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

25 July 2006

APPENDIX A

TERMS OF REFERENCE

The Securities Commission ("the Commission") is conducting a review under sections and of the Securities Act 1978 of the conduct and circumstances surrounding:

the release on Wednesday 3 May 2006 of the Government's Telecommunications Stocktake Paper; and
comments reported to have been made on Tuesday 16 May 2006 by the Communications Minister David Cunliffe about Telecom's dividend policy.

In particular, the Commission will consider whether the conduct and circumstances surrounding these matters affected the transparent and orderly functioning of the securities markets.

The purpose is to form a view as to whether such conduct and circumstances give rise to any issues of securities law, practices relating to securities, activities on securities markets.

In particular, the Commission wishes to consider:

whether any person misused any price sensitive information in relation to securities contained in the Paper before that information was publicly available;
whether any Government and/or state sector policies and procedures for handling non-public price sensitive information in relation to securities were appropriate and properly applied in respect of these matters;
whether any person could or should have taken, or refrained from taking, any actions in respect of these matters to maintain the transparent and orderly functioning of the securities markets in New Zealand or elsewhere.

Accordingly the Commission will obtain, consider and utilise information for the purposes of any recommendation, report or comment the Commission may decide to make under sections 10(b), 10(c) or 10(caa) of the Securities Act 1978.

SUBJECT to the Commission's discretion to amend these Terms of Reference as it may consider fit.

May 2006

APPENDIX B

Chronology of key events

(All times have been converted to New Zealand Standard time)

Friday, 28 April 2006

The Cabinet document relating to the telecommunications stocktake review ("the Stocktake paper") was circulated to Cabinet Ministers, in preparation of a Cabinet Meeting scheduled for Monday morning 1 May 2006.

Monday, 1 May 2006

Cabinet met, considered the Stocktake paper, and decided to delegate to the Policy Committee of Cabinet the finalisation and approval of the telecommunications stocktake policy. The Committee was scheduled to meet on Wednesday morning 3 May 2006.

Tuesday, 2 May 2006

A.M.

Mr Michael Ryan, a messenger employed by the Department of Prime Minister and Cabinet ("DPMC"), took a copy of a Cabinet document relating to the telecommunications stocktake review ("the paper") from within an office in the DPMC, where it had been left for destruction by attendees at the previous day's Cabinet meeting. The policy proposals set out in the paper given to Mr Garty had not been approved by Cabinet at that time.

P.M.

At around 11.00 p.m. Mr Ryan passed the paper to a friend, Mr Peter Garty, Group Financial Controller for Telecom Corporation of New Zealand Limited ("Telecom"). Later that evening, Mr Garty made a photocopy of the paper.

Wednesday, 3 May 2006

A.M.

At around 7.30 a.m. Mr Garty returned the paper to Mr Ryan. Mr Ryan then returned the paper to the DPMC offices.
At around 8.30 a.m. Mr Garty arrived at Telecom. He made a masked copy of the front page of the paper so as to remove the document identifiers that had appeared on it. He destroyed the original front page and replaced it with the masked copy front page ("the masked paper").
At approximately 9.45 a.m. Mr Garty showed the masked paper to Mr David Knight, Telecom's New Zealand General Counsel (who was the first of Telecom's senior legal advisers to become available that day).
Between 10.30 a.m. to 12.30 p.m. most of Telecom's executive team and directors were either in Sydney or enroute to Sydney to attend a series of meetings concerning Telecom's forthcoming third quarter results.
At around 10.30 a.m. Mr Knight had contacted a number of Telecom's executives and arranged to have a copy of the executive summary of the masked paper to be sent, by facsimile, to them for review.
At around 11.00 a.m. the Cabinet Policy Committee made its decision to adopt the recommendations contained in the Stocktake paper, subject to certain changes.

P.M.

At around 1.00 p.m. Telecom executives met to discuss the matter. It was agreed that Telecom might be required by stock exchange listing rules to disclose the information contained in the masked paper, if the document was genuine and reflected settled government policy. It was decided to contact the apparent source of the document, the Government, to ascertain the authenticity and status of the masked paper.
Between 1.30 p.m. and 2.30 p.m. Telecom executives tried to contact various Ministers and officials:
- Ms Theresa Gattung, Chief Executive Officer of Telecom, rang Mr David Cunliffe, Minister of Communications, on his mobile telephone and left a message detailing the situation. She advised in her message that unless Telecom could be assured that the paper did not represent the Government's position, Telecom could be obliged to disclose the information to the market;
- Ms Gattung telephoned Mr Maarten Wevers, Chief Executive Officer of the Department of the Prime Minister and Cabinet, and left a message with his assistant;
- Mr John Goulter, Telecom's Public Affairs and Government Relations Manager, telephoned the Office of the Communications Minister, Mr David Cunliffe and spoke to his Communication Adviser. He asked her to tell the Minister that Ms Gattung had left him an urgent message on his mobile telephone;
- Mr Goulter then telephoned Ms Heather Simpson, Chief of Staff to the Prime Minister, and briefed her on the situation. Ms Simpson did not confirm the status of the document described to her by Mr Goulter. To the contrary she expressed the view that she did not believe it could be a Cabinet paper;
- Ms Gattung then telephoned the Prime Minister and left a message on her mobile phone explaining the situation and advising that Telecom was seeking to ascertain the status of the paper;
- Mr Goulter attempted to contact Ms Simpson once more and spoke to her assistant who advised him that she was unavailable.
At around 1.45 p.m. Mr Cunliffe became aware of the message left by Ms Gattung on his mobile telephone.
Between 2.00 p.m. and 3.00 p.m. Mr Cunliffe attended the House for Question Time.
At around 3.00 p.m. Mr Cunliffe met with a number of senior Government officials to discuss the course of action to take. At this meeting, a preliminary conclusion was reached that it was important that all participants in the market had the same information promptly, and that the consensus was that the Minister should make an announcement after the New Zealand market was closed.
By 3.30 p.m. Telecom had received external legal advice that agreed with the inhouse view that Telecom may be obliged to disclose the information in the masked paper if it was genuine, and that Telecom should continue to try to ascertain the status of the document.
Between 3.30 p.m. and 5.30 p.m. Telecom continued to hold its Committee Meetings in Sydney, which included members of the Board.
At approximately 4.00 p.m. it was decided by the Minister and his officials that the Government would formally release the Stocktake paper to the public.
At 4.15 p.m. it was decided by the Minister and his officials that an announcement should be made at 5.15 p.m.
At 4.26 p.m. the Office of the Communications Minister issued a media advisory stating that the "Communications Minister David Cunliffe will make a major announcement at 5.15 p.m. in the old Legislative Council chambers". This was issued by emailing or faxing to particular journalists. It was also posted on the Beehive website (www.beehive.govt.nz). It was not sent to Telecom, the NZX, or ASX.
At 4.28 p.m. Mr Goulter received a call from the media enquiring about the Minister's 4.30 p.m. media advisory. This was the first time Telecom became aware of the media advisory.
At 4.38 p.m. Mr Cunliffe telephoned Ms Gattung to advise her of the 5.15 p.m. press conference. Immediately following that call, Ms Gattung immediately briefed her senior team. It was at this point that her senior team, including Telecom's Group General Counsel, Mark Verbiest, formed the view that the masked paper was most probably genuine.
At approximately 4.45 p.m. Mr Cunliffe made a telephone call to the Chief Executive of the New Zealand Exchange Limited, but the Chief Executive was unavailable.
At 5.15 p.m. the Minister formally released the Stocktake paper and the Government's position on the recommendations outlined in the document. The paper was also made available online via the Government's Beehive website.
At approximately 5.20 p.m. Telecom obtained a copy of the released Stocktake paper from the Beehive website.
At approximately 5.30 p.m. Telecom requested a trading halt on the Australian Stock Exchange. A trading halt on the Australian Stock Exchange was implemented from 5.42 p.m. until the opening of the following day.
At 5.56 p.m. Ms Simpson returned Mr Goulter's earlier call. Ms Simpson advised that the Government's decision to announce had been made and that it was now publicly known so there was no point in discussing the matter further.

Thursday, 4 May 2006

At 1.30 a.m. trading of Telecom American Depositary Receipts opened on the
New York Stock Exchange.

APPENDIX C

Markey data graph May 03

NZX Price/Volume activity in TEL on 3 May 3006

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ASX Price/Volume activity in TEL on 3 May 3006

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APPENDIX D

Cabinet Office CircularCO (02) 14 15 October 2002

View as PDF file (614KB)

APPENDIX E

Telecom media release 16 May 2006

View as PDF file (74KB)

APPENDIX F

Bloomberg interview

Transcript of an interview with communications minister David Cunliffe in wellngton on May 15 2006 on Telecom by Bloomberg news agency.

view as PDF (832KB)

APPENDIX G

Market data graph - May 16 2006

NZSX Price/Volume activity in TEL on 16 May 3006

View enlarged image

ASX Price/Volume activity in TEL on 16 May 3006

View enlarged image

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