KEY POINTS:
Property developer Dan McEwan and two of his companies have been found guilty of breaching the Securities Act by selling investments without a registered prospectus or investment statement.
McEwan and his companies had argued the documents were not required because the investments were being marketed to "habitual investors".
The Auckland District Court case against McEwan and the two companies was brought by the Ministry of Economic Development.
The decision is significant because it is the first time a court has defined what a "habitual investor" is.
The ministry's case was that McEwan ran the Investors Forum NZ, which people paid to join and through which he educated them about property investing.
Forum members were offered the opportunity to buy securities in developments such as Agnes Waters on Queensland's Gold Coast and Sovi Bay in Fiji.
They could apply to be classified as "habitual investors".
Dunedin couple Peter and Susan Gale were actively involved in the Investors Forum.
In 2004 Gale applied to be a habitual investor on the grounds that he and his wife had bought several rental properties and had established several companies, but was initially turned down.
He protested, the Gales were accepted 10 days later and invested in Agnes Waters and Sovi Bay.
Neither the Agnes Waters nor Sovi Bay developments proceeded. Gale said he and his wife were owed around $100,000.
In 2006 Gale left the Investors Forum and expressed concern to the McEwan group about his status as a habitual investor.
From late 2006 through 2007 the Securities Commission raised concerns with McEwan about advertising securities to the public and what constituted a habitual investor, with the commission ultimately not satisfied that his investors fell into the statutory definition.
The McEwan definition was that the investor had made seven business investment "trades" in the past 10 years. That was later increased to 10 in 10 years.
McEwan said he had left it to his solicitors to decide who met the statutory definition. His legal advisers did not give evidence.
In her decision, Judge Philippa Cunningham said a company or its director could not simply delegate a task like that to legal advisers.
She said McEwan did not impress her as a witness.
"I found some of his answers to questions about what he had been told by his legal advisers on this important issue evasive and at other times unconvincing."
She said the Gales did not even meet McEwan's definition, having only invested over four or five years.
Judge Cunningham said a habitual investor was one who invested "continuously" or "constantly", and that four or five years was not long enough to say the Gales were in the business of investment.
She also said the nature and quality of the person's investment history must come into the mix.
The judge commented that McEwan had a conflict of interest in that, through his companies, he was "educating, promoting the habitual investor category and then issuing and promoting securities".
