Richwhite: I was a rail believer

By PAUL PANCKHURST AND GARETH VAUGHAN


David Richwhite reveals one possible strand of his defence against Tranz Rail insider trading allegations in a statement of evidence obtained yesterday by the Business Herald.

The Securities Commission alleges that as a Tranz Rail director, Richwhite tipped off Midavia - an investment company he owned with Sir Michael Fay - to unpublicised problems at the company.

Midavia sold shares worth $63 million on February 8, 2002, allegedly avoiding a loss of up to $25 million.

But a statement of evidence from Richwhite to the commission says he was "extremely optimistic" about Tranz Rail's strategic plan and management's ability to deliver as late as June 2002.

He says his optimism was shared by the rest of the Tranz Rail board and senior management - as illustrated by the enthusiastic pursuit of a management buy-out proposal through to late 2001.

His position contrasts with the timeline that the commission regards as crucial to showing that the insiders acted on unpublicised bad news.

It highlights:

* Audit committee papers reflecting auditor KPMG's concerns from "at least July 2001" that Tranz Rail assets needed substantial write-downs.

* A November 2001 report from chief financial officer Mark Bloomer with financial forecasts below previous levels.

* A December 2001 financial plan with management forecasts below the forecasts of sharemarket analysts.

* A December 2001 letter from Rail America saying that, after performing due diligence, it had concluded "the fundamental value of Tranz Rail does not support the current share trading range".

* Board papers in the last quarter of 2001 relating to off-balance sheet risks associated with a long-term lease of the inter-island ferry Aratere.

Unsurprisingly, Richwhite's position, disclosed in his "preliminary comments" on the commission's investigation, is quite different.

He says he was "extremely optimistic" about new chief executive Michael Beard's strategic plan and management's ability to deliver from August 2000 - when the board first sighted the plan - until June 2002.

At that point "it started to become clear that there were serious problems with implementation".

Of the optimism that had been shared by management and board, he says: "We all believed that the strategic plan was at the cutting edge of railways and network management, and were excited about Tranz Rail's prospects."

The bulk of the share sales in contention were in February 2002.

The share price fell from May and tanked in July.

The Richwhite statement is one of nine documents attached as exhibits to an affidavit filed by the commission's director of enforcement, Norman Miller, with the High Court at Wellington.

Details incidental to the purpose of Miller's affidavit - seeking leave to serve proceedings overseas and directions for the conduct of the court proceedings - give some of the flavour of the 19-month Securities Commission investigation.

The case became public on Wednesday when the commission filed a statement of claim in the court.

It accused five defendants of insider trading:

* Sir Michael Fay and David Richwhite's Midavia Rail Investments.

* American investment fund Berkshire Fund III, of Massachusetts.

* Former Tranz Rail managing director Michael Beard.

* Former chief financial officer Mark Bloomer.

* Former director Carl Ferenbach, who was also a representative of Berkshire.

It accused Richwhite and Ferenbach of "tipping", or serving as conduits of inside information.

The penalties could be as much as $258 million.

Papers in the Miller bundle reveal Richwhite was accompanied by three lawyers - Alan Galbraith, QC, Bell Gully partner Roger Partridge and Bell Gully senior solicitor Jenny Cooper - when he was interviewed by the commission in Wellington this year.

Former Tranz Rail managing director Michael Beard went to his interview last December with two partners from Auckland law firm Wilson Harle, Chris Browne and Ian Denton.

A private examination of former Tranz Rail chief financial officer Mark Bloomer was held in a meeting room of the Westin Hotel in Sydney on December 16 last year.

Securities Commission chairwoman Jane Diplock took part in the questioning, held in co-operation with the Australian Securities and Investments Commission under the Mutual Assistance in Business Regulation Act.

The material provides an initial who's who of the behind-the-scenes inquiries and negotiations in the case.

Names to feature include:

* Auckland barrister Anthony Grant and lawyer Paul Collins, acting for Bloomer.

* Jim Farmer, QC - believed by the commission to be acting for Richwhite and Midavia.

* Pip Greenwood, a partner of Russell McVeagh, acting for Tranz Rail, now called Toll NZ.

* Robert Dobson, QC, acting for the commission.

* Colin Beyer and Falc Clouston, Securities Commission members involved in the inquiry.

* Norman Miller and Joanne Moores, commission staff working on the case.

Lawyers Chris Brown and Rick Shera have already been identified as acting for, respectively, Beard, and Ferenbach and Berkshire.

Miller's affidavit says the commission had not had dealings with New Zealand legal advisers for two of the defendants - Berkshire, of Boston, and Ferenbach, also of Boston.

"I believe Ferenbach may have retained New Zealand advisers, but the commission has not had dealings with anyone acknowledging such instructions," he said.

Miller's affidavit asks for leave from the court to serve the defendants overseas.

That request was granted on Thursday.

It also asks for "a specified judge" to be allocated to the proceedings.

"The reasons for the application ... are the complexity of the issues, and because it is expected that there will be a number of interlocutory applications filed in the course of the proceeding."