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2004 Annual Report

ACHIEVEMENTS

ENFORCEMENT

Responsibilities

• enforce the law
• carry out inspections
• maintain oversight of securities market activity and supervision of exchanges
• inquire into suspected breaches of securities law
• intervene in the market in the interests of investors in accordance with statutory powers

Achievements this year

• completed 181 enforcement and surveillance matters including 12 insider trading inquiries
• prohibited three offer documents and advertisements
• accepted 10 enforceable undertakings
• began a Court proceeding for suspected breach of substantial security holder law
• successfully defended two judicial review proceedings
• advised the Minister of Commerce on five sets of NZX Conduct Rules

42% of expenditure

Insider Trading and Other Inquiries
The Commission completed 12 insider trading investigations. Most of these were referred by NZX after the detection of abnormal trading patterns by NZX's SMARTS electronic surveillance system. All referrals are examined closely. We undertake further inquiries of brokers and those who have traded to find out whether there is evidence of trading with inside information. In a lot of cases this cannot be established. However, we remain committed to this work. We have a number of inquiries underway which have required the dedication of significant resources. We intend, in appropriate cases, to take court action under section 18A of the Securities Markets Act 1988. We issued summonses to 72 parties to give evidence or produce documents to the Commission relating to insider trading and other inquiries. The Commission's other enforcement work encompassed offer documents for securities, investment advisers, financial reporting, and substantial security holder disclosure.

Inspections and Prohibitions
The Commission and the Registrar of Companies conducted 11 inspections where we suspected there might be non-compliance with the law. A significant number of inspections were carried out by Companies Office personnel this year, and we are grateful for their work. The Commission conducted inspections of a number of futures dealers and persons it believed could be carrying on business as futures dealers without proper authorisation.

The Commission prohibited offer documents or advertisements of three issuers under section 38B of the Securities Act. In other cases we accepted enforceable undertakings from issuers whose advertising did not comply with the law, or was likely to mislead investors, requiring the issuers to ensure that they met their legal obligations.

Enforceable Undertakings
The power to accept undertakings that are enforceable in the Court is proving an effective enforcement tool for the Commission. Undertakings are used when a party who has breached securities law agrees to rectify the breach. This provides an enforcement solution that can be tailored to fit the circumstances of a situation and avoids the cost and delays of court proceedings. The text of each undertaking is published on our website. If a party fails to fulfill the undertaking it can be enforced in Court. The Commission accepted undertakings from Clinton Braude and Benjamin Mauerberger (arising from the activities of Bergers Securities Limited), Bridgecorp Investments Limited, Stage Three/Four Limited and Pinnacle Hill Farms Limited, Capital Funding Limited, Aquiline Holdings Limited, Prudential Mortgage Limited, Secure Property Investments Limited, Asset Finance Limited, TSB Bank Limited, and Kiwibank Limited.

Litigation
The Commission obtained interim restraining orders under Part 2 of the Securities Markets Act 1988 arising from suspected non-compliance with substantial security holder law by a market participant. The orders prevent parties from dealing in relevant interests until the case comes to Court. The case is proceeding.

The Commission successfully defended two applications for judicial review. The first arose from the Commission's decision in 1993 to recommend statutory management relating to the Peninsula Club Retirement Village. The High Court found in favour of the Commission. The applicants appealed the decision but withdrew this in the Court of Appeal. The second was a challenge by the principals of Bergers Securities Limited to a Commission decision to seek information about the company from the Jersey Financial Services Commission. The proceedings were discontinued after the Commission presented its evidence. The applicants contributed to the Commission's costs.

Co-regulation with New Zealand Exchange Limited
We continued to work with NZX under the terms of our memorandum of understanding. The MOU covers the monitoring and surveillance of the securities market and other statutory matters. It addresses:

• compulsory referrals by NZX to the Commission;
• discretionary referrals to the Commission arising from NZX's oversight of trading activity;
• referral of matters from the Commission to NZX relating to the NZX's Conduct Rules;
• procedures for these referrals;
• consultation on waivers from continuous disclosure;
• procedures relating to the Commission's power to give directions to NZX; and
• procedures to consult on new conduct rules and amendments to those rules.

We welcomed NZX's decision to enter the futures and options arena, and to provide regulatory services as a frontline regulator of futures dealers in New Zealand. We also welcomed the implementation of the new NZX Discipline Rules, which clarify the disciplinary structures of NZX. These new rules also give the Commission a role in confirming appointments to NZX Discipline and appointing the Appeals Panel. These safeguards also clarify the independence of the Special Division, which is responsible for regulation of matters concerning NZX as a listed company. The membership of the Special Division is confirmed by the Securities Commission. Importantly, the role of the Special Division now extends to matters concerning trading in NZX shares that may arise under the Participant Rules.

NZX Conduct Rules
The Commission has a role under the Securities Markets Act 1988 to advise the Minister of Commerce about new conduct rules or amendments to conduct rules of NZX. The Commission advises the Minister on whether or not it would be in the public interest to disallow changes to rules or approve new rules. The Commission advised the Minister on four changes to conduct rules, including new participant rules, new discipline rules, and changes to listing rules. It also advised on proposed rules for the new NZAX market.

Cold Calling
The plague of overseas callers contacting New Zealanders with offers of shares continued. This year most of these have been follow-up calls to people who previously bought shares from telephone callers and whose shares turned out to be worthless. The follow-up caller offers to buy or trade the worthless shares for a better investment, but of course, the victim must pay more money in "transfer fees" or "clearance fees" first. This is all part of the original scam. Callers sometimes offer telephone numbers of official-sounding organisations which the New Zealand victim can call to verify the caller's validity. These numbers are also part of the scam, and the phone is probably answered in the same room as the person making the offer to trade the shares. We have repeatedly warned people about the risks of sending money overseas to callers known to them only by telephone.

Illegal and Dubious Investment Schemes
Unfortunately we continue to see the promotion of illegal investment schemes. Some of these schemes have collected an enormous amount of money. Often they operate on the basis of a "Ponzi" scheme where the money of later investors is used to repay earlier investors. Inevitably these schemes collapse when the supply of new investors "dries up". Church groups appear to be a target for such schemes and there is extraordinary trust and loyalty between those who are encouraged to invest and those who are taking their money. This is a perfect setting for fraudsters. It is called affinity fraud. We urge people to be alert to this type of activity and to report it as soon as possible. Our interest in schemes of this sort arises because of the absence of a prospectus and investment statement. Because of this we normally act to prohibit any further promotion. We would then refer them to the Serious Fraud Office as they invariably raise more fundamental concerns about the motives of the people behind them.

Corporations (Investigation and Management) Act 1989
The Commission has the power to recommend to the Minister of Commerce that a corporation be placed in statutory management. It is a measure of last resort. It applies to a corporation:

• that may be operating fraudulently or recklessly, or
• where it is desirable to preserve the interests of shareholders, creditors, beneficiaries or the public interest, and
• there is no other lawful way to adequately protect these interests.

Unit Trust be placed in statutory management, along with two other related entities and three associated persons, Donald Rea, Catherine Trezona, and Lisa Talbot. These entities and people were involved in the promotion of a Prime Bank type scheme, mainly in the Bay of Plenty area. The corporations and associated persons were placed in statutory management the following day after an urgent meeting of the Prime Minister and senior Cabinet Ministers. The Commission was called on to consider another statutory management case in October 2003. In the event it decided not to recommend statutory management.

Australian Registered Managed Investment Schemes
The Commission concluded its investigation of Australian issuers who were offering investment products in New Zealand under the Securities Act (Australian Registered Managed Investment Schemes) Exemption Notice 1999. The responses to our enquiries indicated that 11 issuers had failed to comply with conditions of this exemption requiring documents to be filed with the Registrar of Companies. At our request all these companies notified their investors and informed them of the situation and their rights. Subsequently the Securities Amendment Act 2004 has introduced a new procedure for issuers who have failed to comply with conditions of exemption to seek validation of allotments in the High Court.