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Effects on the Securities Markets of certain statements made in May 2006 concerning telecommunications

25 July 2006

PART III - THE EVENTS OF 16 MAY 2006

On 16 May 2006 the Bloomberg news agency ("Bloomberg") published a series of reports of an interview with Mr Cunliffe which included comments attributed to the Minister regarding Telecom's dividend prospects.
Telecom responded to the Bloomberg report later that day with an announcement stating that it had not given any indications of its capital management and future dividend policy to the Minister. Telecom also noted that it had not received any prior advice from the Minister about the comments made to Bloomberg. Telecom stated that it believed that the Minister's comments were not based on any confidential information. Telecom's media release is at Appendix E.
On 17 May 2006 the NZX referred the statements reportedly made by Mr Cunliffe regarding Telecom's dividend policy to the Commission for investigation. NZX referred the matter to the Commission for consideration under section 10(c) and (caa) of the Securities Act 1978. The NZX stated that in its view the comments attributed to the Minister were material and price-sensitive, but were not released to the whole market. Rather, they were carried by a wire service which serves a section of the market, but to which the average retail investor does not have access.

Effect on the market - 16 May 2006

The Telecom share price opened at $4.50, traded briefly at $4.53 and at the time of the first Bloomberg report at 12.26 p.m. was $4.41. Volume from opening until 12.26 p.m. was just over 16.5 million shares. The share price had dropped $0.09 from opening bid throughout the morning. From the release of the first Bloomberg report at 12.26 p.m., the share price dropped by $0.06 to $4.35 within half an hour then continued to drop to its low for the day of $4.31 at 2.31 p.m. It then rose to close at $4.39. Volume for the period 12.26 p.m. through to close was just over 17.6 million shares.
There appears to have been an immediate but immaterial impact on the share price after the Bloomberg announcement, and a recovery towards the end of the day, following Telecom's clarifying statements.
On the ASX Telecom quoted securities opened at A$3.65 and had dropped to A$3.61 at the time of the Bloomberg report at 10.26 a.m. (Sydney time). Following the report the share price dropped to A$3.53 at 12.54 p.m. (Sydney time) and recovered to close at A$3.60. The relevant market data for the trading of Telecom securities is set out in Appendix G.

Findings of the Inquiry

The Bloomberg reports

On 16 May 2006 in an article entitled "Telecom NZ Investors May Face Lower Dividends, Cunliffe Says", Bloomberg quoted Mr Cunliffe as follows:

"Its investment levels have not been high relative, for example, to its dividend flow" Cunliffe said in an interview yesterday in Wellington. Greater competition and increased investment "may mean on the part of shareholders that they need to accept that in the short run there may be somewhat lower dividend flows or lower returns" he said.

The article reported a few lines later that Mr Cunliffe said that the company's dividend policy was a decision for Telecom's board.
The Commission has received a copy of the full transcript of the Minister's interview with Bloomberg. A copy of the transcript is at Appendix F. The interview was quite long and the articles report only a very small part of what the Minister said during the interview. The quotes attributed to the Minister were pieced together from comments made at different points over the course of the interview.
The Minister's comment in respect of Telecom's relatively high investment levels was made in response to a question early in the interview about Telecom's past strategy regarding broadband (see page 2 of the transcript). The Minister stated in his response to that question (and also to the previous question) that such issues were ones that company boards have to manage and wrestle with.
The Minister made his comment in respect of lower dividend flows much later in the interview (see page 6 of the transcript), in the context of a question about the possibility of Telecom restructuring its operations. The Minister's full response to that question is as follows:

I can't comment. I have no information on that but whatever they do, I hope that they will face the future not look backwards. I hope that they will look after their customers, including their wholesale customers, and that they will invest in the best interests of New Zealand and in the best long-term interests of their shareholders. That may mean on the part of shareholders that they need to accept that in the short run there may be somewhat lower dividend flows or lower returns and that just reflects the structural situation that the company and the country are both in.

A further question was asked as to whether the Minister would like to see Telecom return less to shareholders and invest more. The Minister's response to this question was that "dividend decisions are obviously very sensitive decisions and decisions that boards need to make, it's not for Ministers". When asked whether he wanted to "view an opinion" on this point, he responded "no".

No evidence of confidential or price-sensitive information

On the evidence available to it, the Commission accepts that the comments made by the Minister on 15 May 2006 to the Bloomberg news agency were not based on any confidential or price-sensitive information about Telecom's intentions or policies, nor did the Bloomberg reports give the impression that they were so based.
It appears that some market participants assumed or guessed that the Minister's comments did reflect confidential information that would affect Telecom's dividend policy and traded on the basis of this. Trading of this nature occurs in the markets and does not of itself mean that the market has been improperly or unequally informed.
Those market participants may have made those assumptions at least in part because the Minister's communications portfolio has direct influence over the operational activities of Telecom. Also, the Minister had released material information on 3 May 2006, which included recommendations for regulating Telecom's broadband business operations.
The present case serves as a general reminder that market participants may perceive statements made by persons with authority in relation to a listed issuer as being made with the benefit of non-public knowledge or information about the issuer. "Persons with authority" will include directors and senior executives of the issuer, and may also include external parties who have a close association with or influence over the issuer. If such a perception is created about matters that may be price-sensitive, the price of the issuer's quoted securities might be affected. If the perception is incorrect, then the resulting price change may not accurately reflect the value of the affected securities.
The Commission notes that the Bloomberg interview was one of several given to media agencies after the release of the Stocktake paper. It is part of the role of a Minister of the Crown to convey policy decisions and their reasons and consequences to the public through the news media.
The Commission also notes that Bloomberg is a subscription service and so reports only to its subscribers. In the Commission's view the Minister is entitled to make comments to agencies that serve only a section of the market if the comments made are not based on any confidential or price-sensitive information.

Recommendations

The Commission notes that Cabinet Office Circular CO (02) 14 contains relevant guidance for Ministers. At paragraphs 6 and 7 it provides that:

"It is almost impossible to predict the questions and issues that could be raised with Ministers by the media and other third parties on any particular issue at any particular time. Therefore, Ministers and officials should act cautiously when dealing with matters relating to a publicly listed company or a commercial agency in the wider state sector. There could be a perception that the Crown has access to confidential information...Market participants may act on statements by Ministers, even if those statements are made without the benefit of confidential information. Such market participant action may then impact on the market price for the publicly listed company's shares..."

The Commission notes its view that this guidance is appropriate and recommends that it continue to be brought to the attention of Ministers and officials.
Disclosures made by way of a written announcement to the relevant exchange will usually be published verbatim to the market as a whole. Other public comments, especially if they are verbal, can be misinterpreted or quoted out of context, and disclaimers and qualifying statements may be overlooked or under-emphasised. As a general point, the Commission recommends that all persons who may be assumed by the market to be in possession of non-public information about a listed issuer exercise caution when commenting publicly on matters affecting that issuer.
The Commission also reminds market participants that reported comments may not be a complete or accurate reflection of what was actually said.

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