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2005 Annual Report

ACHIEVEMENTS 2004 - 2005

ENFORCEMENT

The Commission's goals in this key result area are that bad market practice is seen to be unacceptable and that the law is complied with.

Responsibilities

enforce the law
initiate 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 201 enforcement and surveillance matters including
- 20 insider trading inquiries
- suspending the investment statement or prospectus of 3 issuers
- prohibiting the investment statement and prospectus of 1 issuer
- prohibiting advertising of 2 issuers
- accepting 7 enforceable undertakings
successfully settled proceedings in a case regarding substantial security holder disclosure
filed proceedings in the High Court in 2 insider trading cases
began a surveillance programme to review financial reporting by issuers
monitored corporate governance reporting by listed issuers

42% of expenditure

Insider Trading - Tranz Rail Holdings Limited

The Commission used its powers to take court action against insider trading for the first time on 13 October 2004 when it filed proceedings in the High Court against six defendants relating to share trading in Tranz Rail Holdings Limited. Tranz Rail is now called Toll NZ Limited. The proceedings were brought under section 18A of the Securities Markets Act 1988. This enables the Commission to exercise a public issuer's right of action against an insider (in accordance with section 18B) if it considers that it is in the public interest to do so.

The defendants named in the proceedings were:

Midavia Rail Investments BVBA (previously known as Pacific Rail Limited NV);
Berkshire Fund III A Limited Partnership;
Michael Beard (former Managing Director of Tranz Rail);
Mark Bloomer (former Chief Financial Officer of Tranz Rail);
Carl Ferenbach (former director of Tranz Rail); and
David Richwhite (former director of Tranz Rail).

The Commission's inquiry focused on sales of shares in the first half of 2002, before the share price of the company began to deteriorate from about the middle of 2002. At the beginning of 2002 the share price was $4.00. By 16 April 2003 it had fallen to its lowest level ever ($0.30). The inquiry involved obtaining documents both in New Zealand and overseas, a large number of interviews, and the receipt of formal oral evidence from many witnesses. The basis for the proceedings is that the parties who sold their Tranz Rail shares had information about the company which was not publicly available and which would have affected materially, or would have been likely to affect materially, the price of the shares if it had been publicly available. An additional action for tipping is raised against Carl Ferenbach (representing Berkshire Fund III A Limited Partnership) and David Richwhite (representing Midavia/Pacific Rail, an investment vehicle controlled by Fay Richwhite interests). The proceedings seek compensation for shareholders who may have been disadvantaged. This compensation equates to the losses avoided by the insiders in selling the shares. The proceedings also seek to have pecuniary penalties imposed.

The inside information at issue relates to:

the forecast financial performance of Tranz Rail;
the forecast capital expenditure by Tranz Rail;
a bid by Rail America for Tranz Rail (in the event not proceeded with);
asset and investment write-downs in Tranz Rail; and
the financial obligations and credit-worthiness of Tranz Rail.

Two defendants have subsequently settled with the Commission. Michael Beard, the former Managing Director and Chief Executive Officer of Tranz Rail, agreed to pay the full amount of the Commission's compensation claim of $55,691.84 and $100,000 of the Commission's claim for penalty and costs, a total of $155,691.84. He agreed to make this payment without any admission of liability. Former Chief Financial Officer of Tranz Rail, Mark Bloomer, agreed to pay the Commission the sum of $156,000. That sum represented the maximum sum recoverable by the Commission in terms of compensatory damages and pecuniary penalties in relation to a share sale that was not carried out under the approved procedure. It also included a contribution to the Commission's costs. He agreed to make this payment without any admission of liability. Both settlements were approved by the High Court. Both defendants agreed to assist the Commission with its case against the remaining defendants.

Insider Trading - Provenco Group Limited

The Commission filed insider trading proceedings relating to share trading in Provenco Group Limited in the High Court on 17 December 2004. Provenco was known as Advantage Group Limited until March 2003. The defendants are:

the company, Provenco Group Limited;
Jeda Investments Limited;
Nicholas Peter Gordon as trustee of the Waimea Trust;
Anthony Howard Bradley as trustee of the Bradley Family Trust; and
David John Wolfenden.

David Wolfenden is Chairman of Provenco, Nicholas Gordon is a director, and Anthony Bradley is a former director. David Wolfenden is a director of Jeda Investments Limited. The Commission's claim relates to three phases of trading in Provenco shares during 2003. At the time of trading each of the defendants was an insider of Provenco and, it is asserted, was in possession of inside information that was not publicly available. The inside information related to:

the company's internal profit calculations;
a possible privatisation;
a share buy-back;
the expectation of certain commercial opportunities; and
the quantum of proposed director and staff share purchases.

The Commission claims that any or all of this inside information would, or would be likely to, have affected materially the price of Provenco shares if it had been publicly available at the time of the share trading. In each case the Commission seeks compensation and pecuniary penalties.

Other Insider Trading Inquiries

The Commission completed 20 other insider trading inquiries. Most cases arise from irregular or unusual trading picked up by NZX staff using the SMARTS technology. We undertake further inquiries of brokers and those who have traded to find out whether there is evidence of trading with inside information. Although in many cases this cannot be established, we believe that the work is important and contributes to the integrity of the markets.

Access Brokerage

The Commission began an inquiry into events surrounding the collapse of Access Brokerage Limited in September 2004. The focus is on the regulatory and market issues arising from this situation, rather than on specific events at Access Brokerage. Under the Securities Markets Act 1988 the Commission and NZX have co-regulatory roles in relation to securities markets. NZX is the frontline regulator, responsible for operating its markets in accordance with its conduct rules. The Commission is the statutory regulator with an oversight responsibility for securities markets and registered exchanges. This includes oversight of the performance by NZX of its regulatory responsibilities. NZX is investigating whether, as a result of the collapse of Access Brokerage, there have been any breaches of its conduct rules and, if so, whether any action should be taken in respect of those breaches. NZX is also undertaking a review of client funds accounting at all NZX firms and intends to review its conduct rules in respect of client funds accounting. The Commission supports the steps that NZX is taking. The Commission's inquiry, in its oversight role of NZX's performance of its regulatory responsibilities, is essential to demonstrate an effective co-regulatory system.

Offer Documents

The Commission aims for high standards of disclosure so that investors can make informed decisions on whether or not to invest. The key to this is the quality of offer documents. We give high priority to our surveillance and enforcement work in this area.

Disclosure by finance companies was a focus this year. We reviewed a sample of these offer documents in August and September 2004. We found the general quality of disclosure to be poor, particularly in describing the risks for investors. We published our preliminary views and sought comments from the industry. In April 2005 we published our Report on Disclosure by Finance Companies. This sets out our expectations for improved disclosure and warns that we will be taking enforcement action if we see inadequate offer documents.

The Commission published a report on compliance by registered banks with the investment statement requirements of the Securities Act 1978. Banks must provide investors with investment statements for term deposits. We sought information from 11 banks. Most banks were aware of the need for an investment statement and had processes in place to make sure investors see them. Some banks were not complying. One bank did not have an investment statement for its term deposits and the Commission accepted an enforceable undertaking from this bank to remedy this breach.

The Commission suspended or prohibited offer documents or advertisements of six issuers where, in its opinion, they were likely to deceive, mislead or confuse investors or otherwise did not comply with the law. Some cases were resolved by accepting enforceable undertakings. Other non-compliant offer documents were remedied by the issuer without formal action being taken.


Kathryn Rogers	Caroline Cole	Norman Miller

Enforceable Undertakings

Enforceable 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 time taken for court proceedings. The text of each undertaking is published on our website. If a party fails to fulfil the undertaking it can be enforced in Court. The Commission accepted undertakings from:

Auckland Investment Properties Limited, Commercial Investment Properties Limited, and the sole director and shareholder of these companies, Cheryl Tracy Macaulay;
Carlin Enterprises Limited, the sole director of the company, Kevin David Carlin, and The Styx Mill Country Club Incorporated;
Kookmin Bank and Jung-Tae Kim on behalf of the directors of Kookmin Bank;
LDC Investments Limited and its directors, David Gordon Miller and Kevin Elliot;
Momentum Magazine Group Limited and its directors, DB Hows, TD Lawrence, and L Blincoe;
South Pacific Energy Limited, Calgary Petroleum Limited, and the directors of these companies, Dene Biddlecombe, Bruce Harnett, Murray Hosking, Bill Treuren, and Paul Twynham; and
US 50 Fund Limited and the directors of the company, Brian Phillip Henry, Dennis Jay Gates, and Kevin James Gillespie.

Substantial Security Holder Disclosure

National Property Trust Limited

The Commission successfully settled proceedings with National Property Trust Limited in August 2004. We obtained interim restraining orders relating to suspected breaches of substantial security holder disclosure by National Property Trust Limited, manager of the National Property Trust, a listed unit trust. The case related to the manager's disclosure of a substantial security holding in the trust. At issue was a holding of around 16 percent of the units in the trust acquired by Metropolitan Life Assurance Company of New Zealand Limited in 2002. Metropolitan disclosed the holding to the market in September 2002. In 2002 it entered into an agreement with the manager relating to the units, and it had agreed that if it wanted to sell its units the manager must be given the first opportunity to find a buyer for those units. Metropolitan also agreed not to exercise its votes against the interests of the manager of the trust.

The Commission considered that this agreement gave National Property Trust Limited a relevant interest in the units held by Metropolitan and that this interest should have been disclosed under the Securities Markets Act 1988. The agreement, entered into in 2002, was not disclosed to the market until March 2004.

The Commission sought Court orders in April to prevent National Property Trust Limited from exercising its rights under the 2002 agreement because of the non-disclosure. The Commission obtained interim orders to prevent the manager dealing in the units until the matter was resolved. In June 2004 the manager signed an agreement setting aside the earlier 2002 agreement. The effect of this was that the manager gave up its interest in the units. The manager filed a substantial security holder notice on 4 June 2004 confirming that it no longer held a relevant interest in the units. The termination of the earlier agreement achieved the result sought by the Commission. The interim orders were discharged by consent on 23 July 2004.

Timing of disclosure

The law requires immediate disclosure of substantial security holdings and any changes in those interests. The aim is to keep the market fully and immediately informed about the ownership and potential control of public companies. This is particularly important in a takeover or a stand in the market where delayed filing may result in material information being withheld from the market. There will rarely be any justification for delayed filing of SSH notices where parties involved in stands and takeovers are already substantial security holders. These parties should be well aware that further transactions in the security may trigger the disclosure rule. The Commission made a public statement warning market participants that it intends to focus on the timeliness of disclosures, following delays in disclosures about increased holdings arising from one stand in the market.

Financial Reporting Surveillance Programme


Alastair Boult	Daniel Tan	Tracey Crookston

The Commission reviewed the audited full-year financial reports of 40 companies with balance dates from 31 March to 31 July 2004. The review, which also covered financial statements in prospectuses, substantial security holder information, and continuous disclosure notices, was the first cycle of an ongoing financial reporting surveillance programme. The aim is to encourage New Zealand issuers to improve the quality of their financial reporting. This will enable investors to have confidence in the credibility of financial information provided by issuers, and contribute to the integrity of New Zealand's securities markets.

Forty percent of the financial reports reviewed were found to have some shortcomings that needed to be addressed. We wrote to 15 issuers for clarification of some matters, and/or asking them to address specific shortcomings when preparing their next financial reports. One matter was referred to the Commission's enforcement staff. Although it was pleasing that few serious problems were identified, the review indicated that a number of issuers need to do more to raise the standard of their financial reporting.

Matters found included:

valuation of property, plant and equipment, and intangibles;
the appropriateness of a prior period adjustment;
non-disclosure of a share-based arrangement with a product distributor;
lack of actual versus prospective financial information comparisons and explanation;
format of the Statement of Movements in Equity;
undated financial statements; and
unusual differences in the dates of the annual report, shareholder information, and the audit report.

The review also identified some instances of incompleteness and poor timing of continuous disclosure notices, and incompleteness and inaccuracy of substantial security holder disclosures. The Commission will publish a report on this first stage of its surveillance programme.

Corporate Governance Reporting by Listed Issuers

Last year the Commission published Corporate Governance in New Zealand: Principles and Guidelines following extensive research and public consultation. This established nine principles of good corporate governance and set out guidelines for entities reporting against them. This year we began reviewing how listed issuers report their corporate governance practices. Overall, the Commission is pleased with both reporting and the standards of corporate governance indicated through that reporting. There are some extremely informative reports on listed company governance. However, our review showed some companies still have a long way to go. We will continue this work.

Inspections

The Commission and, at the Commission's request, the Registrar of Companies conducted 13 inspections where we suspected there might be non-compliance with the law. A significant number of inspections were carried out by Companies Office personnel and, as always, we are grateful for their work.

Telephone Share Scams

Reports of overseas callers telephoning New Zealanders out of the blue with offers of dubious shares continued unabated. However, our many warnings to the public to resist these offers may be paying off as more people who contact us are doing so before they have sent any money to these scams. We contact the "broking firms" asking whether they are complying with the Investment Advisers (Disclosure) Act 1996 and seeking evidence of their authority to conduct securities business. We also seek verification from our counterparts in the country the "broker" claims to be operating from. Invariably we get no response from the "broker" and a negative response from the regulator, and we add another name to our website list. It currently has 167 names. These international fraudsters change their names and locations often to avoid detection. Their approach, however, does not change and the persuasiveness of their patter seems to improve with time. How to deal with telephone share scams was a key message in our Protect yourself from fraud campaign, run in conjunction with the Serious Fraud Office, in Tauranga and the Western Bay of Plenty in October and November 2004. In June 2005 we began an education campaign, Don't be sucked in by share scams. This campaign targets small business owners who appear to be particularly sought out by the fraudsters.

Illegal and Dubious Investment Schemes

One very large Ponzi scheme resulted in sentences of five years imprisonment for Margarite Papple and Tina West in the Rotorua District Court in May 2005. They collected some $14.6 million from the public. Money from later investors was used to pay earlier investors what they thought were interest payments. Judge Weir described this as a recipe for disaster. These schemes are like a "house of cards". They require more and more people to sustain them and, when the supply of new investors runs out, as it always does, they collapse. The Commission was the first to take action in this matter by initiating an inspection and making a prohibition order. We issued a public warning and referred the matter to the Serious Fraud Office. The Rotorua scheme caused a great deal of grief to the people who lost their money, people who could ill afford to do so. Another large Ponzi scheme is currently the subject of Court action.

Corporations (Investigation and Management) Act 1989

A judicial review application was made in June 2004 by Donald Moris Rea, challenging the actions of the Commission and the Minister of Commerce in placing the International Investment Unit Trust and others in statutory management in July 2003. This proceeding was struck out by the High Court in December 2004.


Philip Rodrigues	Moana Moore	Geoff Brown	John Mulry

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