The Financial Markets Authority (FMA) has released a report
on its investigations and enforcement activity in the year to 30 June 2014. Some
of the key themes of the enforcement work carried out in the past year have
Responding to serious financial crime;
Investigating alleged secondary markets violations;
Addressing failures to file important financial statements;
Completing the legacy finance company cases; and
Focusing on actual and potential harms facing the market.
This update summarises the report and comments on likely areas of focus for
the FMA in the current year.
Areas of focus
One of the key themes for the FMA was ensuring assertive action against
serious misconduct. As expected, finance company litigation (both civil and
criminal) was the primary focus accounting for 48% of the FMA’s litigation
matters before the courts for the past year. The key pieces of litigation which
were resolved during the past year included:
Claims by the Serious Fraud Office (SFO) and the FMA against
Belgrave Finance Limited (In Receivership and In Liquidation). Mr Hugh Hamilton,
a lawyer, was found guilty of 14 charges under s 220 of the Crimes Act 1963
(theft by a person in a special relationship). It was held that he assisted the
directors of Belgrave by carrying out the directors’ instructions for the
execution of loan advances in breach of the trust deed.
Mr David Ross of Ross Asset Management pleaded guilty to charges laid by the
SFO in relation to a Ponzi scheme and also to charges of: providing a financial
service (brokering) when he was not registered to provide that service; making a
false and misleading declaration or representation to the FMA for the purposes
of obtaining authorisation as an Authorised Financial Adviser; and supplying
information to the FMA which he knew to be false or misleading. Mr Ross was
sentenced to a term of imprisonment of 10 years and 10 months.
Civil proceedings against Mr Brian Henry alleging market manipulation in the
trading of shares in a listed entity. The FMA alleged that the trades created a
false or misleading appearance regarding the extent of active trading and the
supply, demand, and price of the shares. Mr Henry admitted the claims and the
Court imposed a $130,000 pecuniary penalty.
Another area of significant focus for the FMA has been the secondary markets
including NZX. While the NZX has an obligation to ensure that its markets are
fair, orderly and transparent, the NZX also has an obligation to report
potential breaches of the law and NZX rules to the FMA. The main issues
considered by the FMA during the past year have been: potential insider trading,
market manipulation, and continuous disclosure breaches. The FMA and NZX
routinely make inquiries of market participants about the reasons for unusual
trading patterns and timing. In the case of market manipulation, the FMA expects
brokers to keep clear records of client instructions so that these may be
referred to the FMA or NZX where there is suspected market manipulation. It is
up to the broker when executing a trade to consider whether the purpose of the
order is genuine or manipulative.
The FMA has also started to tackle the perennial issue of late filing of
financial statements and auditor’s reports. Directors who fail to ensure that
the issuer’s financial statements and auditor’s report are filed within the
correct timeframe commit an offence and are liable for a fine of up to $100,000
under the Financial Reporting Act 1993. The FMA has said that accurate and
timely disclosure is a key priority for it and it will take enforcement action
where there is persistent non-compliance. The FMA has prosecuted the directors
of eight issuers this year and has made recommendations to the Registrar of
Companies to issue infringement notices to directors of 13 more entities at the
time of the FMA’s report. Recently a director has been fined $30,000 (after a
discount for an early guilty plea) for failing to file financial statements on
time. The FMA has also brought actions against contributory mortgage brokers for
failure to file annual reports with the Companies Registrar on time.
What’s in the tool kit?
The FMA is focusing on using the full range of regulatory tools in its tool
kit to ensure that the action taken is proportionate to the harm. Under the new
Financial Markets Conduct Act 2013 (FMCA), the FMA notes that
there will be a shift away from criminal liability and a trend towards using the
broader range of civil penalties and remedy provisions which are now available
to it under Part 8. The FMA now may use Direction Orders (which direct
compliance with the FMCA including identifying specific steps for compliance)
and Stop Orders (which prohibit certain action). During the year to 30 June
2014, the FMA used a range of other means at its disposal including public or
private warnings about conduct and products, cancelling prospectuses and
imposing management bans on directors. For example:
The FMA issued a number of public warnings including a warning to Phoenix
Forex Limited (In Liquidation), a company which provided access to a foreign
exchange trading system. The FMA warned that it considered the claimed level of
returns was unsubstantiated and that the profitability and risks associated with
the system were misrepresented. The FMA also noted that Phoenix Forex Limited
ought to have been registered in the Financial Service Providers Register and
authorised by the FMA as it was dealing in futures contracts. The company
has now ceased offering its products in New Zealand. The FMA also has the
power to issue public warnings on a non-compliant company’s website.
The FMA has used its powers under s 43G and s 43F of the Securities Act 1978
to cancel a proposed offer of securities where the prospectus or investment
statement was false, misleading or omitted material particulars.
The FMA has sought management bans for directors and sees these as playing an
important role in protecting investors and allowing confidence to be restored in
the market. At the time of the report, 32 directors were subject to an automatic
five year ban under the Securities Act and/or the Companies Act 1993.
As the tail end of the finance company cases work their way through the
courts, the FMA will likely have more time and resources to devote to other key
areas of concern: potential insider trading, market manipulation, continuous
disclosure breaches, late filing of financial statements, breaches of the Code
of Professional Conduct for Financial Advisers and the Financial Service
Providers Register and monitoring the trustee, auditor and Chartered Accountant
sectors. We are also likely to see a wider array of mechanisms used by the FMA
from its expanded tool kit which now includes Direction Orders and Stop Orders
as well as public warnings, the ability to cancel prospectuses and to impose
management bans on directors.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.