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2007 Annual Report

Achievements

Enforcement

The Commission used its powers to ban offer documents and take other actions to address bad practice in the primary markets. It took public enforcement actions which gave clear signals to the market about compliance with the law. The Commission’s actions clarified the standards of behaviour expected in the markets.

Insider trading - Tranz Rail case
The Commission reached a settlement of the insider trading proceedings against Midavia Rail Investments Ltd BVBA (previously known as Pacific Rail Limited NV), which was a former Tranz Rail shareholder, and David Richwhite, a former director of Tranz Rail. Midavia and Mr Richwhite agreed to pay $20 million. This represents a payment towards the compensatory amount sought by the Commission and includes contributions for interest and the Commission's costs of the proceedings.

Midavia and Mr Richwhite agreed to make this payment without any admission of liability. They considered they had defences to the Commission's claims against them. The settlement was approved by the High Court. No judgment was entered against Midavia and Mr Richwhite.

Four other defendants to the Commission's insider trading proceedings had settled previously. Berkshire Fund III, a former Tranz Rail shareholder and former director Carl Ferenbach, settled with the Commission in March last year. Michael Beard, former managing director and chief executive officer of Tranz Rail, settled in December 2004, and Mark Bloomer, former chief financial officer of Tranz Rail, settled in May 2005.

The settlement brought the total amount paid by the six defendants to over $27.5 million. The money will be paid to Toll NZ Limited and held in trust pending reimbursement of the Commission’s costs for bringing the proceedings, and distribution to classes of shareholders determined by the High Court.

Futures dealer convicted
In the first prosecution under the futures dealing provisions of the Securities Markets Act 1988, Tricom Futures New Zealand Limited was convicted in the District Court on 7 August 2006 for dealing in futures contracts without authorisation, and fined $10,000. This successful prosecution signalled to the market that futures dealers must be authorised.

Prospectus suspensions and cancellations
The Commission cancelled the prospectus of finance company Classic Capital Limited in March 2007. The prospectus was cancelled because it did not tell investors that the director of the company was bankrupt, banned from management, and facing charges of forgery and dishonestly using his position as a company officer, all in Australia. The director’s bankruptcy and management ban related directly to his competence to handle investors' money and to run a finance company. The fact that he was facing criminal charges, although these had not yet been heard, would also be likely to influence people deciding whether or not to invest. The Commission suspended registration of prospectuses of three issuers that were false or misleading or otherwise did not comply with the law.

Banned advertisements
The Commission prohibited some advertisements for a unit trust offered by Hanover Funds Management Limited because they were likely to mislead or confuse investors about the potential returns. Hanover cooperated with the Commission and agreed to write to all investors to make sure they understood the returns and to offer them their money back. The action against advertising by Hanover was clear guidance to issuers about the standards required when advertising rates of return for a new product.

In May 2007 the Commission banned advertising for investments offered by NearZero Inc, a company incorporated in the United States. This company was raising funds from the public in New Zealand without a prospectus or investment statement. The company was placed in interim liquidation shortly afterwards. It is not known what funds will be available for people who paid money for shares in the company.

Advertisements for the Locke Secured Capital Plan, an investment advertised on the website of Locke Guaranty Trust (NZ) Limited (LGT), were banned in June because the Commission believed they were likely to deceive, mislead or confuse investors. LGT is incorporated in New Zealand and claims to have headquarters in Auckland. LGT stated that New Zealanders are not eligible to invest in the Plan, but appeared to be using New Zealand as a base from which to offer securities in other countries. LGT’s website statements said that the investment was safe and risk free. All investments have a degree of risk and the Commission believes these statements were deceptive and misleading. The website also stated that LGT offers internet banking and is regulated under the Reserve Bank of New Zealand Act 1989 and that LGT is regulated by the Securities Act 1978. This could give the false and misleading impression that LGT had been licensed and/or approved by the Securities Commission or the Reserve Bank. The description of the scheme was confusing because it was unclear how LGT intended to use investors’ money and the website had potentially inconsistent information about this. LGT removed advertisements for the plan from its website.

Banned contributory mortgage broker
In December 2006 the Commission banned Contributory Mortgage Investments Limited (CMI) from acting as contributory mortgage broker for two of its mortgages and appointed another broker to act in its place. CMI was also banned from offering new mortgages until 30 April 2007. This followed the Commission’s acceptance of enforceable undertakings from CMI, its director John Martin and consultant Peter van Nieuwkoop in February 2006 for breaches of the contributory mortgage regulations. Investigations are continuing. The actions against CMI demonstrated that those who raise money from the public must meet certain standards of care and good governance. The Commission continues to have concerns with aspects of CMI’s compliance with the law and its conduct in offering and managing contributory mortgages. The Commission decided to state a case for the opinion of the High Court on certain legal issues. It has accepted further enforceable undertakings from CMI and its directors designed to preserve the interest of contributors in the meantime.

Overseas enforcement requests
The Commission provided responses to eight enforcement requests from overseas regulatory bodies within the agreed timeframes.

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