ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.46 January 2009
This issue
The Securities Commission laid criminal charges against the directors of failed finance companies Nathans Finance and Bridgecorp in December.
Criminal charges and civil proceedings were filed against Nathans Finance directors John Hotchin, Donald Young, Kenneth Moses and a fourth director believed to be resident in Australia.
The Commission laid criminal charges against the chairman of Bridgecorp Bruce Davidson and non-executive directors Gary Urwin and Peter Steigrad. Criminal charges were laid by the Registrar of Companies earlier last year against the executive directors Rodney Petricevic and Robert Roest. The Commission has also issued civil proceedings against all five directors.
The criminal charges are carry a maximum penalty of five years imprisonment or fines of up to $300,000.
The Commission has applied for declarations of civil liability and civil pecuniary penalties of up to $500,000 against each of the directors in both cases.
Nathans Finance
These proceedings follow extensive investigations by the Commission since Nathans Finance went into receivership on 20 August 2007 owing approximately $174 million to some 7,000 investors. According to the receivers less than 10% of that is likely to be recovered.
“The Commission believes Nathans’ offer documents misled investors about the risks of investing in Nathans Finance, especially the risks of its extensive related party lending,” Commission Chairman Jane Diplock says.
The Commission alleges that the directors made untrue statements in the registered prospectus and investment statement of Nathans Finance NZ Limited (in receivership) dated 13 December 2006. These statements concern lending to related parties (including Nathans’ parent company VTL Group), that Nathans had no bad debts, that it had adequate liquidity, that its lending was diversified, that it made loans and managed them in accordance with robust policies and processes, and that all material matters had been disclosed in the prospectus.
The Commission also alleges that the directors made further untrue statements when they signed a prospectus extension certificate on 30 March 2007. These stated that the company’s financial position had not materially and adversely changed since its last balance date, and that the 13 December 2006 prospectus was not false or misleading.
In addition, the Commission alleges that letters sent to members of the public advertising Nathans Finance debenture stock contained untrue statements about some of the matters referred to above. These claims do not apply to Mr Hotchin who had resigned his directorship by the time the advertisements were sent out.
The three directors Young, Moses and Hotchin did not enter pleas when they appeared in the Auckland District Court on 23 January. They were remanded to appear again on 20 April for a preliminary hearing.
Bridgecorp
Jane Diplock says all the Bridgecorp directors are responsible for the company’s offer documents. “The Commission believes that the offer documents misled investors by misrepresenting the overall financial position of those companies and the risk of investing in them.”
The proceedings relate to Bridgecorp Limited (in receivership and liquidation) (Bridgecorp) and Bridgecorp Investments Limited (in liquidation) (BIL). When Bridgecorp went into receivership in July 2007 it owed approximately $459 million of debenture stock to some 14,300 investors. The receivers estimate the likely recovery for investors to be 13-44%. BIL was placed in liquidation also in July 2007. On that date it owed approximately $29 million to investors. Almost all of the money raised by BIL was on-lent to Bridgecorp and is unlikely to be recovered.
The Commission alleges the directors made untrue statements in the investment statements and registered prospectuses of Bridgecorp and BIL dated 21 December 2006. These statements concerned Bridgecorp’s overall financial position, solvency, and liquidity which the Commission believes had been substantially deteriorating since 30 June 2006. BIL was affected by this because it depended on Bridgecorp to be able to repay its own investors. Other alleged untrue statements concern related party lending, lending policies and procedures, that Bridgecorp had never missed an interest or principal repayment, and that all material information had been disclosed in the prospectus.
The Commission also alleges that the directors made further untrue statements when they signed prospectus extension certificates for Bridgecorp and BIL on 30 March 2007.
These stated that the companies’ financial position had not materially and adversely changed since the last balance date, and that the 21 December 2006 prospectuses were not false or misleading.
The defendants have been summonsed to appear in the Auckland District Court on 24 February 2009.
Civil proceedings
Under the Securities Act an application for a declaration of civil liability and civil pecuniary penalties must be made together.
In the case of both proceedings the Commission’s main purpose in making them is to take the first step towards compensation for investors who invested under the 21 December 2006 prospectuses. A declaration of civil liability is conclusive evidence that can be relied upon by either the Commission or investors themselves in any subsequent claims against the directors for compensation. The Commission will consider pursuing compensation claims in due course should it be in the public interest to do so. The Commission has power to take civil proceedings only in respect of a prospectus registered after October 2006 or an investment statement or other advertisement distributed after that date. Investors can take their own civil compensation proceedings whether or not the Commission also has power to do so.
Other investigations
The Commission acknowledges the assistance of the receivers of Nathans Finance and Bridgecorp, the National Enforcement Unit of the Companies Office, and the Serious Fraud Office with these investigations. The Serious Fraud Office is continuing its investigations into Bridgecorp.
The Registrar of Companies has previously laid charges against Mr Petricevic and Mr Roest. The Commission and the Registrar will continue to work together to progress the cases against all five Bridgecorp directors as promptly and efficiently as possible.
The Securities Commission has identified matters issuers need to focus on as a result of its recent review of financial statements.
The areas requiring particular attention are:
Other significant matters are:
The Commission is keen to see that issuers pay particular attention to these matters when preparing upcoming interim and full-year reports. “These issues take on greater significance in today’s tight market conditions and require greater transparency in the manner in which they are presented in financial statements”, Securities Commission Chief Accountant Alastair Boult says.
The Commission reviewed the reports of 40 issuers with March and June 2008 balance dates as part of its financial reporting surveillance programme. It is in the process of discussing its findings with issuers.
“Full and timely disclosure is essential to keep the market well informed in the changing economic environment,” Alastair Boult says. “It is important for market confidence that issuers tell the full story about their operations in their financial statements. Boiler-plate disclosure will not suffice.” The Commission considers that the manner in which transactions, assets and liabilities are recognised, measured and disclosed, takes on a different significance in current market conditions. This includes, for example:
The Commission’s review of financial statements is ongoing. For the next cycle it will select issuers with balance dates between 1 July and 31 December 2008.
Moratorium documents are a form of offer document and are therefore subject to the same rules as other offer documents. The Commission reviews moratorium offer documents and will take action to ban them if we consider they contain any false or misleading information.
We are working with the Registrar of Companies who has already laid criminal charges in three cases and banned some directors, and the Commission’s investigations of other cases are well advanced.
Many investors are currently faced with considering proposals by finance companies for a moratorium or debt restructuring programme. Investors are being told the only real alternative is receivership. A moratorium means that investors forego interest, capital, or both for a period of time.
If a finance company is placed in receivership, investors usually face the prospect of getting back less than their full investment. If the directors are proposing a moratorium they should believe that this will give investors a better chance of getting more of their money back. While a moratorium may extend the life of the company, in many cases it will merely be a longer term winding down of company assets.
When considering a moratorium investors should ask themselves the following questions:
An important consideration is the time period for any returns to investors. While the total return may be likely to be less under a receivership, any returns will most likely come sooner than under a moratorium.
Therefore it is important to look at the “net present value” of the amounts that are expected to be recovered under each option, as well as the expected total return. A net present value calculation converts expected future benefits into their value today, because money received today is worth more than money received later.
Because payment to investors is deferred, this means they are being asked to take a further risk on the future performance of the company’s assets and management. The longer the moratorium period, the longer this risk will exist. Assets may decline, rather than rise over time. Either decision involves risks.
In deciding to recommend a moratorium the company’s directors must have made some assumptions about the future value of the company’s assets. Investors should be told what these assumptions are and the basis for them. Investors also need to know how the same assumptions would stack up if applied in the shorter term under a receivership. If investors have any doubts about any of these matters they should seek independent advice before voting.
The Commission’s Briefing Paper to the Incoming Minister Hon Simon Power was released by the Minister on 17 December 2008. It is published on the Commission’s website, www.seccom.govt.nz.
The briefing paper states that the current international market turmoil demands a multi-faceted regulatory response to restore investor confidence, to boost industry professionalism and to sustain the domestic and international reputation of New Zealand’s financial system.
It outlines the Commission’s immediate priorities:
Jane Diplock
Chairman on international advisory group
Commission chairman Jane Diplock has been appointed to a high-level global advisory group looking at urgent financial reporting issues arising from the financial crisis.
The Financial Crisis Advisory Group was set up in December by the International Accounting Standards Board and the United States Financial Accounting Standards Board. Its purpose is to advise the boards about standards setting implications of the global financial crisis and potential changes to the global regulatory environment.
The group includes recognised international leaders from the fields of business, standards setting and regulation with a broad range of experience in international financial markets. Jane Diplock, also the chair of the Executive Committee of the International Organization of Securities Commissions (IOSCO), is the only representative from Australasia.
At its recent first meeting Jane Diplock emphasised that “restoring investor confidence should be the number one priority for standards setters when considering any changes to reporting standards”.
The advisory group will identify significant accounting matters for urgent consideration by the two boards as well as long-term issues and will report within six months.
IOSCO and the G20 Summit
With its global reach and technical expertise, IOSCO is assisting policymakers develop and implement common global regulatory solutions in response to the crisis in global capital markets.
In an open letter issued on 12 November 2008, IOSCO welcomed the efforts of the G20 and reinforced its willingness to assist in developing regulatory solutions. To resolve the crisis, co-operation and coordination amongst financial regulators and policymakers, supported by the will to make the necessary regulatory or legislative changes, are critical.
In the days following the G20 Summit last November, IOSCO’s Technical Committee launched three new taskforces to support the aims identified by the Summit.
A taskforce is working to determine gaps in various approaches to naked short selling, including delivery requirements and disclosure of short positions. In this context, the taskforce is also examining how to minimize adverse impacts on legitimate securities lending, hedging and other types of transactions that are critical to capital market formation and to reducing market volatility.
Another taskforce is examining ways to introduce greater transparency and oversight to unregulated market segments, such as OTC markets for derivatives and other structured financial products.
A third taskforce is examining issues surrounding unregulated entities such as hedge funds, including the development of recommended regulatory approaches to mitigate risks associated with their trading and traditional opacity.
All three taskforces will present their reports at the next Technical Committee meeting scheduled on 16 February and this will input into the next G20 Summit in April 2009.
On 16 January, the Technical Committee held one of its regular meetings with representatives of the financial services industry to update stakeholders on IOSCO’s work arising from the global crisis and to seek their views and input. Discussions focused on work on the above mentioned issues as well as on credit rating agencies.
IOSCO has already laid the solid foundation for a strong securities framework. The Objectives and Principles of Securities Regulation developed by IOSCO are recognised as the benchmarks for all securities markets, while IOSCO’s Multilateral Memorandum of Understanding has been instrumental in strengthening cross-border enforcement cooperation and enabling regulators to exchange information.
Where possible, IOSCO coordinates work with other international bodies. The Organisation is a member of the Financial Stability Forum and it counts the IMF, World Bank and OECD among its affiliate members.
Further details can be found at www.iosco.org.