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INFORMATION CONTROL IN MARKET PARTICIPANT FIRMS

REPORT OF AN INQUIRY INTO TRADING IN THE SHARES OF WRIGHTSON LIMITED IN JUNE 2004

EXECUTIVE SUMMARY

1.

This report concerns activities of ABN AMRO Craigs Limited, an NZX Firm, during a takeover offer in 2004. The firm, acting for the offeror in the takeover, received non-public information that a substantial security holder intended to accept the takeover offer. It passed this information on to two other NZX firms, and to its own client advisers, before the information was released to the market.

2.

The Commission's inquiry into this matter arose from a complaint by Wrightson Limited, the company which was the subject of the takeover. The inquiry began as an investigation into possible insider trading. However, evidence provided in the course of the inquiry raised serious issues of market conduct.

3.

The inquiry did not identify any case of insider trading because none of the entities who received potentially price sensitive information fell within the definition of "insider" in the Securities Markets Act 1988.

4.

The Commission considers that the decision by ABN AMRO Craigs Limited to distribute non-public and potentially sensitive information about the takeover to select firms and to its client advisers ahead of the market being informed was inappropriate and was not required by its client mandate. Selective disclosure of information in this way, while not unlawful, is not acceptable practice on the part of a market participant.

5.

This case illustrates the need for all market participants to have robust information controls (Chinese walls), for two reasons:

to reduce the chances of inadvertent corporate liability for insider trading; and
as a matter of good market practice, to discourage selective disclosure of material market information. Selective disclosures undermine the orderly distribution of material information to all market participants and thereby threaten efficient price discovery in the market.

The inquiry highlights that it is not only necessary for market participants to have policies and procedures in place, but also to ensure that persons handling non-public and price sensitive assignments are aware of and adhere to these procedures.

PART 1 - INTRODUCTION

6.: The Securities Commission has conducted an inquiry into the trading in shares of Wrightson Limited ("Wrightson") on the morning of 18 June 2004. This inquiry focused on events surrounding and following the disclosure by Marathon Asset Management Company Limited ("Marathon") to ABN AMRO Craigs Limited ("Craigs") of its intention to accept a takeover offer for shares in Wrightson made by Rural Portfolio Investments Limited ("RPI").
7.: The matter before the Commission arose from a complaint by Wrightson. Wrightson was of the view that knowledge about the intended acceptance of the takeover offer by Marathon may have been available to some market participants and investors before it was generally available. Wrightson considered that this was the reason for very heavy trading in shares of Wrightson on the morning of 18 June, and for the trading halt by NZX in shares of Wrightson between 11.17 a.m. and 2.38 p.m. on that day.
8.: Wrightson requested that the Commission investigate whether there may have been insider trading or tipping in terms of the Securities Markets Act 1988.
9.: The Securities Commission has a function under section 10 (c) of the Securities Act 1978 to keep under review practices relating to securities, and to comment thereon to any appropriate body.
10.: The Commission is authorised by section 28A of the Securities Act 1978 to publish any report or comment made by it in the course of the exercise of its functions under section 10 (c).

THE COMMISSION'S INQUIRY

11.: The Commission's inquiry began as an investigation into possible insider trading. The inquiry concluded that no questions of insider trading liability arose, but the evidence provided in the course of the inquiry raised serious issues of market conduct.
12.: The matters under review raised issues relating to securities law and market practice upon which it is appropriate for the Commission to comment. The Commission has decided to comment by way of this report.

Procedure

13.

The Commission determined the procedures for the review. Trading data in shares of Wrightson was received from NZX for 18 June 2004. The inquiry focused on trading in the morning, prior to the trading halt.

14.

Trading information was sought from brokers who showed any significant trades in Wrightson shares on the morning of 18 June.

15.

Each of these brokers provided a written statement containing information about:

when and how they became aware of Marathon's acceptance of the takeover offer;
whether this information was passed on to any of their clients; and
details of clients who had traded during the period under review.

16.

The Commission received additional evidence by written statement from RPI, Craigs and Marathon.

17.

After reviewing the information the Commission circulated a draft report to affected parties and invited and considered submissions from them.

PART 2 - REVIEW OF EVENTS AND SHARE TRADING

Background

Chronology of events in the takeover bid for Wrightson by RPI

18.

On 20 April 2004 RPI lodged a formal notice with Wrightson of a partial takeover offer for shares in Wrightson. This was a code offer under the Takeovers Code.

19.

The conditional partial takeover offer was at $1.50 per Wrightson share, and was for sufficient shares to take RPI's control of voting rights in Wrightson to 50.01 percent.

20.

RPI appointed Craigs as its advising broker for the takeover offer.

21.

RPI is owned 50 percent by Aorangi Laboratories Limited (the investment vehicle of the McConnon family) and 50 percent by MCN Rural Investments Limited (the investment vehicle of the immediate family of Mr Craig Norgate). The company was formed in 2003 to invest in Wrightson and as a vehicle for other agribusiness investments. The directors of RPI are Mr Baird McConnon (Chairman) and Mr Craig Norgate (Managing Director).

22.

As at the time of the takeover offer RPI had acquired its shareholding of approximately 13 percent of Wrightson in two principal tranches:

a stand in the market on 23 September 2003; and
a second stand in the market on 9 and 10 December 2003 and subsequent purchases in December 2003.

23.

On 22 April 2004 Wrightson announced that the Wrightson board had appointed Grant Samuel & Associates Limited as the independent adviser to prepare a report on the merits of the partial takeover offer from RPI in accordance with the Takeovers Code.

24.

On 13 May 2004 the board of Wrightson recommended shareholders not accept the partial takeover offer from RPI.

25.

On 19 May 2004 RPI sent a letter to Wrightson confirming an extension of RPI's offer period to 5.00 p.m. on 9 June 2004. Other than the extension of the offer period, all other terms of the offer remained the same.

26.

On 1 June 2004 the takeover offer by RPI for shares in Wrightson was increased by 15 cents per share to $1.65. RPI extended the closing date to Wednesday 23 June 2004.

27.

On the same day the board of Wrightson recommended shareholders not accept the revised partial takeover offer from RPI of $1.65 per share.

Market developments on the morning of 18 June 2004

28.: At the time of the takeover offer Marathon held approximately 8 per cent of Wrightson shares. Marathon had been a substantial security holder of Wrightson since April 1997.
29.: On the morning of 18 June there was significant trading in Wrightson shares, with 632,270 shares traded between 10.00 a.m. and 11.17 a.m. This compares to an average daily volume of around 390,000 for the first 4 days of that week.
30.: At 11.16 a.m. (New Zealand time) on Friday 18 June Dow Jones issued a news item that said that a United Kingdom funds manager holding a 12.2% stake in Wrightson had decided to accept the offer. The story did not name Marathon.
31.: At 11.17 a.m. NZX announced a trading halt in shares of Wrightson. The announcement from NZX said simply that trading was being halted because NZX believed that the market may not have been equally informed in relation to the takeover offer for Wrightson.
32.: At 11.45 a.m. the New Zealand Herald website reported that RPI had confirmed that Marathon had agreed to sell its 7.9% stake in Wrightson. The story was sourced from New Zealand Press Association.
33.: At 2.38 p.m. NZX announced that it was lifting the trading halt. Its announcement stated that NZX understood RPI had, since the imposition of the trading halt, disclosed to the media that RPI believed a substantial security holder in Wrightson had agreed to sell its 7.9% shareholding to RPI. The announcement went on to say that NZX understood the shareholder to be Marathon. It noted that Wrightson had not received any formal notification or substantial security holder notice in relation to Marathon's holding.
34.: At 2.56 p.m. Wrightson announced that RPI had informed it that RPI was not currently required to file a further substantial security holder notice. This announcement noted that RPI had been reported in the media as saying that it had received an acceptance from Marathon, described as a holder of 7.7% of Wrightson.

Price movements in shares of Wrightson on 18 June 2004

35.: The Wrightson share price rose throughout Friday 18 June. The stock had closed at $1.51 or $1.52 every day for the previous week. It closed at $1.52 on Thursday 17 June. The first trade on Friday June 18 was struck at $1.53. The last trade before the trading halt was imposed occurred at 10.49 a.m. at $1.55. When the halt was lifted the stock rose immediately to $1.57, the price at which it closed for the day, the afternoon's trading having risen to a high of $1.59 before falling back for the close.

Complaint from Wrightson

36.

On 21 June 2004 Wrightson announced to the market that it had formally requested the Commission investigate what it believed to be irregular trading in its shares on Friday 18 June 2004. The announcement said:

The apparent disclosure of price sensitive information, and possible trading on the basis of that information, before it was publicly available raises questions about whether there was tipping or insider trading in breach of the Securities Markets Act.

37.

At about the same time Wrightson's lawyers, Chapman Tripp, faxed a complaint to the Commission on behalf of Wrightson.

38.

The complaint alleged that Marathon had indicated to RPI that it would accept its takeover offer, and that information on Marathon's intentions may have been available to some market participants and investors before it was generally available, and that this was the reason for very heavy trading on the morning of 18 June and for the trading halt.

39.

Wrightson was of the view that information about Marathon's actions or intentions were likely to have been materially price sensitive. Wrightson requested that the Commission investigate whether there may have been insider trading or tipping in terms of the Securities Markets Act.

Findings of the inquiry

Evidence received from Craigs

40.

In its statement to the Commission, Craigs said that it learned from a telephone discussion with Marathon on the night of 17 June 2004 that Marathon intended to accept the RPI offer. This was in the course of telephone polling of the major shareholders of Wrightson.

41.

The submission stated that Craigs advised Mr Stephen Walker, an RPI adviser, of Marathon's intended acceptance on the evening of 17 June 2004.

42.

Craigs informed the Commission that it also told this news to:

ABN AMRO Rothschild/ABN AMRO Bank NV as underwriter and financier of the redeemable preference share offer;
ABN AMRO NZ Ltd who participated in the regular 8.10 a.m. morning internal Craigs' teleconference call;
Craigs' client advisers and traders throughout New Zealand who participated in that conference call (this is an open call, which advisers may attend or not as they wish);
Forsyth Barr Limited's ("Forsyth Barr") managing principal shortly before 9.00 a.m. on Friday; and
ASB Securities Limited's ("ASB Securities") managing principal shortly before 9.30 a.m. on Friday.

Forsyth Barr and ASB Securities were co-lead managers to the RPI redeemable preference shares issue.

43.

Craigs told the Commission that it also informed NZX of the information before the market opened. The Commission understands that Craigs' representative tried to contact NZX shortly before the market opened on 18 June 2004. A voicemail message was left with NZX. An RPI adviser also tried to contact NZX staff around that time. It was only after the market opened (around 10.10 a.m.) that NZX staff and representatives of Craigs and RPI discussed the issue relating to Marathon's acceptance. Craigs and RPI representatives informed NZX that it was their belief that two NZX firms were aware of Marathon's acceptance.

44.

Four of Craigs' clients traded in Wrightson shares on the morning of Friday 18 June, prior to the market halt. Of these, three bought and one sold. Of the three who bought, the Commission was told that two were informed of Marathon's likely acceptance by their client adviser.

45.

Craigs informed the Commission that it does not tape or record communications undertaken by its staff, so no recordings of these calls were available.

46.

The four clients of Craigs purchased 60,000 shares, sold 5,010 shares, purchased 237,500 shares and purchased 400,000 shares, respectively.

47.

According to the statement received from Craigs two clients had been informed of Marathon's likely acceptance.

48.

Craigs also stated that the indication from Marathon was discussed with RPI in a conference call at 9.30 a.m. on Friday 18 June 2004. In the course of that call RPI discussed whether it had an obligation to issue a substantial security holder notice in relation to Marathon's acceptance. Craigs' understanding of the position, following the call, was that RPI considered it did not have an obligation to issue a substantial shareholder notice (as it had not received Marathon's written acceptance) and had no obligation to inform NZX as it was not a listed entity. Despite this, RPI and Craigs decided it would be appropriate to inform NZX of Marathon's position.

49.

Craigs further stated that they advised NZX that a large United Kingdom shareholder had orally indicated an intention to accept the offer, and that the information was known to the brokers and parties associated with the takeover and underwriting process.

50.

In a subsequent letter the legal representative of Craigs informed us:

We are instructed that Marathon did not request or require ABN AMRO Craigs to keep confidential its indication that it would be accepting RPI's offer. While Marathon did indicate that it did not want RPI to use its name in a media statement (because it wished to be seen as impartial in relation to the takeover process) at no time did it ask ABN AMRO Craigs to keep the information confidential from RPI, its advisers or any other person.

Evidence received from RPI

51.

RPI in its statement told the Commission that:

Mr Neil Craig, managing principal of Craigs, notified Mr Stephen Walker, an adviser to RPI, by telephone on the night of Thursday 17 June that Craigs' discussions with Marathon representatives in London had resulted in the persons holding authorisations over the group of nominee holdings known as "Marathon" indicating to Craigs that Marathon intended to accept the RPI offer for its approximate 8% holding.
Mr Walker informed the people described as the "core RPI team" of the development late on Thursday night. This team comprised Messrs Craig Norgate, Baird McConnon, Richard Mehrtens, Craig Stephen, and a public relations executive.
After the teleconference call with Craigs on the morning of Friday 18 June RPI tried to contact NZX at 9.50 a.m., shortly before the market opened, but was unable to have a substantive conversation with anyone until shortly after 10 a.m.
Their first contact with the media was when the public relations executive contracting for RPI informed the news media at around 10.50 a.m. The information was given on the basis that Marathon's identity was confidential, with RPI confirming only that an offshore party was involved. RPI was of the opinion that the media drew their own conclusions and reported what they speculated.
The public relations executive was misquoted when the articles surfaced and he immediately sought to have them corrected, which was partially done by some media.

Evidence received from Marathon

52.

Marathon provided a submission stating:

The formal decision to accept the offer was taken on the morning of 17 June prior to the call from Craigs........During the course of that conversation [a Marathon employee] stated that he had decided to accept the offer and that he had already instructed Marathon's internal corporate actions team to process the acceptance of the tender offer. No other external parties were notified. During the course of the conversation [the Marathon employee] requested that the information was not released... .

53.

The first public announcement about Marathon's intention to accept the takeover offer was made on the Dow Jones news service at 11.16 a.m. (New Zealand time) on Friday 18 June. The initial story said that a United Kingdom funds manager holding 12.2% stake in Wrightson had decided to accept the offer. The story did not name Marathon.

54.

All the other firms contacted, except Forsyth Barr and ASB Securities, state that they were not aware of the Marathon news until it was announced at 11.16 a.m.

55.

The managing principal of Forsyth Barr confirmed that he was personally informed of the news earlier, but has said that he did not pass on this information to any person, and that the remainder of his firm first learned of the likely acceptance from the news media.

56.

The other person who we are told was informed was the managing principal of ASB Securities. He confirmed that he was advised via a mobile call by Craigs while he was attending a conference in Hamilton. He consequently notified his head of advisory services. The statement from ASB Securities says that ASB Securities' managing principal was unaware that this information was not public knowledge when he passed it on to the head of advisory services. ASB Securities informed the Commission that at the time the call was made to the head of advisory services, ASB had two orders in its system from private clients to buy Wrightson shares, and one from its online service. ASB says that its online clients do not receive advice, and so it has not investigated this further.

57.

In respect of its private clients, ASB told us that the orders were received before the call from the managing principal to the head of advisory services and were instructions to buy at the current market price.

58.

The Commission was told that upon receipt of the information from ASB's managing principal, and substantial buying by other brokers, the head of advisory services contacted the client (one client had placed both orders)

to advise him of current market conditions and news that Marathon had accepted the offer.

The client instructed ASB to meet the market price of $1.54 to purchase the stock. This was done. The two orders amounted to a total of 7,000 shares.

59.

Shortly after this, the managing principal of ASB was contacted again by Craigs and told that Craigs was in discussion with NZX as to whether there were disclosure obligations. This prompted ASB's managing principal to immediately contact his head of advisory services again to tell him to order all advisers to refrain from talking to any further clients until clarification was received from NZX. The head of advisory services passed on this information immediately and ASB Securities did not execute any further buy orders prior to the trading halt.

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