The Financial Markets Authority's unprecedented action against the trustee of a failed finance company is the sort of proceeding the watchdog is likely to launch more often under the country's new regulatory regime, says a senior lawyer.
The FMA announced yesterday that it had filed civil proceedings against Prince and Partners Trustee Company, the trustee of failed finance company Viaduct Capital, which collapsed in 2009 owing investors $7.8 million.
About 95 per cent of what was owed to Viaduct investors was paid out by the Treasury, which bailed the company out through the Crown's retail deposit guarantee scheme.
This scheme was established to try to bolster confidence amidst the global financial crisis.
The Treasury - and those investors not paid out by it - was likely to get back less than 20c in the dollar, receivers said yesterday.
The FMA said the High Court could award compensation to "investors who suffered loss as a result of Prince's failure to fulfil its obligations as trustee".
The FMA's lawsuit against Prince and Partners is taken under laws that allow it "to stand in the shoes of another, and exercise that person's right to take action against an individual or company who is or has been in the financial markets industry".
As well as being the first time the FMA had targeted a finance company trustee, law firm Chapman Tripp yesterday said it was also the first time the regulator had exercised someone else's rights to sue.
"Exercising the right of action of Viaduct investors and the Treasury (who holds the rights of investors paid out under the Crown Guarantee), FMA alleges that Prince failed to fulfil its obligations to protect the interests of investors in Viaduct," the FMA said.
"The claim further alleges that this conduct resulted in loss to individual investors and to the Treasury under the Crown Guarantee, to which Viaduct was a party."
The regulator was required to give notice to investors and the Treasury of its intention to bring a claim, with all parties except one giving consent.
Chapman Tripp partner Ross Pennington said this sort of action - where the FMA exercises an investor's right to sue - was likely to become more frequent under new capital markets regulations.
These rules began coming into effect in April under the Financial Markets Conduct Act - which is a huge overhaul of New Zealand's capital markets law.
"The whole bias has moved from criminal to civil [action]," Pennington said yesterday.
Pennington said it would be interesting to see the dynamic which developed between class actions, suits brought by the FMA, and litigation funding.
"Clearly if you were in a class [of investors] you would love the Government, as it were, to come along and be your litigation funder pursuing your private cause of action."