Report On Share Trading In Fletcher Challenge Ltd
REPORT ON TRADING IN THE SHARES OF FLETCHER CHALLENGE LIMITED IN DECEMBER 1999
The Securities Commission has released its report on trading in the shares of Fletcher Challenge Limited in December 1999.
The report is published on our web site www.sec-com.govt.nz. It can be printed or down loaded from the web site. Hard copies are available from our offices at 12th Floor, Reserve Bank Building, 2 The Terrace, Wellington.
“Amendment Act”: Securities
Amendment Act 1988
“FCL”: Fletcher Challenge Limited
“JBW”: J B Were & Son NZ Limited
“NZSE”: New Zealand Stock Exchange
“the Act”: Securities Act 1978
“the Commission”: The New Zealand Securities Commission
2.1 The Commission has undertaken an inquiry into trading in the shares of FCL in the month of December 1999. The inquiry has been conducted under sections 10, 18 and 19 of the Act.
2.2 A quorum of Members of the Commission comprising Euan Abernethy (Chairman), Falcon Clouston, Ian Farrant and Lloyd Kavanagh was responsible for the conduct of the inquiry.
2.3 The Commission decided to undertake the inquiry following release of statements on 23 December 1999: (a) by Mr Paul Baines, a director of FCL speaking on behalf of the Board, accepting the resignation of Chairman Kerry Hoggard from the Board; and (b) by Mr Hoggard that his decision to resign arose out of the purchase of FCL shares following a FCL Board meeting on 14 December and prior to a public announcement by FCL on the morning of 16 December about important decisions taken at that meeting. Copies of both statements are attached.
2.4 During the course of the inquiry the Commission received assistance from the NZSE, members of the Board and executive staff of FCL, employees of JBW and Mr Hoggard. All of these persons have cooperated fully and the Commission is grateful for this.
2.5 Although the inquiry considered the trading in the shares of FCL throughout the month of December, the Commission only wishes to comment upon the trading on and around 15 December 1999. No other trading appeared to call for comment.
2.6 The Commission has also reviewed the procedures of broking firms in New Zealand for effecting transactions in the listed securities of a company on behalf of persons known to be insiders of the company. We wrote to all members of the NZSE on this matter. The Commission is grateful to the members of the NZSE who provided information.
2.7 Before settling the terms of this report
the Commission prepared confidential consultative drafts
which it circulated to the affected parties and invited
comment. The Commission has carefully considered all
comments made to it.
3.1 On 13 July 1999 FCL announced certain decisions about the strategic direction of the company. The announcement affected all Divisions. On 14 December 1999 the Board of FCL made additional decisions on the future structure of the Company. These related in particular to dismantling the Company’s letter stock structure. The additional decisions were conditional and the company made no public announcement about them at the time.
3.2 At approximately 2:00 pm on 15 December 1999 Mr Hoggard placed with JBW an order to purchase the quantities of shares listed below. JBW completed the order that afternoon at the prices as listed.
Stock Number Average Price Total
Fletcher Building 60,000 shares $2.36 $141,600
Fletcher Energy 60,000 shares $4.28 $256,909.57
Fletcher Forests 150,000 shares $0.69 $102,800
Fletcher Paper 120,000 shares $1.11 $133,200
It should be noted that the above prices exclude brokerage costs.
3.3 On 15 December 1999, following the trade, Mr Hoggard sent a facsimile to the then FCL Corporate Secretary, Mr Gary Key, advising of the transaction. The facsimile was dated 15 November 1999. We accept that this was a typographical error and that the facsimile was actually transmitted on 15 December 1999.
3.4 In the evening of 15 December 1999 Mr Hoggard was contacted at home by a reporter from the New Zealand Herald. The reporter asked him about progress with a “Plan B” at FCL. Many commentators believed there was a restructuring “Plan B” that FCL would adopt, following the failure to bring into effect a plan to merge Fletcher Challenge Paper with Fletcher Challenge Canada (announced on 13 July 1999). Mr Hoggard told the reporter that an announcement would be made the following morning. Mr Hoggard also said that the announcement “was not necessarily on Plan B – it was wider than that”. This information was subsequently published in the New Zealand Herald on the morning of 16 December 1999.
3.5 On the morning of 16 December 1999 FCL publicly announced that the Board of Directors had resolved “to dismantle the Group’s targeted share structure and establish separate entities”. The Company also announced that the Group would record its best first-half earnings result before tax, interest and unusual items since FCL’s share split in 1996. The result for the six-month period to 31 December 1999 was forecast to be more than two and a half times that recorded in the previous six months to June 1999. Mr Hoggard, speaking in his capacity as Chairman of the Company, said that the Board’s purpose in making the announcement was “to provide the equity market with clarity as to the future capital structure of the Company and, along with improved profitability, give shareholders confidence for the future.”
3.6 Mr Hoggard tendered his resignation
as FCL Chairman and Director on 23 December and this was
accepted by the Board. In his resignation statement (copy
attached) Mr Hoggard, in reference to the share purchase
referred to in paragraph 3.2, said:
“The intent of the purchase of these shares was to demonstrate to the market my personal financial commitment to the Company to carry through the critical restructuring that was the subject of the announcement.”
Subsequently Mr Hoggard informed the
Commission that he purchased the shares in FCL because:
“I wanted the Board and more importantly the senior management to know that I had made a significant financial commitment to see through this procedure.”
Mr Hoggard also informed the Commission that he had no intention of selling the shares in the short term.
3.7 Mr Hoggard observed in his resignation statement that as a result of the transactions he had “technically breached the Company’s share trading regulations”, that is, FCL’s Securities Trading Code of Conduct applicable to Directors and Employees.
3.8 It was not clear from the evidence whether Mr Hoggard was conscious that his conduct breached those rules at the time he placed the order with JBW:
(a) Mr Hoggard advised the Commission that he was aware of the Code and the general nature of its contents. He added that he had not, however, had cause to examine those provisions for some years. He stated that he was preoccupied with other matters (relating to FCL’s affairs and to another company’s (of which he is a director) plan to relocate to Australia). He added that he had little time to reflect on his personal position and did not turn his mind to the application of the Code to the transaction that he undertook. He thus failed to appreciate that the purchase transaction, that he initiated by placing the order on 15 December 1999, was one which was prohibited by the Code and the Amendment Act.
(b) Mr Gary Key informed the Commission that, on either 13 or 15 December 1999, prior to the transaction, Mr Hoggard told Mr Key that he intended to buy FCL shares. Mr Key stated that he advised Mr Hoggard not to buy shares until after the announcement. Mr Key noted this on the foot of Mr Hoggard’s facsimile of 15 December 1999 (referred to in paragraph 3.3) and reiterated it in a file note. Having been advised by the Commission of Mr Key’s account of the matter, Mr Hoggard has responded by informing the Commission that he has no recollection whatsoever of such advice being given to him by Mr Key, and he has further explained that had advice or comment such as described by Mr Key been made to him before he placed the share purchase order, he would undoubtedly have paused to reconsider the appropriateness of purchasing shares in FCL at that time.
3.9 The Minutes of an FCL Board meeting on 22 December 1999 record that Mr Hoggard told the Board of FCL that he did not remember receiving Mr Key’s advice. FCL informed us that Mr Hoggard subsequently told the Board at that meeting that if Mr Key said that he had given it, he did not dispute that was the case. Mr Hoggard accepted that he subsequently commented that he would not take issue with Mr Key’s account of their conversation but said that his remark was a pragmatic response made at a time when he considered that there was nothing to be gained from taking issue on the matter as by then he had realised the mistake he himself had made by his own inadvertence. Mr Hoggard does not however accept the accuracy of Mr Key’s account of their conversation.
3.10 The Commission acknowledges Mr Hoggard’s explanation as to his motivation for placing the order. The Commission has decided not to make a finding as to whether Mr Hoggard was conscious at the time that he should not trade prior to the announcement. However we are surprised that Mr Hoggard was not more familiar with his obligations under the Code and the law. We would have thought that a director of a major listed company would ensure he or she was aware of the relevant law.
3.11 As noted in paragraph 3.3 Mr Hoggard informed the company of his transaction on the day on which it was effected. In addition Mr Hoggard informed us that when it was suggested to him on 20 December 1999 that the transaction was contrary to the insider trading prohibition, he acted immediately by sending a second notice of the share purchase, addressed to all directors, in order that the matter could be discussed at the Board meeting scheduled for 22 December 1999. He subsequently tendered his resignation.
3.12 Mr Hoggard said in his resignation statement that he had contacted his broker and ascertained that the possible loss to those shareholders who sold to him was $58,790 being the difference in the share price between what Mr Hoggard paid for his shares on 15 December and the price on 17 December, the day following the announcement. Mr Hoggard placed that amount in the trust account of his solicitors Rudd Watts & Stone for the purpose of enabling them in consultation with the broker “to reimburse the sellers concerned”.
3.13 The Board of FCL had previously insisted that Mr Hoggard undertake to provide full compensation to sellers, in a letter to Mr Hoggard dated 22 December 1999.
3.14 Mr Hoggard’s share purchase was reported by FCL’s Compliance Officer to the Ontario Securities Commission on 24 December as part of FCL’s routine report detailing movements in insiders’ shareholdings for the month ended 31 December 1999.
4. Acquisition of Shares in FCL by Mr Hoggard
4.1 Section 7(1) of the Securities Amendment Act
1988 imposes liability on “An insider of a public issuer who
has inside information about the public issuer and who
(a) Buys securities of the public issuer from any person; or
(b) Sells securities of the public issuer to any person.”
FCL is a public issuer and the FCL letter stocks are securities to which section 7(1) applies. As Chairman of Directors Mr Hoggard was an insider of FCL. He bought FCL shares on the Exchange. Did he have inside information at the time he bought the shares?
information is defined in section 2 of the Amendment Act in
relation to a public issuer to mean:
“information which -
(a) Is not publicly available; and
(b) Would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available.”
Mr Hoggard, as Company Chairman, would have had a great deal of information about FCL which was not publicly available. In particular at the time he bought shares he knew that the Directors had endorsed a plan to restructure the Group, that the plan involved the dismantling of the letter stocks and that the Group was forecasting “its best first-half earnings result before tax, interest and unusual items (EBIT) since the Ordinary Division targeted share split”.
4.3 Mr Hoggard reported these matters in an announcement the following day (16 December 2000). The purpose, he said, was “to provide the equity market with clarity as to the future capital structure of the Company and along with improved profitability, give shareholders confidence for the future”. The price of all the letter stocks increased following the announcement. The price of each letter stock increased by the following amounts:
Close on Midday Close on Open on Close on
15/12/99 (approx.) 16/12/99 17/12/99 17/12/99
on 16/12/99 (ex Bloomberg - Calculation Price)
Building 2.36 2.52 2.59 2.63 2.65
Energy 4.30 4.45 4.52 4.60 4.75
Forests 0.68 0.72 0.71 0.73 0.75
Paper 1.11 1.20 1.23 1.25 1.30
It should be noted that the share prices used by JBW to calculate the amount owed to those persons who sold shares to Mr Hoggard are listed above in the fourth column.
4.4 We consider that the information in the announcement would have been likely to affect materially the share price had it been publicly available at the time Mr Hoggard made his share purchase. The new Chairman, Dr Roderick Deane, and the Chief Executive Officer, Mr Michael Andrews, informed the Commission that they were firmly of the view that this was so. Mr Hoggard acknowledged to us that at the time he placed the order for the purchase of shares he was in hindsight in possession of inside information about FCL and in particular its restructuring plan. However the extent that the company announcement of 16 December 1999 related to information about forecast earnings he considered that these were “widely anticipated by the market”. We have not been able to verify this. Whether or not it may have been so the opinion of the directors on forecast earnings is a very important matter in itself. Mr Hoggard’s own comment that the announcement of the forecast was intended to arrest the decline in FCL’s share price bears this out.
4.5 Accordingly we consider that Mr Hoggard was at the time he bought FCL shares an insider who had inside information. We consider he was liable to sellers and the Company in accordance with the provisions of the Amendment Act.
4.6 Section 7(2)(a) provides that the insider is liable under section 7(1) to “any person from whom the securities are bought for any loss incurred by that person in selling them to the insider”. Mr Hoggard has made a payment equivalent to the maximum sum he believes that sellers may have lost. On that basis we do not think any further liability arises under section 7(2)(a) for the payment of any further amount. However FCL as public issuer may have a claim in respect of this sum of money under section 7(2)(c)(i).
4.7 Under section 7(2)(c)(ii) the insider may also be liable to the public issuer for any amount which the Court considers to be an appropriate pecuniary penalty.
4.8 It is for the Company as the public issuer, or its shareholders under section 18, to decide whether to bring a claim under section 7(2)(c) against Mr Hoggard. This provision has not been applied by the Courts since the Amendment Act came into force and there is no authoritative guidance on the circumstances in which a pecuniary penalty would be imposed or the size of that penalty. It is not for the Commission to decide these things. However it may be helpful for the Commission to make one or two observations about the matters which the Court will take into account in deciding whether to impose a pecuniary penalty in the present case if the matter were referred to them. These matters are set out in section 16. They include:
(a) the nature and extent of the dealing
in the securities by the insider;
(b) the extent of the gains made, or losses avoided, by the insider or others;
(c) The nature and extent of any previous liability of the insider under this Part of the Act;
(d) The relationship of the parties to the transaction or transactions giving rise to the insider’s liability.
4.9 The Commission accepts that Mr Hoggard intended to demonstrate to the market his personal financial commitment to the Company rather than to make a personal profit. He believed the corporate restructuring was important and would provide value to shareholders. He wished to have the support of FCL shareholders and staff for it. The order was placed in his own name. He did not attempt to conceal the transaction. Afterwards, he made a candid public statement of the circumstances. He arranged a facility to compensate sellers. He did so without any shareholder needing to resort to a formal claim. Nevertheless he was guilty of a serious mistake in buying shares at the time that he did. He did not comply with the FCL Securities Trading Code of Conduct applicable to Directors and Employees. He did not ensure he was familiar with, or complied with, the law relating to insider trading. He attracted adverse criticism to himself and he put at risk the reputation of the Company and, more generally, the New Zealand business community.
4.10 Other factors which might be considered include Mr Hoggard’s previous record and character, and whether this was an isolated incident. We were reassured by submissions made on Mr Hoggard’s behalf in those respects, but the Commission has not made its own inquiries.
4.11 Insider trading is a serious matter. It is detrimental to investor confidence in the securities markets. It is difficult to detect. We consider that in the present circumstances there has been a clear breach of an important law.
4.12 We observe that the procedure approved by the Commission under section 8(1)(b) of the Amendment Act, the Insider Trading (Approved Procedure for Company Officers) Notice 1996, was not observed and could not have applied in any event as the purchases lay outside the trading periods provided for in that Notice.
5. Dealing by JBW in FCL Shares
5.1 The Commission has also considered whether Mr Hoggard communicated inside information to JBW or any officer or employee of JBW, whether as a result JBW was an insider of FCL, a tippee which had received inside information in confidence, and whether JBW might be liable to any person under section 7 of the Amendment Act for trading after it had received inside information.
5.2 The order for shares was placed in the course of a telephone conversation at around 2.00 pm on 15 December. The telephone conversation was taped. The conversation lasted a little over 3 minutes. In the course of the conversation Mr Hoggard confirmed that there had been a board meeting on 14 December, a matter already publicly known, that no public statement had been released about the meeting but that one would be released (in Mr Hoggard’s words “But hold your breath it will.”). From this JBW would have learned that a news release was pending.
5.3 We have interviewed all JBW officers who became aware of Mr Hoggard’s order for shares. In the course of our interviews we found no evidence that any employee of JBW, whether acting on his own or the firm’s account or on account of a client, had dealt in FCL stocks or encouraged any other person to deal in FCL stocks as a result of any information that Mr Hoggard may have communicated to the firm. We found no evidence that any employee of JBW had informed any person outside of JBW that Mr Hoggard had decided to purchase shares in FCL.
5.4 In addition we reviewed all purchases of FCL stocks made through JBW on 15 and 16 December, identifying all clients and the nature of their transactions. We found no evidence to suggest that these transactions were driven in any way by JBW’s dealings with Mr Hoggard.
5.5 JBW has a compliance guide which is to be observed by all employees of the firm. This contains a Best Practice Guide for employees who may be in possession of inside information. The employees who dealt with Mr Hoggard did not observe the Guide on the present occasion. They informed us that they considered Mr Hoggard to be an experienced and highly respected company director who was openly purchasing shares in his own name and it did not occur to them that he was imparting inside information or that the terms of the Guide applied.
5.6 Whether or not the information imparted by Mr Hoggard to JBW was in itself “inside information about the public issuer” for the purposes of securities law, and whether or not JBW should have been more alert to this possibility, we found no evidence that JBW relied on the information.
Hoggard trades were clearly significant as a percentage of
the total trades on the day. Although JBW confirmed to Mr
Hoggard that they had completed the trades there was in fact
a shortfall at close of business that day and the firm
carried a shortfall in their house account overnight in
respect of all letter stocks. They needed to buy in the
following morning at a higher price. To the extent that JBW
may be thought to have had a claim on the fund established
by Mr Hoggard (see para 3.12) they had waived that
6. Internal Procedures of Broking Firms for Handling Transactions by Insiders
6.1 The Commission observes that there are particular difficulties generally for a broking firm if it receives inside information from an insider of a listed company. The firm may itself become an insider on receipt of the information and become subject to the liability provisions of the Amendment Act. In addition the firm will inevitably come under suspicion if it is known to have dealt on behalf of an insider with inside information and this may affect its reputation as an ethical and honest trader.
6.2 The Commission wrote to all broking firms in New Zealand asking them whether they had special procedures in place for effecting transactions in the listed securities of a company by company insiders.
6.3 The Commission has received details of the procedures in place for almost all broking firms.
6.4 The Commission proposes to issue a separate report on this matter later on.
7. Further Contact
7.1 Mr Hoggard has informed us that letters and cheques have been forwarded to brokers by his solicitors in order that any affected parties can be reimbursed. The Commission advises any people who believe they may have an interest in this matter as a seller of FCL stocks and who have not heard from their brokers to contact Mr Hoggard’s solicitors, Rudd Watts & Stone, at the following address:
125 Queen Street
P O Box 3798
8.1 Mr Hoggard was an insider of FCL on 15 December. He bought FCL letter stocks on that day. We consider he had inside information on the day. He was liable to the Company and any people who sold shares to him. He has made arrangements to compensate sellers and on this basis we think this may effectively discharge any liability to sellers.
8.2 In the view of the Commission there was a clear breach of an important law by Mr Hoggard.
8.3 FCL may have an action against Mr Hoggard for a pecuniary penalty under section 7(2)(c)(ii) of the Amendment Act. It is for FCL and its shareholders to decide whether it is appropriate to pursue this matter.
8.4 JBW received information from an insider which in all the circumstances of the case may have been inside information. We found no evidence that they relied on this information for any purpose.
Euan H Abernethy
Chairman of the Securities Commission