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Market reality triumphs in Perry appeal ruling

Nick Stride

Friday 7th November 2003

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Justice Judith Potter dismissed compelling evidence, overstated the importance of witnesses, and failed to recognise market reality in her March ruling on Perry Corporation's alleged warehousing of Rubicon shares, the Court of Appeal found this week.

The unanimous five-member appeal ruling was welcomed by Perry, which had effectively been fined more than $8 million in Justice Potter's High Court decision.

It exonerated Rubicon chief executive Luke Moriarty from Justice Potter's "adverse credibility findings" as the appeal court put it, and vindicated investment banks UBS Warburg and Deutsche Bank, who implicitly must also have broken the law had the High Court judgment stood.

Unusually, lawyers said, the lower court decision was overturned on the facts and the inferences the judge had drawn from those facts, rather than on questions of legal process.

The decision also had implications for New Zealand's standing overseas as an attractive investment destination.

The appeal court noted the lower court's decision effectively put New Zealand out of line with Australia, the US, and the UK.

"There was some disquiet when this judgment came out that New Zealand was out of line with international norms and people may take some additional comfort from the Court of Appeal looking at it, although really it's been decided on the facts," said Chapman Tripp partner Roger Wallis.

"It's going to be very difficult to appeal because it has clearly been considered for a long period of time, there's a detailed examination of the facts that Justice Potter relied on, and it's difficult to see the Privy Council having a look and drawing different conclusions from the Court of Appeal."

The case Justice Potter heard concerned allegations by Guinness Peat Group that Perry illegally concealed an 11% Rubicon shareholding.

GPG didn't contend Perry's equity swap arrangements with UBS and Deutsche in themselves amounted to concealment but that an illegal "arrangement or understanding" existed between Perry and the banks that Perry would be able to buy back the Rubicon shares involved when the swaps were wound up.

In finding an arrangement existed Justice Potter said she was unable to determine its exact terms, or by whom, or how, it was reached.

But she was satisfied there was a "consensus or meeting of minds."

The appeal court set a higher bar for finding "reasonable grounds to suspect" an arrangement's existence.

Market reality, it found, was that it was "inevitable" the shares held by UBS would be sold to Perry when the swaps were unwound and "most likely" the Deutsche shares would also be available to Perry.

Perry would have known this but knowledge of market reality wasn't sufficient to create an arrangement or understanding. Perry's knowledge would, however, have meant it had little incentive to risk entering into an illegal arrangement. The same applied to the banks.

The banks had been free to deal with the shares as they chose ­ for instance, using them as collateral ­ but, given Rubicon's small market capitalisation and the illiquidity of trading in its shares it was unlikely the banks would have used them for other purposes.

"The evidence was that a sale to the counterparty [Perry] would be administratively the most convenient means of disposal and would reduce transaction costs and risk."

"We also assume that both banks, to ensure good client relations and repeat business, would wish to accommodate Perry Corporation's desire to purchase any shares held as a hedge if possible."

But that wish did not amount to evidence the banks were "accustomed to act" in accordance with Perry's instructions or wishes as defined in the Securities Act's section 5(2).

Justice Potter treated as neutral evidence from Deutsche's Roger Cohen and UBS' David Gray on the division of function and management control in the banks.

The appeal judges said she should not have done so.

"We also consider the evidence of Mr Cohen as to his actual involvement with the Deutsche Bank hedge as very important evidence pointing to the non-existence of an arrangement."

The court accepted evidence that "warehousing" arrangements were forbidden by the banks' policies and would not in any case have given the banks any practical benefit.

Justice Potter overstated the importance of Perry's owner and president Richard Perry as a witness and was wrong to draw an adverse inference from his absence from the witness box.

The appeal judges said it was difficult to see what he could have added to the evidence given by the Perry executives who did appear.

Had he attended, four key Perry personnel from an organisation that is "not large" would have been out of the office and out of the country at the same time.

However, the judges found Justice Potter was entitled to conclude the evidence of two UBS salesmen and one Deutsche salesman, who were also absent, would not have been helpful to Perry's case.

Justice Potter had found Rubicon had made appropriate inquiries and accepted Perry was not in breach of disclosure regulations.

Rubicon took legal advice on the matter and regularly issued Securities and Markets Act section 29 disclosure notices to Perry, UBS, and Deutsche.

But she inconsistently relied on Rubicon papers describing Perry as a major shareholder as pointing to the existence of an arrangement.

The appeal court found that, had Rubicon's Mr Moriarty known of an arrangement, he must have concealed it from his board.

"It appears to us unlikely that he would take such a risk in circumstances where it is difficult to see an advantage.

"In the circumstances, we consider that it would have been rather surprising if the Rubicon management had treated Perry Corporation as being unimportant to it," the Appeal Court said.

GPG was ordered to pay $18,000 of costs to Perry and $10,000 to Rubicon.

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