O'Sullivan: Fletcher must clobber insiders before the politicians do

Fletcher Challenge must stop horsing around and take legal action against the blatant inside traders in its company's shares.

Fletcher Challenge boss Roderick Deane - singled out in last year's Deloitte/Management Top 200 Awards as New Zealand's outstanding executive of the 1990s and on a pedestal recently opining that the standard of corporate governance was the major issue confronting New Zealand business - has no excuse for not instituting a civil suit on at least two of the outstanding insider trading imbroglios bedeviling his company.

Unless Fletcher uses the civil remedies at its command, the politicians will bring in heavy-handed criminal laws in retaliation for the corporate sector's intransigence on insider trading. That we don't need.

Deflection of management focus and claims that any insider trading actions will cost the company more than the dollar amount of any damages award, do not wash.

Fletcher Challenge is a basket-case. We all know that. Its restructuring programme - a de facto liquidation as the unkind might put it - has been tortuous.

And within the "Wellington Club" where these sorts of problems are frequently sorted, a view has undoubtedly been formed that it would be deleterious for New Zealand's reputation if yet another of our former blue-chips became the subject of public action while sorting out some fairly serious financial issues.

But despite the Securities Commission's hospital pass on the latest Fletcher Challenge inside dealing issue to cross its desk, there is too much momentum for Fletcher directors to play the "see no evil" game.

It is fair to say that Deane did demand his predecessor Kerry Hoggard's head when he put in his order for shares before a company announcement.

Deane is firmly aligned with the Business Roundtable camp which crusaded against making insider trading a criminal offence during the 1980s. But when a company's chairman puts its reputation at risk, it is up to the company's board - not the shareholders - to sort it out.

In Hoggard's case, Business Roundtable executive director Roger Kerr and Act MP Stephen Franks have gained High Court approval to take an action against the former Fletcher chairman.

But if Deane makes a meal out of corporate governance, he should go to his fellow directors and get board approval to ensure the Fletcher Challenge joins the action forthwith and finances it.

The Paul Hyslop affair is less open and shut.

Hyslop got hold of a confidential statement outlining Fletcher's restructuring plans at a relative's house. Hyslop bought shares, then ramped up Fletcher share prices by distributing the confidential memo to brokers and a journalist, before selling out at a $40,000 profit.

This should have been a laydown misere.

But the Securities Commission gave Hyslop a hospital pass.

Without even first testing the evidence, the commission affirmed Hyslop's story that he was two steps removed from a Fletcher contractor who had faxed the confidential memo off to his brother-in-law, CD, in the first place. So, while the incident was regrettable, no action for insider trading could be taken against Hyslop. He was outside the law. But the commission could study the issues raised while proposing yet more reforms of the insider trading laws.

Weak-kneed to a fault, the commission's members have historically been frightened off by defamation threats, and have issued reports which, while canvassing the facts, lead to the path of inaction, or whitewashes.

But the commission is not in the business of mounting criminal prosecutions on insider trading. Insider trading is a civil matter - the courts decide cases on the balance of probabilities.

The convergence of circumstances in how Hyslop got hold of the Fletcher memo, should give directors pause to reflect.

Was it just a chain of accidents? Or have some porkies been told?

The confidential memo was accidentally e-mailed onto a company noticeboard. Contractor "AB" faxed it off before the company put out a notice to employees asking them to destroy any copies and warning them of the inside trading risk.

But while AB warned CD to destroy the memo, her relative still bought shares. More importantly, so did her husband on their joint behalf. Pillow-talk must surely have been at play here.

And would a court believe Hyslop's story that he merely copied the memo off at CD's house without his knowledge?

CD bought a big parcel on his/her own. Why was a sell order placed after AB warned the memo should be destroyed?

My own view is that Fletcher Challenge has reasonable cause to take a civil action.

The commission's view of the facts may be the correct one, but an alternative view could easily be taken.

These two cases are not the only Fletcher insider trading issues still outstanding.

The commission is also looking at the trading in Fletcher Forest stocks. My investigations disclose news media have been fed some blatantly offpace scenarios by various players close to the Fletcher camp. Share prices have been ramped up and stock traded at a premium before company denials were issued.

Fletcher's directors include some of New Zealand's major corporate egos, whose standing will come into question the longer they take a hands-off approach.