Nick Wevers & Paul Bublitz
Watchdog is acting on investors' behalf, writes Hamish Fletcher.
It's a litigant's fantasy - all reward and no risk.
New Zealand's market watchdog has for the first time stood in the shoes of out-of-pocket investors and exercised its right to sue for them.
It's a move we can expect more of from the Financial Markets Authority under the country's new regulatory regime, which shifts focus away from criminal prosecutions and towards civil recovery.
But while this inaugural action is a taste of the future, it is concerned with alleged wrongdoing from half a decade ago.
The FMA is suing Prince & Partners, the trustee of Viaduct Capital - a financier that went into receivership in 2010 owing investors $7.84 million.
Viaduct was among the smaller finance company failures and its collapse was dwarfed by the likes of Bridgecorp, which owed $500 million when receivers were appointed.
Just as Viaduct was a minnow, its trustee was also under the radar in the finance company industry and didn't act for investors in any of the high-profile failures.
It now bears the stain of being the first (and likely last) finance company trustee to be targeted by the FMA, which in 2012 declined an application by Prince & Partners for a new licence.
The regulator alleges the trustee breached its duties to investors and to the Crown, which bailed out those owed more than $7 million when Viaduct went into receivership.
That was because of the company's involvement in the Government's retail deposit guarantee scheme.
A further $515,000 was owed at receivership to investors who put money into the company after the Crown withdrew its safety net in April 2009 because of concerns about Viaduct's change of ownership.
Viaduct's purchase and the Crown then refusing to continue to back the firm is at the heart of the FMA's case against Prince & Partners.
According to court documents filed by the Financial Markets Authority, the purchase transaction was not in the interest of Viaduct's investors.
Had Prince & Partners performed its duty to investors, the FMA alleges, it would not have agreed to the deal.
As a result of the trustee's alleged breach of duties, the FMA says both the Crown and the investors who put in money after April 2009 suffered losses.
The regulator wants an inquiry into those losses and an order that the defendant pay damages, yet to be determined.
Just over a year before Viaduct collapsed, two businessmen -- Paul Bublitz and Nick Wevers -- approached the shareholders about purchasing it.
Until that point it had been known as Priority Finance.
Wevers, the former chief executive of Blue Chip, died this year, only days after the FMA announced separate criminal charges against him, Bublitz and four others.
Bublitz had founded Strategic Finance, but sold it years before that firm also collapsed.
Both he and Wevers were associated with Hunter Capital, a group of investment companies the FMA says Bublitz owned and controlled.
Hunter Capital was to provide the money for Phoenix Finance Holdings, a firm directed by Wevers, to buy Priority.
To enable it to get the required funds, Hunter Capital proposed to sell a mix of loans and shares to Priority for $3.55 million in cash and capital notes.
Hunter Capital would then lend the funds to Phoenix, enabling its purchase of Priority to go ahead.
After reviewing the proposed purchase -- which included legal and accounting opinions provided by Hunter Capital -- Prince & Partners director Colin Wilson approved the transaction.
The FMA alleges Wilson did not make separate inquiries or carry out due diligence before giving the trustee's go-ahead for the deal. Prince & Partners denies this and has said Wilson met with Wevers to discuss the transaction.
A month after the sale went ahead and the company was renamed Viaduct, Treasury aired concerns about the change of ownership and appointed PwC to investigate the deal.
A week after PwC's report was released, Treasury pulled Viaduct out of the guarantee scheme.
According to the FMA's court documents, PwC's report raised a string of issues about the acquisition.
For example, it alleged that the recovery of one of the Hunter Capital loans sold to Viaduct was questionable and the guarantees obtained by the firm could be of little value.
"The quality of due diligence come
undertaken by Viaduct and its directors was poor," the FMA said PwC found.
"The assets purchased by Viaduct appear to have been motivated by Hunter Capital's desire to exit a number of its investments ... as a consequence of the transactions, cash in Viaduct decreased from $2.78 million to $231,000. That cash was used to purchase assets with limited liquidity," the FMA also said in referring to the PwC report.
Prince & Partners, in its statement of defence, denies a number of these allegations.
The FMA alleges that in approving the purchase transaction, Prince & Partners breached duties to investors by failing to make adequate inquiries into the relationship between Wevers and Bublitz, and Hunter Capital and Phoenix.
The defendant also allegedly breached its duties by "failing to carry out adequate due diligence on the value of the assets sold by Hunter Capital to Priority and whether the agreed price reflected fair value."
The regulator also alleges that the PwC report and the withdrawal of the Crown guarantee put (or ought to have put) Prince & Partners on notice of material concerns about Viaduct's operation.
If the trustee had followed its duty to investors once it was put on notice, the FMA alleges, it would have exercised its rights to protect the interest of Viaduct investors by requiring the company to stop issuing securities and/or starting an orderly wind up.
Prince & Partners denies the key points of the FMA's claim and that it breached its duty to investors relating to the purchase deal or the withdrawal of the Crown guarantee.
No trial date has been set for the High Court stoush, and the case is to come before a judge in February, to deal with any administration issues.
The Paul Bublitz-controlled group that financed Viaduct's purchase included Hunter Capital, a now-liquidated company involved in an ill-fated property development on Auckland's North Shore.
According to the firm's liquidators, Hunter Capital participated in a property project known as Albany Heights, which the Serious Fraud Office has been investigating for more than a year.
An SFO spokeswoman yesterday said the investigation was ongoing.
The liquidators, from Waterstone Insolvency, say this project sought millions of dollars from Asian investors, whose funds were transferred via a Wellington law firm into two companies, called Hunter Gills Road and Albany Heights Villas.
Hunter Capital received some of these millions.
Hunter Gills Road and Albany Heights Villas also went into liquidation without the project being completed. The land was then sold to new developers.
House prices will be 20% lower in real terms by the mid-2030s than in 2021.