Boggles me how many of these tech scams work in Aus/Nz...
"You would think a man like Chris Kelliher would be the last person to fall for what Digi-Tech's Australian manager would later describe as "a classic piece of vapourware". Kelliher, a 45-year-old New Zealander, had been the long-time managing director of Microsoft in Australasia, an executive in the world's largest company and its greatest digital success story.
It was autumn 1997 and Kelliher was leaving Microsoft to go into business for himself.
"I wanted to get involved in start-ups, and I wanted to be my own boss," he says. The phone call, from an accountant/friend named Gary Urwin, came to the right man at the right time.
Urwin, a 52-year-old fellow New Zealander, is a former partner at Horwath, specialising in putting together business financing deals. By 1995 he was managing director of a company called Horwath Corporate Pty Ltd, which was majority owned by 13 of Horwath's NSW partners, and whose three other directors were a Horwath partner, the firm's chief executive and a former partner turned adviser.
The name Horwath added a credible brand to Urwin's pitch, says Kelliher. The firm is, after all, the local arm of one of the world's top 10 accountancy firms, with branches across Australia and in 90 other countries. In NSW alone, Horwath has 28 directors, 220 staff and turnover of $30 million a year.
Its Web site proclaims: "Horwath [is] dedicated to one objective - the success of our clients. Our diligent approach reassures our clients [that] they will always receive the high level of service and advice they should expect ... we are proud of our reputation."
The proposition Urwin put to Kelliher was investing in a licence to the Australian rights to a piece of high-tech equipment called a terminal adaptor - in layman's terms, a $400 gadget to give a computer high-speed Internet access using existing phone lines (ISDN).
The technology had been developed by a small, unknown Wellington company called Digi-Tech, and Horwath had been appointed "to assist in establishing operations in Australia and procure joint investment partners". Their fee was to be 3.1 per cent of the money invested - more than $2 million.
In a confidential "information memorandum" sent to potential investors, including clients of the firm, Horwath said the gadget represented "state-of-the-art tools and technology", and that it was "leading-edge software [that] would enable Digi-Tech to benefit from the explosive growth expected in the tele and data communications industry throughout the '90s and into the next century".
Kelliher was well aware from his time at Microsoft that "the Internet was exploding and there was going to be huge demand for high-speed access, particularly ISDN".
He saw Digi-Tech as "an opportunity to get a stake in the ground" and did not dismiss extravagant claims about its potential: "It could have been another Netcom or a Sirius with a 60 or 70 per cent market share."
Kelliher said that as a reality check he visited Digi-Tech's premises in New Zealand: "It was only a two-hour smell test, but they seemed to have good people, and there were products on the bench with lights flashing and so on. I really never suspected the thing did not exist [as it was marketed to us]."
Adding credibility to the investment pitch was a report by the NZ branch of Deloittes, which had been commissioned by Digi-Tech. The Horwath memorandum cited that report to support predictions of gross profits of $267 million over five years in the Australian business marketplace, with "total potential gross profits increasing to $1.94 billion should Telstra extend ISDN to private homes".
Investors say they were told lucrative deals with Telstra and Reuters were soon to be signed. In fact, Kelliher says Reid told him specifically that Telstra would order 15,000 of the gadgets - a deal worth around $6million - within a fortnight. Reid denies this.
The icing on the cake was the advice from tax-law guru Gzell circulated to investors that the juicy tax-minimisation strategy which Horwath was promoting would comply with Australian tax laws. According to court documents, the deal was structured so that the first payment of $12,500, which was due on the last day of the 1997 financial year, would carry a tax deduction of $83,333 - effectively a return of 333 per cent for a one-day investment.
"I had a million things on my mind," says Kelliher. "Deloittes [and Horwath] ... are very conservative, very careful. When I saw their name on the study it absolutely impressed me. They did a sanity check on the numbers and a sanity check on the thinking. At the end of the day it was their seal on it ..."
Kelliher says he committed himself to investing $300,000 a year for the five-year life of the scheme - $1.5 million. And his decision encouraged other investors to jump on board.
"If it was good enough for the boss of Microsoft, it's good enough for me," said one. The bandwagon had begun to roll."
(20min delay)