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

Dealing by JBW in FCL Shares
5.1    The Commission has also considered whether Mr Hoggard communicated inside information to JBW or any officer or employee of JBW, whether as a result JBW was an insider of FCL, a tippee which had received inside information in confidence, and whether JBW might be liable to any person under section 7 of the Amendment Act for trading after it had received inside information.
5.2    The order for shares was placed in the course of a telephone conversation at around 2.00 pm on 15 December. The telephone conversation was taped. The conversation lasted a little over 3 minutes. In the course of the conversation Mr Hoggard confirmed that there had been a board meeting on 14 December, a matter already publicly known, that no public statement had been released about the meeting but that one would be released (in Mr Hoggard's words "But hold your breath it will."). From this JBW would have learned that a news release was pending.
5.3    We have interviewed all JBW officers who became aware of Mr Hoggard's order for shares. In the course of our interviews we found no evidence that any employee of JBW, whether acting on his own or the firm's account or on account of a client, had dealt in FCL stocks or encouraged any other person to deal in FCL stocks as a result of any information that Mr Hoggard may have communicated to the firm. We found no evidence that any employee of JBW had informed any person outside of JBW that Mr Hoggard had decided to purchase shares in FCL.
5.4    In addition we reviewed all purchases of FCL stocks made through JBW on 15 and 16 December, identifying all clients and the nature of their transactions. We found no evidence to suggest that these transactions were driven in any way by JBW's dealings with Mr Hoggard.
5.5    JBW has a compliance guide which is to be observed by all employees of the firm. This contains a Best Practice Guide for employees who may be in possession of inside information. The employees who dealt with Mr Hoggard did not observe the Guide on the present occasion. They informed us that they considered Mr Hoggard to be an experienced and highly respected company director who was openly purchasing shares in his own name and it did not occur to them that he was imparting inside information or that the terms of the Guide applied.
5.6    Whether or not the information imparted by Mr Hoggard to JBW was in itself "inside information about the public issuer" for the purposes of securities law, and whether or not JBW should have been more alert to this possibility, we found no evidence that JBW relied on the information.
5.7    The Hoggard trades were clearly significant as a percentage of the total trades on the day. Although JBW confirmed to Mr Hoggard that they had completed the trades there was in fact a shortfall at close of business that day and the firm carried a shortfall in their house account overnight in respect of all letter stocks. They needed to buy in the following morning at a higher price. To the extent that JBW may be thought to have had a claim on the fund established by Mr Hoggard (see para 3.12) they had waived that claim.
Internal Procedures of Broking Firms for Handling Transactions by Insiders
6.1    The Commission observes that there are particular difficulties generally for a broking firm if it receives inside information from an insider of a listed company. The firm may itself become an insider on receipt of the information and become subject to the liability provisions of the Amendment Act. In addition the firm will inevitably come under suspicion if it is known to have dealt on behalf of an insider with inside information and this may affect its reputation as an ethical and honest trader.
6.2    The Commission wrote to all broking firms in New Zealand asking them whether they had special procedures in place for effecting transactions in the listed securities of a company by company insiders.
6.3    The Commission has received details of the procedures in place for almost all broking firms.
6.4    The Commission proposes to issue a separate report on this matter later on.
Further Contact
7.1 Mr Hoggard has informed us that letters and cheques have been forwarded to brokers by his solicitors in order that any affected parties can be reimbursed. The Commission advises any people who believe they may have an interest in this matter as a seller of FCL stocks and who have not heard from their brokers to contact Mr Hoggard's solicitors, Rudd Watts & Stone, at the following address:
125 Queen Street
P O Box 3798
AUCKLAND
Findings
8.1    Mr Hoggard was an insider of FCL on 15 December. He bought FCL letter stocks on that day. We consider he had inside information on the day. He was liable to the Company and any people who sold shares to him. He has made arrangements to compensate sellers and on this basis we think this may effectively discharge any liability to sellers.
8.2    In the view of the Commission there was a clear breach of an important law by Mr Hoggard.
8.3    FCL may have an action against Mr Hoggard for a pecuniary penalty under section 7(2)(c)(ii) of the Amendment Act. It is for FCL and its shareholders to decide whether it is appropriate to pursue this matter.
8.4    JBW received information from an insider which in all the circumstances of the case may have been inside information. We found no evidence that they relied on this information for any purpose.

Euan H Abernethy
Chairman of the Securities Commission
6 June 2000

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