An Inquiry Into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage

PART II - DEFAULT OF ACCESS

37. Access was registered as a company in 1986, originally under the name Discount Brokerage Limited. Access was based in Wellington and since 1986 had carried on business as a sharebroking firm and had been a member of the NZSE.
38. On 3 September 2004, NZX was contacted by Mr Bill Garlick, the majority owner of Access, who advised that there was a deficit in the Access client trust account. A preliminary NZX inquiry showed that Access was unable to meet its obligations under the NZX Participant Rules regarding client funds and that the company was insolvent. It was estimated that Access was in deficit by approximately $3.7 million and that the Access client trust account was in deficit by approximately $4.8 million. The Commission understands that the difference was made up by securities to the value of approximately $1 million that Access held on behalf of clients.
39. NZX's preliminary inquiry, conducted over the weekend of 4 and 5 September 2004, identified evidence to suggest that funds had been transferred from the Access client funds account into the Access operating account and that these funds were being used to meet Access' operating costs. The client funds account was required to be a trust account under the NZX Participant Rules so that client funds would be separate to Access' funds. The only authorised deductions from the client funds account (other than client trading) were reimbursing the participant for amounts paid in settling trades on behalf of clients, and the payment of brokerage fees and other permitted charges for the trades undertaken.
40. Over the weekend of 4 and 5 September NZX advised the Ministry of Economic Development, the Securities Commission, and the Serious Fraud Office.
41. On 5 September 2004 the Registrar of Companies appointed inspectors under the Corporations (Investigation and Management) Act 1989 to assess the situation at Access. Following discussions between the Registrar and NZX, an application was made by NZX on the morning of 6 September to place Access in interim liquidation. Michael Stiassny and Brendon Gibson of Ferrier Hodgson & Co were appointed as interim liquidators of Access by the High Court under section 246 of the Companies Act 1993.
42. On 6 September 2004, NZX Regulation declared Access a "Defaulter" under the NZX Participant Rules and suspended Access as an NZX Firm from trading in any market provided by NZX. NZX announced that it was conducting an inquiry into all aspects of the Access matter.
43. On the same day NZX established a helpline for Access clients and published information relating to the matter on the NZX website.
44. On 8 September 2004, Access was placed into liquidation by a special resolution of its shareholders under section 241(2)(a) of the Companies Act 1993, at which time Mr Stiassny and Mr Gibson were appointed the Joint and Several Liquidators of Access.
45. On 15 September 2004 the Bank of New Zealand announced that it would underwrite the $4.8 million shortfall in the Access trust account. NZX announced that it would pay out $460,000 from its Fidelity Fund.
46. The Commission supports the steps taken by NZX in conjunction with the Registrar when the Access situation became known. This prompt and appropriate action minimised harm to the market and Access' clients.

Matters following the collapse of Access

47. On 8 September 2004, the Commission informed the Chairman of NZX that it would undertake an inquiry into the matter and that the focus of the Commission's inquiry would be on the regulatory and market issues arising from the Access situation, rather than on specific events at Access.
48. The Commission advised NZX of the scope of the Commission's inquiry on 1 October 2004. Consistent with New Zealand's co-regulatory arrangements, the Commission advised NZX that it considered it appropriate for NZX, as front line regulator, to continue to investigate and take action in respect of any breaches of its Conduct Rules. The Commission also considered it appropriate for NZX to review its Conduct Rules and their application as these related to participant supervision and inspection.
49. An investigation by NZX was underway to examine the circumstances that led to the collapse of Access and whether Access or any of its personnel had breached the Participant Rules. Chartered Accountants KPMG and law firm Russell McVeagh were engaged to assist NZX with this investigation.
50. KPMG was engaged by NZX to carry out work in relation to NZX's compliance programme to enable the NZX Board to assess whether any changes should be made to its compliance rules, procedures or practices. The Commission understands this work was put on hold once the Commission began its inquiry.
51. NZX advised that it was also conducting a review of all NZX Firms' client funds accounting practices to determine whether there was a wider problem in relation to compliance with the NZX client fund accounting rules. Grant Thornton, Chartered Accountants, were engaged to conduct this review.
52. NZX agreed to provide the Commission with reports on the work it was undertaking and to update the Commission on progress.
53. The Commission advised NZX that its preference in relation to aspects of the Commission's own inquiry was to make use of evidence being gathered through the work of NZX and its external consultants where the Commission could be satisfied with the methodology and scope of the work, and with the Commission's ability to obtain unrestricted access to the results of the work. In February 2005 the Commission was given a copy of a draft report prepared for NZX by Grant Thornton, reporting on its assessment of client fund accounting practices at NZX Participant Firms. At the same time the Commission was advised that for various reasons NZX was unable to put a firm timetable on its intended assessment of its broker compliance programme. It became apparent to the Commission that the timeframe for the NZX work programme would be likely to extend beyond that which the Commission considered appropriate to complete its inquiry in a timely manner. Accordingly the Commission decided it should gather evidence itself to allow it to assess the rules, procedures, and practices relating to participant supervision and inspection by NZX, with reference to the performance of these functions in relation to Access.
54. On 14 April 2005, NZX filed a Statement of Case with NZX Discipline relating to breaches of the Participant Rules against Access and Mr Marshall. This proceeding is ongoing.
55. On 10 May 2005, the Serious Fraud Office announced that the Chief Executive Officer of Access, Mr Peter Marshall, had been charged with 13 counts of false accounting and two counts of making a false statement as an officer of Access. Given the Commission's functions and the scope of our inquiry, we do not comment further in this report on any matters relating to compliance by Access and its principal with the NZX Participant Rules, or on matters pertaining to the charges laid against Mr Marshall.
56. On 12 September 2005 the BNZ and Ferrier Hodgson started legal proceedings in the High Court against NZX and Deloitte seeking recovery of money paid out by the BNZ to Access clients following Access' collapse. NZX has said it denies liability. The Commission's inquiry concerns the performance by NZX as a registered exchange in the context of the Commission's function to review and comment on activities relating to securities and securities markets, and accordingly the Commission does not comment on whether any legal liability arises or can arise from NZX's position as a registered exchange.