Fay and Richwhite hit back

David Richwhite

Sir Michael Fay and David Richwhite have hit back at the Securities Commission, accusing it of abuse of process and using misleading information in the Tranz Rail insider trading action.

The commission made headlines in October when it filed an unprecedented action against six former owners or executives of Tranz Rail for either insider trading or tipping shares, seeking compensation and pecuniary penalties of about $258 million.

But the merchant bankers - through their investment vehicle Midavia Rail Investments - allege that the sharemarket watchdog is barred from seeking pecuniary penalties against their company over the sale of a parcel of Tranz Rail shares in February 2002 as the claim is outside a statutory two-year limit.

The merchant bankers want the action removed from the High Court at Wellington and heard in the High Court at Auckland on the Commercial List.

In a statement of defence filed in the High Court at Auckland yesterday, Midavia (formerly Pacific Rail) strenuously denied the commission's allegation that it had inside information of Tranz Rail's financial troubles when it sold a 14.5 per cent stake at $3.60 just months before the national rail company unveiled large writedowns.

Richwhite - who is only accused of tipping - has also strongly denied the allegation, challenging the commission to prove he was in fact representing Midavia at Tranz Rail board meetings where it alleges price-sensitive material was presented.

Part of the commission's case rests on a December 2001 letter from Rail America saying that, after performing due diligence, it had concluded "the fundamental value of Tranz Rail does not support the current share trading range".

In their statement of defence, Midavia and Richwhite admit Rail America had expressed an interest in buying 100 per cent of Tranz Rail at $4.25 a share in mid-2001.

But they allege the commission's statement of claim against them was "misleading" as it omitted the following sentence from the Rail America letter: "Rail America's view is that the fair value of Tranz Rail is in the vicinity of $3.50 per share."

This is just 10c short of the share price Midavia achieved for the sale of its own stake six weeks later.

While Midavia and Richwhite go on to say the Tranz Rail board disputed Rail America's letter, they also admit the Tranz Rail board did not inform the market about the negotiations, including Rail America's claim in relation to the share value, as it "was under no duty to do so".

In its statement of claim, the commission highlighted five areas it regards as crucial to showing that the alleged insiders acted on unpublicised bad news.

Apart from the Rail America issue, they include:

* Audit committee papers reflecting auditor KPMG's concerns from "at least July 2001" that Tranz Rail assets needed substantial writedowns.

* A November 2001 report from chief financial officer Mark Bloomer with financial forecasts below previous levels.

* A December 2001 financial plan with management forecasts below the forecasts of sharemarket analysts.

* Board papers in the last quarter of 2001 relating to risks off the balance sheet associated with a long-term lease of the inter-island ferry Aratere.

Midavia and Richwhite generally deny that any of the five "so-called 'heads of information' was inside information", but concede some factual points.

In a separate issues paper, the merchant bankers note two of Tranz Rail's three main shareholders, Pacific Rail (Midavia) and Berkshire, had sold out on February 8 and 12, 2002, respectively.

They point out the other main shareholder, Wisconsin Central Transportation (now Canadian National Railway), "which sold its larger, 23.7 per cent holding on February 22, 2002, "has not been joined as a defendant in the proceedings".

The Fay Richwhite camp believes the omission of Canadian National is because the watchdog is seeking "celebrity scalps".

But there are no plans by Midavia and Richwhite to seek to join Canadian National as a defendant to the action.

Last night, commission head of enforcement Norman Miller refused to comment on the allegation that the watchdog had abused process by taking an action that is time-barred.

Midavia's lawyers are relying on Section 4(5) of the Limitation Act 1950 which says an action to recover any penalty or forfeiture, or sum by way of penalty or forfeiture, recoverable by virtue of any enactment shall not be brought after the expiration of two years from the date on which the cause of action accrued.

Midavia and Richwhite are the first defendants to issue statements of defence. Others include Berkshire Fund III, former Tranz Rail managing director Michael Beard, Bloomer and Carl Ferenbach.