Sunday 1 April, 2012

This week on Q+A, Greg Boyed Interviews Sean Hughes

Headlines below:

Financial Markets Authority (FMA) announces proceedings were filed Friday on six directors or promoters of the Hanover group of companies: Mark Hotchin, Greg Muir, Sir Tipene O’Regan, Bruce Gordon and Dennis Broit.

FMA alleges “certain statements that were made in various fundraising documents and advertisements over the 2007/2008 period were misleading and were untrue.”

Initial cause of action focuses on limited period in 2007/8 because FMA believes that offers the best chance of success.

Hughes says: “I don’t rule out the possibility that there will be future claims, either against those individuals, and others involved as well.”

Civil case will target reparation for investors, but “a lot of that money has gone, and the prospects of people getting back 100 cents in the dollar must be seen as remote.”

On the range of cases against Finance Company directors and promoters: “Some of it has been undoubtedly shoddy and verging on incompetent. Some of it has been more pointed, at the criminal end of the scale.”

FMA expresses regret at Lombard sentences: “perhaps the sentences did not reflect what we think… was the sort of outcome we were looking for”, says Hughes.  “ We are going away to look at that decision very carefully.”

“I think the disappointment is really those of the investors who’ve lost money. They were entitled to believe and trust in the names that encouraged them to invest in those ventures.”

Hughes “saddled” with old legislation, looking forward to reforms currently before parliament.

On asset sales: “Mighty River Power and all the other ones which may be floated, they will be successes only and only if mums and dads understand what they’re getting into.”

Q+A, 9-10am Sundays on TV ONE. Repeats of Q&A will screen on TVNZ7 at 9pm Sundays and 9am and 1pm on Mondays.                

Q+A

GREG BOYED INTERVIEWS SEAN HUGHES

GREG BOYED $6 billion and no fewer than 200,000 investors out of pocket. Such is the legacy of the 46 finance companies that collapsed between 2006 and 2011. This past week four directors of Lombard Investments, including two former justice ministers, were given community sentences and ordered to pay reparations.
                       
But the most prominent case of finance company collapse has been Hanover Finance, where 16,000 investors lost more than half a billion dollars. Co-founders Eric Watson and Mark Hotchin - he of the $40 million luxury pad on Paritai Drive - have faced intense criticism as investigations into the company have dragged on and on and on.
 
When we spoke to Financial Markets Authority chief executive Sean Hughes last year, he promised to come back and tell us how he was going to proceed with Hanover, and today he’s as good as his word.
 
Good morning, Mr Hughes. So, you can reveal this morning exactly what proceedings have been filed and against who. Do tell us.
 
SEAN HUGHES – Chief Executive Financial Markets Authority

Yes, good morning, Greg, and thank you for having me on the show. I’m pleased to announce that on Friday afternoon Financial Markets Authority commenced an action in Auckland against the directors and promoters of the Hanover group of companies, in particular Mr Watson, Mr Mark Hotchin, Mr Greg Muir, Sir Tipene O’Regan, Mr Bruce Gordon and Mr Dennis Broit. We’ve brought that action because we make allegations that certain statements that were made in various fundraising documents and advertisements over the 2007/2008 period were misleading and were untrue. We’ve put that claim out there. We know that that’s been something that the public’s been very interested in, so we were keen to make this announcement today. It’s now up to the court to set a timetable and for the defences to come in.
 
GREG            So getting down to a point that any investors who have lost their money over this are going to be interested in it, does that mean anybody before 2007/2008 when this information was put out is on a hiding to nothing as far as getting any money back?
 
SEAN             Well, I think what we’ve done, first of all, is to look at where our strongest case lies, and I said back in December that we were focusing on the areas where we thought we had the best prospects of success. That’s just being responsible as a public litigant. So what we’ve said is that our case in relation to the 2007/2008 period is strongest, and that’s where we’re focusing right now. The money invested over that period is roughly in the order of $35-odd million, and that includes investments and re-investments So what we’ll be doing is bringing that claim to start with. We’ll be looking for liability decisions against those directors and promoters, and penalties, and then we’ll be looking at the question of compensation. Now, I don’t rule out the possibility that there will be future claims, either against those individuals, and others involved as well, but we want to start where we think we’ve got the best case, and that’s where we are today.
 
GREG            Let’s get this absolutely straight. This is a civil case; it’s not a criminal case, unlike what we saw with Lombard. There’s no question of Mark Hotchin and company going to prison. This is about money.
 
SEAN             This is a civil liability case. We have an ability to make a decision as to whether we should bring criminal or civil proceedings. I explained to the public back in December that we did not think that this case merited a criminal prosecution. That was certainly the advice that we received, and we’re comfortable with that outcome. If I can contrast Lombard, Lombard Finance was a prosecution that was commenced by a predecessor body, the Securities Commission. We weren’t involved in those decisions. We’ve inherited those matters. But the Hotchin and Hanover proceeding that I’m announcing today is the first major finance company proceeding that FMA has commenced in the 11 months it’s been operating.
 
GREG            We will come back to Hanover in just a moment. First of all, Lombard, last week. You must be disappointed. Four community service sentences and about $200,000 in reparations. That has to be disappointing, doesn’t it?
 
SEAN             Well, Greg, my reaction is, frankly, irrelevant. I think the disappointment is really those of the investors who’ve lost money. They were entitled to believe and trust in the names that encouraged them to invest in those ventures. We would say that perhaps the sentences did not reflect what we think… was the sort of outcome we were looking for, but at the end of the day, that’s the decision of the court, and we respect it. We are going away to look at that decision very carefully. I understand that at least one of those convicted, Mr Jeffries, has signalled that he will be appealing, and so it may well be that we’ll have another day in court on this one. But I certainly want us to look very carefully at the question of reparation, and in particular to balance it up against some of the earlier decisions in relation to, say, Nathans Finance or Mr Ludlow is another example, where we’ve gotta make sure that these decisions are all consistent with each other. So let’s see what comes of that period of review.
 
GREG            Given the consistency side of it, and given that the case of Lombard was seen at the higher end of this type of thing, how much hope should investors in Hanover Finance have about getting any of that $550-odd million back at this point?
 
SEAN             Well, at the moment we’re just focusing on the $35 million covered for the period that we have commenced the action on. So in terms of the much larger period of time, that is not the current focus of our enquiries, and I don’t want to mislead anyone to think that we are. The reality is, Greg, a lot of that money has gone, and the prospects of people getting back 100 cents in the dollar must be seen as remote. No one should think that this is an easy task, that commencing litigation like this is akin to issuing a parking fine. These are very very hard cases to run. They involve vast amounts of evidence and material that has to be assessed. We have to go through a proper process as a public litigator using taxpayer funds to make sure that we’re taking the cases that have the strongest prospects of success. But I’m not gonna sit here and promise to mums and dads out there watching this programme that they’re gonna get all their money back. We’ll do our best, but we’ve only been going for 11 months, and so far we’ve had 100% success rate in the litigation that we’ve inherited and in the cases that have gone on appeal. But inevitably we will lose some, and that’s not because we’re not good at what we do. It’s simply because we don’t have all the material in front of us to run the best case that we can. But we are doing our best. I do want us to move, though, Greg, to a period where we’re not just looking in the rear-view all the time and looking at the past. We do need to move forward and to assist investors to understand the risks that they face in any investment market, no matter how good it is. We want to work with directors and issuers in the entire investment market to make sure that they understand the rules that they’re playing by. These are also important, and I don’t want us to be always distracted by what happened in the past.
 
GREG            If we can just glance into that rear-view mirror a little bit longer, though. In the case of Lombard, you’ve got four men who are very prominent, very respected, grey hair and probably have a lot of leather-bound books in their homes. That doesn’t necessarily make them wizards when it comes to - clearly - investing other people’s money. Mark Hotchin and Eric Watson are obviously very very good at making money. How different are these two cases?
 
SEAN             Well, I think they’re different firstly because one has been taken as a criminal prosecution and one has a civil, and that’s clearly a decision that we’ve made as to where we think the line has to be drawn in the sand as to the sorts of behaviour that we’re seeing. Now, having said all that, the question of whether you look at retired politicians as directors, as being good at the job that they’re doing, or financial market wizards as being good at the job that they’re doing, at the end of the day, the law applies the same standard to both, and that is the law is saying to directors, ‘You have an absolute obligation - it can’t be delegated to anyone else - to get the facts right and to make sure that investors get that information on a timely basis and that it’s relevant.’ Now, at the moment, Greg, we’re saddled with a piece of law that is 34 years old. We’re yet to have the sort of reforms go through the parliament that we need to have a more flexible regime around disclosure and to improve some of the standards of behaviour that we’ve seen in this market. So there’s still a lot of work to be done.
 
GREG            In the case of both Lombard and Hanover, is this a case of directors asleep at the wheel, or is there something… certainly in the past, certainly with Lombard, that there was something more crooked afoot?
 
SEAN             I think you’ve gotta look at all these finance company collapses across the broad spectrum of behaviour, Greg. Some of it has been undoubtedly shoddy and verging on incompetent. Some of it has been more pointed, at the criminal end of the scale. And that’s why I’m pointing at the future and saying that the proposed reforms that we hope to see passed through parliament this year will actually deal with all of that. At the moment, all the behaviour can be dealt with just in a very simple way, which is saying if you get it wrong in the prospectus or the investment statement, you’re a criminal. Now, what we’re saying is that we need to move to a regime where there’s more balance applied so that different types of behaviour receive a different result. My concern at the moment is that directors are fearful of getting things wrong. Good directors are fearful of getting things wrong by making a simple mistake. They’ll end up in the position of the Lombard four.
 
GREG            Let’s talk about Mark Hotchin. From an investor’s point of view, he’s got - what is it - a $30 million house being constructed, or might even be finished, on Paritai Drive. His assets have been frozen. Unlike the case with Lombard, there is money about with both Mark Hotchin and Eric Watson.
 
SEAN                         Well, we have inherited a series of asset preservation orders that the Securities Commission sought back in 2010. We’ve been back to court 10 times in relation to the preservation of those orders. We’ve been to the Court of Appeal as well. Those are matters that are being hotly contested, and Mr Hotchin and the trust have every right to do so. Now, in the situation of other defendants or directors who don’t have those assets, clearly we have to make a judgement call as to whether it’s worth our while using taxpayer money to pursue assets when there may not be very much there There are some unusual features, though, in relation to the Hotchin position that your viewers may not be aware of. The court will make orders in relation to preservation where there is a list of dissipation, either because we’ve put up evidence that they may be whittled away in some way, or potentially where the defendant might be overseas, and in that situation we’ve had a stronger case. Most of these finance company cases do not have those sorts of situations involved, and so we are looking carefully at all the other range of cases in front of us to see whether similar sorts of preservation orders ought to be sought as well.
 
GREG                        Looking forward, we’ve got some power companies that are going to be going up for sale. We’ve got people who will be looking to invest in those. Given the experience of what we’ve seen with the Lombards, with the South Canterbury Finance, with all of those, do we know enough? Are there going to be safeguards in place that ensure in two or three years’ time we’re not sitting here having a similar discussion?
 
SEAN             Well, I hope I’m not sitting here in two or three years’ time as well, Greg, because that would be a very sad day for us at FMA if we haven’t been able to do our part to assist in improving the market. But let me put this statement to you - the finance company collapse occurred in only a very small part of the market and, yes, the NZ economy as a whole took a shock through the GFC, but the impact of the collapse of the finance companies was particularly tough on a sector of the investment market, and sadly those were retirees and mums and dads who had invested all of their eggs in one basket, and we all know that’s not the safe thing to do. So that’s the first point. I would like to see investors spreading their assets across a range of different types of investment. Secondly, we’ve had an improvement in the regulatory regime. We now have much tougher standards and supervision for financial advisors. So investors can have confidence when they go to an advisor that they’ll be getting competent advice and that their advisor understands what they’re doing, and I’m not sure that always was the case with the finance companies. Thirdly, you’ve got a beefed-up regulator that’s got more powers and more resources. But there’s still a lot of work to be done. We’ve got, as I’d mentioned before, Greg, a large-scale reform of NZ’s securities laws which is yet to pass through the parliament, and beyond that there’s a lot of detail that needs to be sorted out with the market to understand. Now, we can do our part. The market can do its part. Investors also need to do their part in learning about the risks that they face. What we don’t want to have is a nanny state, where investors only put all their eggs in a very very safe basket. What we’d like to see is a market that’s got lots of options, but mums and dads understand what it is that they’re investing in. So the investor education and literacy piece is absolutely critical to getting this right. And so Mighty River Power and all the other ones which may be floated, they will be successes only and only if mums and dads understand what they’re getting into.
 
GREG            Sure. Just finally, Warren Buffet, who knows a thing or two about making a buck, said, ‘You can only find out who’s swimming naked when the tide goes out.’ We’ve talked about the financial crisis and its impact on all of this. How many more naked swimmers are we going to be finding?
 
SEAN             Well, I think the important thing about swimming at a nude beach is that if you see the signs that say ‘don’t go there because you might be offended’ then you should stay away. And if you go and you see it and you are offended, then you were warned. So all I can say is it’s like driving home from the studio today - look forward. Have a look in the rear-vision mirror to make sure you know what happened behind you, but be safe and look ahead.
 
GREG            Right, Sean Hughes from the FMA, thank you so much for your time.
 
SEAN             Thank you.

ENDS

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