Brian Gaynor: Kiwis exposed to dubious offers

DNZ investors received an offer from Carrington Securities. Photo / Greg Bowker

Dubious investment offers were in the headlines this week with an attempt by a banned director to acquire DNZ Property Fund shares below their fair value and the news that the liquidator of B'On Financial Services has found no evidence that $17,780,077 of investor funds had ever been invested.

These incidents are disturbing as the aim in the DNZ share purchase is to take advantage of unsophisticated and uninformed investors and there has been a serious abuse of trust and friendship as far as B'On Financial Services is concerned.

These offers show that investors have relatively limited protection in New Zealand and it is important to think twice, and seek credible advice, before making investment decisions.

On July 26, Carrington Securities LP wrote to DNZ Property Fund shareholders offering them 60 cents a share on a "first come, first served" basis. The offer was for two million shares, it expired on August 9 and acceptances were to be sent to a post box in Auckland.

Carrington is a Limited Partnership formed last month by Bernard Whimp of Christchurch. Whimp was banned as a company director for four years in October 2006.

The offer, which appeared to be fairly official, had the big bold heading "Cash offer for your DNZ Property Fund shares". The 60c price was barely noticeable but the total amount that investors would receive was highlighted in big figures.

Thus the main objective was to get the shareholder to focus on the total payment, rather than the share price of 60c. The latter was well below the indicative price range of 80c to $1.05 a share as detailed in DNZ's July 9 prospectus.

DNZ posted a warning about the offer on its website on August 2 but Whimp wrote to shareholders again on August 6, this time under the name of NZ Investment Securities LP, seeking one million shares at 75c each.

On Monday a public notice appeared in the Herald disclosing that Carrington was raising its offer from two million to four million shares at 60c each.

The Securities Commission was contacted by this columnist on Monday, and it issued a warning the following day, but it was clear that a number of DNZ shareholders had already accepted the derisory offer.

A spokesman for the commission said the media has given insufficient attention to warnings and, as a result, shareholders had accepted similar low-priced offers in the past.

Under New Zealand law it is not illegal to offer to buy securities below their value, although these offers must not be misleading or deceptive. The term "misleading or deceptive" is difficult to interpret and Whimp's offers appear to be legal.

The situation across the Tasman is quite different, as reflected by the July 26 offer by Share Buyers to purchase AMP shares from New Zealand investors at A$2.29. This compares with AMP's current market price, which is in excess of A$5.

Share Buyers is an Australian company controlled by the notorious David Tweed. Tweed's opportunistic approach has encouraged the Australian Government to introduce a number of requirements regarding these unsolicited offers. These include:

* A written statement setting out the market value of the shares on the day the offer is made.
* A minimum of one month in which to accept the offer.
* A failure to disclose the market price attracts a fine of $22,000 or two years' jail for each breach by an individual.

Tweed's latest offer for AMP shares is consistent with these requirements as the documents clearly state that the A$2.29 a share offer compares with the market price of A$5.35 on the day the offer was made. The letter also reveals the total value of Tweed's offer to each shareholder compared with the total market value of these shares.

These rules enable investors in Australia to be far better informed than DNZ's New Zealand shareholders and means that low-priced offers by Australian companies are much less likely to be "misleading or deceptive" because of the threat of a two-year jail sentence.

DNZ revealed this week that the strike price under this week's bookbuild process was 97c a share, well above Whimp's 60c and 75c offers.

DNZ will list on the NZX on Monday and Whimp should make a big profit on the shares he has managed to extract from unfortunate shareholders.

His offers were cleverly constructed so that payment isn't due until 14 days after he receives notice that the DNZ shares have been registered in the name of Carrington Securities or NZ Investment Securities.

This will enable him to sell his DNZ shares next week for a fat profit and settle with the shareholders who sold to him at a later date.

The clear message from this is that shareholders - or investors in finance company debentures - should never accept offers from unknown sources unless they are absolutely clear it is in their best interest.

B'On Financial Services, the financial planning group run by Mike and Jackie Bradley, appears to be New Zealand's Bernie Madoff as - according to the company's liquidator - "investors' monies received have been used to pay other investors and expenses of the company".

The Bradleys, who had impressive offices on Level 34 of the Vero Centre, signed up new clients on the simple basis that their money would be invested in bank deposits. Investors received statements every six months showing the amount invested and the latest value of these funds.

These basic one-page statements had no information on the investments held. Returns were fantastic, according to these reports, as investors were told they had achieved gains of more than 10 per cent on an annual basis during most six-month periods.

When investors asked for their money back during the global financial crisis they were told that the performance of their portfolio was still fantastic but in order to achieve these returns the funds had to be invested in illiquid assets.

When the Bradleys were pressed for further information they were unable to supply any evidence of monies either registered in the name of clients or the name of B'On Financial Services and any of its related companies.

B'On Financial Services was put into liquidation last December 21, and the group's total assets are just $77,600 and "a small sum of investments held within an Australian Fund".

Thus 54 individuals have lost virtually all of the $17.8 million "invested" through the Bradleys.

There are a number of important lessons to be learned from this debacle. These include:

* Investors should always require a detailed outline of any proposed investment strategy and its risk profile.
* It is essential that the initial investment is deposited with an independent custodian company rather than the adviser to ensure separation from the business assets of the adviser.
* The independent custodian company, rather than the adviser, should measure and report the value and performance of the portfolio.
* Portfolio performance statements should clearly outline the individual investments.
* It is preferable that the assets, including cash, continue to be held through an independent custodian company.

The new regulatory regime, which will apply to all financial advisers from July 1 next year, should plug many of the gaping holes that have appeared in the investment sector in recent years.

However, there will always be unscrupulous individuals who are one step ahead of the rules and will try to extract money from unsuspecting investors.

The best defence against these offers is vigilance and caution because our rules and regulations will never be strong enough to protect investors against all the potential pitfalls they face.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com