Toothless Stock Exchange watchdog under fire

By ELLEN READ markets writer

The Stock Exchange yesterday revealed an extraordinary rift in relations with its own watchdog and said it is reviewing the market surveillance panel's future.

After a lengthy investigation into forecasts made by plastics manufacturer Vertex last year, the panel yesterday found the company had breached listing rules but took no action against it.

The exchange immediately made its irritation clear, issuing a statement saying the conduct of Vertex "constituted a significant breach and warranted censure".

The panel could have recommended censure, suspension, or delisting.

The exchange created the panel in 1989 to enforce listing rules. It operates independently, but the exchange said it had for some time been reviewing its business and infrastructure, including the legal and regulatory framework.

"Any relevant findings of this review, which will include all services discharged by independent bodies to the NZSE, will be made public at the appropriate time," the exchange said.

Shareholders' Association chairman Bruce Sheppard said the Vertex squabble effectively means that the exchange has no confidence in the panel.

He questioned the dynamics of the relationship where the panel will have to police the exchange after its planned listing later this year.

"Our view is that the Securities Commission should be running surveillance," and the dispute added weight to that, he said.

Vertex makes ice cream tubs, industrial containers, foam food trays, and parts for drench guns. It issued a profit warning only 9 1/2 weeks after its $61 million float on July 1 last year.

The exchange asked the panel to investigate Vertex on September 5 after it said its half-year pre-tax earnings would be 15 per cent under the forecast in its June prospectus.

Reporting that investigation, the panel said Vertex had information about the company's outlook that should have been released to the market, but was not.

"The Vertex prospectus highlighted that the company's revenue growth would derive from two divisions in particular - Technical Injection and Securefresh," the panel said.

"It appears, however, that the performance of both divisions was falling short of prospectus levels prior to listing, and that this continued thereafter with, successively, cost increases during July, and material revenue declines during August."

Although the divisions were below par in July, Vertex management waited until receiving data in August before deciding whether the downturn signalled a trend.

The panel said Vertex directors may have believed they were allowed some leeway before deciding to review the company's performance, but the exchange rules required "relevant information" to be disclosed immediately.

The continuous disclosure regime of the new listing rules heighten that responsibility.

Vertex directors said they believed it was important to take the time over a revised forecast rather than risk misleading the market with a rushed assessment.

The company disagreed with the panel about when the board reached "sufficient certainty" to release information to the market.

"Vertex believes there is widespread confusion about the new stock exchange continuous disclosure regime, and the directors of New Zealand public companies need detailed guidelines if they are to avoid unwittingly breaching the new requirements," the company said in a statement.

Last month, shortly after South Island businessman George Gould took a 19.9 per cent stake, Vertex again lowered its full-year profit forecast for the year ended March 31.

The company now expects earnings before interest and tax of between $9.2 million to $9.6 million, compared with the previous estimate in September of $10.1 million.

Vertex shares last traded yesterday at $1.45. They have recovered after slumping from their listing price of $1.97 to a low of $1.14 in October.

The company remains under investigation by the commission over its initial profit announcement.