25 Jul 2013

Shareholders' Association welcomes FMA civil action

9:06 am on 25 July 2013

The New Zealand Shareholders' Association is welcoming the Financial Markets Authority's decision to take the first civil action for market manipulation under the Securities Markets Act.

The Financial Markets Authority (FMA) has filed six claims against Brian Henry, one of the founders of Diligent Board Member Services.

It alleges certain orders and trades he made in 2010 breached the market manipulation provisions of the Securities Markets Act. Mr Henry, who left Diligent in March 2009, faces a maximum fine of $1 million for each contravention.

Shareholders' Association chairman John Hawkins says the legal action is another indication the FMA is steadily moving to eliminate undesirable activities from financial markets.

He says prior to the advent of the FMA many retail investors felt regulators were not given any teeth. "Now the FMA through various actions over the last couple of years, and the recently announced one, have shown that we do in fact have teeth and that there's nowhere for people who are perceived to have engaged in inappropriate behaviour to go and hide."

The FMA won't say why it chose to take civil action rather than a criminal prosecution, other than to say it made its decision taking into account the details of the case and its enforcement policy.

The penalties for a criminal conviction include a prison term of up to five years and a fine of up to $300,000 for an individual.

A barrister who specialises in corporate and securities law, Jenny Cooper, says there are a number of considerations which might have led to the FMA choosing a civil action.

She says criminal liability for market manipulation requires proof of actual knowledge by the alleged offender that the statement or conduct is false or misleading, whereas for civil liability it's enough if the person ought reasonably to know it's false or misleading.

Ms Cooper says the claim is easier to prove in civil action, because it's about probabilities rather than requiring proof beyond reasonable doubt.

In civil action, she says, there is a wider range of remedies available. "For a start there's a civil pecuniary penalty option where the maximum penalty is actually higher than the maximum criminal fine and in addition the court can make compensatory orders in civil proceedings to compensate anyone who's lost money as a result of the offending."

Brian Henry was New Zealand's shortest-lived listed company chief executive, resigning 24 hours after the company's shares began trading in December 2007.

That was because he failed to reveal in Diligent's prospectus that he had been bankrupted over the collapse of Energycorp in the wake of the 1987 stock market crash.

Mr Henry says the Securities Commission, which has now been replaced by the Financial Markets Authority, decided to take no action. He says the trading had a minimal effect on the market, with the net effect of the trades being just $1500.

Mr Henry, who now lives in New York, says he will respond vigourously to the legal action.