Editorial: Hanover deal leaves too much in dark

Claims that Hanover's directors and promoters misled investors in prospectuses and advertising between December 2007 and July 2008 will not be tested in court. Photo / Brett Phibbs

Editorial

Law enforcement agencies have a number of reasons for reaching out-of-court settlements. Most obviously, they provide certainty of outcome and avoid years of costly legal deliberation. But there are also clear disadvantages. If there is an important statement to be made about the law and the need to abide by it, a case needs to be pursued to the bitter end. Only court proceedings can bring details of wrongdoing into the open and, if successful, ensure a fuller measure of accountability. The Financial Markets Authority's settlement with the failed finance company Hanover needs to be considered in that context.

Claims that Hanover's directors and promoters misled investors in prospectuses and advertising between December 2007 and July 2008 will not now be tested in court. Instead, the company will pay $18 million to 5500 investors. Some will be grateful even if that equates to only between 5c and 20c in the dollar. Others may have preferred to have seen the authority press its $35 million civil claim for however long it took in the interests of accountability.

As it is, there is not even an admission of liability from Mark Hotchin, Greg Muir, Sir Tipene O'Regan, Bruce Gordon and Dennis Broit, or former shareholder Eric Watson. Indeed, the five claimed the authority would not have succeeded at trial, though it might be wondered therefore why they agreed to a payout. Either way, the absence of legal proceedings means many questions will remain. We do not know, for example, who paid what in the settlement. Or why Mr Broit, a Hanover Group director, was required to contribute but Mr Watson, a fellow board member, was not.

Nor will New Zealanders gain a clearer picture of the downfall of Hanover and related companies, which meant 16,000 people with investments totalling more than $500 million lost most of their money. Amid the domino-like collapse of finance companies, this had a very high billing in terms of profile and calamity.

In many minds, it reconfirmed a mistrust of financial markets that had persisted since the 1987 sharemarket crash. The confidence of such people is not restored by settlements like this.

In the first instance, the deterrent value is clearly limited. The sum of $18 million needs to be measured against what the authority planned to claim. Such settlements also cease to make sense if they are palpably unfair to one side of the equation. Many Hanover investors will have a dim view of what has been secured in the settlement.

There are, of course, perils in pursuing legal action. The Serious Fraud Office's prosecution of South Canterbury Finance was an instance of over-reach. Only minor convictions resulted. The Financial Markets Authority can also argue that the most important part of its job is the promotion and facilitation of fair, efficient and transparent markets. It would prefer to look to the future, not deal with history. But regulating misconduct will always be an integral part of that process. In the case of Hanover, a full accounting in court would have served the public interest better than cutting a deal.