Securities Commission applauded for bringing Tranz Rail action

1.00pm

Sharemarket watchdog the Securities Commission was praised today for taking the unprecedented step of bringing court proceedings against shareholders in an insider trading case.

Yesterday the commission said it had filed proceedings in the High Court against high-profile former owners and executives of Tranz Rail, seeking compensation and penalties that have been calculated to have a maximum sum of $250 million.

The law was changed in late 2002 to allow the watchdog to bring court action.

Previously, it could investigate but it was left to shareholders to bring any action. The commission has been 18 months investigating the Tranz Rail case.

Among the defendants is David Richwhite, one of New Zealand's richest men, with an estimated wealth of $630 million. His lawyer said he, and a company he is associated with through merchant bank Fay Richwhite, Midavia Rail, will vigorously defend the allegations.

It is alleged the defendants sold Tranz Rail shares between February and June 2002 with knowledge of financial problems the national rail operator faced but had not disclosed to other shareholders.

The shares were sold at prices between $3.60 and $4.28.

By April 2003, Tranz Rail shares were selling at just 30c, their lowest ever level.

Defendants named in the proceedings are:

* Midavia Rail Investments, controlled by Sir Michael Fay and David Richwhite.

* Mr Richwhite individually, a former Tranz Rail director.

* Former Tranz Rail director Carl Ferenbach.

* Former Tranz Rail managing director Michael Beard.

* Former Tranz RAil chief financial officer Mark Bloomer.

* US investment fund Berkshire Fund 111.



NZPA was unable to contact other defendants to get their responses.

Shareholders' Association chief Bruce Sheppard called the commission's action a "watershed decision".

"They have acted decisively and firmly. They haven't issued a report saying 'naughty boys you've insider traded, someone else do something about it'. They have skipped that intermediate step and they have got on and dealt with," Mr Sheppard told National Radio.

"It's an amazingly good outcome."

Lawyer and former Securities Commission member Peter Ratner said it was a very important decision as it was the first time the commission had exercised its new powers.

He told National Radio the commission would have selected its case very carefully with a view to ensuring it won.

He noted the case was civil, as under the Securities Markets Act there is no criminal breach than can be alleged.

Mr Ratner said the case was sending a message to corporate New Zealand that the commission was willing to flex its muscles to bring actions under its new powers. "People cannot assume that they can get away with matters on the basis that there is no one out there who is prepared to take them on, because there will be very significant costs in actions of this kind".

He said there was always a question of whether or not the legal model was "sufficient to deter greed". Often high stakes were involved and no matter what law was in place, some investors would take risks for the possible gains to be made.

He said there was strong suspicion in the past that people had got away with insider trading.

The commission has said it was pursuing pecuniary penalties, which under the Act, meant if the action was proved, penalties of up to three times the loss that was avoided could be awarded.

Initially, any penalties would go to Tranz Rail, now called Toll New Zealand since control was won last year by Australia's Toll Holdings, but the court had the power to ensure the money was awarded to shareholders who had lost out in the wake of the alleged insider trading and tipping.

Mr Ratner said insider trading was always difficult to prove because the prosecution had to prove knowledge "and knowledge was inside somebody's head". Secondly, something hypothetical had to be proved -- what would have happened if that particular knowledge had been known.

Mr Richwhite's and Midavia's lawyer, Roger Partridge of Bell Gully said his clients believed there was no basis for any proceedings against them.

They might "have something more to say in the near future. It's something we have to decide in the next few days."

The commission is seeking compensation and penalties from Midavia which have been calculated at up to $100 million. It is also seeking compensation and penalties from Mr Richwhite in a separate cause of action. It has been estimated that these could total up to $100 million.

The commission is seeking compensation and penalties from Berkshire Fund 111. These have been estimated to total up to $24 million.

It is also seeking compensation and penalties from Mr Ferenbach, who was Berkshire's representative on the Tranz Rail board, for allegedly "tipping" Berkshire Fund about Tranz Rail's financial problems.

The commission alleges that had the information about financial issues Tranz Rail was facing been disclosed to the market, the defendants would have received up to 40 per cent less for their shares.

The commission is seeking compensation from the defendants of up to 40 per cent of what they received for the shares as well as financial penalties. A securities law specialist said the maximum financial penalty was three times the gain on the shares or the loss avoided on the shares.

- NZPA