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Insider Trading Law and Practice

REPORT ON QUESTIONS ARISING FROM AN INQUIRY INTO TRADING IN THE SHARES OF FLETCHER CHALLENGE LIMITED IN MAY 1999

SECURITIES COMMISSION
WELLINGTON, NEW ZEALAND

PART 2 - REVIEW OF EVENTS AND SHARE TRADING

Background

In early 1999 FCL management were considering options for a possible merger of FCL Paper with Fletcher Challenge Canada. By late April 1999 these plans were well advanced but remained confidential. FCL senior staff began to work on a draft news release. We understand from FCL that a version of this draft news release was circulated to three employees for comment using FCL's internal computer network situated at its corporate office in Penrose. The draft news release was a ten page document.

Part of this draft news release comprises the information that is the subject of the Commission's inquiry.

FCL's computer system

FCL's corporate office runs a Microsoft Windows NT Local Area Network (the "Corporate LAN"). The email system comprises a Microsoft Exchange server and Microsoft Outlook clients. FCL had in place an email policy for users of the Corporate LAN.

The email programs used on the system provide a screen interface for users in the form of "folders". Among other folders, each user has an "Inbox" folder which displays messages received and a "Deleted Items" folder which holds messages that have been marked for deletion from the system.

FCL informs us that in late 1998, in response to an increasing use of email by its staff for non-work related communications, the company established a "Notice Board" to run in conjunction with the email system. FCL advises us that the purpose was to provide a facility for system users to communicate "non-work related messages and low priority work-related messages requiring distribution to all staff." The Notice Board was implemented by means of a "public folder" (meaning a folder available to all authenticated LAN users) within the Microsoft Exchange system with a shortcut icon to this folder being added to the shortcut menu bar of each user's Outlook program.

FCL advises us that the Notice Board was routinely used for:

Non-work related messages for which staff wanted wide circulation (e.g., 'for sale' notices);
Notification of upcoming IT training courses;
Notification of Fitness Centre events; and
Secondary means of some general communications to all staff.

This last category included staff announcements such as promotions.

There were no express restrictions on material to be posted to the Notice Board other than those set out in FCL's email policy. This policy stated that classified, confidential, and secret material should not be sent via email. FCL further informs us that the nature of information posted to the Notice Board was such that staff did not have to "clear" use of this information with management. Confidential information was not placed on this Notice Board.

In April 1999 the Notice Board was available on the computers of all Corporate LAN users. FCL advises that this was about 200 people. Most of these were FCL staff. The FCL Corporate LAN was also available to staff of a small number of non-FCL organisations providing contract services to FCL.

Sequence of events

30 April 1999 - document released to Notice Board

On the afternoon of 30 April 1999 an FCL employee who had been sent a copy of the draft press release on the internal email system for review accidentally deleted his copy from his Inbox folder. Items which are deleted when using Microsoft Outlook are not immediately lost, but are sent to the Deleted Items folder, and can be retrieved from there. One way to do this is to open the Deleted Items folder and "click and drag" the particular message back to the Inbox folder.

We understand that the employee attempted to recover the draft news release in this way. On his screen the Inbox folder icon was positioned next to the Notice Board folder icon. As he dragged the shadow icon of the message across the screen it appears that he inadvertently released the mouse button while the message icon was positioned over the Notice Board folder rather than the Inbox folder. This sent the message to the Notice Board. No warning was generated asking if he wanted to confirm the posting. As we understand it the employee was unaware that he had released the message to the Notice Board, as he did not immediately check to see that the message had been returned to his Inbox.

The draft news release was posted to the Notice Board at around 2.15 pm. Once there it was available for all users of the Corporate LAN to view.

FCL's response

We understand from FCL that the Company Secretary was advised by an IT Manager of the posting of the draft news release to the Notice Board at around 2.40 pm. He quickly contacted the system administrator and had the document removed, and followed this up at around 3.47 pm by sending a warning e-mail message to each individual who had access to the Notice Board. This message read as follows:

"It has come to my attention that a confidential file has today appeared on the Fletcher Challenge e-mail Noticeboard.

Persons having read this file must be aware that the information contained in it cannot, under any circumstances, be communicated to anyone (including a fellow employee), disclosed or reproduced for any purpose whatsoever, either within the Company or outside. If you have already copied this file, please destroy it immediately and be aware that having read it, you are deemed an "Insider" under the Securities Amendment Act."

FCL's IT staff were later able to establish that 7 people printed copies of the draft news release before it was removed from the Notice Board. Six of these people were FCL staff. The seventh, AB, was an independent contractor who worked for a company that provided support services to FCL.

This company's computers were connected to the FCL Corporate LAN. Staff and contractors of this company could access their own files and public files (including the Notice Board). These people did not have access through the system to confidential FCL information.

We note also at this point that the Commission was advised by FCL that these incidents prompted it to review its computer procedures, including the working and layout of the Notice Board on Corporate LAN computers. FCL advises that it has taken steps to ensure that documents can no longer be placed accidentally on the Notice Board in the manner described above.

30 April 1999 -transmission from FCL premises

AB told the SFO that she saw the first page of the draft news release when it appeared on the Notice Board, and that she believed it was a press release. She said that the announcement appeared to be "confirmation of a confidential thing that was told to me" some 6-8 weeks prior to 30 April.

AB printed the first page of the draft news release. She told FCL and SFO investigators she believed this to be the entire announcement. She did this at 2.23 pm.

AB states that after reading the header of the printed document and the first bullet point (which referred to the proposed sale of FCL Paper) she sent a copy of the document by facsimile to a relative, CD, at his home. AB states that CD has been a long-term shareholder of FCL. This facsimile was sent at 3.11 pm.

The Company Secretary's email warning was sent at 3.47 pm. AB says that when she noticed this message she rang CD, and told him to destroy the fax and ignore its contents. Phone records show a call being made to CD's home at 4.46 pm.

CD has acknowledged that he received a facsimile from AB on 30 April 1999. The content of this message was the first page of the draft news release accidentally placed on the FCL Notice Board (referred to from here on as the "leaked page"). A copy of the leaked page is attached to this report as Appendix B.

CD was already a holder of FCL Paper shares. An FCL investigator recorded that CD told him he had asked AB to be on the lookout for any announcements relating to FCL shares, but in an affidavit later given to the Commission CD denied that he had made such a request. AB also denied through her counsel that any such request was made to her.

CD also acknowledged receiving a telephone call from AB late in the afternoon of 30 April in the course of which AB told him that he should destroy the facsimile because it had been sent out in error by the Fletcher Challenge Group.

CD has told the Commission that he believed the information in the leaked page to be already "in the public domain" at the time that he received the facsimile. CD told us he had read an article published in the Dominion newspaper the week prior to receiving the facsimile from AB.

An article headed "Fletcher considers Paper Sale" was published in the New Zealand Herald on 30 April 1999. The same article was printed, with minor additions, in the Dominion on 1 May 1999 (the day after CD received the facsimile from AB), under the headline "Sale of Fletcher Paper Rumoured." Both articles stated in part:

"...It is understood that for the last nine months the company (FCL) has been working on a deal where Fletcher Paper's Canadian subsidiary does a reverse takeover of the local paper stock...Attempts to confirm this at Fletcher have been unsuccessful..."

As CD lives in Auckland it might be that he saw the Herald article, rather than the Dominion version, in which case he might have seen this before he received the leaked page.

When initially questioned by FCL investigators CD stated that upon receiving the telephone call from AB he tore the facsimile into pieces and disposed of these in his rubbish bin. He later told the SFO that he in fact left the facsimile lying on his desk, which was in an untidy state. CD denies passing on the leaked page to any person.

CD told the SFO that he learnt in August 1999 that a relative of his, EF, had come to his house in early May and, unknown to CD, took a copy of the facsimile from CD's desk. CD denies telling EF about the leaked page or any information contained in it, and denies giving the leaked page to EF. He asserts that EF took the copy of the facsimile without his knowledge.

EF told the SFO that early in the week following 30 April 1999 he visited CD's home. He said that he was alone in CD's office when he noticed the leaked page lying on the desk. EF stated that he read this and then made a copy of the leaked page using CD's fax machine. EF said he replaced the original and put the copy in his pocket. He said that he did not discuss this with CD, and that CD had not told him about the existence of the leaked page.

EF told the SFO that he did not tell CD he had taken a copy because he felt that he was not supposed to know about the document.

EF could not remember the exact date of these events but feels it was probably the Tuesday or Wednesday of the week following 30 April. These dates were 4 and 5 May 1999.

7 May 1999 - document delivered to news media

On the morning of 7 May 1999 EF contacted an Auckland journalist. EF met the journalist, and handed him a copy of the leaked page. He did not give his name. EF described his motive for doing this to the SFO in the following terms:

"In giving the document to the ...reporter, it was my intention that he would write a story about it, it would force Fletcher's hand into making that public announcement official. If I had bought some shares in the meantime, the shares would go up in value and I would sell them and make a profit. That was my intention".

7 May 1999 - document released to sharebrokers

Between 10 am and 12 midday on 7 May 1999 EF went to a business services bureau in Auckland. He handed over a copy of the leaked page along with a list of facsimile numbers. He asked for the leaked page to be faxed to each of the numbers on that list. He gave a specific instruction that the document should not be faxed until 2 pm that day. He gave a false name to the receptionist at the business services bureau.

Phone records show that the business services bureau began faxing the document to the numbers provided at 1.58 pm. It took approximately 20 minutes to complete this. The document was faxed to 13 sharebroking firms and to the news media.

At around 2.30 pm EF returned to the business services bureau. He ascertained that the faxes had been sent successfully.

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