FMA talks settlement with Strategic directors

Kerry Finnigan, former head of Stragetic Finance, is one of six directors who may face civil proceedings filed by the FMA. Photo / Supplied

The Financial Markets Authority is in talks with the board of failed lender Strategic Finance in a bid to cut a deal, while the receiver for the financier has extended its own settlement discussions.

The market watchdog, which in February said Strategic probably breached securities law, is in "confidential settlement discussions with the directors with respect to the FMA's claim," a spokesman told BusinessDesk.

The FMA gave the board the opportunity to respond as it prepared to file civil proceedings against directors including Kerry Finnigan, Graham Jackson, Marc Lindale, Timothy Rich, Denis Thom and David Wolfenden. It dropped its investigation into former director Jock Hobbs in mid-2011 as the extent of his illness became apparent.

Those negotiations come as Strategic's receiver, John Fisk of PwC, told investors in a May 9 update that "substantial progress has been made" in their settlement talks over potential breaches of the Companies Act and that it was "worthwhile continuing with the settlement process whilst certain matters are worked through."

That process has an agreed-upon timetable, and the receiver anticipates making another announcement early next month.

"The receivers acknowledge that investors are keen to see a resolution in respect of any claims against directors and, at this stage, we consider the settlement process provides the best opportunity to maximise recoveries for investors," the update said.

Early on in the receivership, Fisk identified "several transactions undertaken during February 2007 to August 2008" which warranted greater scrutiny from the legal team.

Some 10,000 Strategic investors owed $367.8 million when the lender failed got a Christmas Eve distribution of 1.5 cents in the dollar, taking their return-to-date to 10 cents, and PwC's Fisk estimates they will get between 12 per cent and 20 per cent of their principal back.

The FMA's predecessor, the Securities Commission, began investigating Strategic Finance in 2009 when former Act Party MP John Boscawen told Parliament the finance company misrepresented about $68 million worth of debt which it classified as second mortgages when they were effectively a third-ranking security. Former Commerce Minister Simon Power subsequently referred the matter to the regulator.

Strategic was sent to the receivers in March 2010 by trustee Perpetual Trust, ending a moratorium arrangement that had been in place since December 2008.

The finance company missed its milestone repayment in January of that year when it failed to generate enough loan recoveries.

It had tried to get out of trouble in a Hanover-style debt-for-equity swap with South Canterbury Finance that would've given Strategic investors a mix of SCF debentures, shares and preference shares, but Perpetual chose to call in the receivers instead.