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Decision of the Securities Commission on the request from Catharine Mary Franks pursuant to Section 17 of the Securities Amendment Act 1988 [2002] NZSecCom 7 (14 May 2002)
Last Updated: 7 November 2014
Decision of the Securities Commission
on the Request from Catharine Mary Franks Pursuant to
Section 17 of the Securities Amendment Act 1988
14 May 2002
The Request
- On
10 April 2002 the Commission received a request on behalf of Catharine Mary
Franks that the Commission approve the giving of a
notice by her to Air New
Zealand Limited (Air NZ) under s17 of the Securities Amendment Act 1988.
The purpose of the proposed notice is to require Air NZ to obtain the opinion of
a lawyer on whether or not Air NZ has a cause of action against an insider. Mrs
Franks was a shareholder in Air NZ at the relevant
time. This request was
forwarded under cover of a letter from Mr Stephen Franks MP.
- The
people identified as possible insiders in the proposed notice were:
"
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1.
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The New Zealand Government.
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2.
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The Prime Minister of New Zealand.
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3.
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The Minister of Finance.
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4.
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The Ministry of Transport.
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5.
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Any advisers to any of the above who received non-public price sensitive
information concerning Air New Zealand at the relevant times.
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6.
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Any agents or officers of the Australian Government."
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- The
request asserted that some or all of the directors of Air NZ might also be
liable for tipping. Although an opinion was not specifically
sought concerning
the liability of directors of Air NZ, this was requested if the Commission
considered it necessary or desirable.
- The
letter did not allege that any of the listed persons themselves bought or sold
securities in Air NZ in the relevant period. Rather
an opinion was sought on
whether or not those persons were liable, under s9(2), as tipsters. Section 13
was also mentioned, and raised
the same issues in this case as did section 9.
- This
request was received before the Commission issued, on 26 April 2002, "A Report
on Certain Statements Made in Respect of Air New
Zealand Limited in September
2001" (for convenience the Air NZ Report). It was also before The
Treasury released various papers (both external and internal) covering the
dealings between Air NZ and the
New Zealand Government during 2001.
Procedure
- The
Commission was concerned to ensure that it had before it appropriate factual
information to enable it to decide whether or not
to approve the request.
- The
Commission requested clarification of what was being alleged and more specifics
of the suggested causes of action. Mr Franks provided
the Commission with
further information in response to these requests.
- The
Commission gave Mr and Mrs Franks an opportunity to appear and make submissions
to the Commission in support of the request. Mr
Franks took up that opportunity
and appeared before the Commission in support of the request at its meeting on
13 May 2002 accompanied
by Ms Julie Crengle, a solicitor.
The
Basis of the Request
- Following
the Commission's requests for information and in the course of Mr Franks'
submissions on 13 May the allegations in the request
for approval were refined
down to two broad matters.
The Turkington Conversation
- The
request sought an opinion under section 17 as to whether or not Air NZ has a
cause of action against the Prime Minister under
section 9 (and section 13) of
the Securities Amendment Act arising out of a conversation on 25 September
between the Prime Minister
and a sharebroker at Forsyth Barr Frater Williams
Limited. Mr Franks informed the Commission that an anonymous informant had told
him that on the morning of 25 September 2001 at approximately 10 o'clock a
sharebroker in Forsyth Barr Frater Williams Ltd of Auckland
telephoned the
informant, a client of the broker, advising them that "their boss had just
got off the phone to someone in Government who had phoned them saying that the
Government was not going to let
Air NZ go under". Mr Franks told the
Commission that his informant identified the "someone in Government" as being
the Prime Minister.
Due Diligence
- The
second main allegation relates to a series of "due diligence" disclosures by Air
NZ. The complaint was that each of:
- The
New Zealand Government;
- The
then major shareholders of Air NZ namely BIL International Ltd and Singapore
Airlines Ltd; and
- Qantas
Airways Ltd (Qantas) received inside information about Air NZ. The New
Zealand Government later subscribed for shares in Air NZ. Once again the request
sought an opinion as to whether Air NZ has a cause of action against the
directors of Air NZ or the Government under section 9.
- In
the course of his submissions Mr Franks advised the Commission that he did not
object to "due diligence" arrangements as such,
and pointed out that this was a
matter raised in the past by him and others as a problem in the current insider
trading legislation.
Mr Franks noted that previously the Commission had not
supported reform in this area.
- He
acknowledged that it may be idle to bring an insider trading claim against the
New Zealand Government, BIL or Singapore Airlines
Ltd and it was not the
intention of Mrs Franks to do that. However, he pointed out that any opinion
would be available to other shareholders
who might form a different view. It
would also be relevant to a consideration of law reform.
- Mr
Franks was unable to point to actual disclosures to Qantas or any securities
trading by Qantas. Mr Franks said he had a suspicion
that inside information had
been leaked to Qantas by unnamed Government sources.
The
Legislative Background
- For
liability to be found under Securities Amendment Act there must be an insider of
the public issuer (here Air NZ), the insider
must have inside information about
the public issuer, and the insider must either:
- him
or herself have sold or bought the public issuer's securities; or
- have
"tipped" someone else who then buys or sells such securities. What constitutes
tipping is spelt out in s9(1). Broadly, tipping
requires either:
- that an insider
passes on inside information to another knowing or believing that such other is
likely to trade (or to advise or encourage
a third person to do so); or
- that an insider
advises or encourages another to trade (or to in turn advise or encourage a
third person to do so).
- When
the Commission approves a request under s17 the public issuer (here Air NZ) must
appoint a barrister or solicitor approved by
the Commission to investigate the
matter and provide an opinion. That is at the cost of the public issuer who is
also required to
provide to that person all information relating to the matter
in its possession or available to it.
- The
opinion is then to be made available to certain persons, in this case Air NZ,
the Commission, Mrs Franks and any shareholder of
Air NZ who requests it.
- The
scheme of the Act then contemplates that if the lawyer's opinion is that there
is or may be a cause of action, the right of action
of Air NZ against the
insider could be exercised by the company. Alternatively it can be exercised by
the requester (here Mrs Franks)
or other shareholders. This can be done, under
section 18 of the Securities Amendment Act, at the expense of Air NZ but is
subject
to Mrs Franks (or such other shareholders) first obtaining leave of the
Court. However an opinion under section 17 is not a prerequisite
for obtaining
leave under section 18. The applicant can rely on, for instance, a report of an
inquiry by the Commission or other
available information.
- The
Act provides no explicit guidelines to the Commission as to the basis on which
it is to exercise its discretion. The Commission
takes the view that the
threshold for giving approval is low and that it is entitled to have regard to
all the circumstances of the
case. Those circumstances would include:
- Whether
or not there is at least a prima facie issue to be investigated and on which an
opinion can be formed that Air NZ has, or
may have, a cause of action against an
insider;
- Whether
or not the insiders against whom there may be such a cause of action are
identified or identifiable;
- Whether
or not there is any conclusive defence;
- What
information might otherwise be available to the requester without the necessity
of first obtaining an opinion;
- The
seriousness of the alleged breach of the Securities Amendment Act;
- The
scope of the request; and
- The
costs and resources which would be involved in such a process.
Consideration - The Turkington Conversation
- The
background to the first allegation (the Turkington conversation) has already
been considered in the Air NZ Report. In particular,
it was covered at paras 9.1
to 9.4 and at paras 12.1 and 12.2.
- Four
points emerge from that part of the Report relevant to the present request:
- The
approach was initiated by Dr Turkington, not the Prime Minister who simply
returned the call. This call was taken in the dealing
room of Forsyth Barr
Frater Williams Limited in Auckland at about 9.45am on Tuesday 25 September
2001;
- The
evidence the Commission received was that no inside information was conveyed. Dr
Turkington stated that he did not come away from
the conversation any wiser
about any aspect of the Air NZ matter than he had been before it;
- Dr
Turkington stated that he did not report this conversation to any person other
than Mr Edgar (of the Dunedin office), at 3.30 pm,
and Mr Cameron (acting for
the Crown), at 3.50 pm. The basis put forward by Mrs Franks does not point to
them having leaked the matter,
as the alleged "leak" had been much earlier in
the day and, according to Mr Franks, from the Auckland office of Forsyth Barr
Frater
Williams Limited;
- The
Commission questioned every broking firm in New Zealand and evidence was
assembled from every one. It was clear both from this
and from the Crown
evidence that no other contact was made by the Government.
- In
short there is no evidence that inside information was conveyed by the Prime
Minister to Dr Turkington, or by Dr Turkington to
a broker in Forsyth Barr
Frater Williams Limited, nor that Dr Turkington advised or encouraged any broker
either to trade or in turn
to advise or encourage others to trade. That this
occurred is contrary to the evidence of Dr Turkington, which was accepted by the
Commission.
- The
Commission has reviewed the trading on 25 September through Forsyth Barr Frater
Williams Limited (when compared with trading on
the other days in that and the
preceding week) looking particularly at the "buy" deals. The firm's share of
transactions expressed
as a percentage of overall buy trades of all brokers in
each of the "A" and "B" shares (even excluding, in the case of the "B" trades,
the large overnight institutional trade through another broking firm) were well
within the normal range of activity by Forsyth Barr
Frater Williams Limited in
these shares in this period. There is no indicator of unusual activity.
- As
is apparent from the trading information available, as set out in the charts in
Appendix D to the Air NZ Report, when the market
opened at 9am on Tuesday 25
September 2001 the price of the "A" shares had already risen to 22 cents from
the close of 18 cents the
day before. Similarly the "B" shares opened at 19
cents, up from the 15.5 cents. Trading volumes on that day were very high from
opening, before the telephone conversation in question. Although both classes of
shares rose further during the day the range of
movement was well within the
volatility exhibited by Air NZ shares in this general period. The Commission
also notes that Wall Street
indexes had risen overnight and that the
Christchurch Press had, that morning, reported that Air NZ had reached an
understanding
with the administrators of Ansett International Ltd and "appeared
to have stepped back from the brink of statutory management".
- Mr
Franks had advised the Commission that his informant would be willing to attend
a Commission meeting and give evidence if this
became necessary after the
Commission had investigated Forsyth Barr Frater Williams Limited trades. In
light of the Commission's
investigation outlined in paragraphs 22 and 23 the
Commission is satisfied that this is not necessary.
- The
Commission considers there is nothing raised by the circumstantial matters to
cause it to doubt the probity of the evidence received
by it or to create a
prima facie issue for investigation.
- The
Commission also notes that it had, at para. 14.1 of the Air NZ Report, concluded
the Prime Minister was an insider under s3(1)(e)
of the Securities Amendment
Act. That is the third and last tier of the definition of insider.
Consideration - Due Diligence
- In
the course of submissions it emerged that the request under this head was not
sought for the purpose of Mrs Franks bringing a claim
against potential insiders
but that Mr Franks considered the law to be deficient in this area and an
opinion on the facts of the
case would be helpful for law reform purposes.
However Mr Franks noted that others may wish to take an action.
- The
Commission considers it is inappropriate to use the section 17 process to pursue
a law reform purpose at the expense of a particular
public issuer. However, the
request was also considered on the basis that another shareholder might take up
any cause of action identified.
- In
relation to the New Zealand Government's subscription for new equity in Air NZ:
- This
subscription was formally approved by the shareholders of Air NZ in general
meeting;
- The
price for the shares was fixed by reference to trading periods after full
disclosure had been made to the market, meaning that
no loss could result in
terms of the Securities Amendment Act (the calculation for loss under the
Securities Amendment Act is based
on a person having inside information at the
time of the transaction. Broadly, loss is calculated by comparing the price of a
trade
against the price that would have been struck had the information been
public);
- The
factual position regarding communications between Air NZ and the Crown is
already public in light of the information released
by the Treasury;
- In
any event it is not clear that Part I of the Securities Amendment Act applies to
new share subscriptions as opposed to buying or
selling of existing shares.
- In
relation to BIL International Ltd and Singapore Airlines Ltd there is no
evidence that either company bought or sold any securities
in Air NZ over the
relevant period. By way of a negative indicator the Commission notes that both
were substantial security holders
under the Securities Amendment Act and, if the
change in holding comprised 1% or more of the total number of issued voting
shares
of Air NZ, notice would be required. Further, Singapore Airlines Ltd was
precluded from increasing its percentage holding under the
terms of consent to
its holding given by the New Zealand Government as the Kiwi shareholder.
- The
allegations of tipping or passing inside information to Qantas were extremely
vague and, in the view of the Commission, lacked
the specificity required for it
to approve the giving of a s17 notice. Further, there is no evidence that Qantas
(who, by this time,
held no Air NZ shares) then bought any shares in Air NZ. The
Commission notes that for Qantas, as an airline, to do so would require
the
written consent of the New Zealand Government as the Kiwi shareholder.
- In
view of the above, there is no evidence that could form the basis for any cause
of action under section 9 of the Securities Amendment
Act.
- Finally
the Commission also rejects the submission made by Mr Franks that it should not
rely on its own views on this matter simply
because it is, or is perceived to
be, "an organ of Government".
Result
- Accordingly,
acknowledging the low threshold to be applied in such cases the Commission
considers that the threshold is not reached
in this matter. Having regard to the
factors set out in paragraph 18 the Commission declines to approve the issue of
a notice requiring
Air New Zealand Limited to obtain an opinion on matters
contained in the proposed notice from Mrs Franks which accompanied the letter
of
10 April 2002.
_______________________________
Jane Diplock
Chairman
of the Securities Commission
14 May 2002
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