FMA keeps powder dry on civil claims

FMA's head of enforcement Belinda Moffat.

Markets watchdog holds options open on civil action against finance company directors.

The Financial Markets Authority won't wait until receivers have finished chasing funds from convicted finance company directors when deciding whether to push on with its own civil proceedings and says it considers more than just the interests of a failed firm's investors in weighing up its court claims.

The market watchdog's civil proceedings were filed against the board members from a range of failed lenders as early as 2008 but were put on hold while criminal prosecutions ran their course.

Even though many of these criminal cases have wrapped up, none of the FMA's civil action has yet to see a court room.

The authority also dropped two of these civil cases in the past few months to make way for receivers to recover money from errant directors.

Receivers from PwC had alleged the directors of Lombard and Bridgecorp had breached their directors' duties but settled both of these cases.

For Lombard, the receivers this year announced a $10 million settlement had been reached involving four directors, their insurers and an unnamed "third party".

It will see another 9c in the dollar go to Lombard's 3900 secured debenture holders, who were owed $111 million when the company collapsed in 2008. This brings the total payout for investors so far to 22c in the dollar.

For Bridgecorp, PwC announced an $18.9 million deal involving directors Peter Steigrad, Bruce Davidson and Gary Urwin and their insurers.

The settlement brings the total return for Bridgecorp investors to date to 12c in the dollar. Bridgecorp collapsed almost seven years ago owing 14,500 investors about $460 million.

The FMA dropped its own cases as a condition of these settlements and its remaining proceedings - against the convicted directors of Dominion Finance and Capital + Merchant Finance - are still on hold.

The FMA's head of enforcement Belinda Moffat said the authority would provide updates on these cases in the "near future".

But the market watchdog is not the only one chasing assets from convicted finance company bosses and the police are also eyeing up the assets of two jailed Capital + Merchant Finance directors.

As well as this, Dominion Finance's liquidators have filed a High Court claim against the firm's directors, a former director and chief executive.

Moffat said the likes of receivers or liquidator may be in a better position to chase funds on behalf of finance company creditors and in those instances the authority will assist them and "maintain a watching brief".

"FMA will support the settlement achieved by receivers, if that settlement draws from the same funds that FMA is claiming against and if the settlement will enable funds to be returned to investors more quickly than through litigation. Using the recent Lombard settlement as an example, FMA's claim would have gone after the same funds that the receiver had reached a settlement on," Moffat said.

While the FMA works closely with receivers and other parties on its decisions to push on or discontinue a civil case, the authority is required to make up its own mind.

"FMA is required to make its decisions independently, and in what we consider is in the public interest. Our consideration is not limited to just what is best for the creditors or investors of the company in question. At times FMA's view of what is in the public interest may differ from the commercial interests that a receiver or liquidator may have," Moffat said.

In determining whether or not to drop a civil proceeding in a situation where the authority has already secured criminal convictions - like in the case of Bridgecorp and Lombard - the FMA says it has to assess the "public interest" in the case continuing.

This "public interest" includes the likelihood of success of a claim, the estimated cost and time involved and whether the action will "advance FMA's regulatory objectives".

"Civil litigation involves the deployment of considerable resources and FMA is conscious to ensure that taxpayer funds are not expended on pursuing claims that will not benefit investors or New Zealand's financial markets ... in saying that, FMA will proceed with civil claims where it thinks this is the best option for investors and fulfils a regulatory purpose, which may include clarifying the law and determining issues of importance to New Zealand's financial markets," she said.

Assets in trust safe from FMA

The FMA says it cannot chase trust assets in its civil action against failed finance company directors.

FMA head of enforcement Belinda Moffat said when deciding whether or not to lay civil claims, it considered how much money they have.

"FMA will also carefully assess the personal financial position of the defendants to determine whether actual recovery of compensation is a realistic prospect in the event of a successful claim, and what the size of any recovery might be," she said.

Moffat also said the FMA can usually only target a director's personal assets.

"We cannot pursue assets held in trust. That is because the trust is a separate legal entity, and in law is seen as separate from the individual."

There are exceptions and Moffat cited the ability which receivers have to pursue claims against a trust where assets were transferred to it by an individual during a certain period.

"Another exception is if it can be proved that an individual has an interest in an asset owned by the trust. An example is where the individual has a valid legal claim against or interest in property held by a trust," she said. "However, where property is wholly held by the trust, there is little prospect of FMA or a creditor of the individual being able to access those trust assets."

On the money trail

Bridgecorp
• Collapsed in 2007, owing 14,500 investors about $460 million.
• Investors have received back about 12c in the dollar.
• Receivers reached an $18.9 million settlement with three of the company's directors and their insurers, dropped their $320 million civil claim against the men.
• FMA dropped its claim as a condition of the settlement.

Lombard Finance & Investments
• Collapsed in 2008 owing about 3900 secured debenture holders about $111 million.
• These investors have got back 22c in the dollar.
• Receivers reached a $10 million settlement with the four directors, their insurers and an unnamed third party.
• FMA dropped its claim against the men because of the settlement.

Capital + Merchant Finance
• Collapsed in 2007 owing 7500 investors $167 million.
• These investors have got back nothing to date.
• Receivers say the only potential recovery for investors is action against the company's former trustee, Perpetual, and solicitors who acted for the failed firm. This is due to go to court in May.
• The FMA has filed civil actions against the company's directors but these have been parked.

Dominion Finance Group and North South Finance
• Dominion collapsed in 2008 owing almost 6000 investors a total of $176.9 million.
• To date these investors have got back 12c in the dollar.
• North South went into receivership in July 2010 owing 3900 debenture holders a total of $31 million.
• To date these investors have got back 65c in the dollar.
• Dominion's liquidators have filed a claim against a number of directors and executives associated with the company.
• The FMA has filed civil action against the company's directors but this has been parked.