Greg Boyed interviews Sean Hughes
$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 hes 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. Im 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 ORegan, Mr Bruce Gordon and Mr Dennis Broit. Weve 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. Weve put that claim out there. We know that thats been something that the publics been very interested in, so we were keen to make this announcement today. Its 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 weve 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. Thats just being responsible as a public litigant. So what weve said is that our case in relation to the 2007/2008 period is strongest, and thats where were 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 well be doing is bringing that claim to start with. Well be looking for liability decisions against those directors and promoters, and penalties, and then well be looking at the question of compensation. Now, I dont 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 weve got the best case, and thats where we are today.
GREG Lets get this absolutely straight. This is a civil case; its not a criminal case, unlike what we saw with Lombard. Theres 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 were 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 werent involved in those decisions. Weve inherited those matters. But the Hotchin and Hanover proceeding that Im announcing today is the first major finance company proceeding that FMA has commenced in the 11 months its 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, doesnt it?
SEAN Well, Greg, my reaction is, frankly, irrelevant. I think the disappointment is really those of the investors whove 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, thats 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 well 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 weve gotta make sure that these decisions are all consistent with each other. So lets 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 were 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 dont 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 were taking the cases that have the strongest prospects of success. But Im not gonna sit here and promise to mums and dads out there watching this programme that theyre gonna get all their money back. Well do our best, but weve only been going for 11 months, and so far weve had 100% success rate in the litigation that weve inherited and in the cases that have gone on appeal. But inevitably we will lose some, and thats not because were not good at what we do. Its simply because we dont 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 were 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 theyre playing by. These are also important, and I dont 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, youve got four men who are very prominent, very respected, grey hair and probably have a lot of leather-bound books in their homes. That doesnt necessarily make them wizards when it comes to - clearly - investing other peoples money. Mark Hotchin and Eric Watson are obviously very very good at making money. How different are these two cases?
SEAN Well, I think theyre different firstly because one has been taken as a criminal prosecution and one has a civil, and thats clearly a decision that weve made as to where we think the line has to be drawn in the sand as to the sorts of behaviour that were seeing. Now, having said all that, the question of whether you look at retired politicians as directors, as being good at the job that theyre doing, or financial market wizards as being good at the job that theyre 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 cant 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 its relevant. Now, at the moment, Greg, were saddled with a piece of law that is 34 years old. Were 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 weve seen in this market. So theres 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 youve 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 thats why Im 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, youre a criminal. Now, what were saying is that we need to move to a regime where theres 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. Theyll end up in the position of the Lombard four.
GREG Lets talk about Mark Hotchin. From an investors point of view, hes 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. Weve been back to court 10 times in relation to the preservation of those orders. Weve 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 dont have those assets, clearly we have to make a judgement call as to whether its 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 weve put up evidence that they may be whittled away in some way, or potentially where the defendant might be overseas, and in that situation weve 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, weve got some power companies that are going to be going up for sale. Weve got people who will be looking to invest in those. Given the experience of what weve 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 were not sitting here having a similar discussion?
SEAN Well, I hope Im 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 havent 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 thats not the safe thing to do. So thats the first point. I would like to see investors spreading their assets across a range of different types of investment. Secondly, weve 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 theyll be getting competent advice and that their advisor understands what theyre doing, and Im not sure that always was the case with the finance companies. Thirdly, youve got a beefed-up regulator thats got more powers and more resources. But theres still a lot of work to be done. Weve got, as Id mentioned before, Greg, a large-scale reform of NZs securities laws which is yet to pass through the parliament, and beyond that theres 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 dont want to have is a nanny state, where investors only put all their eggs in a very very safe basket. What wed like to see is a market thats got lots of options, but mums and dads understand what it is that theyre 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 theyre getting into.
GREG Sure. Just finally, Warren Buffet, who knows a thing or two about making a buck, said, You can only find out whos swimming naked when the tide goes out. Weve 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 dont 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 its 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.