead could have told the Crown he would sign the guarantee deed regardless. A statement to that effect would have "inevitably" led to the charge not being laid. The Court considered that the failure to obtain evidence directly from Dr Whitehead was a "fundamental error" on the part of the investigation team.

Justice Heath finished by noting that while he "levelled stern criticism at the standard of investigation on Count 10" he did not want an award of costs to be of such a sum that it would provide a disincentive for the Crown to prosecute appropriate cases in the future. He also noted that while some of the behaviour of the accused was not proven to be criminal, it fell well below the standards expected of those responsible for the stewardship of funds provided by members of the public, and indeed some behaviour was commercially unacceptable.