Brian Gaynor: Watchdog inconsistent in use of powers

The Securities Commission has acted against Bernard Whimp's latest low-ball offers. Photo / 3News

The latest batch of deceptive offers from Bernard Whimp pinpoints some of the inconsistencies associated with the Securities Commission and its oversight of our financial markets.

Whimp has finally been taken to task by the regulator but only after making millions from his low-ball share offers.

The Whimp family, which includes Bernard and his younger brothers Athol and Tristram, have all had an address at 518 Woodend Rd Rangiora, according to Company Office records, although Bernard has used different Christchurch addresses from time to time.

Another brother, Simon Henry Whimp, who has changed his name to Simon Henry, is an Auckland-based property developer.

Bernard Whimp was bankrupt in 1998 but discharged in 2001 after reaching agreement with creditors.

He first came to the attention of the Securities Commission in December 2001 when the regulator prohibited the offer document for Rosetta Terraces Contributory Mortgage, a scheme offer by General Mortgage.

General Mortgage, which was formed in 2000 when Whimp was bankrupt, was controlled by 90 per cent shareholder Merlin Capital Partners, which is based at 518 Woodend Rd, Rangiora.

Merlin is 100 per cent owned by Tristram Whimp and its only director has been Athol Whimp.

The commission's 2001 comments about General Mortgage are particularly interesting in light of the finance company collapses a few years later.

"The commission acted because the document was likely to mislead investors," chairwoman Jane Diplock wrote.

"It was misleading about the nature, type and level of risk involved in the investment.

"The commission has been concerned about a number of contributory mortgage schemes which promise high rates of return but do not adequately disclose the high risks of such investments.

"Contributory mortgages are arrangements where the money of individual investors is pooled to lend to property owners or developers to enable them to refinance or develop large properties. Often the developer or borrower can't get finance from banks or other traditional lending institutions and is prepared to pay the higher rates of interest charged by contributory mortgage brokers."

Diplock went on: "No doubt some of these schemes are well managed and promoters ensure that investors know the risk they take. However others do not disclose the full risk and may mislead investors, particularly those who can ill afford to lose their money."

Why did the commission ban contributory mortgage schemes because they lend to high-risk property developers and then argue that it had no powers to intervene as far as higher-risk finance companies were concerned?

In June 2003, the commission ordered General Mortgage to cease acting as a contributory mortgage broker because it "has failed to meet the standard of care and governance expected from those who raise funds from the public".

General Mortgage appealed against the commission's decision and also tried to stop it telling the media. An affidavit lodged in the High Court identified Bernard Whimp as General Mortgage's controlling manager.

The High Court ruled in favour of the commission.

Justice Wild noted that the commission's role is to regulate securities markets, with the aim of ensuring that they are informed and efficient.

General Mortgage withdrew its appeal and judicial review proceedings.

The company was subsequently liquidated with the process completed in mid-2008.

Meanwhile Tristram Whimp, who is also a property developer, had his own problems including court proceedings to fend off a bankruptcy application by Strategic Finance. The media reported he was banned for a year but Companies Office records fail to confirm this.

However, Companies Office records show that Bernard Whimp was banned from acting as a director from September 2007 to September 2012.

Whimp came under the commission's spotlight again in August 2010 when he made an offer for DNZ Property Fund shares at 60 cents each when its indicative price was between 80 cents and $1.05 a share.

The commission pointed out that the offer was not illegal or misleading.

When Whimp made his low-ball offer for seven companies on last December 27 the commission was closed for the Christmas-New Year break and made no official comment on the issue.

But the latest Whimp offers - for TrustPower, Vector, Guinness Peat Group, Contact Energy, DNZ Property and Fletcher Building - have stirred the regulator into action.

On March 16, it issued a press release noting that the offers were not illegal but "it is against the law to mislead or deceive investors into accepting an offer and the commission is urgently reviewing the current offers in light of this requirement".

It said although the offers appeared to be above market price, payment would be deferred and wouldn't be received by investors in full for as long as 10 years.

Two days later, the commission announced it had required Whimp to immediately write to all shareholders who had received the offer telling them it was misleading.

On Thursday, the High Court granted interim injunctions that stop shares being transferred to Whimp. Whimp is now prohibited from acting on any acceptances he receives in relation to his latest offers.

A hearing will take place in the High Court on May 9 to determine whether the offer is misleading.

If the court decides it is, the regulator will seek to have the offers cancelled and any shares that have already been transferred will have to be returned to the original shareholders.

The Whimp saga raises a number of issues about the commission's willingness to regulate our securities markets, particularly when people with chequered business careers try it on with elderly investors.

Why has it taken so long to take action against these low-ball offers from Whimp and other opportunists? Why has the regulator considered the General Mortgage and latest Whimp offer misleading when Whimp's other ones were not?

And why did the commission ban Whimp's General Mortgage because it had high-risk second mortgages to property developers when no action was taken against finance companies with similar lending strategies?

Diplock has consistently argued that she doesn't have the powers to take action but when she does, as in the case of General Mortgage and the latest Whimp offers, the courts support the commission's applications.

Another confusing issue is Diplock's statement on March 16 that investors who receive the Whimp offers should seek advice from "a reputable financial adviser, but talking with the Citizens Advice Bureau or even family or friends can be a good start".

This comment fails to take into account the new financial adviser regulations.

A December 2010 news release by the commission stated that the new regulations took effect at the beginning of that month and would be phased in until the official start-up date on July 1, 2011.

The release went on to say: "From early 2011, the Securities Commission will be signalling to the public that if they want personalised investment advice they should be dealing with an Authorised Financial Adviser."

The new regulations make it clear that non-qualified individuals may not give investment advice.

If so, why is the commission's head recommending that investors should talk to the Citizens Advice Bureau regarding Whimp's offers? Diplock says that the regulations don't come into force until July 1 but this comment is inconsistent with the commission's news release statements.

The commission, which will evolve into the Financial Markets Authority in the next few months, needs to be quicker off the mark over Bernard Whimp-type offers and should also be far more consistent in its statements regarding securities laws, particularly as far as the Financial Advisers Act 2008 is concerned.

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