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Credit Sails' oldies save Forsyth Barr, Credit Agricole from courtroom

Thursday 7th March 2013

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Brokerage Forsyth Barr and French bank Credit Agricole avoided a lawsuit over the sale and promotion of the disastrous NZX-traded Credit Sails notes because the regulator deemed a settlement would return more to the mostly retired investors.

Commerce Commission chairman Mark Berry told media the $60 million settlement announced in December was in the best interests of the investors who were largely in their 70s and may have had to wait another two or three years before seeing any return from a prosecution.

"These were retired people, they needed the interest, the income flow off their capital investment - that's the nature of it," Berry said. "We were confident that we could proceed to trial and prevail in this case, but we had a situation where we had Credit Agricole and Forsyth Barr happy to engage in settlement discussions."

At issue was the claim in marketing material that the notes were "capital protected", a term that was frowned on by the Companies Office at the time of the offer and largely removed from the prospectus, and the complexity of the securities, which the regulator said should only have been offered to institutional or sophisticated investors.

The settlement meant those investors who didn't take up the offer from Credit Agricole's Calyon can accept a return of about 85 percent of their principal, giving up their right to pursue further action, while the companies don't wear any liability for their actions.

Berry defended the settlement over prosecution, saying the size of it "speaks for itself."

"I don't think it is insignificant to note that any company having to assume paying $60 million is any light matter," he said. "While they may not have gone to a trial situation or had a finding of liability or penalty, bear in mind the impact it has on a company in having to front up with $60 million."

The regulator's investigation found a series of emails between Forsyth Barr and Calyon showing a desire to accentuate the positives of the investment while talking down the negatives to "ensure the successful marketing of the product."

An email from Forsyth Barr to Calyon over some changes to the offer document made by the Credit Agricole unit said "one of the deletions we feel is harmful to the marketing of this offer. Remember we catch more flies with honey than vinegar!"

The email stressed the importance of a flashy opening in the material as "investors seldom read in detail beyond the first few pages."

The regulator said the risks, which didn't appear in the investment statement until page 48, weren't "expressed with sufficient prominence or clarity given its critical importance to an understanding of the risks of an investment in Credit Sails."

Still, Berry was reluctant to comment specifically on the internal communications cited in the report.

"I can't comment on how they choose to communicate amongst themselves, that's a question you should really put to Forsyth Barr," he said.

The index-linked notes were promoted by Calyon Hong Kong and the sale managed by Forsyth Barr in 2006, raising $91.5 million at $1 apiece from 3,000 investors on the promise of 8.5 percent interest and capital protection. The notes failed in 2008.

The notes were backed by a portfolio of corporate debt from 125 firms, and came unstuck as the global financial crisis knocked out portfolio members including Lehman Brothers, Washington Mutual, three banks in Iceland and Idearc, the publisher of America's Yellow Pages.

They were delisted from the stock exchange's NZDX debt market after the settlement was reached.

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