KEY POINTS:
Two senior finance company executives were duped in a major fraud three years ago, but the public will probably never find out who they are, nor the name of their high-profile company.
That's because the men were granted name suppression by Judge James Weir when they gave evidence
about the case, heard in Rotorua.
One of the men was alleged in court to have used his business to prove that he had $27 million to put into a "prime bank instrument" scheme in which investors ended up losing millions of dollars.
The scheme, which promised monthly returns of up to 100 per cent, was promoted by a Rotorua couple, Bill and Lee Papple, and a Dunedin woman, Tina West.
The court heard that one of the executives ended up investing more than US$300,000 ($394,500) in the scheme, despite being given "bugger all" information about it. The other invested US$250,000.
The men's lawyer told the court his clients were worried that if the public found out about their "Looney Tune" investments, their company might collapse.
In the end, the judge ordered their names be kept secret because of their reputations, the financial and professional consequences, and possible consequences for their company and its employees.
The pair are still in the finance industry, entrusted with tens of millions of investors' dollars.
The case highlights the risks for investors willing to dabble in the non-bank finance sector. And while it has been easy for Bridgecorp's critics to say "I told you so", it also begs the question of who might be next.
One company that has attracted some scepticism in the past is Hanover, partly because of its links to flamboyant businessman Eric Watson. In April, the company was rated BB+, one notch below investment grade, by Fitch, one of the top three global ratings companies.
Chairman Greg Muir says Hanover has worked hard under his stewardship to get itself in good shape "and really letting people see further up the skirt than most other finance companies do".
"We've been trying to run the business like a public company for the past two years."
Almost everyone in the industry seems to agree that Marac, Strategic Finance, Canterbury Finance, St Laurence, UDC and Hanover (which also owns United Finance, FAI Finance and United Home Loans) are in the top tier. But when it comes to the ones that most advisers wouldn't touch with a bargepole, naming names is legally fraught.
Kapiti Coast sharebroker Chris Lee runs his own ranking system, available on his website, www.chrislee.co.nz. He has received plenty of writs, but is prepared to defend his decisions, and denies claims by his critics that some of his rankings are personal rather than professional.
Lee believes the Bridgecorp collapse will spark a shakeup in the sector. He would like to see advisers forced to fund an Ombudsman, and would also like to see them forced to hold a certain amount of cash relative to their volume of sales.
Some believe a move to fees, rather than commissions, would help restore public confidence in advisers.
"It's very apparent to me that this is going to be the catalyst that causes the change that the industry really desperately needs," says Lee.
However, the real catalyst could be the changes proposed by the Securities Commission.
Way back in 2004, the commission prepared a report that was highly critical of the non-bank finance sector. The review suggested "a large number" of finance companies had shortcomings in their disclosure and identified as problem areas the spelling out of risk, as well as details of related-party transactions. It was also critical of finance company advertising, and credit ratings.
In June this year, the Government outlined proposed new laws for the sector that will include oversight by the Reserve Bank, compulsory licensing, "fit and proper" requirements for directors and senior managers, strengthened capital adequacy rules, and mandatory credit ratings from an approved rating agency.
But some critics believe it is too little, far too late - with some of the measures, like mandatory credit ratings, not expected to come into force until 2010.
The industry is rife with rumour that more than half a dozen companies have recently received damning ratings, and failed to publicise them. But few support mandatory ratings, believing the cost will be prohibitive for smaller companies that are well run. Some also believe it will actually destabilise the industry, by forcing needless diversification in such a small market.
However, most agree there needs to be much better disclosure. The disclosure issue is vital, to prevent more investors getting burned, says NZX chief executive Mark Weldon.
"The Government should urgently put through legislation which is very simple and says 'if you've raised money from the public, and there is any material change in your financial health, then you have to tell the public about it', and you'd very quickly find out who's going down the toilet right now," says Weldon.
Meanwhile, the fate of another finance company linked to Bridgecorp remains unclear. Compass Capital was set up by Bridgecorp as a more conservative product for investors. It has a separate board and six good-quality loans, worth around $18 million, and is fully insured. It is believed to be the $2 million "investment" mentioned in the receivers' update issued last week.
Asked about the future of Compass, receiver John Waller will only say he is working closely with the company. But according to an insider, he could have a fight on his hands.
"I'm sure the receiver would like Compass to go away and he can free up his $2 million. But I'm sure they'd like to stay alive, and they have the quality of lending and insurance policies to do that."
* Disclosure of interest: Karyn Scherer was editor of The Daily Post in Rotorua at the time it opposed the suppression order in the fraud case, and represented the paper in court.
