By Bernard Hickey
The Commerce Commission has lifted the lid on what Forsyth Barr was talking about internally and to its customers in the lead up to the doomed sale of NZ$91.5 million of Credit SaILS notes in 2006.
It doesn't make pretty reading and will cause many to question whether Forsyth Barr is a fit and proper brokerage to be helping the Government sell Mighty River Power to a generation of investors who are reluctant to trust the stock market.
Every investor who is a client of Forsyth Barr or has been a client should read the full report from the Commerce Commission, which says Forsyth Barr and Calyon, the French investment bank that created the notes, engaged in "deceptive and misleading" behaviour.
The Commission estimated losses of NZ$70.7 million out of the capital investments of NZ$91.5 million. Eventually, Forsyth Barr and Calyon settled and contributed NZ$60 million to a fund for investors. But both maintain they did nothing wrong and don't believe any court action would have been successful. Forsyth Barr Managing Director Neil Paviour-Smith was not immediately available for comment today on the report, but has previously denied responsibility and the Commerce Commission said in the report Forsyth Barr does not accept the Commission's view.
The details of the report are damning.
Forsyth Barr and Calyon promoted the notes as 'capital protected' and 'safer than a term deposit in a bank', yet it was effectively a derivative on top of a derivative of toxic Icelandic and US banks. What's more revealing is how aggressively Forsyth Barr pushed Calyon and the Companies Office to allow it to keep the 'sizzle' in the prospectus and the marketing material for the sale.
Here's an un-named Forsyth Barr employee in an email cited in the report:
Calyon has made further changes to the offer document which in my view detract from the "sizzle" of the offer. I would like your views on whether we should hang tough on their reinsertion. On page 5 we have some language talking about modern yacht design.. blah blah blah making an analogy with Credit SaILS, stating "... Credit SaILS! an AA principal rated investment producing 8.5% interest payments." This was big and bold but has been removed by Calyon so there is now no reference in this page to the returns.
In the "What are Credit SaILS" there was an analogy between the Credit Strategy and fire insurance. Calyon have removed this. I felt (as author) this was very useful in understanding how credit swaps work and how the income and risks are generated through a comparison with normal household insurance.
Later Forsyth Barr sent Calyon an email asking to leave in the comments with more 'sizzle'.
[The external legal adviser] has forwarded me the last night’s version with further deletions and changes made by you. One of the deletions we feel is harmful to the marketing of this offer.
Remember we catch more flies with honey than vinegar!
On screen 7 this is pure marketing spiel. We want the retention of some statement here about the returns. This is entirely consistent with the offer and makes an eye catching initial statement which we think is very important as investors seldom read in detail beyond the first few pages.
Then Forsyth Barr asked Calyon to take out graphs showing lower returns than Forsyth Barr expected:
We would very much wish for the section on back testing to be removed the graphs in particular show a large number of incidences were (sic) the returns are materially lower than we expect which is a big marketing negative, and there is no obligation for you to include this information anyway.
Later the Companies Office asked Forsyth Barr to tone down the prospectus, triggering an internal debate at Forsyth Barr about how much they should change the marketing material for the sale process:
“Here is the marked up version of the advertisement, basically reflecting the CO’s required comments, as you can see, they don’t look good.”
“I say we flag the advertising and work on media interviews and articles to convey the message.”
“[The] suggestion is to take out the 8.5% to get rid of the negative language and go with a smaller schedule (maybe two placements?) A further alternative is to replace the language relating to 8.5% with the marketing spiel at the front of the offering document.”
“Why can't we put the 8.5% in there with a tiny (1) next to it and then at the bottom in tiny text next to the (1) we put all their dumb language? This would be workable. We're not selling bloody cigarettes!”
This suggests Forsyth Barr were that keen to get around the prospectus amendments and promote the message of capital-guaranteed returns of over 8.5% they were looking at using other channels such as the media and were prepared to use asterixes to cover themselves.
It's the sort of tactic a payday lender or door-to-door vacuum cleaner salesman would use.
The rest of the details in the report are almost as damming. They show other banks and brokers thought Credit SaILS was too risky to sell to retail investors. It shows Calyon only allowed the product, which was a derivative layered on top of at least five of the world's most toxic banks, to be sold to retail investors in one other country -- Taiwan. It shows Forsyth Barr as the party pushing Calyon hard to sell the product in New Zealand.
Here's an email from one executive:
“Did they (Calyon) knock on our door. Not really, the courting went the other way and it took considerable effort to get them to entertain doing a retail issue in NZ. Other than ABN this is the only major international bank to promote such a structure for retail. This structure is not new, ANZ “inflicted” exactly the same deal on its middle market & institutional clients last year. We consider that an endorsement of the structure as these types of investors are sophisticated….the key guy running things is the Calculation Agent Calyon. They run the strategy”
They show Forsyth Barr consistently pushing the boundaries of what it could say and get away with.
It also shows Forsyth Barr's brokers didn't even understand the product, but were happy to foist it on their clients or put it into their discretionary portfolios.
Forsyth Barr has form and denies everything
Forsyth Barr had a difficult 2006. That was the year Feltex collapsed, costing many investors who had been convinced by Forsyth Barr to invest, as Gareth Vaughan reported on Interest.co.nz in 2011.
Witness June Goldstein. A Christchurch widow then in her eighties, Goldstein told me in 2006 she had invested NZ$15,000 in Feltex after a Forsyth Barr adviser (Forsyth Barr was co-lead manager of the Feltex float with First NZ Capital) convinced her Feltex was a "long time, reliable firm" and a better bet than children's clothing retailer Pumpkin Patch which she had planned to invest in.
Within 27 months of its June 2004 IPO that raised NZ$254 million at NZ$1.70 a share, Feltex was gone, brought down by too much debt and, in my opinion, dismal management.
Where's the acceptance of responsibility?
Forsyth Barr has never accepted responsibility for misleading investors or doing anything wrong.
Paviour-Smith even said in a 2010 interview with Gareth Vaughan of Interest.co.nz that the prospectus or the way it was marketed by brokers was not Forsyth Barr's responsibility.
Paviour-Smith said then that Forsyth Barr's role as lead manager and underwriter of the Credit Sails issue were "completely separate" to the involvement of the firm's advisers in discussing the securities with their clients, and how they represented the security offering to their clients. This was the same as how other brokers discussed and marketed Credit Sails.
"That means that if broker XYZ misrepresented Credit Sails to a client it does not mean Forsyth Barr is at fault just because we were the lead manager," Paviour-Smith added in 2010.
"As regards the offer documents etc these were all the responsibility of the issuer/promoters IE Calyon Bank."
However, the email trails disclosed by the Commerce Commission show Forsyth Barr was up to its neck in the design and content of the prospectus, and was actively working to ensure plenty of 'sizzle' was in the prospectus, not to mention there was plenty of 'sizzle' and honey (rather than vinegar) in all the marketing material.
The 'sizzle' included that Credit SaILS were "safer than a bank term deposit," were "capital guaranteed and would return 10% on average."
Forsyth Barr should be barred.
Forsyth Barr's role as a retail broker in the Mighty River Power float is now untenable, in my opinion. The government should remove Forsyth Bar from the panel.
One of the major drivers of the 'Mixed Ownership Model' (MOM) process was to introduce a whole new set of investors to the stock market and to win back the trust of many who abandoned it after the 1987 crash and the many scandals that followed, including the collapses of Feltex and Credit SaILS.
Forsyth Barr's behaviour has been described by the Commerce Commission as 'misleading and deceptive'. Forsyth Barr has not accepted this or apologised to its investors.
It should be removed from the MOM process to retain the confidence of Mums and Dads.
Paviour-Smith's role as a director of the NZX should also be questioned. How can he credibly remain as one of the guardians and representatives of the New Zealand stock market when he has denied responsibility for what New Zealand's regulator of fair trading has judged 'misleading and deceptive' behaviour?
Leaders take responsibility for their mistakes. Forsyth Barr has gone part of the way by contributing in some way (we don't know how much) to the NZ$60 million settlement.
If it is serious about maintaining the confidence of its clients and the wider market it should accept responsibility and pay its penance from withdrawing from both the Mighty River Power float process and the NZX board.
Forsyth Barr later published a statement on the Commerce Commission website, saying it did not agree with parts of the report, which it said contained "factual errors and statements taken and presented out of context".
(Updated with Forsyth Barr statement on Commerce Commission website)