CBL investigation update

13 July 2018

The FMA investigation into the conduct of CBL Corporation Limited (“CBL”) and its directors is ongoing. Due to investor interest in these matters an update on the investigation is appropriate at this time.

The FMA has completed a preliminary assessment of the information obtained as part of the investigation to date and has concerns about potential breaches of the Financial Markets Conduct Act 2013 (“FMC Act”) and the Companies Act 1993 (“Companies Act”) for:

· Disclosures made as part of the initial public offer;

· Continuous disclosure, in particular for matters which arose from mid-2017;

· Financial reporting;

· Directors duties.

Given the FMA’s mandate in auditor oversight, the FMA is also considering the performance of the auditor, Deloitte.

It is important for the market to understand how the FMA will make decisions about the direction of the investigation, and what, if any, enforcement action may be appropriate. In line with our enforcement guidelines, the FMA will be guided by the following primary regulatory objectives in carrying out this investigation:

Sending an important denunciation and deterrence message where misconduct is identified in an area of strategic importance to New Zealand’s financial markets;
Holding to account those considered most culpable for any identified misconduct, e.g. directors or a subset of directors;
Clarifying the law and provide important legal precedent for future actions.

Given the circumstances leading up to the FMA investigation of CBL, some interested parties have asked the FMA to consider using its powers to step in and exercise any potential right of action that shareholders may have under the Companies Act.

At this time, given the preliminary stage of the investigation, the FMA has not yet determined whether the use of this power would be appropriate. That determination will not be made until the investigation has progressed further.

Any future decision on the possible exercise of this power will need to consider whether it would be in the public interest for the FMA to do so, having regard to the factors outlined in section 34 of the Financial Markets Authority Act 2011 (“FMA Act”).

In particular, the FMA will consider whether outcomes that meet the FMA’s regulatory objectives can be achieved through action under the FMC Act, without the FMA exercising another person’s right of action pursuant to section 34 of the FMA Act.

The FMA notes that directors can be joined to an action under the FMC Act as accessories to the breach, and, as such, there is a mechanism under that Act to hold directors to account where appropriate.

The FMA remains focused on lifting standards of corporate governance, particularly given observations that poor corporate governance leads to poor disclosure by listed issuers. If it is considered that there has been a breach of director’s duties, the FMA will need to assess whether there is additional benefit in also pursuing directors for a breach of director’s duties under the Companies Act.

Additionally, the FMA does not consider it would be appropriate to exercise section 34 powers for the sole purpose of seeking compensation for shareholders. We note that pathways to compensation may be achieved through actions under the FMC Act. For example, the FMA may obtain a declaration of contravention which can be used by either the FMA or shareholders, and/or creditors to take forward actions for compensation where causation and loss can be proven. These options will all be considered in light of our regulatory objectives outlined above.

The FMA continues to liaise with the RBNZ and the SFO about their ongoing investigations and to seek to gather information from the voluntary administrator (CBL) and liquidator (CBL Insurance) as well as relevant overseas regulators. Given the involvement of these other agencies and the complexity of the issues the investigation process is likely to take some time.

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