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Finance Company Investigations [2010] NZSecCom 22 (1 December 2010)

Last Updated: 16 November 2014

FINANCE COMPANY INVESTIGATIONS

Since 2006, 51 New Zealand finance companies have either gone into liquidation or receivership, or froze payments. Many New Zealanders lost their money.

The scale and circumstances of the sector gave rise to concerns of inappropriate behaviour and breaches of the Securities Act. The Securities Commission therefore began a programme of investigations into the failures.

This page answers some of your questions about the Commission's work in connection with the failures.

• How much information can we make public?
• What powers do we have?
• Which cases do we investigate first?
• What is our approach to investigations?
• What happens when an investigation is launched?
• What does an inspector do?
• What happens after an inspector reports?
• What happens after a case assessment?
• What happens when the Commission decides to take criminal and/or civil proceedings?
• What happens when a case goes to Court?
• Which investigations are currently underway?
• Which cases are currently before the Court?
• Why don't we always take Court action?
• What other ways can the Commission get an effective result?

How much information can we make public?

Like other regulators in New Zealand and around the world, we generally do not comment on the progress of our investigations. This is because of the risk of causing unjustified damage to the reputation of the businesses and individuals we are investigating before we are sure that the grounds for our concern were justified by the evidence we have established.

We must also take care that we don't prejudice the fair and effective trial of a person who is eventually charged by releasing too much information.

On the other hand, we want to keep the public - and particularly investors - informed about our finance company work. From time to time we release additional information when we believe it is in the public interest to do so.

What powers do we have?

Our powers under the Securities Act relate to the offer documents (prospectus and investments statement) all issuers - including finance companies - must prepare.

These must disclose a product's features and risks so investors can weigh the risk they are willing to take against the offered return.

Under current law, it is the Commission's job to ensure these documents accurately disclose everything they should. We have no other power to enforce any duties that failed companies or their directors might owe to investors.

Our powers under the Securities Act are separate from the powers we have under other legislation such as the power to recommend to the Minister that a corporation at risk is placed in statutory management under the Corporations (Investigation and Management) Act 1989.

Statutory Management can only be used as a last resort when there is no other way of adequately protecting the interests of the members, creditors, beneficiaries or the public interest. It has not been available in the case of the finance companies because other legal procedures, such as the appointment of receivers, were available.

The Serious Fraud Office detects, investigates and prosecutes serious and complex fraud. The Commission works closely with the SFO to ensure law-breakers are brought to justice.

Which cases do we investigate first?

So far it has made sense for the Commission to use its limited resources to investigate failures in broadly the order they occurred.

This is because the failure date may indicate when the law was broken, and some criminal prosecutions and civil proceedings must be taken within a certain time.

The Commission staff's case load and availability of people and financial resources are also taken into account in deciding which cases to investigate first.

It's not always easy to say when a finance company failed, For example, if a company is working under a debt-restructuring proposal (or moratorium), it could be said there was no failure until a receiver or liquidator was appointed.

Information about finance companies in moratorium is more difficult to get, which means investigations into them can take longer to complete.

What is our approach to investigations?

Every investigation is different because each company and its circumstances are different.

Each step in an investigation must comply with the rules that apply to evidence that can be used in court, in case the investigation results in a prosecution. It is important for both the prosecution and the defence that procedural rules are followed and are not short cut.

What happens when an investigation is launched?

Commission staff assess the finance company's offer documents to see if there appear to have been any misstatements or omissions. This might require finding out more about the company and its business.

Sometimes the company, its receiver or liquidator will volunteer the information. Sometimes we get it by using our statutory power to summons or inspect information.

If it looks like the Securities Act may have been breached, staff recommend to Commission Members that a formal investigation is opened and an inspector is appointed.

What does an inspector do?

Our inspector compares the information to hand with what the company said in its offer documents. This allows them to assess if any statements were untrue or if they left out information an investor would have needed to make an informed investment decision.

If necessary, the Commission's investigation team gets help from an external forensic accountant or investigator.

Inspections are complex. They cover a very large part (sometimes all) of a finance company's business. They can take a long time for investigators and forensic accountants to complete.

Months of work

If all the electronic data managed by our inspector in a 2010 case had been printed and stacked, it would have stood as high as the Auckland Sky Tower.

It took two experienced forensic accountants, a financial analyst and a data/electronic discovery manager more than 900 hours (or 21 weeks) complete their investigation.

As well as reviewing documents, transactions and electronic data, our inspectors talk to potential witnesses.

An inspector's reports comprises factual analysis and opinion. It is often peer-reviewed by another professional to ensure its conclusions are robust.

What happens after an inspector reports?

Three outcomes are possible:

• If the inspector's report shows that the offer documents contained no material misstatements, we close the file and take no further action.
• We might refer the matter to other agencies - such as the Registrar of Companies if we think the issuer might have breached the Financial Reporting Act or to the Serious Fraud Office or the Police if we think there was fraud.
• If the report finds the offer documents did contain material misstatements, we ask external prosecution lawyers for a case assessment. This will tell us whether the law was broken and, if it was, suggest the best course of action.

What happens after a case assessment?

If the inspector's report says there were material misstatements, Commission staff report to Commission Members on what courses of action are open to them.

Commission Members look at the circumstances of the case and decide how to proceed. Actions might include:

• laying criminal charges
• beginning civil proceedings
• getting enforceable undertakings (the finance company's directors promise that they will comply with the law in future)
• referring the case to another regulator or law enforcement agency
• publishing a report to guide other market participants
• taking no further action.

What happens when the Commission decides to take criminal and/or civil proceedings?

Charges or proceedings are prepared, then laid or issued and served on the defendants.

With a criminal proceeding, we make a public announcement about it only after the first court appearance. This gives the defendant time to get advice and seek name-suppression, as they have a right to do.

Announcements must follow the Solicitor-General's Media Protocol (PDF 172KB).

What happens when a case goes to Court?

Criminal prosecutions

• Cases go to Court when we believe finance company directors have committed a crime by misleading investors in offer documents.
• Most criminal charges are laid on indictment under s58 of the Securities Act.
• An indictable (or serious) offence means the prosecution must file evidence establishing there is a case to answer before the case can go ahead.
• Indictable charges are heard by a jury, unless they qualify for a judge-alone hearing.
• Indictable offences carry a maximum penalty of five years imprisonment or fines of up to $300,000, plus $10,000 for every day the offence is continued.
• Sometimes charges are laid summarily under either s58 or s59 of the Securities Act.
• Summary charges are heard by a judge alone and carry a maximum penalty of three months imprisonment or fines of up to $300,000, plus $10,000 for every day the offence is continued.
• A person found guilty of an offence under s58 is automatically banned from being a director or promoter of a company or body for 5 years.

Civil proceedings

• We issue these under s55C and other sections of the Securities Act.
• Doing so allows investors to seek compensation from the company's directors and others involved in a misleading offer.

Which investigations are currently underway?

We have completed our investigations of 26 failed finance companies by:

• laying criminal charges/commencing civil proceedings
• achieving a good result by other means eg getting enforceable undertakings from those involved
• referring the case to another, more appropriate, agency
• deciding no further action is warranted because:
  • the information isn't enough to justify charges or proceedings
  • we've uncovered no material breach of the law
  • we've uncovered a material breach but decided it's not in the public interest to prosecute.

Any decision to take no further action is made on the basis of information we currently have. Our decision can and will be reviewed, and our investigation be reopened, if new information comes to light.

Investigations into the other 25 failed finance companies continue.

Which cases are currently before the Court?

Civil and criminal charges laid against directors or officers of 11 companies are currently before the Court. These charges have been laid either by the Commission, or by the National Enforcement Unit of the Companies Office following referral by the Commission. For details see Cases before the Court (PDF 41KB)

Why don't we always take Court action?

We apply the public-interest test set out in the Solicitor-General's Prosecution Guidelines. (PDF 183KB). Reasons for not taking court action may include:

• the unlikelihood of success
• lack of enough evidence
• lack of significant material benefit eg investors unlikely to receive compensation even if civil charges are successful
• little or no impact of any penalty on the accused eg the accused is already bankrupt or banned from acting as a director
• investors will benefit more from finite Commission resources being directed elsewhere.
• we can get an effective result in another way

What other ways can the Commission get an effective result?

Enforceable undertakings

• Enforceable undertakings are legally binding promises made by directors to do things properly in future are sometimes more publicly beneficial than prosecution.
• So, for example, Finance & Investments' partners offered securities to the public without an investment statement or registered prospectus. The Commission accepted an enforceable undertaking that the partners wouldn't manage the company or offer or promote an offer in the future.
• If directors don't comply, the Commission can apply to the Court for compensation and other orders.

Referral to other agencies

• Sometimes our investigations suggest a case would be better pursued by another agency eg the Registrar of Companies, the Commerce Commission, the Police or the Serious Fraud Office. Sometimes we pass on information to another agency for them to consider while we continue our own investigations.

No further action

• Sometimes we decide that a case warrants no further action because:
  • our investigations didn't reveal any material breaches, or
  • there wasn't enough evidence to prove a breach in Court, or
  • there was a material breach, but it wasn't in the public interest to proceed to prosecution in accordance with the public-interest test set out in the Solicitor-General's Prosecution Guidelines (PDF 183B).