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Star witness takes on taxman in court

By Deborah Hill Cone

Friday 14th February 2003

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Documents obtained yesterday by The National Business Review show the Serious Fraud Office's star witness in the Digi-Tech fraud case, Rowan Chapman, is suing Inland Revenue for defamation in proceedings related to the case.

Mr Chapman, whose accountancy firm, Gosling Chapman, got a broking fee for selling the Digi-Tech investment product to its clients, was involved in alerting authorities to the tax scheme.

Mr Chapman carried out his own inquiries including a cloak-and-dagger trip to track down Digi-Tech's Hong Kong connection, which he claims revealed the scheme was bogus.

He laid a complaint with the SFO about the scheme, questioning whether the insurance and loan structure at its heart was bogus.

But the IRD has said it was its own probe that led to an investigation, creating some confusion over who dobbed the promoters in.

Those questions are believed to be at the crux of the proceedings filed by Gosling Chapman in late January at the High Court in Auckland against the commissioner of Inland Revenue.

The statement of claim shows the second plaintiff is Mr Chapman and third plaintiff is another Gosling Chapman partner, Geoffrey Walker.

Neither Mr Chapman nor his barrister, Fiona Bolwell, would comment on the proceedings yesterday.

But Mr Chapman took the stand in the Digi-Tech depositions as the SFO's opening witness in its case against Digi-Tech promoter John Reid, former Gosling Chapman partner Peter Russel, UK-based merchant banker Peter Connolly and Horwarth Corporate Melbourne partner John Currie.

In his evidence Mr Chapman said his firm initially thought the Digi-Tech deal was bona fide, with its complex structure devised to "de-risk" the investment, and would not have got involved or let their clients get involved if they had been aware of claims made by the SFO.

Mr Chapman had personally made two investments in Digi-Tech through his companies, Helvita and Parrish. Digi-Tech investors had to invest a minimum of $1 million ­ later lowered to $500,000.

"I was not aware of any relationship between the insurance company, the bank and Milloy Reid Wong or any parties associated with them. If I had been aware of such a relationship Gosling Chapman would not have introduced [our clients] to them. We would view that as a circular transaction and circular transactions can be disallowed by the IRD," Mr Chapman said.

An opinion from tax lawyer Denham Martin was based on an underlying assumption that there was a genuine insurance policy that did not involve circularity of funds, Mr Chapman said.

Prosecutor Mike Ruffin asked Mr Chapman whether he had had any discussions with Mr Russel about the substance of the insurance company.

Mr Chapman: "Not that I can recall, not with me."

New details of fraud surrounding the Digi-Tech investment were revealed in court this week as the SFO outlined its case. Evidence heard in court this week included allegations that:

* Bank of New Zealand was duped into setting up a $2 million "daylight" bond trading facility for Milloy Reid Wong but no bonds were ever traded;

* cash from investors for shares in Digi-Tech was taken by John Reid to buy a third share of Marlborough winery Whitehaven;

* a transaction to buy 5000 second-hand modems was used to pump up Digi-Tech's profits to meet projections and prevent shareholders from exercising an exit clause to bail out; and

* Mr Reid plotted an elaborate paper trail to give the impression he was dealing with an arms-length merchant banker contact in the UK, when UK-based Peter Connolly was writing letters that had been dictated to him over the phone by Mr Reid and were typed up by Mr Connolly's wife.

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