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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

1. 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.
2. The people identified as possible insiders in the proposed notice were:

3. 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.
4. 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.
5. 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

5. 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.
6. 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.
7. 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

8. 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

9. 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

10. The second main allegation relates to a series of "due diligence" disclosures by Air NZ. The complaint was that each of:
    1. The New Zealand Government;
    2. The then major shareholders of Air NZ namely BIL International Ltd and Singapore Airlines Ltd; and
    100. 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.
11. 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.
12. 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.
13. 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

14. 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:
    1. him or herself have sold or bought the public issuer's securities; or
    2. 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).
15. 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.
16. 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.
17. 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.
18. 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:
    1. 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;
    2. Whether or not the insiders against whom there may be such a cause of action are identified or identifiable;
    100. Whether or not there is any conclusive defence;
    4. What information might otherwise be available to the requester without the necessity of first obtaining an opinion;
    5. The seriousness of the alleged breach of the Securities Amendment Act;
    6. The scope of the request; and
    7. The costs and resources which would be involved in such a process.

Consideration - The Turkington Conversation

19. 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.
20. Four points emerge from that part of the Report relevant to the present request:
    1. 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;
    2. 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;
    100. 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;
    4. 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.
21. 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.
22. 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.
23. 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".
24. 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.
25. 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.
26. 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

27. 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.
28. 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.
29. In relation to the New Zealand Government's subscription for new equity in Air NZ:
    1. This subscription was formally approved by the shareholders of Air NZ in general meeting;
    2. 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);
    100. The factual position regarding communications between Air NZ and the Crown is already public in light of the information released by the Treasury;
    4. 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.
30. 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.
31. 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.
32. 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.
33. 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

34. 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