ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.43 April 2008
This issue
Investigations into collapsed finance companies by the Commission and other agencies are progressing well. It is likely that proceedings will be laid relating to several finance companies.
“The work is well advanced, but still ongoing, and we cannot speculate on the outcome,” Jane Diplock said. “We are assessing whether the information given by the companies to investors before they went into receivership was true and not misleading, and that all material information was disclosed.”
“We are working to establish whether there may be grounds to lay criminal charges or seek civil penalties under the Securities Act.”
“It is important that people who raise money from the public are held to account if they mislead their investors. We will take court action if our investigations show this to be in the public interest and in the interests of investors.”
Law changes in force since October 2006 enable the Commission to go to court to seek compensation for affected investors, for prospectuses registered after that date. We can also seek civil penalties in some circumstances. These actions can be taken against each director of the company, and any promoter of the offer. The Commission’s litigation fund will be topped up from the Tranz Rail settlement providing significant resources to take actions under the new law.
Investors can also sue for compensation for loss caused by false or misleading statements.
The Commission is continuing to investigate whether there may be any prospects for compensation if investors’ losses can be attributed to misleading statements or omissions in the prospectuses.
We are working with the receivers and with the other enforcement agencies, to progress these matters as quickly as possible. Where necessary we are using our inspection powers under the Securities Act to obtain information.
The Commission cannot protect people against genuine investment risk. However, some of these collapses raise serious questions as to whether directors were giving investors an accurate picture of their financial situation and the risks of investing with them, or even in some cases whether there was fraudulent behaviour.
Every offer of securities to the public, including finance company debentures and notes, must have a registered prospectus and an investment statement. A prospectus must be kept up to date. If it becomes misleading because of any adverse circumstance, the issuer must amend it or stop allotting the securities.
If a prospectus is false or misleading in a material way, or if the securities have otherwise been offered or allotted in breach of the Securities Act, the issuer and its directors can face criminal penalties of imprisonment or substantial fines.
Enforcement priorities
The Commission’s two main enforcement priorities are investigating finance companies and enforcing new securities trading law, in particular investment adviser disclosure. Some investors who lost money in finance companies claim that they were not told about high commissions their advisers stood to earn from recommending those finance companies.
In 2005 we published a report advising finance companies and investors of the standards we expect for disclosure, in particular about risk. In that report, and again in 2006, we warned investors about the added risk that comes with promises of higher returns. We continue to raise awareness of risk with our look-learninvest website.
Last year we took preventative action to give formal consents to the Registrar of Companies (under the Corporations (Investigation and Management) Act) to secure assets of several companies in distress, where there were risks to the assets.
We required directors of all deposit takers to provide us with signed statements certifying that their prospectuses were up-to-date and not misleading. We required several companies to close their public offers, in order to preserve existing funds to the greatest extent possible.
We are continuing our surveillance of current offer documents as issues come to our attention, as well as investigating finance company collapses.
Finance company collapses over the past 12 months have added momentum to law reform initiatives to strengthen regulation of deposit takers. For now, regulation of these companies continues to rely principally on disclosure.
That means it relies on the directors of finance companies making sure that offer documents contain all information material to the securities being offered, and that advertising does not mislead, deceive, or confuse investors.
The Commission has received hundreds of investment adviser disclosure statements in response to a letter sent in March to some 1500 firms and individuals.
The letter was the Commission’s first step to enforce compliance with investment adviser disclosure law which came into effect on 29 February 2008.
“We first want to know whether each adviser and broker has a disclosure statement,” Director, Primary Markets, Kathryn Rogers said. “We are now reviewing a sample of the disclosure statements and advertisements for compliance with the law. We will take enforcement action in appropriate cases.”
Enforcement action can be taken against advisers or brokers:
The Commission’s powers include making orders to prohibit or correct a disclosure statement, or to disclose information, or to temporarily ban an adviser or broker.
It is a criminal offence:
These offences carry fines ranging from $30,000 to $300,000.
An adviser or broker can be banned for up to 10 years if they are convicted of one of these criminal offences, or have consistently contravened the law, or have been banned overseas.
The disclosure statement must be given to a client before any advice is given or any investment money is received. It must give specific information about the adviser, the products they give advice on, and how they get paid.
Investment adviser advertisements must say that the disclosure statement is available.
The Court has approved the Commission’s recommendation to distribute about $17 million to 30 investment firms and individuals who bought shares from Tranz Rail insiders six years ago and suffered a loss.
The Commission will be writing to the people concerned to, among other things, confirm they would not receive money for the benefit of any of the defendants in the case.
The defendants were David Richwhite, Midavia Rail Investments BVBA (a Belgium-registered company owned by Mr Richwhite and Sir Michael Fay), former Tranz Rail chief executive Michael Beard, ex-chief financial officer Mark Bloomer; former director Carl Ferenbach, and American investment fund Berkshire Fund III.
All the defendants settled with the Commission without admitting liability. A total of $27.7 million was paid in the settlements.
The Court agreed with the Commission’s proposal that investors who bought from the defendants but did not suffer a loss, would not receive any money.
The money, which with interest is now some $29.5 million, is in a trust account held by Toll New Zealand, formerly Tranz Rail. First call on the money is reimbursement of the Commission’s costs which will be paid into the litigation fund.
The Commission will go back to court with a proposal to distribute the remaining $10 million or so. The law sets out categories of people who could be paid. Potential recipients include shareholders at the time of the trades, Toll New Zealand, current Toll shareholders, further payment to the group of 30, the Commission, or a charity.
The Commission’s brochure Choosing an investment adviser has been revised to reflect changes brought to the law that came into force on 29 February 2008.
This brochure explains what people should expect from their investment adviser.
Investment advisers must tell their clients more about themselves and the products they give advice on. They must also explain how they get paid.
The Commission’s other brochures are:
These are available at no charge from the Commission phone 04 472 9830 or you can order them from www.seccom.govt.nz.
Investors’ funds have been recovered from most of the contributory mortgages managed by a replacement broker appointed by the Securities Commission.
Crichton Horne & Associates Mortgage Brokers Limited was appointed to manage the mortgages of New Zealand Commercial Mortgage Brokers Limited, Harts Contributory Mortgages Limited (previously named Reeves Moses Hudig Mortgage Brokers Limited), and General Mortgage Limited in 2001, 2002 and 2003 respectively.
The appointments related to 46 mortgages in which people had invested some $82 million.
“Almost all principal and interest has been recovered from 40 of the mortgages,” Chairman Jane Diplock said.
Recovery of principal for the remaining six mortgages ranged between 22% and 91%.
The replacement broker sold properties held as security for the mortgages. In some cases it pursued guarantees for loans, and took legal action against the directors of the contributory mortgage broking firms and the valuers who valued the properties.
“The Commission is pleased with the level of recovery for investors,” Jane Diplock said. “This is partly attributable to the buoyant state of the property market when the properties were being sold. Care needs to be taken with valuations supporting contributory mortgage investments particularly in the current less buoyant property market.”
Crichton Horne also managed the full recovery of principal and interest on the $27 million Parliament Street mortgage offered by The Mortgage Financier Limited. This matter was referred to them in 2002.
The Commission can appoint a replacement broker for contributory mortgages where it is satisfied that a contributory mortgage broker has contravened the Securities Act or regulations, and that the appointment is in the public interest. The Commission does not have this power in relation to other types of investments.
Law changes for disclosure by substantial security holders include a new exemption for trustee corporations and nominee companies (Section 31, Securities Markets Act 1988). This came into force on 29 February 2008.
The exemption means that trustee corporations and nominee companies who have a substantial security holding only because they act for another person in the ordinary course of their work, need not comply with sections 22 to 25 of the Act – i.e. the provisions setting the disclosure requirements for substantial security holders.
Entities who wish to rely on the exemption must opt in by writing to the Commission.
Previously, trustee corporations and nominee companies designated by the Commission did not have to disclose relevant interests in securities under substantial security holder law. This provision, previously section 6(1)(e) of the Act, has been revoked, so old Commission designations no longer have effect.
Trustee corporations and nominee companies wishing to rely on the new exemption should write to the Commission. The names of entities that opt in to the exemption will be published on the Commission’s website.
A new wave of telephone share scams appears to be underway.
"We are getting an increased number of reports about overseas callers offering share deals," Director of Market Supervision, John Mulry says.
Telephone shares scams have taken many millions of dollars from New Zealanders in the past ten years.
"The bogus brokers target people with small businesses. They are convincing and persuasive. Hanging up on them is the best response. Talking to them gives them the opportunity to persuade you to send more money. Money once sent is inevitably lost."
The fraudsters regularly change their tactics, their names, and the countries they operate from – to avoid detection and to keep the money rolling in.
To check lists of these fraudsters visit the Commission's website www.seccom.govt.nz and Australian Securities and Investments Commission's website www.asic.gov.au. These lists are not exhaustive, the fraudsters change their names often.
If a caller is not on the list it does not mean they are genuine. All unsolicited calls should be treated with suspicion. For more information on telephone share scams visit www.sharescams.org.nz
A new campaign of advertising the Commission’s look-learn-invest website is underway.
We are targeting internet users to interest them in visiting the site which explains investment risk. We want investors to think about risk before they invest, and to feel able to discuss their appetite for risk with their advisers.
www.looklearninvest.org.nz also has information about types of investments, where to get more information, and what you should expect from an investment adviser.
The Securities Commission is again in the top ten small workplaces category in the Unlimited/JRA Best Places to Work in New Zealand Survey 2007. The Commission has been a top 10 finalist for four consecutive years.
“It is good that the Commission is such a great place to work notwithstanding its serious role and responsibilities as regulator of the capital markets,” Chief Operating Officer Sanjiv Jetly said. “We have a highly dedicated and professional staff.”
This year the Commission rated 7th Best Place to Work in the Small Workplace category and was the only public sector agency in the Top 10 in any category.
The report of the Commission’s Cycle 6 review of the financial reporting surveillance programme has been published.
The Commission reviewed financial reports of 30 issuers with balance dates from 31 December 2006 to 30 April 2007. It focused on first-time adopters of NZ IFRS.
“Few matters were identified in the financial statements of firsttime adopters of NZ IFRS and we congratulate those issuers on their preparedness,” Chief Accountant Alastair Boult said.
Reports of 20 of the 30 issuers reviewed had matters that prompted the Commission to write to the issuer. Satisfactory agreement was reached on 92% of matters raised.
The Commission also raised matters relating to disclosures in respect of substantial security holder information, director share dealings and iance with NZX Listing Rules.
Substantial security holders should be aware of changes to the Securities Markets Act 1988 relating to disclosure by substantial security holders that are now in force.
The report Review of Financial Reporting by Issuers Cycle 6 is available at www.seccom.govt.nz.
Catherine Chapman
Communications Manager
Catherine Chapman leaves the
Commission at the end of April.
Catherine has worked on the Commission’s websites, media releases, publications and public inquiries for just over 10 years.
She was involved in developing public education campaigns including:
“Catherine has made a significant contribution to raising the Commission’s profile in the community,” Chairman Jane Diplock said.
Joanna Perry
Joanna Perry has completed 11 years service
as a Commission Member. Chairman
Jane Diplock said Joanna had made a
significant contribution to the Commission’s
work, particularly by encouraging good
accounting practice through the Financial
Reporting Surveillance Programme. On
the wider scene Joanna contributed to New
Zealand’s move to International Financial
Reporting Standards, both as a Commission
Member and as Chair of the Financial
Reporting Standards Board.
The Commission works with MFAT and NZTE to create opportunities to promote New Zealand as an attractive investment destination by capitalising on the Chairman’s role on IOSCO’s Executive Committee. Most meetings are hosted by resident New Zealand Ambassadors to explain New Zealand’s investment environment and regulatory framework, and opportunities for business development. Interest generated is channelled back through the relevant government agency for follow-up. Meetings held include the Women Corporate Directors in Washington DC, a group of investors in Amsterdam, investors, government and business leaders in Bahrain, the New Zealand- Australia-Korea Chamber of Commerce, members and friends of NZICA in London, and the IE Business School in Madrid.
The Commission recently hosted H.E. Sheikha Lubna, Minister of Foreign Trade and Chair of the Emirates Securities and Commodities Authority, in Wellington to discuss IOSCO developments, the role of the Securities Commission, and recent regulatory reforms.
Jane Diplock chaired the 2nd Gulf Co-operation Council Regulators Summit, attended by financial and regulatory institutions with a focus on Islamic capital markets, in Bahrain on 19-20 February 2008. Ms. Diplock spoke on IOSCO’s priorities, in particular the IOSCO MMoU on cross border cooperation. She congratulated the Central Bank of Bahrain on being the first regulator from the region to join the IOSCO MOU.
The Commission signed a bilateral MOU with the Jordan Securities Commission in Amman on 17 February. Ms Diplock met the Jordanian Prime Minister Mr Nader Dahabi to discuss attracting foreign investments to small countries and the importance of IOSCO’s work.