Get inside the trading game

By BRIAN GAYNOR

Kerry Hoggard has joined a long list of high-profile New Zealand businessmen who have been the subject of an insider trading investigation or legal action under the Securities Amendment Act 1988 (the insider trading act). These include Sir George Chapman, Colin Herbert, Sir Michael Fay, Sir Robert Jones and Eric Watson.

All walked away from these investigations relatively unscathed. These cases have highlighted the inadequacies of the Securities Amendment Act 1988 and its inconsistency with insider trading legislation in most other western countries.

The first major insider trading investigation began in 1985 when the Securities Commission looked into the collapse of Perry Dines Corporation. It reported that on June 20, 1985 the Registrar of Companies informed Perry Dines that its financial position was not sound and there were reservations about the group's solvency.

A few days later the group's chairman, Sir George Chapman, resigned and sold his shares. Perry Dines was placed in receivership eight weeks later, but the commission determined that Sir George's share sale did not breach the Stock Exchange's guidelines for share dealings by directors (there was no insider trading legislation at the time).

In 1991 four shareholders, including this columnist, started insider-trading proceedings under the Securities Amendment Act 1988 against Colin Herbert and a number of other Wilson Neill directors. The main allegation was that these directors were selling shares while issuing optimistic and inaccurate statements to the Stock Exchange.

A report by William Young, QC gave details of a large number of material and price sensitive items that were not disclosed to investors. Dr Young also revealed that six of the eight directors had either sold shares or had parties associated with them sell shares during the period under review.

After a lengthy and tortuous legal process - which went to the Court of Appeal - the complainant shareholders reached an out-of-court settlement with a number of directors. These directors made payments to shareholders - on a no admission of guilt basis - that partially compensated for the losses incurred on the purchase of Wilson Neill shares from insiders.

In 1993 Donald Kincaid, a Levin businessman, applied to the High Court to bring insider trading proceedings against Capital Markets, Fay Richwhite, Sir Michael Fay, David Richwhite, Robin Congreve and Geoff Ricketts. Mr Kincaid claimed that the defendants were aware of serious problems at the Bank of New Zealand when Fay Richwhite sold BNZ shares in July 1990.

Justice Henry granted leave to Mr Kincaid to take action against all the defendants with the exception of Mr Richwhite. After protracted and costly legal proceedings, which were heading to the Court of Appeal, the parties reached an out-of-court settlement.

Mr Kincaid agreed to discontinue his proceedings and, in return, the Bank of New Zealand paid his legal fees, believed to be in excess of $600,000. As part of the settlement Fay Richwhite sponsored seminars in Auckland and Wellington on Securities Regulation and Insider Trading. Hon. Justice Michael Kirby of the Australian High Court severely criticised New Zealand's insider trading regulations at these seminars.

In 1993, the Securities Commission took Sir Robert Jones to court for breaches of section 30 of the Securities Amendment Act 1988. The commission alleged that Sir Robert had reduced his relevant shareholding in Robt. Jones Investments (now Trans Tasman Properties) from 202.6 to 97 million shares between July 1989 and November 1991 without disclosing the sales as required under the 1988 Act.

It also alleged that Robt. Jones Investments (RJI) sold properties at an inflated price to boost its March 1990 year profitability and the essential nature of these transactions was concealed from investors. The vendor effectively financed these property sales and Justice McGechan wrote RJI was, in substance, selling to itself.

The commission sought a range of penalties up to forfeiture of all of the 40 million RJI shares held by Sir Robert at the time of the trial.

Justice McGechan concluded that there was no reason to believe that Sir Robert was aware of the disclosure requirements of the 1988 Act. This was not an excuse but it ruled out the more serious offence of a deliberate attempt to conceal his share sales.

Sir Robert was ordered to pay costs of $250,000 and to forfeit 6 million RJI shares worth only 8c at the time of the decision. He had realised 100c per share and more on many of the 105.6 million shares covered by the proceedings.

In 1994 and 1995 the Securities Commission published reports on insider trading allegations at Regal Salmon and Fortex.

The commission noted that Regal Salmon had no procedures for the acquisition and sale of shares by directors or officers. The wife of managing director Terry Shagin purchased shares a week before a takeover bid from Salmon Smith Biolab was made public. Mr Shagin was aware of the impending takeover, he placed the purchase order and payment for the shares was made from Mr and Mrs Shagins' joint account.

T/A Pacific, a United States-based institution and Fortex's largest shareholder, visited the meat company on March 2, 1994. Two executives of Garlick & Co, a stockbroking firm advising Fortex at the time, also attended.

The overseas institution continued to communicate with Garlick & Co after the meeting and began selling its shareholding on March 7. Four days later, Fortex unexpectedly told the Stock Exchange that it anticipated a loss of between $45 million and $50 million for the six months ended February 28, 1994. Receivers were appointed less than two weeks later.

No action was taken against any of the parties involved in the Regal Salmon or Fortex share transactions.

In December 1998, the Securities Commission released a report on an inquiry into trading in the shares of McCollam Printers.

On May 16, 1997 Blue Star made a takeover offer for McCollam Printers at 275c per share. Eric Watson, the chief executive of Blue Star, had primary responsibility for planning and negotiating the proposed acquisition.

Approximately one hour before the takeover announcement, a parcel of 398,000 McCollam shares were purchased at 236c, 39c below the offer price. The commission was informed that these shares were acquired at the instructions of, and on behalf of, private interests of Mr Watson. The report also revealed that Mr Watson had purchased a total of 2,403,800 McCollam shares in the seven months preceding the offer.

The commission concluded that Mr Watson was not guilty of insider trading because only individuals associated with a listed company could be liable for insider trading. Blue Star has never been listed.

This week's release of the Securities Commission's report into Kerry Hoggard's share dealings illustrates again the ineffectiveness of the insider trading act and the widespread disregard for the content and spirit of the legislation.

The act is ineffective because it has been poorly drafted. It is up to the listed company, in Mr Hoggard's case Fletcher Challenge, or an aggrieved shareholder to instigate civil proceedings. In most other countries insider trading is a serious criminal offence that is rigorously enforced by a well-resourced agency.

These cases are the tip of the iceberg. Countless incidents of insider trading are unreported and are not investigated because the legislation covering this area is ineffective.

At least one New Zealand shareholder has not given up hope of securing the country's first successful insider trading prosecution (Sir Robert Jones was charged with a technical breach of the insider trading act).

Eldercare (formerly New Zealand Petroleum) began proceedings in the High Court in Auckland yesterday against a Fletcher Challenge subsidiary and two of its former executives. The lawsuit has been taken under section 18.1 of the Securities Amendment Act 1988.

This action is for alleged insider trading activity in relation to Fletcher Challenge's takeover of Southern Petroleum in 1995. The outcome of these proceedings will be watched with interest because, to date, the act has been relatively toothless.