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A Report on Certain Statements made in Respect of Air New Zealand Limited in September 2001

D  CONCLUSIONS

On the basis of the evidence considered by it, the Commission reaches the following conclusions. However, the Commission notes that it is not the function of the Commission to make determinations as to liability under the law.

12   APPROACH BY OFFICE OF THE PRIME MINISTER TO BROKING HOUSES

12.1   The Commission inquired of all broking firms in New Zealand, regarding media reports of approaches to broking houses by the Office of the Prime Minister about possible steps to be taken by the Government in relation to Air NZ. Each firm stated that it had not been so approached.

12.2   The Commission also inquired of:

• the Office of the Prime Minister;
• the Department of Prime Minister and Cabinet;
• the Treasury;
• the Ministry of Economic Development; and
• the Ministry of Transport

"I can confirm that no one in the Office of the Prime Minister was authorised to approach any broking house on this topic [possible steps to be taken by the Government in relation to Air NZ]. I am confident that I would have been aware at the time had any such initiative been taken, and it was not. Further, since the matter was raised in the media, I have checked with all those employed within the Office of the Prime Minister that might possibly have taken such a step, and can confirm that no such steps were taken."

12.2   It is possible that the conversation that took place between the Prime Minister and Dr Turkington on the morning of Tuesday 25 September 2001 became known to others and was misreported as an approach by the Government. Whether that occurred, and, if so, how, is not known to the Commission. The Commission is of the view that, on the evidence available to it, nothing was said or disclosed during the course of that conversation regarding the affairs of Air NZ that was inappropriate or indiscreet. We conclude that the Office of the Prime Minister did not approach broking houses about possible steps to be taken by the Government in relation to Air NZ.

13   INSIDER TRADING - GENERAL

13.1   Under our Terms of Reference we considered whether questions arose with regard to insider trading or tipping in terms of Part I of the Securities Amendment Act 1988. Appendix E of this report contains an outline of the relevant provisions of this legislation.

13.2   From the evidence before us, including our review of trading records and interviews with brokers, we have found no evidence of insider trading by any person in the shares of Air NZ during the period of this inquiry.

14   INSIDER TRADING RULES - THE PRIME MINISTER

14.1   The independent directors had told Mr Cameron on Friday 21 September that they could not continue beyond Sunday 23 September without Government support for the company. Mr Cameron had also learned from the directors that there was a possibility of an Ansett settlement, and had been advised of the settlement in principle negotiated on Sunday 23 September. That information was conveyed to the Prime Minister in the preamble to Mr Cameron's term sheet and at the Ad Hoc Ministerial Committee meeting on Tuesday 25 September. That information was inside information as defined by section 2 of the Securities Amendment Act 1988. We conclude that as at Tuesday 25 September 2001 the Prime Minister was an insider of Air NZ with inside information as defined by section 3(2)(e) of the Securities Amendment Act 1988, having obtained the inside information through the chain of the Air NZ independent directors and Mr Cameron and having been present at the Ad Hoc Ministerial Committee meeting.

14.2   Under section 9(1) of the Securities Amendment Act 1988 an insider of a public issuer who has inside information about the public issuer and who "advises or encourages any person to buy or sell securities of the public issuer" is liable to the persons listed in section 9(2).

14.3   In the following paragraphs we consider the statements by the Prime Minister in the context of tipping for the purposes of section 9 of the Securities Amendment Act 1988. In relation to Air NZ the interview was as follows:

Robyn Janes: Air NZ - anything to report today?

Prime Minister: Nothing to report.

Robyn Janes: What's your recommendation to mum and dad shareholders at the moment?

Prime Minister: I'd recommend they hang on to them because I am absolutely convinced that Air NZ has a viable future.

Vernon Small: Stephen Franks was saying that the government should give an assurance to people buying tickets that there will be an airline. Can you give that assurance?

Prime Minister: I am certainly having tickets bought for me on Air NZ and I have every confidence it's going to be flying.

Vernon Small: When you say people should hold on to their shares, are you saying that it won't go into statutory management, or implying that it could trade out if it did go that way?

Prime Minister: I think that whatever the path that is chosen, Air NZ has a very viable future as a company.

14.5   This leaves a question as to whether the Prime Minister "encouraged" any person to buy or sell shares in Air NZ for the purposes of the Securities Amendment Act 1988.

14.6   The tipping provisions of the Securities Amendment Act 1988 do not refer to "holding" shares, only to buying or selling. However, the Commission considers that a statement by an insider with inside information that shareholders should "hold on" to or "not sell" their shares can, in some circumstances, constitute tipping. This can be so if the overall context of the statement and the tone and terms of the statement infer the sending of a more positive message than a simple "hold".

14.7   The Securities Amendment Act 1988 does not define the word "encourage" and the term has not been considered in the context of this legislation by the courts. The Court of Appeal in Colonial Mutual Life Assurance Society Limited v Wilson Neill Limited made a number of statements about liability under the Securities Amendment Act 1988 in light of the legislative scheme of the Act. The Court in that case was of the provisional view that an absence of moral fault would have no bearing on liability under section 7 or section 9, other than on questions relating to penalty. In relation to "inside information" and "insider" the Court adopted objective tests. The Court of Appeal's approach in the Wilson Neill case suggests that an objective test may be applied to the consideration of the actions of insiders.

14.8   We accept that the Prime Minister did not intend to encourage any person to buy shares in Air NZ. However it is clear from evidence received by the Commission that some market participants, mostly retail investors, were encouraged to buy Air NZ shares by the Prime Minister's statements as they were reported. In assessing whether or not this is sufficient to be able to say that the Prime Minister "encouraged" any person to buy shares it is important to consider the context in which the statements were made and the manner and context of the reporting of the statements.

Context of statements

14.9   The first question relating to Air NZ was: "Air NZ - anything to report today?" As her press secretary had earlier predicted, the Prime Minister replied, "Nothing to report". The Prime Minister has explained that in her view "this made it clear that nothing had changed since earlier interviews". In other words, as far as the Prime Minister was concerned, the public perception of her comments, had they been reported verbatim and in full, ought to have been that there were no developments, good or bad, which she was able to report.

14.10   Following her statement that shareholders should hang on to their shares, the Prime Minister was asked two further questions. One related to assurances as to the purchase of airline tickets. The last question referred expressly to the Prime Minister's statement that shareholders should hang on to their shares. She was asked:

"When you say people should hold on to their shares, are you saying that it won't go into statutory management, or implying that it could trade out if it did go that way?

To this the Prime Minister replied:

"I think that whatever the path that is chosen, Air NZ has a very viable future as a company."

Reporting of statements

14.11   The manner in which the Prime Minister's remarks were reported is also significant. The story was first reported on TV One News at 6 pm on Tuesday 25 September. The story began with the presenter Simon Dallow saying: "The Prime Minister is urging small investors not to sell their Air New Zealand shares". The story was then taken up by reporter Owen Poland. At this point the transcript reads:

"Reporter: Julian Warren bought a thousand Air New Zealand shares for eighteen cents yesterday. He now wants a fund set up to save the airline.

Julian Warren (Air NZ supporter): If we can all contribute to some sort of fund now, very quickly indeed, and save Air New Zealand, and give it some liquidity, then that trust fund would presumably, I would imagine, be capable of some ownership or stake in the running of Air New Zealand.

Reporter: The shares gained a little altitude after yesterday's record loss, and the Prime Minister's urging small investors not to sell.

Helen Clark (Prime Minister): I'd recommend they hang on to them, because I'm absolutely convinced that Air New Zealand has a viable future.

Reporter: But analysts say it's a risky investment.

Bruce McKay (DF Mainland analyst): So any investor who was contemplating buying some shares at the moment really has to look at it on the basis they may perhaps lose all their money."

14.12   The New Zealand Herald of Wednesday 26 September reported the story under the headline "Don't Sell Up, PM Urges Shareholders". The first sentence of The New Zealand Herald story read:

"Prime Minister Helen Clark has advised investors to hold on to their shares amid reports that her Office has tested market reaction to the Government's increasing its commitment to the multimillion-dollar bailout of Air New Zealand."

The juxtaposition of the Prime Minister's statement that shareholders should hang on to their shares and testing by her Office of market reaction may have given a different impression of what she had actually said.

14.13   We conclude that the way in which the Prime Minister's comments were first reported was relevant to the perception of these statements by the market. First, the media focused on only one of the answers that she gave to questions on Air NZ, where the overall tone of her comments may have been balanced by a full reporting of the interview. Secondly, we conclude her statement that shareholders should hang on to their shares because she was absolutely convinced that Air NZ had a viable future was either linked with an incorrect report of the Government testing the market (The New Zealand Herald) or with the suggestion that buying Air NZ shares was patriotic, public-spirited and necessary to save the airline (TV One News). Thirdly, the statements by TV One News that "the shares gained a little altitude after yesterday's record lows, and the Prime Minister's urging small investors not to sell" may have given the wrong impression that the market was already reacting to the Prime Minister's statements. In fact we consider that none of the movement in price on Tuesday 25 September should be attributed to the Prime Minister's statements, as these statements were reported for the first time at 6pm, some time after the market closed.

Statements by insiders intended for public release

14.14   The Crown's legal advisers invited the Commission to find that the Prime Minister's statements could not have constituted tipping in any event because the statements were made to representatives of the news media for public release. The Crown submitted that a statement made to "every" person cannot be a statement made to "any person" for the purposes of liability for tipping under the Securities Amendment Act 1988. The basis for this submission was that generally liability for tipping arises where a statement is directed at a person or persons in order to confer on them an advantage not available to others in the market, and so in terms of the scheme of the legislation a public statement should not be considered a tip.

14.15   The Commission agrees that if a statement is made with the full intention and in the reasonable expectation that it will be immediately reported to the market at large then this should not be viewed as tipping. No advantage to any person is likely to be intended or achieved in the circumstances. Both positive and negative statements about the affairs of listed issuers are routinely made by those issuers to shareholders and the market, and are important to maintain an informed market.

14.16   However, the Commission is of the opinion that the fact that a statement is made solely for public release is not in and of itself the end of the matter in terms of liability for insider trading. The release of a statement that includes inside information or that might reasonably be viewed as an encouragement to trade needs to be managed carefully.

14.17   The Commission has previously stated its opinion that a piece of information should be considered "publicly available" for the purposes of insider trading legislation only once it is available to participants in the market in which the securities are traded, and probably also to potential participants, that is, those who might act on the information. This is consistent with the approach taken in overseas jurisdictions, notably the United States. Making a statement to the news media for reporting does not make the information publicly available. Whether information is publicly available is a question of fact and will depend on the extent to which the statement is reported, and the timing of that reporting. For this reason the Commission is of the opinion that any insider should take great care about the procedures to be adopted in making any price sensitive statement about a public issuer. This reinforces our view, recorded below, that statements about listed public issuers made by insiders should where possible be made through the market information mechanisms provided by the NZSE.

Conclusion - the Prime Minister

14.18   In the present case we conclude that the Prime Minister's statements were not intended to "encourage" but that encouragement was taken from her comments, as reported.

14.19   We consider that an insider of a company does not "encourage" another person to buy shares in that company for the purposes of the legislation merely because the other person takes encouragement from what the insider says. This is certainly so if the reaction of the person taking encouragement is inappropriate. Against that background we focus on the phrase "encourages any person to buy". It is important to read the phrase as a whole and in the context of the purpose of the legislation in which it is found. The following elements are important:

• First, there must be some active step taken to encourage; and.

• Secondly, that step must be directed at another person or persons and not to the world at large; and

• Thirdly, it must have been capable of conferring an advantage.

14.20    We think five points emerge as important in considering the Prime Minister's statements in the context of section 9:

1. The wording of section 9 of the Securities Amendment Act 1988 does not expressly refer to "holding" in contrast to buying or selling.
2. There was no intention to encourage.
3. The overall context in which she made the statement, had it been reported in full, would have at least lessened the impact of the statement that was reported.
4. Although we believe that the Prime Minister's statement that shareholders should hang on to their shares was perceived by the public as an encouragement to buy, we consider that the way in which the news media reported the statement contributed significantly to that perception.
5. Her remarks were addressed to the public at large and were not in the nature of a confidential communication. Despite a delay in the wide dissemination of the remarks the statements were available to the public at large before any person acted on them.

14.21   In the present case, applying these factors to the statements of the Prime Minister, we conclude that she did not "encourage" any person to buy shares within the meaning of section 9 of the Securities Amendment Act 1988.

14.22   Moreover, although encouragement was taken from the Prime Minister's statements as reported, the market was informed of the statements by the time trading commenced on Wednesday 26 September. We have no evidence of loss that could be attributed to her statements.

15   INSIDER TRADING RULES - MR TERRY

15.1   On Monday 24 September Mr Terry attended by telephone a meeting of the Board of Air NZ which received a report of the settlement in principle with the Ansett administrators. On Tuesday 25 September Mr Terry attended by telephone a meeting of the Board of Air NZ where the independent directors informed the Board of Air NZ that there was now a reasonable chance that a recapitalisation would be put in place. Mr Terry confirmed at this meeting that no comment would be made on current discussions or proposals regarding Air NZ at the announcement of BIL's annual results. Therefore, as at Thursday 27 September, Mr Terry, as a director of Air NZ, was aware of the settlement in principle with the Ansett administrators, and was aware at least that there was a reasonable chance of recapitalisation by the Government. We have already concluded that this information was price sensitive.

15.2   We conclude that Mr Terry was an insider with inside information at the time of his statement on Thursday 27 September (NZ time).

15.3   In the following paragraphs we consider the statement by Mr Terry on 27 September regarding Air NZ's share price that "30 could bounce to 60 fairly quickly if there was an announcement that it will continue and it will continue with full support" in the context of tipping for the purposes of section 9 of the Securities Amendment Act 1988.

15.4   The Commission does not consider that it matters that the statements were made offshore by an overseas resident, as they relate to a New Zealand listed company.

15.5   We do not consider that Mr Terry advised any person to buy or sell shares in Air NZ.

15.6   As with the Prime Minister, this leaves the question as to whether Mr Terry "encouraged" any person to buy or sell shares in Air NZ for the purposes of section 9 of the Securities Amendment Act 1988.

15.7   The Commission considers that a statement about the share price by an insider with inside information, particularly when it predicts an upward movement, can constitute tipping. Mr Terry's statement must be considered taking account of the factors set out in paragraphs 14.7 and 14.14 to 14.17 of this report.

15.8   We accept that Mr Terry did not intend to tip. Mr Terry informed us that he "intended to do no more than illustrate what might happen should certain circumstances occur". However, we consider that objectively Mr Terry did more than that. He addressed directly the question of price and forecast that the share price of Air NZ could double if there was an announcement. He would have been aware at the time that an announcement from the Government was likely.

15.9   Unlike for the Prime Minister, we do not think that the context and reporting of Mr Terry's comments were in any way mitigating in an assessment of the appropriateness of his comments.

15.10   As outlined above, we consider that an insider of a company does not "encourage" another person to buy shares in that company, for the purposes of the legislation, merely because the other person takes encouragement from what the insider says. As above, we identify the following elements as important:

• Firstly, there must be some active step taken to encourage;

• Secondly, that step must be directed at another person or persons and not to the world at large; and

• Thirdly, it must have been capable of conferring an advantage.

15.11   We think three points emerge as important in considering Mr Terry's statements in the context of section 9:

1. There was no intention to encourage.
2. The statement was not in its own express terms an encouragement to buy. It was made in the context of a report on the affairs of BIL and quite negative sentiment about its Air NZ asset.
3. His remarks were addressed to the public at large and were not in the nature of a confidential communication. Despite a delay in the wide dissemination of the remarks the statements were available to the public at large before any person acted on them.

Conclusion - Mr Terry

15.12   In the present case, applying these factors to the statement of Mr Terry, we conclude that he did not "encourage any person to buy" shares within the meaning of section 9 of the Securities Amendment Act 1988.

15.13   Moreover, although encouragement may have been taken by Mr Terry's statement, we observe that following the report of Mr Terry's statement the NZSE imposed a trading halt until a statement had been made by the company. Air NZ then asked that trading be suspended. This remained in place until an announcement was made about recapitalisation on 4 October 2001. We have no evidence of loss that could be attributed to Mr Terry's statement.

16   LAW REFORM

16.1   The circumstances of this case raise difficult questions about the tipping provisions of the Securities Amendment Act 1988. They highlight the tension between imposing liability only where tipping was intended, with the consequential problems of proof, and attaching liability where the tipping was not intended. We consider the uncertainty created by this to be undesirable. We note that the Government intends to carry out a full review of insider trading laws, including an examination of liability provisions. We recommend that the question of tipping be included in this review.

17   WHETHER THE PRIME MINISTER'S COMMENTS WERE APPROPRIATE IN THE CIRCUMSTANCES

17.1   The Prime Minister has said in evidence to the Commission that her statement on Tuesday 25 September regarding shareholders was appropriate in the circumstances. We do not agree. We accept the Prime Minister's contention that her motivation was the national interest. In evidence provided to the Commission the Prime Minister stated:

"I did not have a view, at the time or otherwise, as to whether the Air New Zealand share price was likely to go up or down, either in the short or long term. That was not a particular concern of mine - my focus was in ensuring that the Government preserved a national airline, and that I in particular reassured the public that the Government was doing all it could to achieve that goal."

17.2   The Prime Minister was at the time an insider of the company. She is an influential figure whose statements are accorded significant weight by the New Zealand public. Air NZ was a publicly listed company, and one in which there were a large number of retail investors. In the circumstances we consider that any statement she made about Air NZ would be likely to be given the highest significance by investors.

17.3   The Crown submitted that the Commission should not judge the Prime Minister's comments by the standard it would apply to market participants. The submission was not that the Commission should apply a lighter standard, but that it should take into account the unique position of the Prime Minister, her relative distance from the detail of the Air NZ situation, and the national interest imperatives that apply to her conduct. However, the Prime Minister is the lead spokesperson of the Government. We consider that the circumstances were such during late September, in particular at or immediately following the meeting of Tuesday 25 September, that warnings should have been given to all Ministers to take great care in their statements about Air NZ. They were only advised at the meeting on 25 September that there should be no public comment on the specific point of the prospect of a new transaction until it could be properly disclosed. We consider this insufficient in the circumstances.

17.4   The interview itself was not an ambush. In view of the volatility of Air NZ's share price and the speculation about statutory management we consider that a question about the fate of minority shareholders should have been anticipated and that the Prime Minister should have been specifically advised on how to respond to questions about shareholding in Air NZ. The Prime Minister was not so advised.

17.5   In any event we consider that the Prime Minister's responses should have distinguished questions about shareholding from issues of confidence in the viability of the airline's business. She should have responded to questions about shareholding in a different manner. Statements were made that we consider to have been inappropriate both from a securities markets' perspective and by the standards which we consider the Crown, and the Prime Minister as its representative, should have followed when making statements about Air NZ.

17.6   The willingness of the Government, confirmed by the decision of the Ad Hoc Ministerial Committee, to recapitalise Air NZ on its own was price sensitive information. The Prime Minister has stated in evidence that there was no connection between the decision of the Ad Hoc Ministerial Committee approving Mr Cameron's proposal to the major shareholders and her recommendation some two hours later to shareholders in Air NZ that they should hang on to their shares. The Commission has not received any evidence to the contrary. The Crown's legal advisers advanced the proposition that the Prime Minister's response would have been the same regardless of the outcome of the meeting, short of misleading investors. Even on the basis of this assertion, however, it seems to us unlikely that the Prime Minister would have given the same response to the question about shareholding had the Ad Hoc Ministerial Committee meeting decided the Crown was not willing to consider recapitalisation of Air NZ under any circumstances or that statutory management was the only option.

17.7   Although it is difficult to judge the extent to which this occurred, we are satisfied that investors, mostly unsophisticated, were influenced by her statement in the form in which it was reported. It was taken by the market to signal clear support by the Government for Air NZ. The Crown has submitted that the comment was simply consistent with the Prime Minister's previous line of providing reassurance about the future of Air NZ as an airline. We believe a distinction should be drawn. The Prime Minister's statement on Tuesday 25 September was an express comment about shareholding. Her responses appear to have addressed the issues raised by the reporter by expressing an opinion as to what shareholders should do. A statement referring to shareholders should not have been made in advance of orderly disclosure to the market, through the proper channels, of information about the possible recapitalisation by the Government. The subsequent revelation that the statement was given when a decision by the Government had only just been made to negotiate an equity stake in Air NZ is significant and inevitably raised questions about the proper functioning of the New Zealand share market.

17.8   That is not to say that a major stakeholder, including the Prime Minister as head of Government, should not make public statements. On the contrary, there will be many occasions when it will be important for a stakeholder to comment on events or developments in a listed company. We also accept that there may be broader sensitivities for the Prime Minister and Ministers in responding to questions. However, where there is a commonality between the government's national interest and the interests of the investing public, we consider the timing and medium of communication of information is critical, particularly where the information may be price sensitive. We consider that potentially important statements or comments about any publicly listed company should be disclosed to the market through appropriate channels, for example, the NZSE, and in accordance with appropriate rules or guidelines about the timing of release of information to a market. The emphasis on disclosure in this way ensures that the market is uniformly informed. The risks that statements such as those made may give rise to questions as to whether the "tipping" provisions of the Securities Amendment Act 1988 apply is a further reason why the making of such a statement in these circumstances is inappropriate in our view.

Guidelines for the guidance of Ministers and their spokespersons

17.9   The Commission is surprised that neither the Prime Minister nor Dr Cullen were specifically briefed during the period of negotiations for the recapitalisation of Air NZ as to the appropriateness of comments by Government spokespersons in relation to matters affecting shareholding in Air NZ. We note a warning about making any public announcement was given to those present at the Ad Hoc Ministerial Committee meeting on 25 September. However, the Crown accepts that there was no structured or special advice to Ministers.

17.10   We are also concerned that there are no general guidelines in place to assist Ministers and their advisers when dealing with situations involving publicly listed companies. We recommend that such guidelines or procedures be drawn up for the guidance of Ministers and their spokespersons when commenting on events affecting publicly listed companies in New Zealand in circumstances where the Government has, or is reasonably perceived to have, price sensitive information not available to the market. We believe the existence of such guidelines could assist to avoid situations such as those that were the subject of our inquiry. They could assist to maintain public confidence in the integrity of an informed share market. We accordingly recommend that the Department of the Prime Minister and Cabinet or other appropriate Department should devise suitable guidelines and that these should be made available to Ministers and their advisers. The Crown has told the Commission it recognises the desirability of appropriate guidelines and has already begun to develop them.

18   WHETHER MR TERRY'S COMMENTS WERE APPROPRIATE IN THE CIRCUMSTANCES

18.1   The comments of Mr Terry, who at the time was a director of Air NZ, were interpreted by the market to indicate an undisclosed favourable event (as it transpired, recapitalisation by the Government). We conclude that Mr Terry's remarks were inappropriate, quite aside from any question of tipping. Difficulties are faced by a director who, as a spokesperson for a public company, is required to answer questions which relate to the fair value of a significant asset of the company. Notwithstanding this, the proper functioning of an orderly, informed market is jeopardised when an insider of a public issuer with inside information publicly makes a statement about possible movements in the level of the share price at a time when the market is already subject to extensive rumour and media speculation.