Ex-Hanover Director Mark Hotchin. Photo / Brett Phibbs
Ex-Hanover Director Mark Hotchin. Photo / Brett Phibbs
5500 Hanover investors are finally going to get back some of their money. What they won't get is their day in court. Hamish Fletcher reports.
It was our market watchdog's first big court case, but now it will never see a courtroom.
More than three years after the chief executive of the Financial Markets Authority appeared on live television to trumpet civil action against six men associated with the failed Hanover group of companies, the authority has settled that claim out of court, in exchange for payments totalling $18 million.
When it was announced in 2012, Hanover was touted as the first major finance company case to be launched since the new regulator took over from the Securities Commission.
The FMA had enjoyed a 100 per cent success rate for the cases it inherited from its predecessor, and hadn't cut a single deal with any of its targets.
That has since changed and even before this week the FMA had tallied a string of out-of-court deals.
The Hanover case was keenly watched: about 16,000 people with investments totalling more than $500 million lost most of their money after the group's companies failed and the sale of their assets to Allied Farmers.
As many as 5500 of those investors will finally get something back as a result of the settlement.
Eligible investors are expected to receive between 5c and 20c in the dollar, depending on which of the various Hanover vehicles their money was invested with.
FMA chief executive Rob Everett defended the settlement this week, saying the regulator's primary focus was on getting some redress for investors. "We feel we have achieved the most money for investors we could and in the shortest timeframe possible," he said on Monday.
Photo / Wayne Drought
"For all the enthusiasm in some quarters for a public trial, a court process, including any subsequent appeals, would have come at the expense of the investors ... and we were not willing to allow that.
"$18 million to be paid to investors now is a better and earlier outcome than would have been achieved in court," Everett said.
But when the action began, it was about more than compensation. It also sought financial penalties from the six defendants, Mark Hotchin, Eric Watson, Greg Muir, Bruce Gordon, Sir Tipene O'Regan and Dennis Broit.
As well, the FMA believed that if its action was successful, that could help others bring related claims.
Despite the sums invested in the group, the FMA's case focused only on getting a return for a minority of investors: people who put money into Hanover Finance, Hanover Capital and United Finance between December 7, 2007 and July 22, 2008. That is between when the final Hanover offer documents were released and when investments were frozen.
The accuracy of some of those documents - and whether they contained misleading or untrue statements - was at the heart of the FMA's case.
For example, the regulator argued that the chairman's statement in Hanover Finance's 2007 prospectus was untrue because it didn't disclose a deterioration in the company's liquidity from June of that year.
The FMA's statement of claim alleged there had been a decline in secured deposits and the reinvestment rate at the company.
It was also alleged that receipts from Hanover Finance's loan book between the end of June 2007 and December of that year totalled $79 million, while payments required to investors were $177 million.
The FMA also alleged that a series of statements associated with the overall impression of the prospectus were untrue because of the circumstances that had arisen between June and its issue, which had adversely affected the trading or profitability of Hanover Finance and its ability to pay its liabilities.
It is important to note that these allegations were denied by the defendants, none of the claims was ever tested in court and the deal came with no admission of liability.
It is also important to stress that the FMA's case was only about specific allegations that the six defendants had breached their disclosure obligations.
Everett, when fronting to the media on Monday, said the case "was never going to be a proxy for the overall Hanover situation".
"We didn't have the remit or the evidence that would have enabled us to open up a much broader case, so by its nature these proceedings were only limited to a subset of the investors and only a subset of the issues that attach to Hanover ... it was never going to cover the fuller picture," he said.
There were many things the FMA case was not about.
For example, it was not about one of the issues that upset many investors - dividends paid by Hanover to founders Hotchin and Watson in the two years before investor funds were frozen.
Hanover paid dividends of $86.5 million in the two years ending June 2008, even though it had net earnings of only $54.3 million during this period.
Hotchin later said he and Watson put more into the companies than was taken out.
The FMA's case also had nothing to do with the deal that saw Hanover investors swap their investments for shares in Allied Farmers.
In 2008 Hanover investors had agreed to a moratorium on repayments, in the hope of getting their money drip-fed back to them in instalments. However they were later told those repayments would be less than expected.
Then, in December 2009, they were presented with a debt-for-equity deal in which they got shares in Allied Farmers, a rural services firm which took over Hanover's loan assets, apparently worth $396 million.
Sir Tipene O'Regan.
When the deal was done it put a value of 20.7c on Allied shares, and Hanover investors were told this was the equivalent of getting 72c in the dollar for their debenture stock.
However Allied shares plunged after the move, and by 2011 were trading at under 2c each. Today the shares are worth about 6c.
Allied Farmers later wrote off the vast majority of the loans' value and referred alleged irregularities in Hanover's affairs to the Serious Fraud Office.
The SFO spent 32 months investigating the group, in what was called the most extensive and challenging finance company probe to date, before deciding to not lay any criminal charges.
Dennis Broit.
The fraud-busting agency believed there were "serious questions" around Hanover concerning:
• The consistency between the overall view of the nature and financial condition of the companies disclosed to investors in the period from December 2007, and the actual position of the companies.
• The solvency of the companies at the times that dividends were paid during the six months before the suspension of payments to investors in July 2008.
• The propriety of a number of transactions entered into in the three months immediately before the suspension of payments to investors that appear to have provided little or no benefit to the companies, while conferring some significant benefits on the related parties.
• The accuracy of the valuation of the companies' assets in the financial statements supporting the debt repayment proposal that was put to investors in November 2008.
But criminal charges would have required proof beyond reasonable doubt that these events occurred, that they breached the group's legal obligations and that the people in control of the companies had knowledge and caused them to occur with dishonest intent.
The acting SFO chief executive at the time, Simon McArley, said it was difficult to satisfy this standard of proof.
"While many may view the conduct that occurred at Hanover Finance as egregious, that alone is not sufficient for me to commence a prosecution," McArley said in 2013 when closing the Hanover file.
Greg Muir. Photo / David Rowland
Since then, any investors wanting to see Hanover in court would have been relying on the FMA case - the case that has now been closed.
It has been a long and hard road for those investors, some of whom lost their life savings when Hanover failed.
But Sean Hughes, appearing on television to announce the case in 2012, said he wanted New Zealand to get to a point where "we're not just looking in the rear-view mirror all the time and looking at the past".
