Securities Commission | Publications: Annual report 2006

The Commission’s goals in this key result area are that bad market practice is seen to be unacceptable, that the law is complied with, and that the integrity of and confidence in the markets are improved.

Responsibilities

Achievements this year

38% of expenditure

Insider Trading - Tranz Rail Holdings Limited
The Commission reached a settlement of its insider trading case against Berkshire Fund III and Carl Ferenbach. They agreed to pay the full compensatory amount sought by the Commission, namely $7,030,509 plus $350,000 as a contribution to the Commission’s costs. The two defendants agreed to make these payments without any admission of liability. They considered they had defences to the claims made against them. The settlement was approved by the High Court and no judgment was entered against the defendants. The remaining defendants in the case are Midavia Rail Investments and David Richwhite. The Commission is preparing for the action against these two parties to come to trial.

Insider Trading - Provenco Group Limited
The second insider trading action that was instituted by the Commission in the High Court (in December 2004) was settled in October 2005. This related to trading in the shares of Provenco Group Limited (formerly Advantage Group Limited) by the company itself and by various directors. The company agreed to pay $300,000. Anthony Bradley agreed to pay $150,000, Nicholas Gordon $130,000 and David Wolfenden $42,000. The sums represented in each case an amount for compensation, a component for penalties and a contribution to the Commission’s costs. The defendants contended that they had good defences to the claims. No judgment was entered against them.

Other insider trading inquiries
The Commission completed 26 other insider trading inquiries.

Suspensions and prohibitions
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.

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

In October 2005 the Commission prohibited the distribution of advertising by Global FX Secure Pte Limited (incorporated in Singapore). The directors and controlling shareholders of this entity were Dr Nico and Mrs Irine Francken who are New Zealand residents. They operated a Dunedin-based company called WKF Asset Management Limited which was referred to in the advertising. The Commission considered that the activities did not comply with the law, in particular, by not having a registered prospectus and an investment statement. The Commission also considered the advertising was likely to have misled investors.

We warn people about paying money to investment schemes which do not have the required offer documents. A registered prospectus and investment statement give important information about how the money is being invested and about the people involved in the investment.

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 of 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. Enforceable undertakings have again proved to be an effective enforcement solution. In the course of the year the Commission accepted undertakings from:

Monaco Village Holdings Limited, Robert Michael Gepp and Roderick Hugh Duke;
Alpine Pacific Developments Limited, Neil Gurdjieff Dougan and Ernest Ross Thomson;
Braemar Lodge (2004) Limited, Neil Gurdjieff Dougan and Ernest Ross Thomson;
Contributory Mortgage Investments Limited, Robert John Martin and Peter van Nieuwkoop;
The Gables Limited, Combined Financial Services Limited, Aoraki Commercial Property Limited, Rhys Morgan, Lorraine Te Atairehia and Neville Cant.

Inspections
Inspections are useful means of investigating schemes that are brought to our attention and ascertaining whether securities laws apply and whether they have been breached. These inspections are carried out by staff at the Companies Office and by our own staff. In the course of the year eight inspections were conducted.

Review of NZX’s performance of its regulatory functions - Access Brokerage
The Commission published its review of the performance by NZX of certain of its regulatory functions as a registered exchange during 2003 and 2004, in the context of the collapse of Access Brokerage. The Commission's inquiry did not seek to establish the cause of the collapse of Access Brokerage. It focused on NZX's broker compliance programme during the early stages of its development, in particular in 2003 when an inspection of Access Brokerage was conducted. The report concluded that there were some shortcomings in the development and early operation of the NZX broker compliance programme. The Commission recognised the significant progress made by NZX, since its demutualization, to increase its focus on regulation in the listed market.

Information control in market participant firms
We published a report highlighting the need for market participants to have good information controls (Chinese walls). This followed our inquiry into trading in shares of Wrightson Limited in June 2004. The report concerns activities of ABN AMRO Craigs Limited, an NZX firm, during a takeover offer in 2004. The firm, acting for the offeror in the takeover, received non-public information that a substantial security holder intended to accept the takeover offer. It passed this information on to two other NZX firms, and to its own client advisers, before the information was released to the market. The decision by ABN AMRO Craigs Limited to distribute non-public and potentially sensitive information about the takeover to select firms and to its client advisers, ahead of the market being informed, was inappropriate. Selective disclosure of information in this way, while not unlawful, is not acceptable practice on the part of a market participant. The inquiry highlighted that market participants not only need to have policies and procedures in place, but also to ensure that peo ple handling non-public and price sensitive assignments are aware of and adhere to these procedures.

Financial reporting surveillance programme
The Commission published reports of two cycles of its Financial Reporting Surveillance Programme. The aim of the programme 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. The first cycle covered audited full-year financial reports of 40 issuers with balance dates from 31 March 2004 to 31 July 2004. The second covered reports of 46 issuers with balance dates from 31 December 2004 to 31 March 2005. The reviews also included financial statements in prospectuses, substantial security holder information, and continuous disclosure notices. The reviews sought to identify the level of compliance with Financial Reporting Standards and other elements of Generally Accepted Accounting Practice and to assess the overall quality of financial reporting. Neither review found serious problems but each identified issuers (16 in cycle 1 and 19 in cycle 2) whose reports had shortcomings which needed to be addressed. We wrote to these issuers. The Commission has been pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting. The review also identified some inconsistencies in directors' and officers' relevant interests and substantial security holder disclosures that required us to write to issuers and security holders. Some non-disclosures of NZX waivers were also identified and referred to NZX.

The Commission is continuing its Financial Reporting Surveillance Programme. In cycle 3 we are reviewing the financial reports of early adopters of New Zealand equivalents of International Financial Reporting Standards with a 31 December 2005 balance date. This is part of the Commission's plan to review disclosures and adjustments made by issuers as they move to NZ IFRS.

Review of NZX’s performance of its obligations as a regulated exchange
The Commission published terms of reference and commenced an oversight review of NZX. We have statutory functions to review practices relating to securities and activities on securities markets, and to comment on these. In relation to NZX, performance of these functions requires the Commission to keep under review and comment on NZX’s performance of its obligations as a registered exchange. We expect to publish a report of this review early in the new financial year.

Review of disclosure by finance companies
The Commission published a report on disclosure by finance companies in April 2005. We subsequently reviewed disclosure documents of 20 finance companies that had registered new prospectuses after our 2005 report. We reviewed them for compliance with the Securities Act and Regulations and the guidance provided in the report. Generally the standard of disclosure had improved since the earlier review. Some still had shortcomings that we considered needed to be addressed and those companies readily amended their disclosure documents. Many other companies agreed to make improvements in accordance with our suggestions the next time they revised their offer documents. This should mean that investors in these companies are better informed than in the past.

Inquiry into effects on the market of certain statements made in May 2006 concerning telecommunications The Commission began an inquiry into whether the conduct and circumstances surrounding: (a) the release of the Government's Telecommunications Stocktake Paper on 3 May 2006; and (b) comments reported to have been made on 16 May 2006 by Communications Minister Hon David Cunliffe about Telecom’s dividend policy, affected the transparent and orderly functioning of the securities markets.

The Commission expects to report early in the new financial year on any issues of securities law and/or securities market practices arising from the conduct and circumstances surrounding the Paper's release.

Corporate governance reporting by listed issuers
The Commission developed a database to record its monitoring of corporate governance practices of listed issuers. The monitoring programme followed the publication of Corporate Governance in New Zealand: Principles and Guidelines and its associated Corporate Governance Handbook for Directors and Officers. These set out the Commission’s nine principles of good corporate governance and provide guidelines for entities reporting against them. Additional print runs of the handbook have been required to keep up with the demand.

Telephone share scams
Callers from overseas continued to plague New Zealanders with fraudulent offers to trade or buy shares. In most cases they were follow up calls to victims holding worthless shares bought several years ago. This scam has evolved over many years and has taken many millions of dollars out of the country. The Commission continued its enforcement efforts by endeavouring to contact the callers and the regulator in the jurisdictions they purported to be operating from. Invariably the callers were found to be fraudulent and we named these people on our website. Currently there are 223 names on this list. The fraudsters change their names often to avoid detection and a recent trend has been to use the names of genuine firms in the United States. The Commission conducted an education campaign, Don’t be sucked in by share scams, to alert people in small businesses who are specifically targeted by these fraudsters. This appears successful in that most of the people who contacted us during the campaigns were not going to send more money.

Illegal and dubious investment schemes
The Commission warned people against investment scams being hawked on the internet as High Yield Investment Programmes (HYIP's). Pureinvestor and People in Profit Systems (PIPS) were schemes identified by the Commission and other regulators around the world. One PIPS company, PIC Trust, was incorporated in New Zealand but appeared to have no presence here. PIPS was being investigated by the Central Bank of Malaysia, where its founders were based, and was subject to scrutiny by regulators in Australia, United States of America and the United Kingdom. These schemes are typically Ponzi scams in which money from new investors is used to pay returns to earlier investors to give the illusion that the scheme is successful. When the supply of new investors dries up the scheme collapses. The fraudsters have in the meantime invariably siphoned money off, spending it on themselves or banking it offshore. The websites are sophisticated, visually impressive, and interactive. They provide chat forums for virtual communities of investors who swap tips and rate schemes. Inevitably, hot tips give way to alarm when the returns no longer materialise.

Bill Papple was sentenced to two years in prison for his part in a Ponzi scheme which defrauded Rotorua people of some $14.6 million. In May 2005 his wife, Margarite Papple, and Tina West were sentenced to five years in prison. The Commission initially acted against the scheme by carrying out an inspection and making a prohibition order. It issued a public warning and referred the matter to the Serious Fraud Office.

2006 Annual Report

ACHIEVEMENTS 2006 - 2007

ENFORCEMENT, MONITORING AND MARKET OVERSIGHT

Responsibilities

Achievements this year

38% of expenditure