The Financial Markets Authority (FMA) has sharply criticised Perpetual Trust Ltd's management of investor money and has demanded it returns to its Cash Management Fund NZ$13 million lent in a related party transaction to its owner George Kerr's Torchlight fund.
"In FMA’s view, these loans were not in the best interests of investors in the Funds and the circumstances in which they were made by Perpetual reflects a lack of judgment and lack of understanding of its role as trustee of funds of this nature," the FMA said in a statement after confidentiality orders on a June 26 High Court ruling.
"FMA has sought to minimise losses that investors may suffer by engaging with Perpetual to seek the return of the loans. Since April 2012, around half of the total amount lent to Torchlight has been repaid, but approximately NZ$13 million remains outstanding," the FMA said.
"FMA considers Perpetual has now had ample time to secure repayment of the loans, but is concerned at the lack of progress and the consequent risk to investors," it said.
The FMA said after the ruling it could now confirm it had been trying to get Perpetual Trust to recover NZ$25 million in related party loans made by Perpetual as trustee of the Perpetual Cash Management Fund.
The Fund's February 2012 prospectus shows it had NZ$60.1 million in assets invested as at March 31, 2011. Perpetual is a subsidiary of Pyne Gould Corporation (PGC).
The FMA said it became aware of the issues with the Fund in April this year. The Court of Appeal yesterday dismissed Perpetual’s appeal against the High Court decision and ruled it can be released. Perpetual had tried to keep the original decision confidential.
“FMA welcomes the High Court and Court of Appeal decisions and believes they emphasise the importance of transparency in the markets,” said FMA Chief Executive Sean Hughes.
The FMA said on May 1 it was investigating PGC. "Those inquiries have to date focussed particularly on loans made by the Fund to Torchlight Fund No. 1 LP (Torchlight) and the implications for the investors in the Fund and the Perpetual Mortgage Fund," the FMA said.
The FMA said it believed investors in the Fund needed to be aware of its concerns about the loans made by the Fund to Torchlight and the delays in repayment, so they could make informed decisions about their investments.
“FMA has moved proactively in the interests of investors in the funds and is pleased the High Court’s decision can now be released. Actions taken by FMA are in line with its objective to promote the confident and informed participation of businesses, investors and consumers in the financial markets,” Hughes said.
Torchlight is a limited partnership for sophisticated investors run by Torchlight GP No 1 Ltd, which is a subsidiary of PGC. George Kerr is Chairman and has an ownership interest in Torchlight. Brian Mogridge (one of Perpetual’s two directors) and Torchlight GP also have ownership interests in Torchlight. Kerr is also a director and owns approximately 76.5%, of PGC.
Perpetual had has NZ$587 million in either funds under advice or management as at the end of December 2010, PGC's annual report for 2010 showed.
PGC released a statement through the NZX saying it disputed the FMA's interpretation and position over the 'interfund facility' between the Perpetual Fund and Torchlight.
"Perpetual considers that the interfund facility provides superior first ranking security and provides a good return," it said.
"However, to alleviate the concerns raised by the FMA, Perpetual has (without prejudice to its position) asked Torchlight to prepay the NZ$28 million interfund facility in advance of the scheduled repayment in February 2013," it said.
"In response, Torchlight agreed to do so. To date, Torchlight has prepaid NZ$15 million in cash leaving a balance of approximately NZ$13 million outstanding. Full prepayment is expected this month."