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Making legal history

Friday 8th August 2003

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Who is suing?

The plaintiffs are a mixed bunch of former Southern Petroleum shareholders ­ some of whom responded to a mailout by case crusader Tony Gavigan asking for volunteers to join the action.

Parnell businesswoman Rosemary Haylock, second-tier sharebroker Stuart Cairns, millionaire Hugh Green and solicitor John Oakley are the current plaintiffs.

Eric Watson's ElderCare (formerly New Zealand Petroleum) was originally the first plaintiff but in February 2001 it settled for $1.3 million. "Brave Rosemary Haylock" (Mr Gavigan's words) stepped into the breach.

So, who's the defendant?

The first defendant is the then Petrocorp general manager Jim Patek who now lives in the US. The second defendant is Energy Exploration Ltd, owned by multinational oil company Shell.

The original target was Fletcher Challenge Energy (owner of Petrocorp) but after the split up of the Fletcher letter stocks the liability passed to Royal Dutch Shell with Fletcher Energy's assets. Shell has since sold Mangahewa (or most of it) to Todd Energy for an undisclosed sum but that doesn't make any difference to the case ­ the liability sticks with it.

What do the shareholders claim?

They allege price-sensitive inside information about the Mangahewa field was kept from them by Jim Patek and Petrocorp (owned by Fletcher Energy). They claim a review of the field, known as the Deep Gas Study, should have been disclosed to them.

Under New Zealand's insider-trading laws, the plaintiffs claim Mr Patek was an insider, had this information and encouraged shareholders to sell. They don't need to show the inside information was used. For this part of their case to succeed Mr Patek merely needed to be in possession of it and also encourage to a shareholder to sell.

There has been a big argument over this point ­ causation ­ which the plaintiffs won, but Shell may raise it again after the substantive hearing (if the case gets that far).

What do the plaintiffs want?

They are demanding what they believe their shares were worth when Petrocorp bought them in 1995. The price paid was 75c, but taking into account the effect of the information about Mangahewa, the shares would be worth more ­ possibly up to $4, they claim, but more likely about $2.

That works out at about $23 million, which would be shared among the shareholders (after Mr Gavigan and the lawyers, most of whom are working on contingency, take their cut).

What's happened so far?

The plaintiffs applied for leave to bring the proceedings. Justice Robert Fisher granted it ­ and said the cost of the action should be borne by Southern Petroleum (that means the defendant, Shell, pays, as it took over Southern Petroleum). Shell appealed Justice Fisher's decision. The Appeal Court turned Shell down and endorsed the plaintiffs, agreeing they had shown they had an arguable case.

Last month Shell appeared before the Appeal Court asking for leave to appeal to the Privy Council but then had a change of heart.

What happens next?

Last week the High Court set a timetable for discovery of documents ­ it is supposed to be finished by November. There is no date set yet for the substantive hearing, which will be held in the High Court at Auckland once the parties have finished discovery. It is likely to be before Justice Fisher, who is already familiar with the complexities of the case.

Why should I care?

This is the closest this country has ever got to an insider-trading case substantive hearing. There have been many investigations by the Securities Commission but no case has ever made it home.

The recent one that came closest was the action brought by Business Roundtable executive director Roger Kerr and Catharine Franks, wife of Act MP Stephen Franks, against Fletcher Challenge over the Kerry Hoggard trades. But the amount involved was too small to justify the stratospheric legal costs so the Franks settled and set up a "business integrity trust" with the payout.

An insider-trading case would test the law and set a benchmark for future cases where shareholders feel they have been hard done by ­ not to mention that it would finally expose to scrutiny the widely held belief in middle New Zealand that listed companies are run by a small club of well-connected investors who are privy to all sorts of inside info, denied to mom and pop investors.

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