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Questions and Answers - ACT's Stephen Franks

1. Why are you taking this course of action?

I was disturbed by the NBR poll results. When such a large number of New Zealand investors believe they are powerless against rogue company directors the penalty provisions must be made to work.

2. Why are you filing the action yourself?

It is easy for authorities to claim the remedies are there and leave it at that. My background makes me one of the best equipped individuals in New Zealand to undertake this case. I feel I have a responsibility to pursue justice. I hope my high profile actions encourage others. If the current remedy does work all will gain confidence. As a Securities Commission member I urged pursuit of cases like this, so now I am putting my money where my mouth is.

3. But you said ‘shame’ was Hoggard’s penalty. Why did you change your mind?

My initial comments were extracted by inquiring journalists. I have since read the Securities Commission report. It depicts a crystal clear case of insider trading with no extenuating circumstances. The result of the NBR poll contributed. In my experience, insider trading was not such a serious problem but public concern is serious. Thirdly Roger Kerr contacted me to ask if anything could be done. He wanted action, as honest directors are penalised when guilty actions go unpunished. He thought the Securities Commission should be doing more. When I explained that no one had ever pursued the penalties right through, he asked why not now?

4. Hasn’t Mr Hoggard paid back his gains?

We don’t know. Mr Hoggard has paid back a value ($58,000) he placed on the inside information, namely the difference between the share price the day before the announcement and the price the day following the announcement. The Court may find that a longer time period, adjusted for market conditions should be considered. A newspaper article (Evening Post 07/06/00) estimates that Mr Hoggard made $200,000 from the deal.

5. Aren’t you overacting to a technicality?

Mr Hoggard tried to ‘spin’ that the rules were “technically breached”. This version is thoroughly discredited by the Securities Commission report. I can think of no other case that better fits what insider trading laws are designed to stop.

6. Who is paying the costs of the action?

The cost for the first stage - leave to proceed, is paid by the applicants. If the application succeeds the rest will be paid for by Fletcher Challenge. It would not be right that Fletcher Challenge shareholders should be out of pocket, so we want the Judge to exercise powers available to make Mr Hoggard pay all expenses.

7. Isn’t the Government planning Insider Trading law changes anyway?

Yes, but they should test the current laws first. There are no overseas models that don’t already have their own problems.

8. What happens if the Court says no case?

This is highly unlikely given the clear facts. If the improbable does occur I will consider the law defective. The difficulties can then be remedied in Paul Swain’s review of Insider Trading laws.

9. What is your ideal result?

Mr Hoggard pays back all the gain the Court finds he made, and the Court punishes Mr Hoggard to the limit; three times the illegal profit gained.

10. What happens to the money if the court makes an order in your favour?

The order will be in Fletcher Challenge’s favour. The Judge will tell Fletcher Challenge what to do with it. We hope the Court will order that we be repaid our costs. I would like to see some penalty go into a trust fund to assist the initiation of cases of this sort. I think any excess will be donated to charity.

11. Why do you think it will be $600,000?

I don’t think it will be that much. This is an approximate maximum. Mr Hoggard has paid back on the basis he made $58,000. Other reports suggest it is now closer to $260,000. It is the Courts job to decide what it is. The Court can order a penalty of three times the amount gained.

12. How will this action protect shareholders in the future?

In two ways. Firstly it will make it clear that any shareholder has the ability to bring wayward directors to justice even if the company decides not to. Secondly, it will signal to other potential insider traders that the risk of substantial punishment far outweighs any future rewards.

13. Have any shareholders in NZ taken an action like this in the past?

Yes. To my knowledge two parties have applied for leave before. One was turned down by the Court and the other was granted but the case was settled out of court.

14. Is it not time for stricter insider trading laws?

Yes and No. We need much stricter enforcement of the current law where it catches true insider trading, but the definition is far too wide, so it catches perfectly ethical conduct.

15. What does the law catch that it should not catch?

The existing law does not permit selective disclosure meaning so called ‘inside information’ need not come from the inside at all. The law makes a listed investment company culpable for using its own research information. There is no provision for the internationally common practise of due diligence. The law makes it dodgy for analysts and company officers to go to roadshows and specialist briefings even when all shareholders benefit if the specialists understand an issue (for example, when a company must rebut false allegations privately, without destroying brand value by open disclosure). Insider trading law does not recognise the unavoidable compression in prospectus presentation.

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