US defendants state their case under protest

Carl Ferenbach

The Boston-based Berkshire Fund III and partner Carl Ferenbach are alleging that the Securities Commission failed to table all relevant facts when it sought court permission to file an insider trading action against the former Tranz Rail shareholders.

Yesterday the two United States defendants filed an "appearance under protest" to question the commission's ability to institute proceedings against them in New Zealand.

The commission has claimed that Berkshire had inside information when it sold its 3.5 per cent stake in Tranz Rail on February 12, 2002, at $3.60 a share, just months before serious writedowns were revealed.

It has taken an additional action alleging tipping by Ferenbach, who is a former Tranz Rail director.

Both Berkshire Fund III and Ferenbach say they have no assets in New Zealand and the court has "no power" to assume jurisdiction over them by the service of the proceedings outside of New Zealand.

The application to serve the defendants outside of New Zealand was held ex parte - without their knowledge - denying them ability to mount a counter-argument.

Among the issues:-

* A claim the commission has misconstrued High Court rules since the subject of the action does not relate to property but conduct alleged to be in breach of the statutory prohibition against inside trading;

Berkshire Fund III and Ferenbach now want the court to have the service of proceedings set aside claiming:

* The commission's claim for pecuniary penalties against them is statute-barred under the Limitations Act. Berkshire Funds faces maximum penalties of $18,478,945 and Ferenbach a maximum of $21,091,528 if the court ultimately finds in the commission's favour.

* The commission should have acknowledged to the ex parte hearing that any judgment for pecuniary penalties against the the defendants would be unlikely to be enforced in Massachusetts where they reside.

* That the commission did not fully disclose to the hearing a Toll New Zealand letter which set out why it "did not object" to the commission taking the action in Tranz Rail's name.

* The commission failed to disclose that the New Zealand courts were not the only forum for the case.

At the time the defendants sold their shares, Tranz Rail's American Depository Receipts were also listed on the American Nasdaq exchange. Thus any trades would also have been subject to US Federal Securities laws and relevant insider trading provisions.

"Basically they have to be scrupulous in giving up all of the facts - good, bad, ugly, indifferent - when they are applying ex parte," said their solicitor Rick Shera.

"What we are saying is they fell well short of that," he said.

Meanwhile, there has yet to be a decision on whether the high-profile court battle will be heard in Wellington - where the commission filed proceedings - or in Auckland, which most of the defendants prefer.

Justice Hugh Williams will preside over a hearing on February 10 to hear the commission's challenge to Midavia Rail Investment's actions to have the proceedings transferred to the commercial list in Auckland.