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Opinion: 20 years after crash and shareholders are still being done

By Simon Louisson of NZPA

Friday 12th October 2007

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Twenty years after the sharemarket crash it seems small shareholders are still being done.

Tighter rules on reporting, disclosure, director responsibility and so on seem to make little difference.

Those responsible for corporate collapses still appear on rich lists and are rarely brought to account.

New Zealand's sharemarket has never really recovered from the pounding of October 1987. We have abysmal rates of share investment compared with similarly developed countries. Even worse, there have been just two new equity listings this year, a poor year, but not much poorer than others.

In the pitifully thin IPO pickings, Feltex Carpet's $254 float in 2004 was one of the standouts.

Yesterday's damning report by the Securities Commission into its collapse revealed not only shortcomings by Feltex's board and auditors, Ernst & Young, but a degree of impotence to do much about it.

The commission reiterated its earlier finding the prospectus released by Feltex's promoters -- First NZ Capital, Forsyth Barr, ABN Amro and Macquarie Equities -- was not misleading.

The watchdog found Feltex failed to make material disclosures about its banking arrangements in 2005 and Ernst & Young's work on the 2005 half-year accounts failed to meet required standards.

"It appears that the FTX directors failed to comprehend the significance of changes made to the debt facility agreement that were designed to protect the position of the bank, and so failed to adequately inform the market of these," the commission said.

The commission said, because Feltex was in liquidation and its shares no longer traded, it had no real chance of taking action against the company.

Commission chairwoman Jane Diplock said the main recourse for investors would have been if the prospectus had been misleading, but it found it was not.

Under the law in force in 2005, directors and company officials could not be held liable for continuous disclosure breaches. That law will change soon, allowing investors to sue directors and executives.

As seems to happen in so many of these types of cases here, the stable door is shut after the horse has bolted.

Not all may be lost, however.

The former directors could still face penalties or even criminal prosecution for what the commission said was falling short in financial reporting obligations.

Diplock has referred the matter to the Companies Office registrar who will assess whether or not to take a criminal prosecution against the directors at the time -- Tim Saunders (chairman), Peter Thomas, Michael Feeney, John Hagan and David Hunter -- for breaches of the Financial Reporting Act.

"We certainly thought there was enough evidence to refer the matter to them," Diplock said.

She has also referred the auditing issues to the Accounting Standards Review Board and Institute of Chartered Accountants.

The directors said they relied on advice from management and auditors. They said they had an opinion from another major accounting firm, Deloittes, that disclosure at the time would have made no difference to the share price.

The commission accepts non disclosure made no difference to the eventual collapse of the company.

Saunders argues that as well as relying on advice of accountants, share analysts knew of breaches of banking covenants.

"Unfortunately we didn't seek advice that led us down the right path. We certainly relied on those advisers."

He told Radio New Zealand a number of analysts had forecast Feltex was in breach and they put that into their forecast for pricing and valuations.

"The investors who are close to the market would see themselves as being informed."

Saunders claims he wouldn't have done things much differently and he does not believe disclosure would have greatly altered the share price.

Sharemarket operator NZX to its credit has enacted the continuous disclosure rules, but these must be enforced. It is not good enough for companies to tell a select few, such as market analysts, and then deem the market to be informed.

Just last month, NZX issued a statement saying investors had a right to expect companies they invest in to advise them of material changes in an upfront and timely fashion.

"This is the way companies build the trust and confidence of their investors," the exchange said.

However, it is up to the exchange to back its words with actions.

For its part, Ernst & Young disagreed with the findings "and in particular, the thoroughness of our review procedures.

"We note that a review involves quite different procedures to an audit, which is acknowledged by the commission," it said in a brief statement.

Feltex's liquidator McDonald Vague believes the commission report will provide more ammunition in its $20m claim against the directors.

As well, a group of disgruntled shareholders, led by Tony Gavigon, are still suing those who sold the public Feltex, Credit Suisse First Boston.

He believes the finding that the prospectus was not misleading is wrong as the commission should have looked beyond the Securities Act.

"What we're saying is that under the Fair Trading Act it was the overall impression that was given by the documents that is important.

"It was promoted as a successful, manufacturer and exporter of New Zealand wool-based products. That was the thrust of the prospectus.

"The reality was that revenues didn't mean profit and the profit wasn't there," he told Radio New Zealand.

The wider implication of whether anyone is brought to account is, until the investment community starts to behave with integrity, not only in what it brings to the market but in how companies are governed, the overall sharemarket will remain a dog.

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