Former Tranz Rail shareholders face insider trading charges

1.00pm

The Securities Commission said today it had filed insider trading charges against former leading shareholders in Tranz Rail including high profile expatriate businessman David Richwhite.

The watchdog said it was the first time the commission had used its powers to take court action for insider trading.

It had filed insider trading proceedings relating to share trading in Tranz Rail Holdings Ltd, named in the High Court at Wellington today as Toll New Zealand .

Those named were Midavia Rail Investments BVBA (previously known as Pacific Rail Ltd NV), Berkshire Fund III A Limited Partnership, Michael Beard (former managing director of Tranz Rail), Mark Bloomer (former chief financial officer of Tranz Rail), Carl Ferenbach (former director of Tranz Rail), and Mr Richwhite (former director of Tranz Rail).

The commission's inquiry focused on the sales of shares in the first half of 2002, before the share price of the company began to deteriorate from about the middle of 2002.

At the beginning of 2002 the share price was $4.00. By April 16 2003 it had plunged to 30c.

The commission explained the long wait before issuing proceedings by saying its inquiry involved obtaining documents both in New Zealand and overseas. It involved a large number of interviews and the receipt of formal oral evidence from many witnesses.

"The basis for the proceedings is that the parties who sold their Tranz Rail shares had information about the company which was not publicly available and which would have affected materially, or would have been likely to affect materially, the price of the shares if it had been publicly available."

An additional action for "tipping" is raised against Carl Ferenbach, representing Berkshire Fund III A Limited Partnership, and David Richwhite, representing Midavia/Pacific Rail, an investment vehicle controlled by Fay Richwhite interests.

Fay Richwhite is the high profile merchant bank which is controlled by Mr Richwhite and Sir Michael Fay, who is best known for backing New Zealand challenges for yachting's America's Cup. Sir Michael is now based in Geneva.

The commission's proceedings seek compensation for the losses avoided by the traders. They seek to have pecuniary penalties imposed.

The commission said it had actively investigated the matter since February 2003, when the now disbanded Stock Exchange Market Surveillance Panel released a report on Tranz Rail.

The commission said the inside information at issue relates to: a forecast on Tranz Rail's financial performance and capital expenditure, a bid by Rail America for Tranz Rail which did not eventuate, asset and investment write downs in Tranz Rail, and the financial obligations and credit worthiness of Tranz Rail.

The proceedings are brought under Section 18A of the Securities Markets Act 1988.

The Government changed the law in late 2002 to extend the commission's power to prosecute for insider trading. Previously, it undertook an investigation and left it to shareholders to prosecute if they wanted to.

Under the amended law, the commission can pursue cases when they are deemed to be in the public interest.

"The commission has decided that it is in the public interest to do so in the present case," it said in today's statement.

The commission would not say how much damages it was seeking. Nor would it comment beyond the statement it released.



Fay Richwhite was part of consortium that bought Tranz Rail in 1993 for $400m. It quit the stake in February 2002 at $3.60/share, netting an $87 million profit on the original $31m investment. As well, Fay Richwhite collected $10m in advisory fees.

Fay Richwhite's Pacific Rail sold its 17.5m Tranz Rail shares, then comprising 14.5 per cent of the company, 32 cents below the prevailing price, to financial institutions.

Messrs Beard and Bloomer were the key executives in charge of Tranz when the company careered into near bankruptcy just over a year ago. Australia's Toll Holdings took control of the company last October following a deal with the Government whereby the latter took back the track network for a $1 and agreed to invest $200m revitalising the network as well as investing $100m in Toll NZ rolling stock.

Mr Beard was in the news this month when it was revealed he collected $3.37m as his final pay when he quit the company with a golden handshake following Toll's entry. He worked just three years for Tranz Rail.

The total payout to executives was not disclosed, but a figure of $6m was estimated last year. That would include payments to Mr Bloomer.

It is not unusual for failed executives to be among the best-paid -- a fact that has drawn comment on both sides of the Tasman.

- NZPA