By Simon Louisson of NZPA
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Friday 15th October 2004 |
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Long castigated as toothless, the commission was given new powers two years ago to not just investigate, but take cases to court.
Previously, there had been a litany of commission investigations concluding in "no further action". Since the law amendment, the watchdog has been quietly gathering material for a test case that will set a precedent.
On Wednesday, came the bombshell announcement that it had filed proceedings in the High Court against six former Tranz Rail executives and major shareholders, including some of New Zealand's highest profile businessmen, for alleged insider trading.
Among the six defendants is David Richwhite who faces an additional charge of "tipping". Now living in London, the former Tranz Rail director was listed as New Zealand's second richest person before he left in apparent bitterness towards New Zealand in the wake of the Wine Box tax investigation.
Also named was Midavia, a private investment vehicle of Richwhite and his business partner, Sir Michael Fay, who bankrolled New Zealand challenges for yachting's America's Cup. He left for apparently similar reasons and these days resides in Geneva.
Others cited include former Tranz Rail director Carl Ferenbach of the United States, who was managing director of Berkshire Fund III, that is also a defendant; former Tranz Rail chief executive Michael Beard, and his chief financial officer Mark Bloomer.
Lawyers for Richwhite, Midavia and Bloomer said they would "vigorously defend" the allegations. There has been no response yet from the other defendants who, like the others, are now overseas-based.
Whether or not insider trading is proved, there is no question Tranz Rail investors were sold some of the sourest of sour lemons. Those charged sold shares at prices between $3.60 and $4.28 a share and 15 months later the shares had plunged to 30c and the company was on its knees.
This will be such a momentous business case for several reasons.
Any court case involving the fabulously rich is always of interest, but bigger issues are at stake. Firstly, it is the first time the commission has exercised its power to take a case to court. No doubt it has chosen its fighting ground carefully and believes it can win. The case will obviously be precedent-setting.
Secondly, the commission will be claiming compensation as well as pecuniary damages, which under the law can be three times the estimated losses. That means, according to some estimates, up to $250 million will be sought, which would even dent Richwhite and Fay's estimated wealth of $630m each.
The case may result in a re-examination of the stock exchange's role as market regulator. NZX's now disbanded Market Surveillance Panel investigated much of the trading relating to the commission's case. It found Tranz Rail breached listing rules by failing to make timely disclosure of substantial writedowns after a board meeting. But the panel said it could find no evidence directors knew of these and likely resulting profit downgrades.
The roles of Fay Richwhite, Fay and Richwhite have been controversial from their first involvement in Tranz Rail when they were advisers to the government on its privatisation in 1993 and then led the buying consortium.
Commentator and share analyst Brian Gaynor estimates the original shareholders made profits of $370m from Tranz Rail - including $87m for Fay Richwhite, $140m for Berkshire Fund, $100m for Wisconsin Central and $43m for Huka Lodge owner Alex van Heeren.
Wisconsin, now Canadian National, sold its 23.7% in February 2002, two weeks after Fay Richwhite sold its last 17.5m shares, but has escaped court action as it had no director on the Tranz Rail board.
Gaynor has estimated the original shareholders stripped $155m of equity out of Tranz Rail before floating the company to the public at $6.19/share in 1996. They had paid the government $400m for the company but put in only $107m of equity.
Fay Richwhite was heavily involved as adviser in the subsequent financial engineering of Tranz Rail which led to it selling its Cook Strait ferries, locomotives and rolling stock and leasing them back.
How much the series of asset write-downs and profit downgrades in 2002 and 2003 were the result of that aggressive financial gearing may be revealed in the court case. At what point directors and executives knew the company was in trouble is likely to be central to the case.
The case will have reverberations in the wider corporate world. Insider trading is prevalent in every market where greed and opportunity overcome probity. While some players will always be prepared to take risks in a high stakes game, securities laws should operate to minimise the chance of getting away with it and penalties should be a sufficient deterrent.
The securities law was beefed up in 2002 as part of the Government's effort to dispel the Wild West image of New Zealand's securities markets.
Previous insider trading investigations by the commission had invariably resulted in no action taken by damaged shareholders and/or the proverbial slap on the wrist with a limp lettuce.
In one case, Bank of New Zealand shareholder Donald Kincaid took proceedings against Fay and Richwhite but he ended up settling out of court because his legal fees had escalated to the point where, if he lost, he would have been bankrupted.
Kincaid, who died two weeks ago, got no assistance from the commission.
Lawyer and former Securities Commission member Peter Ratner said now people could no longer assume there was no one prepared to take them on.
The Shareholders' Association, which was one of the complainants to the commission about the Tranz Rail share trading, called the commission's decision to bring the case a "watershed decision".
"They have acted decisively and firmly. They haven't issued a report saying `naughty boys you've insider traded, someone else do something about it'. They have skipped that intermediate step and they have got on and dealt with it," chairman Bruce Sheppard told National Radio.
"It's an amazingly good outcome."
Ratner said proving insider trading was always extremely difficult as the prosecution had to prove knowledge "and knowledge was inside somebody's head". Secondly, something hypothetical had to be proved - what would have happened if that particular knowledge had been known.
The case is likely to take a long time to come to court and will take a long time. The only guaranteed winners are likely to be a plethora of Queen's Counsel who will be rubbing their silks in gleeful anticipation of huge fees.
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