Financial Markets Authority continues 16 inherited finance company investigations, closes six

The Financial Markets Authority (FMA) hopes to conclude as many as five of its 16 ongoing probes into failed finance companies by year's end but says it's likely to take another two years to work through the other 11 cases as the new regulator strives to clear what its CEO describes as an "unmerited stench over New Zealand's corporate reputation."

The FMA, which replaced the Securities Commission and inherited other regulatory body powers from the likes of the Ministry of Economic Development on May 1, says it will continue 16 investigations into collapsed finance companies it inherited from its predecessors. The 16 involve an estimated NZ$3.45 billion of investor losses.

The FMA's decision comes after the demise of 51 finance companies since 2006, which has put billions of dollars of investors' money on the line. See full details in our Deep Freeze List.

"These cases have created a stench, or a cloud over New Zealand's corporate reputation which we think is unmerited," FMA CEO Sean Hughes said. "And it's very important for us to move on as quickly as possible so New Zealand can regain its reputation as a good place to do business and invest in."

Hughes said decisions on at least three, but perhaps five, of the investigations were likely before the end of 2011. However, he said wrapping them all up will take the next couple of years. He said in some cases defendants may approach the FMA to secure an early compromise and the FMA would welcome such approaches.

The 16 ongoing investigations are into:

Allied Nationwide Finance

OPI Pacific Finance (formerly MFS Pacific Finance)

Boston Finance

Propertyfinance Securities

Equitable Mortgages

South Canterbury Finance

Hanover Capital

St Laurence

Hanover Finance

Strategic Finance (including Strategic Nominees)

Kiwi Finance

Structured Finance

LDC Finance

Viaduct Capital

Mutual Finance

Vision Securities

The FMA has closed its probe into Rockforte Finance having referred it to the Serious Fraud Office.  A further six cases are being dumped, at least for now, because in those cases the FMA hasn't identified any breaches of the law nor had any brought to its attention, Hughes said. These six cases involve All Purpose Finance (trading as St Kilda Finance) Geneva Finance, Direct Property Investments (No.6), Mascot Finance, Finance & Leasing, and Strata Finance.

Hughes said the FMA currently had seven finance company cases before the courts. It had put each inherited case through a "careful and detailed triage analysis" and reviewed them to decide how to proceed on each.  This included applying the FMA's new Enforcement Policy.

The FMA inherited a total of 25 live investigations into finance companies from the Securities Commission and Ministry of Economic Development.

"We inherited investigations in different stages of completion and in some cases not a lot of work had been done," said Hughes. "That's a reflection (that) our predecessor agencies did not necessarily have all the resources or powers that we acquired."

Hughes said a reoccurring theme in the investigations was a failure of corporate governance, as was related party lending and the accuracy of information presented to investors.

Asked why so many companies had failed, Hughes cited poor corporate governance, inadequate disclosure to investors, investors who failed to understand the risks they were taking on through their investments coupled with the impact of the Global Financial Crisis, falling property values, and over leverage or too much debt.

The FMA was launched in May as part of the government's attempt to restore ma and pa retail investors' confidence in the capital markets. It consolidated the powers and functions of the Securities Commission, some of the functions of the Registrar of Companies and the Government Actuary . See more in this Double Shot interview with Sean Hughes.

Read the FMA's statement below:

The Financial Markets Authority (FMA) announced today that investigations into 16 collapsed finance companies involving an estimated $3.45 billion of losses to investors were continuing, with decisions on the most advanced cases likely before the end of 2011.

“FMA’s decisions are consistent with our recently published Enforcement Policy, and are the result of careful review and analysis since we began operating just over four months ago in May,” said Mr Hughes.

“Amongst the cases remaining under FMA’s scrutiny are some involving large numbers of investors at risk of significant or potential loss; in which there is information suggesting unlawful behaviour; and where there is a need to send a clear regulatory signal to the markets.”

FMA’s 16 ongoing investigations are at different stages of completion:

· Five cases are close to the point at which recommendations will be made on bringing civil and/or criminal proceedings;

· In a further six cases, a significant body of information has already been obtained which FMA staff and external advisers will continue to review and analyse with the aim of completing the investigations as soon as possible;

· In the remaining five cases, where FMA does not yet have enough information to decide whether to continue or to close the investigation, it has appointed external investigators and forensic accountants from three leading insolvency practices to assist. Announcements will be made in the next two months as to whether these investigations will continue or be closed.

FMA has also identified six cases it will not pursue at this stage because further investigation would not be in the public interest because no law breaches have been identified.

The six cases are: All Purpose Finance (trading as St Kilda Finance) Geneva Finance Direct Property Investments (No.6) Mascot Finance Finance & Leasing Strata Finance

“In those six cases in which we have decided not to pursue our investigations, we have carefully assessed whether we have information suggesting unlawful behaviour; whether such information is sufficient to justify charges or proceedings; and whether it would be in the public interest to prosecute,” said Mr Hughes.

In those six cases FMA has not found any breaches or had any brought to its attention. Consistent with FMA’s Enforcement Policy it has concluded there is no public interest in continuing its investigation, without sufficient cause. In the case of Rockforte Finance, FMA closed its investigation because it referred the matter to Serious Fraud Office (SFO). Should the SFO not proceed to prosecution, FMA may decide to reopen its investigation.

Rockforte Finance investors’ capital is subject to a Crown guarantee, as are investments in Strata Finance and Mascot Finance. This means the Crown will compensate investors for their losses in part or in whole. FMA announced on 20 June that it had closed its investigation into Aorangi Securities (including Hubbard Management Funds) and referred the matter to the Serious Fraud Office.