Watson 'violated US laws'

By PAUL PANCKHURST

Share trading in a New Zealand company by businessman Eric Watson violated United States securities laws, says the US sharemarket watchdog, the Securities and Exchange Commission (SEC).

Watson "engaged in conduct that had the effect of defrauding a US issuer and its shareholders", say commission findings on his purchases and sales of shares in McCollam Printers in 1996 and 1997.

Under a settlement agreement, Watson has neither admitted nor denied the findings.

The commission's findings are not a criminal conviction.

A 1998 report by the Securities Commission in New Zealand stopped short of saying Watson had breached New Zealand's insider trading rules but said the trades had not enhanced "the reputation and standing of our market".

Watson then set up a $680,000 fund to return profits from the share trading to McCollam shareholders but said he had been unfairly criticised for trading that was not illegal.

The powerful US watchdog revisited the facts from an American perspective. The American company in the case was US Office Products.

London-based Watson is one of New Zealand's wealthiest businessmen. He co-founded the Hanover Group of finance companies in 1999, and has controlled the listed Pacific Retail Group since then also.

The opening of the American SEC investigation was reported in New Zealand in 1998 but fell off the news media's radar as negotiations between Watson and the commission stretched out over years.

The findings were issued just over two and a half years ago but not publicised in New Zealand.

The Business Herald uncovered them last week during research into Watson's business interests.

The SEC found Watson breached a section of the Securities Exchange Act in the United States relating to omissions of material facts when buying or selling shares.

It ordered Watson to "cease and desist" from further violations.

The case goes back to 1996 and 1997 when Watson was the chief executive of Blue Star Group, a New Zealand firm he had sold to the Nasdaq-listed US Office Products.

US Office Products was on the acquisition trail. It used Blue Star as the vehicle for buying a series of businesses in Australia and New Zealand, including McCollam.

The SEC found Watson bought and sold McCollam shares at the same time he was negotiating the purchase of McCollam for Blue Star.

US Office Products did not know of the conflict.

For US Office Products - and the SEC - that was a major omission of a fact that could have caused the US company to walk away from the deal.

The SEC said: "In November 1996, Watson recommended McCollam to US Office Products' CEO as a potential acquisition target.

"Watson did not, however, tell US Office Products that he and two associates owned more than 300,000 shares of McCollam."

While negotiating the deal, Watson "failed to disclose that he and two associates continued to purchase McCollam shares". The group bought a further 1.7 million shares through 19 separate transactions.

"None of these transactions was made in Watson's name.

"Instead, Watson's purchases were conducted through corporate nominee accounts, including foreign accounts, which he owned or controlled at several different brokers.

"Since the purchases by Watson and his associates were executed through nominee accounts, US Office Products could not have known of their beneficial interest in McCollam."

The SEC said Watson's trading was "a material fact, and his failure to disclose it to US Office Products was a breach of his duty".

Through the omission, Watson and his associates "reaped a profit of more than $530,000".

"Even though Watson is a New Zealand citizen and his purchases and sales of McCollam shares occurred in New Zealand, Watson engaged in conduct that had the effect of defrauding a US issuer and its shareholders.

"The commission will hold accountable all violators of the US federal securities laws, including foreign entities and individuals, when their actions adversely impact US issuers and individuals."