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Report on Trading in the Shares of Fletcher Challenge Limited in December 1999

Acquisition of Shares in FCL by Mr Hoggard

4.1 Section 7(1) of the Securities Amendment Act 1988 imposes liability on "An insider of a public issuer who has inside information about the public issuer and who -

Buys securities of the public issuer from any person; or
Sells securities of the public issuer to any person."

FCL is a public issuer and the FCL letter stocks are securities to which section 7(1) applies. As Chairman of Directors Mr Hoggard was an insider of FCL. He bought FCL shares on the Exchange. Did he have inside information at the time he bought the shares?

4.2 Inside information is defined in section 2 of the Amendment Act in relation to a public issuer to mean:

"information which -

Is not publicly available; and

Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available."

Mr Hoggard, as Company Chairman, would have had a great deal of information about FCL which was not publicly available. In particular at the time he bought shares he knew that the Directors had endorsed a plan to restructure the Group, that the plan involved the dismantling of the letter stocks and that the Group was forecasting "its best first-half earnings result before tax, interest and unusual items (EBIT) since the Ordinary Division targeted share split".

4.3 Mr Hoggard reported these matters in an announcement the following day (16 December 2000). The purpose, he said, was "to provide the equity market with clarity as to the future capital structure of the Company and along with improved profitability, give shareholders confidence for the future". The price of all the letter stocks increased following the announcement. The price of each letter stock increased by the following amounts:

Close on 15/12/99 Midday (approx.) on 16/12/99 Close on 16/12/99 Open on 17/12/99 (ex Bloomberg - Calculation Price) Close on 17/12/99

Building 2.36 2.52 2.59 2.63 2.65

Energy 4.30 4.45 4.52 4.60 4.75

Forests 0.68 0.72 0.71 0.73 0.75

Paper 1.11 1.20 1.23 1.25 1.30

It should be noted that the share prices used by JBW to calculate the amount owed to those persons who sold shares to Mr Hoggard are listed above in the fourth column.

4.4 We consider that the information in the announcement would have been likely to affect materially the share price had it been publicly available at the time Mr Hoggard made his share purchase. The new Chairman, Dr Roderick Deane, and the Chief Executive Officer, Mr Michael Andrews, informed the Commission that they were firmly of the view that this was so. Mr Hoggard acknowledged to us that at the time he placed the order for the purchase of shares he was in hindsight in possession of inside information about FCL and in particular its restructuring plan. However to the extent that the company announcement of 16 December 1999 related to information about forecast earnings he considered that these were "widely anticipated by the market". We have not been able to verify this. Whether or not it may have been so the opinion of the directors on forecast earnings is a very important matter in itself. Mr Hoggard's own comment that the announcement of the forecast was intended to arrest the decline in FCL's share price bears this out.

4.5 Accordingly we consider that Mr Hoggard was at the time he bought FCL shares an insider who had inside information. We consider he was liable to sellers and the Company in accordance with the provisions of the Amendment Act.

4.6 Section 7(2)(a) provides that the insider is liable under section 7(1) to "any person from whom the securities are bought for any loss incurred by that person in selling them to the insider". Mr Hoggard has made a payment equivalent to the maximum sum he believes that sellers may have lost. On that basis we do not think any further liability arises under section 7(2)(a) for the payment of any further amount. However FCL as public issuer may have a claim in respect of this sum of money under section 7(2)(c)(i).

4.7 Under section 7(2)(c)(ii) the insider may also be liable to the public issuer for any amount which the Court considers to be an appropriate pecuniary penalty.

4.8 It is for the Company as the public issuer, or its shareholders under section 18, to decide whether to bring a claim under section 7(2)(c) against Mr Hoggard. This provision has not been applied by the Courts since the Amendment Act came into force and there is no authoritative guidance on the circumstances in which a pecuniary penalty would be imposed or the size of that penalty. It is not for the Commission to decide these things. However it may be helpful for the Commission to make one or two observations about the matters which the Court will take into account in deciding whether to impose a pecuniary penalty in the present case if the matter were referred to them. These matters are set out in section 16. They include:

the nature and extent of the dealing in the securities by the insider;
the extent of the gains made, or losses avoided, by the insider or others;
The nature and extent of any previous liability of the insider under this Part of the Act;
The relationship of the parties to the transaction or transactions giving rise to the insider's liability.

4.9 The Commission accepts that Mr Hoggard intended to demonstrate to the market his personal financial commitment to the Company rather than to make a personal profit. He believed the corporate restructuring was important and would provide value to shareholders. He wished to have the support of FCL shareholders and staff for it. The order was placed in his own name. He did not attempt to conceal the transaction. Afterwards, he made a candid public statement of the circumstances. He arranged a facility to compensate sellers. He did so without any shareholder needing to resort to a formal claim. Nevertheless he was guilty of a serious mistake in buying shares at the time that he did. He did not comply with the FCL Securities Trading Code of Conduct applicable to Directors and Employees. He did not ensure he was familiar with, or complied with, the law relating to insider trading. He attracted adverse criticism to himself and he put at risk the reputation of the Company and, more generally, the New Zealand business community.

4.10 Other factors which might be considered include Mr Hoggard's previous record and character, and whether this was an isolated incident. We were reassured by submissions made on Mr Hoggard's behalf in those respects, but the Commission has not made its own inquiries.

4.11 Insider trading is a serious matter. It is detrimental to investor confidence in the securities markets. It is difficult to detect. We consider that in the present circumstances there has been a clear breach of an important law.

4.12 We observe that the procedure approved by the Commission under section 8(1)(b) of the Amendment Act, the Insider Trading (Approved Procedure for Company Officers) Notice 1996, was not observed and could not have applied in any event as the purchases lay outside the trading periods provided for in that Notice.

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