Fran O'Sullivan: Hanover big test for new regulator

FMA members will not be affected by Mark Hotchin's claims that Hanover's former investors have been mightily let down by the subsequent performance of Allied Farmers. Photo / Richard Robinson

The first big decision the Financial Markets Authority will have to confront is whether to lay criminal charges against any of Hanover Finance's high-powered directors.

It will be a testing occasion for FMA chairman Simon Allen and his eight strong board: Shelley Cave, Colin Giffney, Mary Holm, Murray Jack, James Miller, Justine Smyth, Michael Webb and Mark Verbiest.

The collapse of Hanover Finance - owned by high-profile shareholders Eric Watson and Mark Hotchin - has been a running sore within the New Zealand capital markets since Hanover initially froze $554 million of assets in 2008 affecting 13,000 investors.

One thing is sure. Hanover Finance part-owner and director Hotchin's recent PR campaign will not have any influence on the FMA board's decision.

Its members will not be affected by Hotchin's claims that Hanover's former investors have been mightily let down by the subsequent performance of Allied Farmers which acquired the assets of Hanover Finance and United Finance in a deal worth some $400 million.

When it comes to the issues under investigation that is simply a red herring.

The FMA board's decision will be based on its cold, hard deliberations on the results of the existing Securities Commission's investigations into a trio of Hanover-related companies: Hanover Finance, United Finance and Hanover Capital.

When the commission finally went public and confirmed - "in the public interest" - that it was investigating the Hanover trio of companies late last year, it said it would meet before Christmas to decide whether criminal charges would be laid against the directors of the respective companies.

But the commission's director of investigations and litigation, Sue Brown, says the FMA's incoming CEO - ex-pat Kiwi and former ASIC executive Sean Hughes - has been kept abreast of progress during the transition period. FMA board members Verbiest, Jack and Cave are also current commission members.

The commission's investigative team has been ploughing through a welter of information submitted by the companies and their directors in response to inquiries. With "natural justice" paramount, the FMA's Allen will want to be assured that the Hanover group directors have had time to put forward all the relevant information.

The Serious Fraud Office's own investigation is expected to plough on into the second half of 2011. There will be no double-ups by the two agencies - if it comes to criminal litigation. But it is possible the directors could face action on the civil front.

Commerce Minister Simon Power has set expectations that the authority has been designed to "restore the confidence of mum and dad investors" in the financial markets by actively and consistently enforcing financial laws.

The obvious - but unstated - corollary being that the current nest of market regulators, including the Securities Commission, have not taken sufficient steps in the past to ensure investor confidence.

But it should be pointed out that Hanover is not the only finance company that will be in the new FMA's sights. The commission has been investigating all finance firms that went belly-up in the sector's multibillion-dollar collapse.

Back to Hotchin who is now taking on the media over their examination of his and Hanover's dealings.

Last weekend, he had the Sunday Star-Times run his counterview on a Kawarau Falls transaction. He's also tried to force the Herald to run a counter to Brian Gaynor's March 5 "Own up or shut up" column. But the points he was making were not accepted as invalidating any but one point of Gaynor's analysis, which was corrected last Saturday.

And he's also taken issue with my March 16 column writing that this is the second time I have "hawked" comments made by former investor John Hepburn about his disgruntlement with Hanover (more on this later).

That column set out the points that Hepburn wanted to make to TVNZ's Close Up programme in response to its "exclusive" interview with Hotchin.

Let's be clear. Hepburn did not hawk his comments to me. He only shared his dissatisfaction with Hanover's performance after he received a nil response to five attempts to get information from the company between December 9, 2009 and March 1, 2010.

It was Hanover's failure to respond which prompted Hepburn to write to the commission and SFO on April 1 last year in respect of "possible overpayments" of common share dividends made by Hanover Finance and United Finance before their announcements that all payments of interest and principal to secured depositors were being suspended on July 23, 2008.

And it was his dissatisfaction with those bodies' responses which prompted him to write to Power suggesting the "agencies within his ministry's portfolio" need to give their urgent attention to the plight of former secured depositors in Hanover Finance. Something I reported in the first of two columns I wrote on this issue (August 12 and 25) last year.

Hotchin's letter (published below) makes clear that he takes issue with four specific concerns put forward by Hepburn:

1. $9.624 million dividend paid from Hanover to Hotchin/Watson was in excess of available earnings.

2. $7.428 million dividend paid from United to Hotchin/Watson was in excess of available earnings.

3. $9.733 million Hanover preference shares redeemed by Hotchin and Watson.

4. Questions over authenticity of solvency certificates given Hepburn's view that dividends must have come from secured depositors' funds.

Hotchin reckons:

1. The "available earnings" distinction is irrelevant as the directors' solvency certificates were the only test to be met and all dividends followed signed solvency certificates.

2. The $9.7 million "dividend" was not to Hotchin/Watson but paid to Hanover Capital Ltd for the benefit of bondholders.

3. Hepburn was given supporting details by Hanover's lawyers Chapman Tripp and can't have shared pertinent material with me.

But Hotchin's response has not removed any of Hepburn's "disgruntlement".

1. He says the correctness of the directors' solvency certificates will be something for officials to determine; the solvency test provisions meant the company had to have been able to pay debts when due.

2. He notes the $9.733 million redemption of Hanover preference shares (not dividend) was paid to Hanover Capital Ltd, of which Hotchin/Watson are sole shareholders.

3. The details he received did not include all the documents that Hotchin refers to in his letter. Hotchin's letter says Chapman Tripp have given Hepburn a raft of information - including monthly management reports and weekly liquidity reports - as part of a comprehensive response to his various questions. But Hepburn says the monthly management reports and weekly liquidity reports have not landed in his own in-tray.

Frankly, if they had - they would no doubt have prompted a new flurry of questions which would have kept Hotchin and his PR man Carrick Graham very busy indeed. Perhaps they have confused Hepburn with the investigators?


Mark Hotchin's letter:

Fran O'Sullivan's column "Shareholder activist deserves to be heard" cannot pass without a response.

This is the second time O'Sullivan has hawked John Hepburn's comments about his disgruntlement with Hanover and highlighted his concerns.

I wonder if Mr Hepburn shared with O'Sullivan the response he received from Chapman Tripp of August 20, 2010, that addressed these concerns.

Perhaps he didn't share with O'Sullivan the fact that PricewaterhouseCoopers, the independent expert appointed by The New Zealand Guardian Trust Company (trustee for Hanover Finance Limited Stockholders) published, as part of their report on the 2008 debt restructure, an analysis of the various dividends declared by the company (page 75).

O'Sullivan would see that the dividend payment of $9.7m from Hanover to Hanover Capital Ltd was not redeemed by either myself or Eric Watson, but was used as part of a $13.9m dividend paid to bond holders.

That report was available to investors and included on Hanover's website.

A copy was provided to Mr Hepburn. Maybe he didn't share with O'Sullivan the letter which clearly outlined that Mr Hepburn's understanding of the requirements to declare dividends was and is incorrect.

Since the Companies Act 1993 was enacted, there is no longer a requirement that dividends are declared out of retained earnings. Rather, the legal test is that the company satisfy the solvency test in section 4 of the Companies Act and that, before payment of a dividend, the directors sign a solvency certificate recording the grounds for solvency.

If that letter had been shared with O'Sullivan, then she would have known that in relation to all the dividends declared in the year ended June 30, 2008, the directors signed solvency certificates as required by the Companies Act 1993, before dividends were paid.

Not all of the dividends resulted in net cash outflow from the company, as the dividends were reinvested into the company by the shareholders, to reduce related party borrowings, as suggested by the company's rating agency and financial advisers to a fundraising programme the company was pursuing.

Mr Hepburn was given a comprehensive response to his questions, including various financial reports, statements, monthly management accounts and weekly liquidity reports.

There was no attempt by O'Sullivan to verify the accuracy of Mr Hepburn's views or balance the article by calling me for comment. If she had, she would have discovered there is always another side to the story.

- Mark Hotchin, Hanover Finance