O'Sullivan: It's time to release insider trading files

Anyone studying the Serious Fraud Office's correspondence with Fletcher Challenge over the Paul Hyslop affair would have to wonder just whose interests the office serves by investigating insider trading allegations in the first place.

Particularly when the SFO then denies the company access to any material it has acquired, so the company can take a civil action on its own behalf when criminal proceedings have been ruled out.

Letters released to the Business Herald disclose that the SFO has refused point blank to release its investigative files on the insider trading imbroglio to Fletcher Challenge.

The SFO gave the barest reasons, relying on what its critics see as the "trust us to know best" rationale it applies to controversial or politically tinged issues, such as the Winebox.

The Fletcher refusal was nearly a year ago. But the game is now changing with public pressure on the Fletcher board to take civil action against Mr Hyslop and others who bought shares after acquiring a confidential company memorandum.

The SFO correspondence predates the latest round of publicity on the share price ramping scandal of May last year. It shows that last December, Fletcher deputy secretary Grant Niccol wrote to the SFO saying the company had legal advice that it might have a cause of action against Mr Hyslop for insider trading under the Securities Amendment Act 1988.

Mr Niccol made his request to the SFO after it decided not to launch any criminal prosecutions in relation to the affair.

But in January the SFO wrote back, saying that while its director had the discretion to reveal information obtained through the use of its powers to interested parties who were able to demonstrate good cause, it had to be extremely vigilant that any release was fully warranted.

"If we were to release information obtained due to the exercise of our powers in the wrong instances, our powers would soon be under attack, and perhaps rightly so," said Andree Wiltens, SFO deputy director prosecutions. "The balancing exercise involved is sometimes very difficult. I regret to advise that in this instance the director has declined to exercise his discretion in your favour."

With the acid now on the Fletcher board to take public action on three insider trading scandals which are marring the firm's reputation, the SFO's stance bears re-examination.

Fletcher chief executive Mike Andrews has been pursuing the issue with the SFO this week, but company staff say he has yet to get a definitive answer from the prosecution agency.

But the SFO's stance as outlined in its letters to Fletcher begs as many questions as it answers.

The company invited the SFO to investigate after Mr Hyslop bought a swag of Fletcher shares in May 1999, then ramped up the share price by distributing the confidential release to brokers and a Herald journalist, before selling out at a profit.

The Fletcher memo was hardly fraudulent - directors and senior managers knew it was a draft for a forthcoming announcement.

In November 1999, the SFO advised Fletcher that there were difficulties finding the right charge. Consideration had been given to prosecutions under the Crimes Act and provisions of the Companies Act, but the SFO director had determined that there would be no prosecution.

The key reasons cited were two categories expressed in the Solicitor-General's prosecution guidelines - whether the conduct really warrants the intervention of criminal law, and whether the consequences of any resulting conviction would be unduly harsh and oppressive.

Not spelled out in the correspondence is why the SFO accepted Fletcher's invitation to investigate a case of insider trading in the first place.

Insider trading is not a crime in New Zealand. But there are civil sanctions. Indeed, two Fletcher shareholders - Business Roundtable executive director Roger Kerr and Catherine Franks, wife of Act MP Stephen Franks - are pursuing at the company's expense another action against its former chairman Kerry Hoggard for acquiring shares ahead of a price-sensitive announcement.

It is hard to see what material advantage Fletcher shareholders have gained from bringing the SFO into the picture if it simply stalls any action that could have been taken directly in civil courts.

The SFO letters state that if the office was to release information obtained through the exercise of its powers in the wrong instances, "our powers would soon be under attack, and perhaps rightly so."

The office had unique and extensive powers under the Serious Fraud Act 1990, but the "quid pro quo for those powers is the imposition upon us of a very high degree of secrecy and confidentiality."

What is at issue now is whether statements and other material obtained by the SFO in determining whether sufficient evidence exists to mount a criminal prosecution can then be released to form the basis of a civil action.

The SFO turned over "certain information" to the Securities Commission for its own inquiry into the Fletcher share trading.

"Certain of the individuals referred to in this report were interviewed by SFO investigators in the course of its investigation. Each of these persons has given their consent to the commission for their statements to the SFO to be used as evidence by the commission for the purposes of its inquiry," said the commission's recent report.

"As such, the commission has not heard sworn oral evidence from any of these people. The commission received affidavits and submissions from several parties in response to a draft of this report."

If Fletcher Challenge cannot persuade the SFO to turn over its files, it should make its case directly to the Securities Commission. It is time the evidence was fully tested.