Paul McBeth is the editor of The Bottom Line and Curious News, having worked at BusinessDesk for 15 years.
Blue Chip, Bridgecorp, Hanover Finance – these were the names that elicited visceral reactions from investors during the last bout of turbulence in marketland.
They stood for the Auckland wide boys who pushed the boat out – or in Bridgecorp’s case, literally stole investor funds to buy a luxury launch – leaving the mythical hard-working mum and dad investors out of pocket and facing a desolate retirement.
In the case of Blue Chip, it stood for a regulator asleep at the wheel when the Securities Commission deemed its property schemes as falling outside securities law that needed detailed offer documents to be put in front of would-be investors.
That left some 2,000 investors out of pocket by $84 million feeling pretty aggrieved when principal Mark Bryers was slapped with a wet bus-ticket fine of almost $38,000 and 75 hours of community work when he pleaded guilty to a series of financial reporting charges.
When a newly energised Serious Fraud Office had a look, then-chief Adam Feeley didn’t find enough evidence to pursue prosecution, even if the high-pressure sales techniques and opaque disclosures left the firm operating in a moral vacuum.
It took another 14 years, but few were surprised when Bryers was jailed in Australia for tax fraud last year.
Missing Medici
Bridgecorp, meanwhile, went belly up owing 14,400 investors about $459 million with shonky disclosures in its investment statements compounded by outright theft when Rod Petricevic defrauded investors to buy a luxury launch.
He got jail time, plus a roughing up at a swanky Parnell restaurant, not that it was much comfort for the investors who got 15.5 cents in the dollar.
And Hanover. Does it need more column inches?
The finance company owed 17,000 investors $554 million when it froze their funds and orchestrated a debt-for-equity swap with NZX-listed Allied Farmers that never captured the sliver of hope offered them, having paid 6 cents in the dollar in the moratorium to depositors and secured stockholders.
While about 5,500 of them extracted between 6.5 cents-and-19 cents in the dollar from the Financial Markets Authority’s settlement with the directors, principals Mark Hotchin and Eric Watson became pin-up boys for the finance company collapses, even if the courts never found their offers wanting and the Serious Fraud Office burned through $1.1 million before deciding not to proceed with a case.
Which brings us to the FMA’s recently released financial conduct report – a companion to its outcomes-focused regulation document published in March.
The pair of papers both make clear that wholesale market activity is in the regulator’s sights. Something which should be abundantly obvious given how much of its reputation is staked on finding wrongdoing – and proving it – at the collapsed property developer, Du Val, now under the watch of a government-imposed statutory management.
Finfluencing
To be fair, the stakes at Du Val are significantly smaller than the finance company debacle, with $41 million owed to 180 or so investors – even if its principals Kenyon and Charlotte Clarke had talked a big game about going public a few years back.
The outcomes paper points out that a particular area of focus for the FMA is products and services not captured by licensing and formal supervision, which typically account for many of the complaints it receives.
And that was followed up in the conduct report claiming a significant number of wholesale issuers are using false or misleading information in their pitch to investors, especially in their advertising, which is often targeted at people who probably wouldn’t fall into the sophisticated category of investor capable of waiving legislative protections.
That aligns the FMA’s desire to have a closer eye on entities that are meant to safeguard investors’ assets, with the institutions that hold assets on behalf of investors left outside the licensing regime back when securities law was overhauled as officials ignored submissions from trustees that the exclusion was a bit daft.
Plus, the International Monetary Fund reckoned custody services needed to be brought into the licensing and supervision tent when it ran the rule over New Zealand’s financial system back in 2017.
Around we go
The IMF also thought it would be a good idea to have proper oversight of wholesale asset managers back then too, given they’d become an increasingly important sector as it matured, and brought new risks to the table.
The FMA hasn’t quite gone that far, even if it is seeking a High Court declaration on just how much due diligence a wholesale issuer needs to do to make sure its investors are capable of signing away their protections.
Which seems as though the regulator hasn’t quite cottoned on to the lesson from Blue Chip.
The wholesale offers that have got the regulator’s knickers in a twist are promoted hard on social media platforms and even come in the form of direct mail drops.
Sure, a driftnet marketing pitch will always capture the attention of people it shouldn’t but asking the courts to draw a line in the sand on how much legwork an investment’s promoter needs to put in to ensure would be investors meet the bar seems to cloud the FMA’s real fear: retail investors are investing in things they shouldn’t.
Image from Sam Moghadam on Unsplash.
