Digi-Tech promoter asks investors to cough up

By Deborah Hill Cone

Friday 22nd November 2002

Investors in the ill-fated Digi-Tech tax scheme were bemused yesterday after receiving a letter from the maestro behind the scheme demanding more money.

Considering most of them probably wish they had never got involved in the troublesome thing in the first place, they could be forgiven for being tempted to scrunch it up and toss it in the bin.

The letter is from John Reid, who is facing fraud and moneylaundering charges brought by the Serious Fraud Office, and it demands what he claims are outstanding payments under the investment agreement.

For a $500,000 investment, the minimum investors could sign up for, Mr Reid estimates $185,000 is still owing to n-Tech, the Digi-Tech holding company. Investors defaulted on the scheme en masse and some are still in the process of settling disputes over their disallowed tax deductions with Inland Revenue.

Given the scheme turned to custard and is now ensnared in complex litigation, it seems strange for Mr Reid to make an out-of-the-blue demand for payment. It is possible the demand is intended to back up his defence where he will be arguing it was a bona fide investment scheme so needs to be seen to be pursuing payment as if all was proceeding normally.

The complex tax scheme involved about 110 investors signing up in 1996 to buy shares in Wellington technology company Digi-Tech Communications using a long-term sale and purchase agreement.

It is not surprising it was an attractive proposition; they did not have to pay cash up front, there apparently was no risk since the investment was insured, they were lent the money to pay for it yet they could claim large tax deductions.

That was because they signed up for a "loss-of-profits" insurance policy which guaranteed the future value of the shares at the end point, 10 years on in 2005.

The money for the insurance policy was lent to investors and the cost of the insurance policy was claimed in full as a lump-sum tax deduction, a claim later challenged by the IRD.

A similarly structured scheme used shares in another company called New Zealand Investments (NZIL), which owned shares in a variety of companies linked to Mr Reid including marketing startup Escalator Advertising and trailer manufacturer Fruehauf Pacific.

The scheme is alleged to be a sham by the IRD, which has questioned the authenticity of the insurance contract, whether loans were made to investors and whether the insurer would be able to pay out anyway.

But in Mr Reid's letter, after demanding payment, he claims the IRD has backed down and admitted it was wrong in alleging fraud in the NZIL scheme.

The IRD is not permitted to comment on individual taxpayer's affairs but it is likely if it could it would take issue with Mr Reid's version of events, especially since he quotes from his own file note.

He claims a solicitor for the IRD said at a December 2000 meeting:

"I'm embarrassed. This is not fraud. We never actually worked through what would happen in year 10 under the scenario of the contracts being performed ... If you can show that there is a security deposit from the insurer to the lender which the insurer can call on to meet its obligations, then I can't see the fraud."

But Mr Reid also gets some details confused in the letter, which refers to n-Tech as the holding company for the NZIL transaction, when it was another company, St Lucia Investments.

Tax specialist Geoff Clews, who acts for some of the investors, said his clients had passed on the letter to him and he was forwarding it to the IRD for comment.

Mr Reid won an Australian case taken by investors in a separate Digi-Tech investment on that side of the Tasman. They sued him for misleading conduct and he countersued, claiming they had not correctly exercised options to back out of the contract.

The court found for Mr Reid and ordered some investors to pay him $A44 million, although even the judge referred to the fact it was unlikely Mr Reid would be able to receive these substantial damages from the limited liability companies set up to make the investment.

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