Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Market watchers all feel the pressure

Opinion: Legal claims hinder writing about controversial topics

Mark Hotchin issued defamation proceedings over opinions expressed in this column. Photo / David Rowland
Mark Hotchin issued defamation proceedings over opinions expressed in this column. Photo / David Rowland

Details of what purports to be the contents of a leaked email from blogger Cameron Slater to Mark Hotchin and PR man Carrick Graham, dated October 5, 2011, particularly disturb me.

According to these reports Slater wrote that Justice Minister Judith Collins was "gunning for" Serious Fraud Office boss Adam Feeley. The email, and subsequent revelations, seemed to me to indicate that parties aligned with Hotchin decided, or were advised, that the best way to defend his role in the Hanover Finance debacle was to attack his critics. These appear to include Financial Markets Authority boss Sean Hughes and Feeley.

If it is true, then the leaked October 2011 email also has relevance to this column because a few months earlier Hotchin lodged a defamation claim against the New Zealand Herald and myself for a number of my Weekend Herald opinion columns between November 2008 and March 2011.

The opinions I set out in the columns were at times critical of Hotchin and his role in the effective collapse of Hanover Finance.

The defamation claim had an impact on my willingness and ability to continue writing about Hotchin and Hanover and this is my first column on the subject since March 2011.

Hopefully, alleged attacks on the FMA and SFO haven't had a similar impact on their willingness and ability to fully investigate the activities of Hanover Finance.

The Hanover Finance story effectively began in December 1999 when Hotchin and Eric Watson gained control of Elders Finance. The company grew rapidly and changed its name to Hanover Finance in September 2005.

Hanover relied heavily on Richard Long, the former television newsreader, to attract investors through an extensive TV and print advertising campaign.

The Long strategy was highly successful and by June 2006 the finance company had total assets of more than $1 billion.

However there there were a number of controversial issues regarding Hanover including:

• The company had a very high level of related party loans (loans to parties related to the main shareholders). These loans totalled $197.5 million, or 19.4 per cent of total assets, as at June 30, 2006.

• Hanover Finance's loans were mainly property development oriented with over 90 per cent of the interest income capitalised.

On July 23, 2008, Hanover Finance suspended repayment of capital and interest on its debentures and bonds. This announcement was made just a month after the company paid a dividend of $5.5 million.

On December 9, 2008, Hanover Finance investors approved a moratorium whereby debenture holders were supposed to receive 100 per cent of their money back by December 2013.

On November 10, 2009, Hanover announced that investors would receive only 70 per cent, instead of 100 per cent, of their capital back. A week later the company announced that it had entered an agreement to sell the entire business to Allied Farmers, the struggling NZX company.

The consideration for each 100 cents' worth of Hanover Finance debentures was as follows:

• Investors would keep the 6c repaid to them under the moratorium approved in December 2008.

• 22c of every 100c would be written off.

• Investors would receive 3.4794 Allied Farmer shares for the remaining 72c outstanding.

Since then Allied Farmers has had a one for 100 share consolidation and the 3.4794 shares have become 0.034794 Allied Farmers shares. As Allied Farmers' shares are now trading at 8.6c these 0.034794 shares are worth just 0.3c. Thus, Hanover Finance debenture investors have received 6 cents in cash and, with their Allied Farmers shares worth 0.3 cents, their total return is only 6.3c for every 100c invested.

Investors in Bridgecorp, another finance company disaster, have received 8c for every 100c invested with the possibility of more to come.

Hotchin's defamation claim was lodged after my opinion column written in response to a radio and television blitz by Hotchin presenting his side of the Hanover debacle.

In the column I quoted the following exchange between Hotchin and TVNZ Close Up presenter Mark Sainsbury on the Allied Farmers transaction:

Sainsbury: "But you were out there at those meetings telling the Hanover investors take this deal ... this is gonna be good for you. It hasn't been good for them."

Hotchin: "No clearly, and that's why I'm here. The whole point is we were sold a concept and an idea and they [Allied Farmers] haven't delivered, and they haven't even come close, it's so far away."

Sainsbury: "So are you saying you were hoodwinked?"

Hotchin: "Totally."

The Sainsbury interview went on to discuss Hanover's dividend payments and related party transactions as follows:

Sainsbury: "How could you take dividends out?"

Hotchin: "Because they went back in, it was liquidity, every dollar that went out two dollars was going back in, so it was actually creating liquidity."

In my opinion Hotchin's 2011 media interviews were bizarre because the Hanover story seemed to have run its course. Hotchin supported both the 2008 moratorium and the Allied Farmers transaction the following year.

The reporting of the leaked emails last weekend seems to suggest to me that those aligned with Hotchin were concerned about FMA and SFO investigations and appear to have decided to attack the regulators.

Media reports of the leaked emails also suggest Carrick Graham, his PR consultant at the time, may have been involved.

These media reports also suggest parties aligned with Hotchin may have been secretly paying bloggers Cameron Slater and Cathy Odgers to write negative posts about the FMA and SFO.

I believe the FMA and SFO would have been well aware of these blog attacks because big organisations circulate daily media briefings, in paper or electronic form.

These briefings usually contain copies of all references to the organisation in the conventional print media, blogs or web comments.

They also contain transcripts of important radio and television references.

Former FMA chief executive Sean Hughes told Kathryn Ryan on Radio New Zealand this week that he was aware of what appeared to be attacks through his organisation's daily media briefing. He said they were "an attempt to distract" the organisation but he rejected any suggestion that former Justice Minister Judith Collins, or any other minister, tried to influence the FMA and any of its investigations.

He said he had been a regulator in a number of countries but "had never experienced the level of personal denigration" that he had been subject to in New Zealand.

He went on to say that listeners may be surprised to hear this, particularly as he had worked in Australia.

Hughes also said that what appeared to be personal attacks had "certainly influenced" his decision not to seek a second term at the FMA.

He said that they had been "a disincentive".

This column is disturbed by media reports that the leaked emails seem to show parties aligned with Hotchin paid bloggers to attack the FMA and SFO.

The integrity of our capital markets is very dependent on public issuers putting the interests of investors first and having regulators willing and able to take action when there are allegation that this important principle may have been breached.

In my experience being subject to defamation claims can leave you feeling intimidated and unable to write about a controversial subject.

Hopefully our regulators haven't felt the same level of intimation and restriction when they have been attacked though blogs, social media or other communication forums.

• Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

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